UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-3473
TESORO CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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95-0862768
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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19100 Ridgewood Parkway
San Antonio, Texas
(Address of principal
executive offices)
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78259-1828
(Zip Code)
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Registrants telephone number, including area code:
210-626-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.16
2/3
par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
At June 30, 2009, the aggregate market value of the voting
common stock held by non-affiliates of the registrant was
approximately $1.8 billion based upon the closing price of
its common stock on the New York Stock Exchange Composite tape.
At February 22, 2010, there were 140,572,348 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement to be filed
pursuant to Regulation 14A pertaining to the 2010 Annual
Meeting of Stockholders are incorporated by reference into
Part III hereof. The Company intends to file such Proxy
Statement no later than 120 days after the end of the
fiscal year covered by this
Form 10-K.
TESORO
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
TABLE OF
CONTENTS
This Annual Report on
Form 10-K
(including documents incorporated by reference herein) contains
statements with respect to our expectations or beliefs as to
future events. These types of statements are
forward-looking and subject to uncertainties. See
Important Information Regarding Forward-Looking
Statements on page 26.
When used in this Annual Report on
Form 10-K,
the terms Tesoro, we, our
and us, except as otherwise indicated or as the
context otherwise indicates, refer to Tesoro Corporation and its
subsidiaries.
1
PART I
ITEMS 1.
AND 2. BUSINESS AND PROPERTIES
Statements in this Annual Report on
Form 10-K,
that are not historical in nature should be deemed
forward-looking statements that are inherently uncertain. See
Important Information Regarding Forward-Looking
Statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 for a discussion of forward-looking statements
and of factors that could cause actual outcomes and results to
differ materially from those projected.
Tesoro Corporation (Tesoro) was incorporated in
Delaware in 1968. Based in San Antonio, Texas, we are one
of the largest independent petroleum refiners and marketers in
the United States. Our subsidiaries, operating through two
business segments, primarily manufacture and sell transportation
fuels. Our refining operating segment (refining),
which operates seven refineries in the western and
mid-continental United States, refines crude oil and other
feedstocks into transportation fuels, such as gasoline, gasoline
blendstocks, jet fuel and diesel fuel, as well as other
products, including heavy fuel oils, liquefied petroleum gas,
petroleum coke and asphalt. This operating segment sells refined
products in wholesale and bulk markets to a wide variety of
customers within the operations area. Our retail operating
segment (retail) sells transportation fuels and
convenience products in 15 states through a network of 886
retail stations, primarily under the
Tesoro®,
Mirastar®,
Shell®,
and USA
Gasolinetm
brands. See Notes N and Q in Item 8 of our
consolidated financial statements for additional information on
our operating segments and properties.
Our principal executive offices are located at 19100 Ridgewood
Parkway, San Antonio, Texas
78259-1828
and our telephone number is
(210) 626-6000.
Our common stock trades on the New York Stock Exchange under the
symbol TSO. We file reports with the SEC, including
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and other reports from time to time. The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, N.E.,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public on the
SECs Internet site at
http://www.sec.gov
and our website at
http://www.tsocorp.com
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. You may
receive a copy of our Annual Report on
Form 10-K,
including the financial statements, free of charge by writing to
Tesoro Corporation, Attention: Investor Relations, 19100
Ridgewood Parkway, San Antonio, Texas
78259-1828.
We also post our corporate governance guidelines, code of
business conduct, code of ethics for senior financial officers
and our Board of Director committee charters on our website. Our
governance documents are available in print by writing to the
address above. We submitted to the New York Stock Exchange on
May 15, 2009 our annual certification concerning corporate
governance pursuant to Section 303A.12 (a) of the New
York Stock Exchange Listed Company Manual.
2
REFINING
Overview
We currently own and operate seven petroleum refineries located
in the western and mid-continental United States and sell
transportation fuels to a wide variety of customers. Our
refineries produce a high proportion of our transportation fuels
sales volumes, and we purchase the remainder from other refiners
and suppliers. Our seven refineries have a combined crude oil
capacity of 665 thousand barrels per day (Mbpd).
Crude oil capacity and throughput rates of crude oil and other
feedstocks by refinery are as follows:
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Crude Oil
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Capacity
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Throughput (bpd)
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Refinery
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(bpd)(a)
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2009
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2008
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2007
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California
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|
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Golden Eagle
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166,000
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140,900
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153,300
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152,700
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Los Angeles(b)
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97,000
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100,500
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105,100
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68,200
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Pacific Northwest
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Washington
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120,000
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84,200
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103,100
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121,000
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Alaska
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72,000
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50,600
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55,600
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61,800
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Mid-Pacific
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Hawaii
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93,500
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68,200
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69,100
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81,400
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Mid-Continent
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North Dakota
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58,000
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54,000
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56,000
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57,900
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Utah
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58,000
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50,600
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52,900
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51,700
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Total
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664,500
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549,000
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595,100
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594,700
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(a) |
|
Crude oil capacity by refinery as reported by the Energy
Information Administration (2009). Throughput can exceed
crude oil capacity due to the processing of other feedstocks in
addition to crude oil. |
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(b) |
|
We acquired the Los Angeles refinery in May 2007. Throughput for
2007 of 68,200 bpd includes amounts for the Los Angeles
refinery since acquisition averaged over 365 days.
Throughput for the refinery averaged over the 235 days of
operation in 2007 was 106,000 bpd. |
3
Feedstock Supply. We purchase crude oil and
other feedstocks from both domestic and foreign sources either
through term agreements with renewal provisions or in the spot
market. We purchase approximately 30% of our crude oil under
term agreements, which are primarily short-term agreements
priced at market. We purchase the remainder of our crude oil and
feedstock supplies in the spot market. We purchase domestic
crude oil primarily in Alaska, California, Montana, Wyoming,
Utah, Colorado and North Dakota. We purchase foreign crude oil
primarily from Canada, South America, Russia, and the Middle
East. Historically, our largest domestic and foreign crude oil
sources have been the Alaska North Slope and Canada,
respectively. Sources of our crude oil purchases are as follows:
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Crude Oil Source
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2009
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2008
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2007
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Domestic
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62
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%
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|
56
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%
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|
52
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%
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Foreign
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38
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|
44
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48
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|
|
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|
|
|
|
|
|
|
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Total
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|
100
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%
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|
100
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%
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|
|
100
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%
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Our refineries process both heavy and light crude oils. Light
crude oils, when refined, produce a higher proportion of high
value transportation fuels such as gasoline, diesel and jet
fuel, and as a result are generally more expensive than heavy
crude oils. In contrast, heavy crude oils produce more low value
by-products and heavy residual oils. Throughput volumes by
feedstock type and region are summarized below (in Mbpd):
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|
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|
2009
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|
2008
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|
|
2007
|
|
|
|
Volume
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|
%
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Volume
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|
%
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|
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Volume
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%
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|
|
California (a)
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|
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|
|
|
|
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Heavy crude(b)
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160
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|
|
|
66
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%
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|
|
164
|
|
|
|
64
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%
|
|
|
133
|
|
|
|
60
|
%
|
Light crude
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|
57
|
|
|
|
24
|
|
|
|
73
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|
|
|
28
|
|
|
|
72
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|
|
|
32
|
|
Other feedstocks
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|
|
24
|
|
|
|
10
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|
|
|
21
|
|
|
|
8
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|
|
|
17
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|
|
|
8
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
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|
241
|
|
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|
100
|
%
|
|
|
258
|
|
|
|
100
|
%
|
|
|
222
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|
|
100
|
%
|
|
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|
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|
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|
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|
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|
|
|
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|
|
Pacific Northwest
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|
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
Heavy crude(b)
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|
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|
%
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|
7
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|
|
|
4
|
%
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|
|
11
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|
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|
6
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%
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Light crude
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|
|
126
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|
93
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|
143
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|
90
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|
163
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|
|
90
|
|
Other feedstocks
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9
|
|
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|
7
|
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|
9
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|
6
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|
8
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|
|
4
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|
|
|
|
|
|
|
|
|
Total
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|
|
135
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|
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|
100
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%
|
|
|
159
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|
|
|
100
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%
|
|
|
182
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|
|
|
100
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%
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
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|
|
|
|
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|
Mid-Pacific
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Heavy crude(b)
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|
17
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|
|
|
25
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%
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|
|
21
|
|
|
|
30
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%
|
|
|
15
|
|
|
|
19
|
%
|
Light crude
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|
|
51
|
|
|
|
75
|
|
|
|
48
|
|
|
|
70
|
|
|
|
66
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
68
|
|
|
|
100
|
%
|
|
|
69
|
|
|
|
100
|
%
|
|
|
81
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light crude
|
|
|
101
|
|
|
|
96
|
%
|
|
|
105
|
|
|
|
96
|
%
|
|
|
106
|
|
|
|
96
|
%
|
Other feedstocks
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
105
|
|
|
|
100
|
%
|
|
|
109
|
|
|
|
100
|
%
|
|
|
110
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(b)
|
|
|
177
|
|
|
|
32
|
%
|
|
|
192
|
|
|
|
32
|
%
|
|
|
159
|
|
|
|
27
|
%
|
Light crude
|
|
|
335
|
|
|
|
61
|
|
|
|
369
|
|
|
|
62
|
|
|
|
407
|
|
|
|
68
|
|
Other feedstocks
|
|
|
37
|
|
|
|
7
|
|
|
|
34
|
|
|
|
6
|
|
|
|
29
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
549
|
|
|
|
100
|
%
|
|
|
595
|
|
|
|
100
|
%
|
|
|
595
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We acquired the Los Angeles refinery in May 2007. Throughput for
2007 includes 68 Mbpd for the Los Angeles refinery since
acquisition averaged over 365 days. Throughput for the
refinery averaged over the 235 days of operation in 2007
was 106 Mbpd. |
|
(b) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. |
4
Refined Products. The total products produced
in the manufacturing process are referred to as the refining
yield. The refining yield consists primarily of transportation
fuels, including gasoline and gasoline blendstocks, jet fuel and
diesel fuel, but also includes other products including heavy
fuel oils, liquefied petroleum gas, petroleum coke and asphalt.
Our refining yield by region is summarized below (in Mbpd):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
California (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
130
|
|
|
|
49
|
%
|
|
|
133
|
|
|
|
48
|
%
|
|
|
121
|
|
|
|
52
|
%
|
Jet fuel
|
|
|
18
|
|
|
|
7
|
|
|
|
18
|
|
|
|
6
|
|
|
|
11
|
|
|
|
4
|
|
Diesel fuel
|
|
|
52
|
|
|
|
20
|
|
|
|
72
|
|
|
|
26
|
|
|
|
53
|
|
|
|
23
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
63
|
|
|
|
24
|
|
|
|
54
|
|
|
|
20
|
|
|
|
49
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
263
|
|
|
|
100
|
%
|
|
|
277
|
|
|
|
100
|
%
|
|
|
234
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
60
|
|
|
|
43
|
%
|
|
|
63
|
|
|
|
38
|
%
|
|
|
77
|
|
|
|
40
|
%
|
Jet fuel
|
|
|
26
|
|
|
|
19
|
|
|
|
32
|
|
|
|
20
|
|
|
|
33
|
|
|
|
18
|
|
Diesel fuel
|
|
|
23
|
|
|
|
16
|
|
|
|
30
|
|
|
|
18
|
|
|
|
33
|
|
|
|
18
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
30
|
|
|
|
22
|
|
|
|
39
|
|
|
|
24
|
|
|
|
46
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139
|
|
|
|
100
|
%
|
|
|
164
|
|
|
|
100
|
%
|
|
|
189
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
16
|
|
|
|
23
|
%
|
|
|
16
|
|
|
|
23
|
%
|
|
|
19
|
|
|
|
23
|
%
|
Jet fuel
|
|
|
17
|
|
|
|
25
|
|
|
|
18
|
|
|
|
25
|
|
|
|
23
|
|
|
|
28
|
|
Diesel fuel
|
|
|
12
|
|
|
|
17
|
|
|
|
11
|
|
|
|
15
|
|
|
|
14
|
|
|
|
17
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
24
|
|
|
|
35
|
|
|
|
26
|
|
|
|
37
|
|
|
|
27
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69
|
|
|
|
100
|
%
|
|
|
71
|
|
|
|
100
|
%
|
|
|
83
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
62
|
|
|
|
58
|
%
|
|
|
63
|
|
|
|
56
|
%
|
|
|
63
|
|
|
|
56
|
%
|
Jet fuel
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
Diesel fuel
|
|
|
27
|
|
|
|
25
|
|
|
|
30
|
|
|
|
26
|
|
|
|
29
|
|
|
|
25
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108
|
|
|
|
100
|
%
|
|
|
113
|
|
|
|
100
|
%
|
|
|
113
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
268
|
|
|
|
46
|
%
|
|
|
275
|
|
|
|
44
|
%
|
|
|
280
|
|
|
|
45
|
%
|
Jet fuel
|
|
|
70
|
|
|
|
12
|
|
|
|
78
|
|
|
|
12
|
|
|
|
77
|
|
|
|
12
|
|
Diesel fuel
|
|
|
114
|
|
|
|
20
|
|
|
|
143
|
|
|
|
23
|
|
|
|
129
|
|
|
|
21
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
127
|
|
|
|
22
|
|
|
|
129
|
|
|
|
21
|
|
|
|
133
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
579
|
|
|
|
100
|
%
|
|
|
625
|
|
|
|
100
|
%
|
|
|
619
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We acquired the Los Angeles refinery in May 2007. Yield for 2007
includes 73 Mbpd for the Los Angeles refinery since acquisition
averaged over 365 days. Yield for the refinery averaged
over the 235 days of operation in 2007 was 114 Mbpd. |
5
Transportation. We time charter four
U.S.-flag
tankers and five foreign-flag tankers to optimize the
transportation of crude oil and refined products within our
refinery system and ensure adequate shipping capacity. All of
the tankers are double-hulled. Four of our time charters expire
in March and July 2010 with the remaining time charters expiring
between 2011 and 2013 with options to renew. We have also
entered into time charters for two new-build
U.S.-flag
tankers with three-year terms and options to renew that will
replace our expiring charters in 2010. Additionally, we charter
tug-boats and product barges over varying terms ending in
January 2010 through 2016 with options to renew. We also
periodically charter double-hulled vessels globally on a voyage
charter basis.
We receive crude oils and ship refined products through owned
and third-party pipelines. We own and operate over
900 miles of crude and product pipelines, located primarily
in North Dakota, Montana, Alaska and Hawaii, through which we
transport more than 355 Mbpd within our refining system.
Beginning in August 2009, we were able to transport over 100
Mbpd of crude oil through an 81 mile pipeline spanning the
Isthmus of Panama from the Atlantic Ocean to the Pacific Ocean
under a long-term agreement. This agreement includes leased
tankage on both ends of the pipeline. The pipeline allows us to
deliver crude oils acquired in Africa, the Atlantic region of
South America and the North Sea to refineries in the Pacific
basin. In addition to this, we operate a proprietary trucking
business at three of our refineries to transport crude oil to
the refinery and refined products to our customers. We also
distribute refined products via railcars.
Terminals. We operate refined products
terminals at our refineries and 14 other locations in
California, Washington, Alaska, Hawaii, North Dakota, Utah and
Idaho. We also distribute products through third-party terminals
and truck racks in our market areas and through purchases and
exchange arrangements with other refining and marketing
companies.
California
Refineries
Golden
Eagle
Refining. Our 166 Mbpd Golden Eagle refinery
is located in Martinez, California on approximately
2,200 acres about 30 miles east of San Francisco.
We source crude oil for our Golden Eagle refinery from
California, Alaska and foreign locations. The Golden Eagle
refinery also processes intermediate feedstocks. The
refinerys major upgrading units include fluid catalytic
cracking, delayed coking, hydrocracking, naphtha reforming,
vacuum distillation, hydrotreating and alkylation units. The
refinery produces a high proportion of transportation fuels,
including cleaner-burning California Air Resources Board
(CARB) gasoline and CARB diesel fuel, as well as
conventional gasoline and diesel fuel. The refinery also
produces heavy fuel oils, liquefied petroleum gas and petroleum
coke.
Transportation. Our Golden Eagle
refinerys marine terminals have access through the
San Francisco Bay that enables us to receive crude oil and
ship refined products. In addition, the refinery can receive
crude oil through a third-party marine terminal at Martinez. We
also receive California crude oils and ship refined products
from the refinery through third-party pipelines.
Terminals. We operate refined products
terminals at Stockton, California and at the refinery. We
distribute refined products through third-party terminals in our
market areas and through purchases and exchange arrangements
with other refining and marketing companies. We also lease
third-party clean product tanks with access to the
San Francisco Bay.
Los
Angeles
Refining. Our 97 Mbpd Los Angeles refinery is
located in Wilmington, California on approximately
300 acres about 10 miles south of Los Angeles. We
source crude oil for our Los Angeles refinery from California as
well as foreign locations. The Los Angeles refinery also
processes intermediate feedstocks. The refinerys major
upgrading units include fluid catalytic cracking, delayed
coking, hydrocracking, vacuum distillation, hydrotreating,
reforming, butane isomerization and alkylation units. The
refinery produces a high proportion of transportation fuels,
including CARB gasoline and CARB diesel fuel, as well as
conventional gasoline, diesel fuel and jet fuel. The refinery
also produces heavy fuel oils, liquefied petroleum gas and
petroleum coke.
6
Transportation. Our Los Angeles refinery
leases a marine terminal at the Port of Long Beach that enables
us to receive crude oil and ship refined products. The refinery
can also receive crude oil from the San Joaquin Valley and
the Los Angeles Basin through third-party pipelines.
Terminals. We operate a refined products
terminal at the Los Angeles refinery and distribute refined
products through third-party terminals in our market areas and
through purchases and exchange arrangements with other refining
and marketing companies. We also lease refined product storage
tanks at third-party terminals in Southern California, the
majority of which have access to marine terminals.
Pacific
Northwest Refineries
Washington
Refining. Our 120 Mbpd Washington refinery is
located on the Puget Sound in Anacortes on approximately
900 acres about 60 miles north of Seattle. We source
our Washington refinerys crude oil from Alaska, Canada and
other foreign locations. The Washington refinery also processes
intermediate feedstocks, primarily heavy vacuum gas oil,
produced by some of our other refineries and purchased in the
spot-market from third-parties. The refinerys major
upgrading units include fluid catalytic cracking, butane
isomerization, alkylation, hydrotreating, vacuum distillation,
deasphalting and naphtha reforming units, which enable us to
produce a high proportion of transportation fuels, such as
gasoline including CARB gasoline and components for CARB
gasoline, diesel fuel and jet fuel. The refinery also produces
heavy fuel oils, liquefied petroleum gas and asphalt.
Transportation. Our Washington refinery
receives Canadian crude oil through a third-party pipeline
originating in Edmonton, Alberta, Canada. We receive other crude
oils through our Washington refinerys marine terminal. The
refinery ships transportation fuels including gasoline, jet fuel
and diesel fuel through a third-party pipeline system, which
serves western Washington and Portland, Oregon. We also deliver
refined products through our marine terminal to ships and barges.
Terminals. We operate refined products
terminals at Anacortes, Port Angeles and Vancouver, Washington,
supplied primarily by our refineries. We also distribute refined
products through third-party terminals in our market areas, and
through purchases and exchange arrangements with other refining
and marketing companies.
Alaska
Refining. Our 72 Mbpd Alaska refinery is
located on the Cook Inlet near Kenai on approximately
450 acres about 70 miles southwest of Anchorage. Our
Alaska refinery processes crude oil from Alaska and, to a lesser
extent, foreign locations. The refinerys major upgrading
units include vacuum distillation, distillate hydrocracking,
hydrotreating, naphtha reforming, diesel desulfurizing and light
naphtha isomerization units which produce transportation fuels,
including gasoline and gasoline blendstocks, jet fuel and diesel
fuel, as well as other products, including heating oil, heavy
fuel oils, liquefied petroleum gas and asphalt.
Transportation. We receive crude oil into our
marine terminal by tanker and through our owned and operated
crude oil pipeline. Our crude oil pipeline is a
24-mile
common-carrier pipeline connected to the Eastside Cook Inlet oil
field. We also own and operate a common-carrier refined products
pipeline that runs from the Alaska refinery to our terminal
facilities in Anchorage and to the Anchorage International
Airport. This
71-mile
pipeline has the capacity to transport approximately 40 Mbpd of
refined products and allows us to transport gasoline, diesel
fuel and jet fuel. Both of our owned pipelines are subject to
regulation by various federal, state and local agencies,
including the Federal Energy Regulatory Commission
(FERC). We also deliver refined products through our
marine terminal to ships and barges.
Terminals. We operate refined products
terminals at Nikiski and Anchorage, which are supplied by our
Alaska refinery. We also distribute refined products through a
third-party terminal which is supplied through an exchange
arrangement with another refining company.
7
Mid-Pacific
Refinery
Hawaii
Refining. Our 93.5 Mbpd Hawaii refinery is
located in Kapolei on approximately 130 acres about
22 miles west of Honolulu. We supply the refinery with
crude oil from Southeast Asia, the Middle East, Russia and other
foreign sources. The refinerys major upgrading units
include vacuum distillation, hydrocracking, hydrotreating,
visbreaking and naphtha reforming units which produce gasoline
and gasoline blendstocks, jet fuel, diesel fuel, heavy fuel
oils, liquefied petroleum gas and asphalt.
Transportation. We transport crude oil to
Hawaii in tankers, which discharge through our single-point
mooring terminal, 1.5 miles offshore from the refinery. Our
three underwater pipelines from the single-point mooring
terminal allow crude oil and refined products to be transferred
to and from the refinery. We also distribute refined products to
customers on the island of Oahu through owned and third-party
pipeline systems. Furthermore, our refined products pipelines
connect the Hawaii refinery to Barbers Point Harbor,
2.5 miles away, where refined products are loaded on ships
and barges to transport to the nearby islands.
Terminals. We distribute refined products from
our refinery to customers through third-party terminals in our
market areas.
Mid-Continent
Refineries
North
Dakota
Refining. Our 58 Mbpd North Dakota refinery is
located on the Missouri River near Mandan on approximately
950 acres. We supply the refinery primarily with Williston
Basin sweet crude oil through our crude oil pipeline system. The
refinery also has the ability to access other crude oil
supplies, including Canadian crude oil. The refinerys
major upgrading units include fluid catalytic cracking, naphtha
reforming, hydrotreating and alkylation units which produce
transportation fuels, including gasoline, diesel fuel and jet
fuel, as well as other products, including heavy fuel oils and
liquefied petroleum gas.
Transportation. We own a crude oil pipeline
system, consisting of over 700 miles of pipeline that
delivers all of the crude oil to our North Dakota refinery. This
system gathers crude oil from the Williston Basin and adjacent
production areas in North Dakota and Montana and transports it
to our refinery. Our pipeline system is also able to transport
crude oil to other points in the region where there is
additional demand. This pipeline system is a common carrier line
subject to regulation by various federal, state and local
agencies, including the FERC. We distribute a significant
portion of our refinerys production through a third-party
refined products pipeline system which serves various areas from
Mandan, North Dakota to Minneapolis, Minnesota. Most of the
gasoline and distillate products from our refinery can be
shipped through that pipeline system to third-party terminals.
Terminals. We operate a refined products
terminal at the North Dakota refinery. We also distribute
refined products through a third-party pipeline system which
connects to third-party terminals in our market areas.
Utah
Refining. Our 58 Mbpd Utah refinery is located
in Salt Lake City on approximately 150 acres. Our Utah
refinery processes crude oils primarily from Utah, Colorado,
Wyoming and Canada. The refinerys major upgrading units
include fluid catalytic cracking, naphtha reforming, alkylation
and hydrotreating units which produce transportation fuels,
including gasoline, diesel fuel and jet fuel, as well as other
products, including heavy fuel oils and liquefied petroleum gas.
Transportation. Our Utah refinery receives
crude oil primarily through third-party pipelines from oil
fields in Utah, Colorado, Wyoming and Canada. We distribute the
refinerys production through a system of both owned and
third-party terminals and third-party pipeline systems,
primarily in Utah, Idaho and eastern Washington, with some
refined products delivered in Nevada and Wyoming.
8
Terminals. We operate a refined products
terminal adjacent to our refinery. We also distribute refined
products to customers through a third-party pipeline to our
owned and third-party terminals in our market areas.
Wholesale
Marketing and Refined Product Distribution
We sell refined products including gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy fuel oils and residual
products in both the bulk and wholesale markets. We currently
sell over 270 Mbpd in the wholesale market primarily through
independent unbranded distributors that sell refined products
purchased from us through more than 60 owned and third-party
terminals. Our bulk sales are primarily to independent unbranded
distributors, other refining and marketing companies, utilities,
railroads, airlines and marine and industrial end-users. These
products are distributed by pipelines, ships, barges, railcars
and trucks. Our sales include refined products that we
manufacture, purchase or receive through exchange arrangements.
Our refined product sales, including intersegment sales to our
retail operations, consisted of (in Mbpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Refined Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
306
|
|
|
|
326
|
|
|
|
319
|
|
Jet fuel
|
|
|
84
|
|
|
|
92
|
|
|
|
96
|
|
Diesel fuel
|
|
|
121
|
|
|
|
144
|
|
|
|
131
|
|
Heavy oils, residual products and other
|
|
|
85
|
|
|
|
94
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
596
|
|
|
|
656
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and Gasoline Blendstocks. We sell
gasoline and gasoline blendstocks in both the bulk and wholesale
markets in the western and mid-continental United States. The
demand for gasoline is seasonal in many of these markets, with
lowest demand during the winter months. We sell gasoline to
wholesale customers and several other refining and marketing
companies under various supply agreements and exchange
arrangements. We sell, at wholesale, to unbranded distributors
and high-volume retailers, and we distribute refined product
through owned and third-party terminals.
Jet Fuel. We supply jet fuel to passenger and
cargo airlines at airports in Alaska, Hawaii, California,
Washington, Utah and other western states. We also supply jet
fuel to the U.S. military from our refineries in Hawaii and
North Dakota.
Diesel Fuel. We sell diesel fuel primarily on
a wholesale basis for marine, transportation, industrial and
agricultural use. We sell lesser amounts to end-users through
marine terminals and for power generation in Hawaii and
Washington. We are able to manufacture Ultra-Low Sulfur Diesel
(ULSD) at all of our refineries and we currently are
the sole producer of ULSD in both Alaska and Hawaii.
Heavy Fuel Oils and Residual Products. We sell
heavy fuel oils to other refiners, third-party resellers,
electric power producers and marine and industrial end-users.
Our refineries supply substantially all of the marine fuels that
we sell through facilities at Port Angeles, Seattle, and Tacoma,
Washington, and Portland, Oregon, and through our refinery
terminals in Washington, Alaska and Hawaii. Our Golden Eagle and
Los Angeles refineries produce petroleum coke that we sell
primarily to industrial end-users. Tesoro is also a key supplier
of liquid asphalt for paving and construction companies in
Washington, Alaska and Hawaii.
Sales of Purchased Products. In the normal
course of business to meet local market demands, we purchase
refined products manufactured by others for resale to our
customers. We purchase these refined products, primarily
gasoline, jet fuel, diesel fuel and industrial and marine fuel
blendstocks mainly in the spot market. Our gasoline and diesel
fuel purchase and resale transactions are principally on the
U.S. West Coast. Our primary jet fuel resale activity
consists of supplying markets in Alaska, California, Washington,
Hawaii and Utah. We also purchase for resale a lesser amount of
gasoline and other refined products for sales outside of our
refineries markets.
9
RETAIL
We sell gasoline and diesel fuel in the western and
mid-continental United States through company-operated retail
stations and agreements with third-party branded dealers and
distributors (or jobber/dealers). Our retail network
provides a committed outlet for a portion of the transportation
fuels produced by our refineries. Many of our company-operated
retail stations include convenience stores that sell a wide
variety of merchandise items. As of December 31, 2009, our
retail segment included a network of 886 branded retail stations
under the
Tesoro®,
Mirastar®,
Shell®
and USA
Gasolinetm
brands. Our
Mirastar®
brand is used exclusively at 34 Wal-Mart stores in 9 western
states under a long-term agreement. We also operate under the
Shell®
brand at certain retail stations in California through a
long-term agreement and own the exclusive rights to the USA
Gasolinetm
brand in California, New Mexico and Washington. Our retail
stations (summarized by type and brand) were located in the
following states as of December 31, 2009:
|
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Brand
|
|
|
|
Type
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
|
|
State
|
|
Company-Operated
|
|
|
Jobber/ Dealer
|
|
|
Total
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|
|
Tesoro®
|
|
|
Mirastar®
|
|
|
Shell®
|
|
|
Gasolinetm
|
|
|
Total
|
|
|
California
|
|
|
253
|
|
|
|
193
|
|
|
|
446
|
|
|
|
12
|
|
|
|
2
|
|
|
|
307
|
|
|
|
125
|
|
|
|
446
|
|
Alaska
|
|
|
28
|
|
|
|
52
|
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
North Dakota
|
|
|
|
|
|
|
89
|
|
|
|
89
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
Utah
|
|
|
31
|
|
|
|
32
|
|
|
|
63
|
|
|
|
57
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Washington
|
|
|
22
|
|
|
|
20
|
|
|
|
42
|
|
|
|
30
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
42
|
|
Minnesota
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Hawaii
|
|
|
29
|
|
|
|
4
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Idaho
|
|
|
7
|
|
|
|
27
|
|
|
|
34
|
|
|
|
30
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Other states(a)
|
|
|
17
|
|
|
|
12
|
|
|
|
29
|
|
|
|
12
|
|
|
|
16
|
|
|
|
1
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
387
|
|
|
|
499
|
|
|
|
886
|
|
|
|
413
|
|
|
|
34
|
|
|
|
308
|
|
|
|
131
|
|
|
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other states include New Mexico, South Dakota, Colorado, Oregon,
Wyoming, Nevada, and Arizona. |
10
The following table summarizes our retail operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fuel Revenues (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
$
|
2,438
|
|
|
$
|
3,408
|
|
|
$
|
2,386
|
|
Jobber/dealer
|
|
|
562
|
|
|
|
776
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Revenues
|
|
$
|
3,000
|
|
|
$
|
4,184
|
|
|
$
|
2,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Branded Retail Stations (end of year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
387
|
|
|
|
389
|
|
|
|
449
|
|
Jobber/dealer
|
|
|
499
|
|
|
|
490
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Stations
|
|
|
886
|
|
|
|
879
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Branded Retail Stations (during the
year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
388
|
|
|
|
422
|
|
|
|
362
|
|
Jobber/dealer
|
|
|
487
|
|
|
|
489
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
875
|
|
|
|
911
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volume (millions of gallons)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
1,027
|
|
|
|
1,072
|
|
|
|
856
|
|
Jobber/dealer
|
|
|
302
|
|
|
|
282
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volumes
|
|
|
1,329
|
|
|
|
1,354
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPETITION
The refining industry is highly competitive. Our competitors
include a number of companies that have greater financial and
other resources. We compete on the world market for the crude
oil and feedstocks we process, and then we compete for the
customers who purchase our refined products. The availability
and cost of crude oil and other feedstocks, as well as the
prices of the products we produce, are heavily influenced by
global supply and demand dynamics. We obtain all of our crude
oil from third-party sources and compete with other refiners for
those limited supplies. We compete with a number of major,
integrated multi-national oil companies who can supply their
refineries with crude oil from their own production.
We sell gasoline through our network of retail stations as well
as on a wholesale basis. We sell most of our distillate
production through wholesale channels. We compete with other
refiners and with importers for customers in most of our market
areas. Competition and concentrations specific to each of our
refineries are as follows:
|
|
|
|
|
Our Golden Eagle, Los Angeles and Washington refineries compete
with several refineries in the contiguous west coast states. In
2009, approximately 85% of the gasoline demand on the
U.S. West Coast was supplied by these refineries. When
regional demand exceeds supply, products are imported to the
U.S. West Coast from other parts of the country and the
world. These are typically pipeline shipments from the
U.S. Gulf Coast but can also include imports from foreign
sources such as the Far East, Europe and Canada.
|
|
|
|
Our Alaska refinery competes with three other in-state
refineries that together have a crude oil processing capacity of
approximately 278 Mbpd. It also competes with refineries on the
U.S. West Coast. Our jet fuel sales in Alaska are
concentrated in Anchorage, where we are one of the principal
suppliers at the Anchorage International Airport.
|
|
|
|
Our Hawaii refinery competes primarily with one other in-state
refinery, also located at Kapolei. It is owned by a major
integrated oil company and has a crude oil capacity of
approximately 54 Mbpd. All crude oil processed in Hawaii is from
out of state. Product imports from the U.S. mainland and
foreign sources are also required to meet the states fuel
demand. Our jet fuel sales are concentrated at the Honolulu
International Airport, where we are the principal supplier. We
serve four airports on other Hawaiian islands and compete with
other suppliers for U.S. military contracts.
|
11
|
|
|
|
|
Our North Dakota refinery is the only refinery in the state and
primarily competes with refineries in Wyoming, Montana, the
Midwest and the U.S. Gulf Coast region. The Midwest region
ranks second in crude oil demand in the United States and is
dependent on crude oil imports, primarily from Canada.
|
|
|
|
Our Utah refinery is the largest of five refineries located in
Utah. The other refineries have a combined capacity to process
approximately 110 Mbpd of crude oil. These five refineries
collectively supply a high proportion of the gasoline and
distillate products consumed in the states of Utah and Idaho,
with additional supplies provided from refineries in surrounding
states.
|
Our retail marketing operations compete with other independent
marketers, integrated oil companies and high-volume retailers.
We sell gasoline in Alaska, California, Hawaii, North Dakota,
Utah, Washington and other western and mid-continental states
through a network of company-operated retail stations and
branded and unbranded jobber/dealers. Competitive factors that
affect retail marketing include product price, station
appearance, location and brand awareness. Large national
retailers as well as regional retailers continue to enter the
fuel retail business. Many of these competitors are
substantially larger than we are and through their greater
resources may be better able to withstand volatile market
conditions and lower profitability.
GOVERNMENT
REGULATION AND LEGISLATION
Environmental
Controls and Expenditures
All of our operations, like those of other companies engaged in
similar businesses, are subject to extensive and frequently
changing federal, state, regional and local laws, regulations
and ordinances relating to the protection of the environment,
including those governing emissions or discharges to the land,
air and water, the handling and disposal of solid and hazardous
wastes and the remediation of contamination. While we believe
our facilities are in substantial compliance with current
requirements, we will continue to engage in efforts to meet new
legislative and regulatory requirements applicable to our
operations. To comply with these laws and regulations will
require us to make significant expenditures. For example, the
U.S. Environmental Protection Agency has proposed
regulating greenhouse gases emissions under the Clean Air Act.
The U.S. Congress is also considering legislation seeking
to establish a national
cap-and-trade
program beginning in 2012 to address greenhouse gas emissions
and climate change. The impact of these regulatory and
legislative developments, if adopted or enacted, including any
cap-and-trade
program, is likely to result in increased compliance costs,
additional operating restrictions on our business, and an
increase in the cost of the products we manufacture. Depending
on market conditions, we will attempt to pass these increased
costs to consumers. If, however, that is not possible, the
changes could have an adverse impact on our financial position,
results of operations, and liquidity. We cannot currently
determine the amounts of such future impacts. For additional
information regarding our environmental matters see
Environmental and Other Matters in Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7.
Oil
Spill Prevention and Response
We operate in environmentally sensitive coastal waters, where
tanker, pipeline and other petroleum product transportation
operations are regulated by federal, state and local agencies
and monitored by environmental interest groups. The
transportation of crude oil and refined products over water
involves risk and subjects us to the provisions of the Federal
Oil Pollution Act of 1990 and related state requirements, which
require that most oil refining, transport and storage companies
maintain and update various oil spill prevention and oil spill
contingency plans. We have submitted these plans and received
federal and state approvals necessary to comply with the Federal
Oil Pollution Act of 1990 and related regulations. Our crude oil
spill prevention plans and procedures are frequently reviewed
and modified to prevent crude oil and refined product releases
and to minimize potential impacts should a release occur.
12
We currently time charter tankers to ship crude oil from foreign
and domestic sources to our California, Mid-Pacific and
Pacific-Northwest refineries. We maintain our own spill-response
capability and have entered into contracts with various parties
to provide spill response services augmenting that capability,
if required. We have spill-response agreements in Alaska with
Cook Inlet Spill Prevention and Response, Incorporated (for
which we have a controlling interest of approximately 89%) and
with Alyeska Pipeline Service Company. We have a response
services agreement in Hawaii with Clean Islands Council. We have
entered into contracts with Marine Spill Response Corporation
for Hawaii, the San Francisco Bay, Puget Sound, the Port of
Los Angeles and the Port of Long Beach. We also contract with
spill-response organizations outside the U.S. to support
our shipments in foreign waters. In addition, we contract with
various spill-response specialists to ensure appropriate
expertise is available for any contingency. We believe these
contracts provide the additional services necessary to meet or
exceed all regulatory spill-response requirements and support
our commitment to environmental stewardship.
We require time chartered vessels used for the transportation of
crude oil and heavy products over water to be double-hulled.
Time chartered vessels for other services and all other
chartered vessels are required to be double-hulled if available.
All vessels used by us to transport crude oil and refined
products over water are examined or evaluated and subject to our
approval prior to their use.
Regulation
of Pipelines
Our crude oil pipeline system in North Dakota and our pipeline
systems in Alaska are common carriers subject to regulation by
various federal, state and local agencies, including the FERC
under the Interstate Commerce Act. The Interstate Commerce Act
provides that, to be lawful, the rates charged by common carrier
petroleum pipelines must be just and reasonable and
not unduly discriminatory.
The intrastate operations of our North Dakota crude oil pipeline
system are subject to regulation by the North Dakota Public
Services Commission. The intrastate operations of our Alaska
pipelines are subject to regulation by the Regulatory Commission
of Alaska. Like the FERC, the state regulatory authorities
require that we notify shippers of proposed tariff increases and
the shippers have an opportunity to protest the increases. The
North Dakota Public Services Commission also files with the
state authorities copies of interstate tariff charges filed with
the FERC. In addition to challenges to new or proposed rates,
challenges to intrastate rates that have already become
effective are permitted by complaint of an interested person or
by independent action of the appropriate regulatory authority.
EMPLOYEES
At December 31, 2009, we had approximately
5,500 full-time employees approximately 1,370
of whom are covered by collective bargaining agreements. The
agreements expire on February 2, 2012 for approximately
1,110 employees and on May 1, 2012 for approximately
260 employees. We consider our relations with our employees
to be satisfactory.
PROPERTIES
Our principal properties are described above under the captions
Refining and Retail. We believe that our
properties and facilities are generally adequate for our
operations and that our facilities are adequately maintained. We
are the lessee under a number of cancelable and non-cancelable
leases for certain properties, including office facilities,
retail facilities, ship charters, barges and equipment used in
the storage, transportation and production of feedstocks and
refined products. We conduct our retail business under the
Tesoro®,
Tesoro
Alaska®,
Mirastar®,
2-Go
Tesoro®,
Shell®
and USA
Gasolinetm
brands through a network of 886 retail stations, of which 387
are company-operated. See Notes J and N in our consolidated
financial statements in Item 8.
13
GLOSSARY
OF TERMS
Alkylation A process that chemically combines
isobutane with other hydrocarbons through the control of
temperature and pressure in the presence of an acid catalyst.
This process produces alkylates, which have a high octane value
and are blended into gasoline to improve octane values.
API American Petroleum Institute
the main U.S trade association for the oil and natural gas
industry.
API Gravity A scale for denoting the
lightness or heaviness of crude oils and other liquid
hydrocarbons. Calibrated in API degrees (or degrees API), it is
used universally to express a crude oils relative density
in an inverse measure the lighter the crude, the
higher the API gravity, and vice versa.
CARB California Air Resources Board.
Gasoline and diesel fuel sold in the state of California are
regulated by CARB and require stricter quality and emissions
reduction performance than required by other states.
Cogeneration Plant A plant that produces both
steam and electricity for refinery operations.
Cracking The process of breaking down larger
hydrocarbon molecules into smaller molecules, using catalysts
and/or
elevated temperatures and pressures.
Deasphalting A solvent extraction process of
recovering higher-value oils from refining residues.
Delayed Coking A process by which the
heaviest crude oil fractions can be thermally cracked under
conditions of elevated temperatures to produce both refined
products and petroleum coke.
Desulfurization The process of removing
sulfur from petroleum fuels to reduce sulfur dioxide emissions
that result from the use of these fuels.
Distillate Hydrocracking A catalytic
hydrocracking process designed to produce primarily diesel fuel
and jet fuel.
Exchange Arrangement An agreement providing
for the delivery of crude oil or refined products to a
third-party, in exchange for the delivery of crude oil or
refined products from the third party.
Fluid Catalytic Cracking Catalytic cracking
is the refining process of breaking down larger, heavier, and
more complex hydrocarbon molecules into simpler and lighter
molecules through the use of a catalytic agent to increase the
yield of gasoline. Fluid catalytic cracking uses a catalyst in
the form of very fine particles, which behave as a fluid when
aerated with a vapor.
Fluid Coking A process similar to fluid
catalytic cracking which removes carbon (coke) from heavy low
quality crude oils to produce lighter products.
Gross Refining Margin The margin on products
manufactured and purchased, including those sold to our retail
segment. Gross refining margin is calculated as revenues less
costs of feedstocks, purchased refined products, transportation
and distribution.
Heavy Crude Oil Crude oil with an API gravity
of 24 degrees or less. Heavy crude oils are generally sold at a
discount to lighter crude oils.
Heavy Fuel Oils, Residual Products, Internally Produced Fuel
and Other Products other than gasoline, jet fuel
and diesel fuel produced in the refining process. These products
include residual fuels, gas oils, propane, petroleum coke,
asphalt and internally produced fuel.
Hydrocracking The process of using a catalyst
to crack heavy hydrocarbon molecules in the presence of
hydrogen. Major products from hydrocracking are jet fuel,
naphtha, propane and gasoline components such as butane.
14
Hydrotreating The process of removing sulfur
from refined products in the presence of catalysts and
substantial quantities of hydrogen to reduce sulfur dioxide
emissions that result from the use of the products.
Isomerization A process that alters the
fundamental arrangement of atoms in the molecule without adding
or removing anything from the original material. The process is
used to convert normal butane into isobutane and normal pentane
into isopentane and hexane into isohexane. Both isopentane and
isohexane are high-octane gasoline components.
Jobber/Dealer Stations Retail stations owned
by third parties that sell products purchased from or through us
and carry one of our brands.
Light Crude Oil Crude oil with an API gravity
greater than 24 degrees. Light crude oils are generally sold at
a premium to heavy crude oils.
Manufacturing Costs Costs associated directly
with the manufacturing process including cash operating
expenses, but excluding depreciation and amortization.
Mbpd Thousand barrels per day.
Naphtha Refined product used as a gasoline
blending component, a feedstock for reforming, and as a
petrochemical feedstock.
Refining Yield Volumes of product produced
from crude oils and feedstocks.
Reforming A process using controlled heat and
pressure with catalysts to rearrange certain hydrocarbon
molecules into petrochemical feedstocks and higher octane stocks
suitable for blending into finished gasoline.
Retail Fuel Margin The margin on fuel
products sold through our retail segment calculated as revenues
less costs of sales. Costs of sales in fuel margin are based on
purchases from our refining segment and third parties using
average bulk market prices adjusted for transportation and other
differentials.
Selective Hydrogenation A process utilizing a
catalyst to modify sulfur compounds in light catalytic gasoline
for removal.
Throughput The quantity of crude oil and
other feedstocks processed at a refinery measured in barrels per
day.
Turnaround The scheduled shutdown of a
refinery processing unit for significant overhaul and
refurbishment. Turnaround expenditures are capitalized and
amortized over the period of time until the next planned
turnaround of the unit.
Ultra Low Sulfur Diesel (ULSD) Diesel
fuel produced with lower sulfur content to lower emissions,
which has been required for on-road use in the
U.S. beginning in 2006.
Vacuum Distillation Distillation under
reduced pressure which lowers the boiling temperature of crude
oils in order to distill crude oil components that have high
boiling points.
Visbreaking A thermal cracking process in
which heavy atmospheric or vacuum unit residues are cracked at
moderate temperatures to increase production of distillate
products and reduce viscosity of the distillate residues.
15
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages
and their positions at Tesoro, effective as of February 26,
2010.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Position Held Since
|
|
Bruce A. Smith
|
|
|
66
|
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer
|
|
June 1996
|
Everett D. Lewis
|
|
|
62
|
|
|
Executive Vice President, Chief Operating Officer
|
|
March 2008
|
Gregory A. Wright
|
|
|
60
|
|
|
Executive Vice President and Chief Financial Officer
|
|
November 2008
|
William J. Finnerty
|
|
|
61
|
|
|
Executive Vice President, Strategy and Corporate Development
|
|
March 2008
|
Charles S. Parrish
|
|
|
52
|
|
|
Executive Vice President, General Counsel and Secretary
|
|
April 2009
|
Arlen O. Glenewinkel, Jr.
|
|
|
53
|
|
|
Vice President and Controller
|
|
December 2006
|
There are no family relationships among the officers listed, and
there are no arrangements or understandings pursuant to which
any of them were elected as officers. Officers are elected
annually by our Board of Directors during the annual meeting of
stockholders. The term of each office runs until the
corresponding meeting of the Board of Directors in the next year
or until a successor has been elected or qualified. Positions
held for at least the past five years for each of our executive
officers is described below (positions, unless otherwise
specified, are with Tesoro).
Bruce A. Smith was named Chairman of the Board of
Directors, President and Chief Executive Officer in June 1996.
Everett D. Lewis was named Executive Vice President,
Chief Operating Officer in March 2008. Prior to that he served
as Executive Vice President, Strategy and Asset Management
beginning in January 2007 and as Executive Vice President,
Strategy beginning in January 2005.
Gregory A. Wright was named Executive Vice President and
Chief Financial Officer in November 2008. Prior to that, he
served as Executive Vice President and Chief Administrative
Officer beginning in June 2007 and as Executive Vice President
and Chief Financial Officer beginning in December 2003.
William J. Finnerty was named Executive Vice President,
Strategy and Corporate Development in March 2008. Prior to that,
he served as Executive Vice President and Chief Operating
Officer beginning in February 2006 and as Executive Vice
President, Operations beginning in January 2005.
Charles S. Parrish was named Executive Vice President,
General Counsel and Secretary in April 2009. Prior to that, he
served as Senior Vice President, General Counsel and Secretary
beginning in May 2006; Vice President, General Counsel and
Secretary beginning in March 2005 and as Vice President,
Assistant General Counsel and Secretary beginning in November
2004.
Arlen O. Glenewinkel, Jr. was named Vice President
and Controller in December 2006. Prior to that, he served as
Vice President, Enterprise Risk beginning in April 2005 and Vice
President, Internal Audit, from August 2002 to April 2005.
16
BOARD OF
DIRECTORS OF THE REGISTRANT
The following is a list of our Board of Directors, effective as
of February 26, 2010:
|
|
|
Bruce A. Smith
|
|
Chairman, President and Chief Executive Officer of Tesoro
Corporation
|
Steven H. Grapstein
|
|
Lead Director and Chairman of the Audit Committee of Tesoro
Corporation; Chief Executive Officer of Como Holdings USA, Inc.
(formerly known as Kuo Investment Company)
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Rodney F. Chase
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Non-Executive Chairman of Petrofac, Ltd.; Deputy Chairman of
Tesco, plc; Director of Nalco Holding Co.
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Robert W. Goldman
|
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Chairman of the Governance Committee of Tesoro Corporation;
Director of El Paso Corporation; Director of McDermott
International, Inc.; Director of Parker Drilling Co.
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William J. Johnson
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President, Director and sole shareholder of JonLoc Inc.
|
J.W. Nokes
|
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Chairman of the Environmental, Health and Safety Committee of
Tesoro Corporation; Retired Executive Vice President for
ConocoPhillips; Director of Post Oak Bank (Houston, Texas);
Director of Albemarle Corporation.
|
Donald H. Schmude
|
|
Retired Vice President of Texaco and President and Chief
Executive Officer of Texaco Refining & Marketing, Inc.
|
Michael E. Wiley
|
|
Chairman of the Compensation Committee of Tesoro Corporation;
Retired Chairman, President and Chief Executive Officer of Baker
Hughes, Inc.; Trustee of Fidelity Funds; Director of Bill
Barrett Corporation.
|
17
Additional
adverse changes in global economic conditions and the demand for
transportation fuels may continue to impact our business and
financial condition in ways that we currently cannot
predict.
The economic recession, including declines in consumer and
business confidence and spending as well as increased
unemployment and reduced demand for transportation fuels
continues to adversely affect the business and economic
environment in which we operate. These conditions increase the
risks associated with the creditworthiness of our suppliers,
customers and business partners. The consequences of such
adverse effects could include interruptions or delays in our
suppliers performance of our contracts, reductions and
delays in customer purchases, delays in or the inability of
customers to obtain financing to purchase our products, and
bankruptcy of customers. Any of these events may adversely
affect our cash flow, profitability and financial condition.
Competition
from companies that produce their own supply of feedstocks, have
more extensive retail outlets, or have greater financial
resources could materially affect our business, financial
condition and results of operations.
We compete on a global basis with a number of integrated and
nationally owned oil companies who produce crude oil, some of
which is used in their refining operations. Unlike these oil
companies, we must purchase all of our crude oil from
unaffiliated sources. Because these companies benefit from
increased commodity prices, have greater access to capital and
have stronger capital structures, they are able to better
withstand poor and volatile market conditions, such as a lower
refining margin environment, shortages of crude oil and other
feedstocks or extreme price fluctuations. In addition, we
compete with producers and marketers in other industries that
supply alternative forms of energy and fuels to satisfy the
requirements of our industrial, commercial and individual
customers.
We also face strong competition in the market for the sale of
retail gasoline and merchandise. Our competitors include service
stations operated by fully integrated major oil companies and
other well-recognized national or regional retail outlets, often
selling gasoline or merchandise at aggressively competitive
prices.
Some of our competitors also have materially greater financial
and other resources than we have. Such competitors have a
greater ability to bear the economic risks inherent in all
phases of our industry. The actions of our competitors, along
with changes in the supply and price of foreign imports, could
lead to lower prices or reduced margins for the products we
sell, which could have an adverse effect on our business,
financial condition and results of operations.
Meeting
the requirements of evolving environmental, health and safety
laws and regulations including those related to climate change
could adversely affect our performance.
Consistent with the experience of other U.S. refiners,
environmental laws and regulations have raised operating costs
and require significant capital investments at our refineries.
We believe that existing physical facilities at our refineries
are substantially adequate to maintain compliance with existing
applicable laws and regulatory requirements. However, we may be
required to address conditions that may be discovered in the
future and require a response. Also, potentially material
expenditures could be required in the future as a result of
evolving environmental, health and safety, and energy laws,
regulations or requirements that may be adopted or imposed in
the future. Future developments in federal laws and regulations
governing environmental, health and safety and energy matters
are especially difficult to predict.
Currently, various legislative and regulatory measures to
address greenhouse gas emissions (including carbon dioxide,
methane and nitrous oxides) are in various phases of discussion
or implementation. These include requirements effective in
January 2010 to report emissions of greenhouse gases to the EPA
and proposed federal legislation and regulation as well as state
actions to develop statewide or regional programs, each of which
require or could require reductions in our greenhouse gas
emissions. Requiring reductions in our greenhouse gas emissions
could result in increased costs to (i) operate and maintain
our facilities, (ii) install new emission controls at our
facilities and (iii) administer and manage any greenhouse
gas emissions programs, including acquiring emission credits or
allotments.
18
Requiring reductions in our greenhouse gas emissions and
increased use of renewable fuels could also decrease the demand
for our refined products, and could have a material adverse
effect on our business financial condition and results of
operations. For example:
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In California, Assembly Bill 32 (AB 32), created a
statewide cap on greenhouse gas emissions and requires that the
state return to 1990 emission levels by 2020. AB 32 also created
a Low Carbon Fuel Standard which requires a 10% reduction in the
carbon intensity of fuels by 2020.
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In December 2007, the U.S. Congress passed the Energy
Independence and Security Act that created a second Renewable
Fuels Standard (RFS2). This standard requires the
total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the
U.S. to reach 12.95 billion gallons in 2010 and rise
to 36 billion gallons by 2022.
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In 2009, the EPA proposed regulations that would require the
reduction of emissions of greenhouse gases from light trucks and
cars, and would establish permitting thresholds for stationary
sources that emit greenhouse gases and require emissions
controls for those sources.
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In 2009, the U.S. House of Representatives passed a
cap and trade bill that would require reduction of
greenhouse gas emissions of 17% by 2020 and 80% by 2050.
|
Our
operations are subject to operational hazards that could expose
us to potentially significant losses.
Our operations are subject to potential operational hazards and
risks inherent in refining operations and in transporting and
storing crude oil and refined products, such as fires, major
accidents, severe weather, natural disasters, explosions,
maritime disasters, labor disputes, security breaches, pipeline
ruptures and spills and mechanical failure of equipment at our
or third party facilities, any of which can result in business
interruptions or shutdowns and damage to our properties and the
properties of others. A serious accident at our facilities could
also result in serious injury or death to our employees or
contractors and could expose us to significant liability for
personal injury claims and reputational risk. Any such event or
unplanned shutdown could have a material adverse effect on our
business, financial condition and results of operations.
While we carry property, casualty and business interruption
insurance, we do not maintain insurance coverage against all
potential losses. We could also suffer losses for uninsurable or
uninsured risks or in amounts in excess of existing insurance
coverage. The occurrence of an event that is not fully covered
by insurance or failure by one or more insurers to honor its
coverage commitments for an insured event could have a material
adverse effect on our business, financial condition and results
of operations.
Our
business is impacted by environmental risks inherent in refining
operations.
The operation of refineries, pipelines and refined products
terminals is inherently subject to the risks of spills,
discharges or other inadvertent releases of petroleum or
hazardous substances. If any of these events had previously
occurred or occurs in the future in connection with any of our
refineries, pipelines or refined products terminals, or in
connection with any facilities to which we sent or send wastes
or by-products for treatment or disposal, other than events for
which we are indemnified, we could be liable for all costs and
penalties associated with their remediation under federal, state
and local environmental laws or common law, and could be liable
for property damage to third parties caused by contamination
from releases and spills. The penalties and
clean-up
costs that we may have to pay for releases or the amounts that
we may have to pay to third parties for damages to their
property, could be significant and the payment of these amounts
could have a material adverse effect on our business, financial
condition and results of operations.
We operate in environmentally sensitive coastal waters where
tanker, pipeline and refined product transportation operations
are closely regulated by federal, state and local agencies and
monitored by environmental interest groups. Our California,
Mid-Pacific and Pacific Northwest refineries import crude oil
and other feedstocks by tanker. Transportation of crude oil and
refined products over water involves inherent risk and subjects
us to the provisions of the Federal Oil Pollution Act of 1990
and state laws in California, Hawaii, Washington and Alaska.
Among other things, these laws require us to demonstrate in some
situations our capacity to respond to a worst case
discharge to the maximum extent possible. We have
contracted with various spill response service companies in the
areas in which we transport crude oil and refined products to
meet the requirements of the Federal Oil Pollution Act of
1990
19
and state and foreign laws. However, there may be accidents
involving tankers transporting crude oil or refined products,
and response services may not respond to a worst case
discharge in a manner that will adequately contain that
discharge, or we may be subject to liability in connection with
a discharge.
Our
operations are subject to general environmental risks, expenses
and liabilities which could affect our results of
operations.
From time to time we have been, and presently are, subject to
litigation and investigations with respect to environmental and
related matters, including product liability claims related to
the oxygenate Methyl Tertiary Butyl Ether (MTBE). We
may become involved in further litigation or other proceedings,
or we may be held responsible in any existing or future
litigation or proceedings, the costs of which could be material.
We have in the past operated retail stations with underground
storage tanks in various jurisdictions. Federal and state
regulations and legislation govern the storage tanks, and
compliance with these requirements can be costly. The operation
of underground storage tanks poses certain risks, including
leaks. Leaks from underground storage tanks which may occur at
one or more of our retail stations, or which may have occurred
at our previously operated retail stations, may impact soil or
groundwater and could result in fines or civil liability for us.
The
volatility of crude oil prices, refined product prices and
natural gas and electrical power prices may have a material
adverse effect on our cash flow and results of
operations.
Our earnings and cash flows from our refining and wholesale
marketing operations depend on a number of factors, including
fixed and variable expenses (including the cost of crude oil and
other refinery feedstocks) and the margin relative to those
expenses at which we are able to sell refined products. In
recent years, the prices of crude oil and refined products have
fluctuated substantially. These prices depend on numerous
factors beyond our control, including the global supply and
demand for crude oil, gasoline and other refined products, which
are subject to, among other things:
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changes in the global economy and the level of foreign and
domestic production of crude oil and refined products;
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availability of crude oil and refined products and the
infrastructure to transport crude oil and refined products;
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local factors, including market conditions, the level of
operations of other refineries in our markets, and the volume of
refined products imported;
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threatened or actual terrorist incidents, acts of war, and other
global political conditions;
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government regulations; and
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weather conditions, hurricanes or other natural disasters.
|
Prices for refined products are influenced by the price of crude
oil. We do not produce crude oil and must purchase all of the
crude oil we process. Many crude oils available on the world
market will not meet the quality restrictions for use in our
refineries. Others are not economical to use due to excessive
transportation costs or for other reasons. The price of the
crude oils used in our refineries fluctuates on worldwide market
conditions. Generally, an increase or decrease in the price of
crude oil affects the price of gasoline and other refined
products. However, the prices for crude oil and prices for our
refined products can fluctuate differently based on global and
local market conditions. In addition, the timing of the relative
movement of the prices (both among different classes of refined
products and among various global markets for similar refined
products) as well as the overall change in refined product
prices, can reduce profit margins and could have a significant
impact on our refining and wholesale marketing operations,
earnings and cash flow. Also, crude oil supply contracts
generally have market-responsive pricing provisions. We purchase
our refinery feedstocks weeks before manufacturing and selling
the refined products. Price level changes during the period
between purchasing feedstocks and selling the manufactured
refined products from these feedstocks could have a significant
effect on our financial results. We also purchase refined
products manufactured by others for sale to our customers. Price
level changes during the periods between purchasing and selling
these refined products also could have a material adverse effect
on our business, financial condition and results of operations.
Volatile prices for natural gas and electrical power used by our
refineries and other operations affect manufacturing and
operating costs. Natural gas and electricity prices have been,
and will continue to be, affected by supply and demand for fuel
and utility services in both local and regional markets.
20
We are
subject to interruptions of supply and increased costs as a
result of our reliance on third-party transportation of crude
oil and refined products.
Our Washington refinery receives all of its Canadian crude oil
and delivers a high proportion of its gasoline, diesel fuel and
jet fuel through third-party pipelines and the balance through
marine vessels. Our Hawaii and Alaska refineries receive most of
their crude oil and transport a substantial portion of their
refined products through ships and barges. Our Utah refinery
receives substantially all of its crude oil and delivers
substantially all of its refined products through third-party
pipelines. Our North Dakota refinery delivers substantially all
of its refined products through a third-party pipeline system.
Our Golden Eagle refinery receives approximately one-third of
its crude oil through pipelines and the balance through marine
vessels. Substantially all of our Golden Eagle refinerys
production is delivered through third-party pipelines, ships and
barges. Our Los Angeles refinery receives California crudes
through third-party pipelines and the balance of its crude
supply through marine vessels. Approximately two-thirds of our
Los Angeles refinerys production is delivered through
third-party pipelines, terminals, ships and barges. In addition
to environmental risks discussed above, we could experience an
interruption of supply or an increased cost to deliver refined
products to market if the ability of the pipelines or vessels to
transport crude oil or refined products is disrupted because of
accidents, governmental regulation or third-party action. A
prolonged disruption of the ability of a pipeline or vessels to
transport crude oil or refined product could have a material
adverse effect on our business, financial condition and results
of operations.
Terrorist
attacks and threats or actual war may negatively impact our
business.
Our business is affected by global economic conditions and
fluctuations in consumer confidence and spending, which can
decline as a result of numerous factors outside of our control,
such as actual or threatened terrorist attacks and acts of war.
Terrorist attacks, as well as events occurring in response to or
in connection with them, including future terrorist attacks
against U.S. targets, rumors or threats of war, actual
conflicts involving the United States or its allies, or military
or trade disruptions impacting our suppliers or our customers or
energy markets in general, may adversely impact our operations.
As a result, there could be delays or losses in the delivery of
supplies and raw materials to us, delays in our delivery of
refined products, decreased sales of our refined products and
extension of time for payment of accounts receivable from our
customers. Strategic targets such as energy-related assets
(which could include refineries such as ours) may be at greater
risk of future terrorist attacks than other targets in the
United States. These occurrences could significantly impact
energy prices, including prices for our crude oil and refined
products, and have a material adverse impact on the margins from
our refining and wholesale marketing operations. In addition,
significant increases in energy prices could result in
government-imposed price controls. Any one of, or a combination
of, these occurrences could have a material adverse effect on
our business, financial condition and results of operations.
Our
operating results are seasonal and generally are lower in the
first and fourth quarters of the year.
Generally, demand for gasoline is higher during the spring and
summer months than during the winter months in most of our
markets due to seasonal changes in highway traffic. As a result,
our operating results for the first and fourth quarters are
generally lower than for those in the second and third quarters.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax laws and regulations, including
federal, state, and foreign income taxes and transactional taxes
such as excise, sales/use, payroll, franchise, and ad valorem
taxes. New tax laws and regulations and changes in existing tax
laws and regulations are continuously being enacted that could
result in increased tax expenditures in the future. Many of
these tax liabilities are subject to audits by the respective
taxing authority. These audits may result in additional taxes as
well as interest and penalties.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
21
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ITEM 3.
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LEGAL
PROCEEDINGS
|
In the ordinary course of business, we become party to lawsuits,
administrative proceedings and governmental investigations,
including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us
in some matters and some matters may require years to resolve.
Although we cannot provide assurance, we believe that an adverse
resolution of the matters described below during a future
reporting period will not have a material adverse effect on our
financial position or results of operations.
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are evaluating the alleged violations
contained in the suit.
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds (approximately $22 million)
as retroactive price adjustments under our previous crude oil
contracts with them. In December 2009, the trial court judge
issued an Order supporting Chevrons claim to receive a
share of the refunds. We disagree with, and are challenging the
Order. The exact amount of refunds subject to the Order has not
been determined, and some uncertainty remains about the scope of
the Order.
In January 2008, we received an offer of settlement in the
amount of $670,000 from the Alaska Department of Environmental
Conservation (ADEC) related to the grounding of a
vessel in the Alaska Cook Inlet on February 2, 2006. The
ADEC has alleged that two vessels chartered by us violated
provisions of our Cook Inlet Vessel Oil Prevention and
Contingency Plan during the period from December 2004 to
February 2006. The resolution of this matter will not have a
material adverse effect on our financial position or results of
operation.
We are a defendant, along with other manufacturing, supply and
marketing defendants, in five lawsuits alleging MTBE
contamination in ground water. The defendants are being sued for
having manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs in the five
cases, all in California, are municipalities and governmental
authorities. The plaintiffs allege, in part, that the defendants
are liable for manufacturing or distributing a defective
product. The suits generally seek individual, unquantified
compensatory and punitive damages and attorneys fees. We
intend to vigorously assert our defenses against these claims.
In October 2008, we received a NOV from the EPA concerning our
Utah refinery alleging certain violations of the Clean Air Act
at the refinery beginning in 2004. We have investigated the
allegations contained in the NOV and sent the EPA additional
information in 2009.
In June 2008, we received an offer from the Bay Area Air Quality
Management District (the District) to settle 44 NOVs
for $740,000. The NOVs were issued from May 2006 to April 2008
and allege violations of air quality regulations at our Golden
Eagle refinery. We are continuing to negotiate a settlement of
the NOVs with the District. The resolution of this matter will
not have a material adverse effect on our financial position or
results of operations.
22
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The following performance graph and related information will
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor will such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
Tesoro specifically incorporates it by reference into such
filing.
The performance graph below compares the cumulative total return
of our common stock to the cumulative total return of the
S&P 500 Composite Index and to a composite peer group of
six companies. The composite peer group (the Peer
Group) includes Alon USA Energy, Inc., Frontier Oil
Corporation, Holly Corporation, Sunoco, Inc., Valero Energy
Corporation and Western Refining, Inc. The graph below is for
the five year period commencing December 31, 2004 and
ending December 31, 2009.
Comparison
of Five Year Cumulative Total Return*
Among the Company, the S&P Composite 500 Index and
Composite Peer Group
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12/31/2004
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12/31/2005
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12/31/2006
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12/31/2007
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12/31/2008
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12/31/2009
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Tesoro
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$
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100
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|
$
|
194.04
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|
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$
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208.61
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|
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$
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304.63
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$
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86.06
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|
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$
|
90.66
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S&P 500
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$
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100
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|
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$
|
104.91
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|
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$
|
121.46
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|
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|
$
|
128.13
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|
$
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80.73
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$
|
102.10
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Peer Group
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$
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100
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|
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$
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218.06
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|
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$
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220.90
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|
|
|
$
|
287.60
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|
|
|
$
|
104.33
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|
|
|
$
|
82.32
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|
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* |
Assumes that the value of the investments in common stock and
each index was $100 on December 31, 2004, and that all
dividends were reinvested. Investment is weighted on the basis
of market captalization.
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Note: The stock price performance shown on the graph is not
necessarily indicative of future performance.
23
Our common stock is listed under the symbol TSO on
the New York Stock Exchange. Summarized below are high and low
sales prices of and dividends declared on our common stock on
the New York Stock Exchange during 2009 and 2008.
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Sales Prices per
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Dividends
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Common Share
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per
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Quarter Ended
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High
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Low
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Common Share
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December 31, 2009
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$
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16.93
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$
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12.26
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$
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0.05
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|
|
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September 30, 2009
|
|
$
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16.04
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$
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10.62
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$
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0.10
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|
|
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June 30, 2009
|
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$
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18.77
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|
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$
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12.25
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|
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$
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0.10
|
|
|
|
|
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March 31, 2009
|
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$
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19.16
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$
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11.75
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$
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0.10
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|
|
|
|
|
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|
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|
|
|
|
|
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December 31, 2008
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$
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16.87
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$
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6.71
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|
$
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0.10
|
|
|
|
|
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September 30, 2008
|
|
$
|
20.17
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|
$
|
14.29
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|
$
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0.10
|
|
|
|
|
|
June 30, 2008
|
|
$
|
33.40
|
|
|
$
|
18.46
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|
|
$
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0.10
|
|
|
|
|
|
March 31, 2008
|
|
$
|
48.35
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|
$
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26.55
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|
|
$
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0.10
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|
|
|
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In February 2010, our Board of Directors suspended indefinitely
our quarterly cash dividend on common stock to shareholders as
further described in Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 7. At
February 22, 2010, there were approximately 2,549 holders
of record of our 140,572,348 outstanding shares of common stock.
For information regarding restrictions on future dividend
payments and stock repurchases, see Managements Discussion
and Analysis of Financial Condition and Results of Operations in
Item 7 and Note O in our consolidated financial
statements in Item 8.
The 2010 Annual Meeting of Stockholders will be held at
3:00 P.M. Central Time on Wednesday, May 5, 2010, at
the Doubletree Hotel, 15747 JFK Blvd., Houston, Texas. Holders
of common stock of record at the close of business on
March 15, 2010 are entitled to notice of and to vote at the
annual meeting.
24
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ITEM 6.
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SELECTED
FINANCIAL DATA
|
The following table sets forth certain selected consolidated
financial data of Tesoro as of and for each of the five years in
the period ended December 31, 2009. The selected
consolidated financial information presented below has been
derived from our historical financial statements. The following
table should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and our consolidated financial
statements in Item 8.
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Years Ended December 31,
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2009
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2008
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2007(a)
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2006(b)
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2005(b)
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(Dollars in millions except per share amounts)
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Statement of Operations Data
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues(c)
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
|
$
|
21,976
|
|
|
$
|
18,061
|
|
|
$
|
16,603
|
|
Net Earnings (Loss)(d)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
|
$
|
507
|
|
Net Earnings (Loss)(Per Share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
$
|
5.89
|
|
|
$
|
3.72
|
|
Diluted
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
$
|
5.73
|
|
|
$
|
3.60
|
|
Weighted Shares Outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
|
|
136.3
|
|
Diluted
|
|
|
138.2
|
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
139.8
|
|
|
|
140.9
|
|
Dividends per share
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$
|
0.20
|
|
|
$
|
0.10
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
2,223
|
|
|
$
|
1,646
|
|
|
$
|
2,600
|
|
|
$
|
2,811
|
|
|
$
|
2,215
|
|
Property, Plant and Equipment, Net
|
|
$
|
5,190
|
|
|
$
|
5,081
|
|
|
$
|
4,780
|
|
|
$
|
2,687
|
|
|
$
|
2,467
|
|
Total Assets
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
$
|
5,904
|
|
|
$
|
5,097
|
|
Current Liabilities
|
|
$
|
1,889
|
|
|
$
|
1,441
|
|
|
$
|
2,494
|
|
|
$
|
1,672
|
|
|
$
|
1,502
|
|
Total Debt(e)
|
|
$
|
1,841
|
|
|
$
|
1,611
|
|
|
$
|
1,659
|
|
|
$
|
1,046
|
|
|
$
|
1,047
|
|
Stockholders Equity
|
|
$
|
3,087
|
|
|
$
|
3,218
|
|
|
$
|
3,052
|
|
|
$
|
2,502
|
|
|
$
|
1,887
|
|
Current Ratio
|
|
|
1.2:1
|
|
|
|
1.1:1
|
|
|
|
1.0:1
|
|
|
|
1.7:1
|
|
|
|
1.5:1
|
|
Working Capital
|
|
$
|
334
|
|
|
$
|
205
|
|
|
$
|
106
|
|
|
$
|
1,139
|
|
|
$
|
713
|
|
Total Debt to Capitalization(e)
|
|
|
37
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
29
|
%
|
|
|
36
|
%
|
Common Stock Outstanding (millions of shares)
|
|
|
140.4
|
|
|
|
138.4
|
|
|
|
137.0
|
|
|
|
135.8
|
|
|
|
138.6
|
|
Book Value Per Common Share
|
|
$
|
21.99
|
|
|
$
|
23.25
|
|
|
$
|
22.28
|
|
|
$
|
18.42
|
|
|
$
|
13.61
|
|
Cash Flows From (Used In)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
663
|
|
|
$
|
716
|
|
|
$
|
1,322
|
|
|
$
|
1,139
|
|
|
$
|
758
|
|
Investing Activities
|
|
|
(436
|
)
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
(430
|
)
|
|
|
(254
|
)
|
Financing Activities(e)
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
(163
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
393
|
|
|
$
|
(3
|
)
|
|
$
|
(963
|
)
|
|
$
|
546
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
401
|
|
|
$
|
619
|
|
|
$
|
789
|
|
|
$
|
453
|
|
|
$
|
262
|
|
|
|
|
(a) |
|
Our financial results include the results of our Los Angeles
refinery and Shell and USA Gasoline retail stations since
acquisition in May 2007. |
|
(b) |
|
Share and per share amounts have been adjusted to reflect our
May 2007
two-for-one
stock split. |
|
(c) |
|
During 2009, we reclassified our gains and losses associated
with our derivative instruments from Revenues to
Costs of sales and operating expenses for prior
years to conform to the current presentation. Our derivative
losses totaled $107 million, $61 million and
$22 million during 2008, 2007, and 2005, respectively. We
recognized a derivative gain of $43 million during 2006. |
|
(d) |
|
Net earnings included the following pre-tax items that affect
the comparability of the periods presented. During 2009, we
incurred an impairment charge of $43 million related to
goodwill impairment in our refining segment and reduced
inventories resulting in a
last-in-first-out
(LIFO) liquidation or reduction in costs of sales of
$69 million. During 2008, we incurred a $91 million
charge to write-off a receivable for which collection was deemed
unlikely, reduced inventories resulting in a LIFO liquidation or
reduction in costs of sales of $138 million and received
net refunds of $50 million from the Trans Alaska Pipeline
System associated with our protest of prior year intrastate
rates. During 2006, we incurred charges of $28 million for
termination of a delayed coker project at the Washington
refinery. For 2005, we incurred charges of $95 million for
debt refinancing and prepayment costs. |
|
(e) |
|
During 2009, we issued $300 million in senior notes for
general corporate purposes and during 2007 we issued
$500 million in senior notes primarily to fund the
acquisition of the Los Angeles refinery. |
25
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following information concerning our results of operations
and financial condition should be read in conjunction with
Business in Item 1 and our consolidated financial
statements in Item 8.
IMPORTANT
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
(including information incorporated by reference) includes and
references forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, expectations
regarding refining margins, revenues, cash flows, capital
expenditures, turnaround expenses, and other financial items.
These statements also relate to our business strategy, goals and
expectations concerning our market position, future operations,
margins and profitability. We have used the words
anticipate, believe, could,
estimate, expect, intend,
may, plan, predict,
project, will, would and
similar terms and phrases to identify forward-looking statements
in this Annual Report on
Form 10-K,
which speak only as of the date the statements were made.
Although we believe the assumptions upon which these
forward-looking statements are based are reasonable, any of
these assumptions could prove to be inaccurate and the
forward-looking statements based on these assumptions could be
incorrect.
The matters discussed in these forward-looking statements are
subject to risks, uncertainties and other factors that could
cause actual results and trends to differ materially from those
made, projected, or implied in or by the forward-looking
statements depending on a variety of uncertainties or other
factors including, but not limited to:
|
|
|
|
|
changes in global economic conditions and the effects of the
global economic downturn on our business and the business of our
suppliers, customers, business partners and credit lenders;
|
|
|
|
the timing and extent of changes in commodity prices and
underlying demand for our refined products;
|
|
|
|
state and federal environmental, economic, health and safety,
energy and other policies and regulations, including those
related to climate change and any changes therein, and any legal
or regulatory investigations, delays or other factors beyond our
control;
|
|
|
|
operational hazards inherent in refining operations and in
transporting and storing crude oil and refined products;
|
|
|
|
changes in capital requirements or in execution of planned
capital projects;
|
|
|
|
disruptions due to equipment interruption or failure at our
facilities or third-party facilities;
|
|
|
|
the availability and costs of crude oil, other refinery
feedstocks and refined products;
|
|
|
|
changes in our cash flow from operations;
|
|
|
|
changes in the cost or availability of third-party vessels,
pipelines and other means of transporting crude oil feedstocks
and refined products;
|
|
|
|
actions of customers and competitors;
|
|
|
|
direct or indirect effects on our business resulting from actual
or threatened terrorist incidents or acts of war;
|
|
|
|
political developments;
|
|
|
|
changes in our inventory levels and carrying costs;
|
|
|
|
seasonal variations in demand for refined products;
|
|
|
|
changes in fuel and utility costs for our facilities;
|
|
|
|
risks related to labor relations and workplace safety;
|
|
|
|
changes in insurance markets impacting costs and the level and
types of coverage available;
|
|
|
|
adverse rulings, judgments, or settlements in litigation or
other legal or tax matters, including unexpected environmental
remediation costs in excess of any reserves;
|
|
|
|
weather conditions affecting our operations or the areas in
which our refined products are marketed; and
|
|
|
|
earthquakes or other natural disasters affecting operations.
|
26
Many of these factors, as well as other factors, are described
in greater detail in Competition on page 11 and
Risk Factors on page 18. All future written and
oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety
by the previous statements. The forward-looking statements in
this Annual Report on
Form 10-K
speak only as of the date of this Annual Report on
Form 10-K.
We undertake no obligation to update any information contained
herein or to publicly release the results of any revisions to
any forward-looking statements that may be made to reflect
events or circumstances that occur, or that we become aware of,
after the date of this Annual Report on
Form 10-K.
BUSINESS
STRATEGY AND OVERVIEW
Strategy
and Goals
Our strategy in our refining and marketing business is to create
stockholder value in a global market with competitive returns in
any economic environment through:
|
|
|
|
|
operating our facilities in a safe, reliable and environmentally
responsible way;
|
|
|
|
achieving greater operational and administrative
efficiencies; and
|
|
|
|
using cash flows from operations to create further shareholder
value.
|
Beginning in late 2007, in response to declining refined product
demand and refining industry margins, we began implementing
initiatives to operate in a lower margin environment. During
2009, our goals were focused on lowering break-even costs,
gaining sustainable improvements in our capture of available
margins and funding our capital program through operating cash
flow. Relative to these goals, we achieved the following during
2009:
|
|
|
|
|
improved our margin capture approximately $370 million
through various non-capital initiatives including crude oil and
feedstock optimization, product realization and refinery yield
improvements;
|
|
|
|
reduced our throughput and inventory to better match lower
consumer demand;
|
|
|
|
improved our cash balance $393 million by decreasing
inventories 4 million barrels, reducing our capital
spending $59 million from a budget of $460 million by
adjusting project costs, scope and timing, and issuing
$300 million of senior notes; and
|
|
|
|
funded our 2009 capital spending of $401 million through
cash flows from operations of $663 million.
|
We expect the industry fundamentals in 2009, namely lower
refined product demand and excess refining capacity, will
persist through 2010. Consequently, we have developed a three
year value creation plan designed to optimize our cash flows
from operations by:
|
|
|
|
|
improving our capture of available margins;
|
|
|
|
lowering our break-even costs;
|
|
|
|
lowering our energy and maintenance costs; and
|
|
|
|
devoting capital to income improvement projects.
|
We have identified approximately 300 high return capital
projects that we can implement quickly to improve our economic
position and create incremental shareholder value in the current
low margin environment. These projects focus on lowering our
feedstock costs, improving clean product yields and reducing
operating costs, including improving energy efficiency at all of
our refineries. The average cost per project for the majority of
these projects is less than $1 million. We plan to spend
approximately $70 million in 2010 for these projects.
Industry
Overview
Our profitability is heavily influenced by the cost of crude oil
and the aggregate value of the products we make from that crude
oil. Product values and crude oil costs are set by the market
and are outside of the control of any refiner. Indexed models
have been developed to meaningfully present the difference
between these two values at an industry level; these
industry refining margins provide benchmarks against
which the performance of individual refiners can be evaluated.
27
The effects of the current economic recession, particularly the
highest unemployment rate since 1983, continued to negatively
impact domestic refined product demand and drive up
corresponding inventories. This weak demand and high inventory
levels, combined with rising crude oil prices, weakened industry
refining margins during 2009. Margins were further compromised
by new global refining capacity and the increased supply of
ethanol in the gasoline market.
Prices for crude oil, in this case West Texas Intermediate,
increased approximately 75% during 2009, from an average of $43
per barrel during the first quarter to an average of $76 per
barrel during the fourth quarter. This increase is attributed
primarily to increased demand in the Far East. Product values
did not increase at a corresponding rate, however, due to poor
demand and excess inventory. Average U.S. West Coast
benchmark gasoline prices increased only 33% and diesel fuel
prices increased only 48% from the first quarter to the fourth
quarter of 2009.
Weak product demand drove U.S. diesel fuel and jet fuel
inventories to their highest levels since 1983. U.S. West
Coast benchmark diesel margins averaged $9 per barrel during
2009, compared to $24 per barrel during 2008. U.S. demand
for gasoline averaged near or below its five-year average during
2009, and gasoline inventories exceeded five-year high levels
during the fourth quarter. Although several refineries in the
U.S. were temporarily idled or permanently shut down during
2009, decreased demand more than offset production losses and
even drove down product imports. Refinery utilization fell to
83% during 2009, the lowest level since 1985.
Narrowing differentials between heavy and light crude oil prices
also negatively impacted industry refining margins during 2009.
For example, Oriente crude (a South American heavy crude oil)
traded for $7 per barrel below Alaska North Slope crude (a light
crude oil) compared to $13 per barrel last year. Price
differentials for heavy crude oil were reduced due in part to a
lower supply of heavy crude oils from Venezuela, Mexico and the
Middle East and higher demand for heavy crude oil in China and
India.
Outlook
While there have recently been signs of improvement in the
U.S. economy, the current global economic slowdown and high
unemployment in the U.S. are expected to continue to
negatively impact demand for refined products. The impact of
reduced demand has been compounded by excess global refining
capacity and historically high inventory levels. These
conditions have continued to put significant pressure on refined
product margins in January and February 2010. Until the economy
recovers and unemployment declines, we expect margins to be
negatively impacted.
As a result of the falling demand and excess refining capacity,
several refineries in North America have been or are planned to
be temporarily or permanently shutdown. We are currently
monitoring, and will continue to monitor, all of our refineries
to assess whether a complete or partial shutdown of one or more
of the facilities is appropriate until market conditions improve.
In addition to the current market conditions, there are
long-term factors that may impact the supply and demand of
refined products in the U.S. These factors include the
increased mileage standards for vehicles, the mandated renewable
fuels standards, proposed climate change legislation, the EPA
proposal to regulate greenhouse gases emissions under the Clean
Air Act and competing refineries being built overseas.
Global
Financial Markets
We continue to remain attentive to current financial market
conditions, including limited credit availability, even as we
continue to see global financial markets improve. While our
ability to finance operations has not been impaired, there can
be no assurance that there will not be a further deterioration
in financial markets and confidence in major economies that
could negatively impact us.
28
RESULTS
OF OPERATIONS
A discussion and analysis of the factors contributing to our
results of operations is presented below. The accompanying
consolidated financial statements in Item 8, together with
the following information, are intended to provide investors
with a reasonable basis for assessing our historical operations,
but should not serve as the only criteria for predicting our
future performance. Our results include the operations of our
Los Angeles refinery and Shell and USA Gasoline retail stations
since acquisition in May 2007.
Summary
Our net loss in 2009 was $140 million ($1.01 per diluted
share) compared with net earnings of $278 million ($2.00
per diluted share) in 2008. The decrease in net earnings of
$3.01 per diluted share was due primarily to the following:
|
|
|
|
|
significantly lower industry distillate margins primarily from
reduced demand and excess inventories;
|
|
|
|
the narrowing of price differentials between heavy and light
crude oils;
|
|
|
|
a lower LIFO liquidation benefit of $69 million;
|
|
|
|
a goodwill impairment charge of $43 million;
|
|
|
|
the impact of scheduled and unscheduled downtime; and
|
|
|
|
refunds received in 2008 totaling $50 million in connection
with our protest of intrastate pipeline rates.
|
The decrease in net earnings during 2009 relative to 2008 was
partially offset by the following:
|
|
|
|
|
higher industry gasoline margins on the U.S. West Coast;
|
|
|
|
reduced refining operating expenses of $149 million
primarily reflecting decreased utility costs and lower refining
throughput;
|
|
|
|
a $91 million charge in 2008 to write-off a receivable;
|
|
|
|
lower losses on our derivative instruments of
$39 million; and
|
|
|
|
improved retail operating income of $37 million primarily
due to lower impairment losses and operating expenses.
|
Our net earnings for 2008 declined to $278 million ($2.00
per diluted share) from $566 million ($4.06 per diluted
share) in 2007. The decline in net earnings of $2.06 per diluted
share was due primarily to the following:
|
|
|
|
|
substantially lower industry gasoline margins;
|
|
|
|
higher operating expenses of $208 million primarily
reflecting increased utility expenses;
|
|
|
|
a $91 million charge to write-off a receivable;
|
|
|
|
the impact of rising crude oil prices on our derivative
positions during the first half of 2008 resulting in higher
losses of $46 million
year-over-year; and
|
|
|
|
planned turnarounds of several units at our Washington and
Golden Eagle refineries during 2008.
|
The decrease in net earnings during 2008 relative to 2007 was
partially offset by the following:
|
|
|
|
|
a LIFO liquidation resulting in a reduction to costs of sales of
$138 million;
|
|
|
|
lower stock-based and incentive compensation costs of
$78 million;
|
|
|
|
refunds received in 2008 totaling $50 million in connection
with our protest of intrastate pipeline rates;
|
|
|
|
initiatives implemented to improve our capture of available
margins and match our yields to market demands including
increasing the yield of distillate products, and increasing the
use of heavy and sour crude oils;
|
|
|
|
utilization of the Golden Eagle delayed coker, beginning in May
2008, to capture yield improvements and increase our flexibility
to use lower cost crude oil; and
|
|
|
|
improved retail gross margins of $131 million.
|
29
Refining
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions except per barrel amounts)
|
|
|
Revenues (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$
|
15,674
|
|
|
$
|
26,759
|
|
|
$
|
20,906
|
|
Crude oil resales and other
|
|
|
691
|
|
|
|
1,126
|
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
16,365
|
|
|
$
|
27,885
|
|
|
$
|
21,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (thousand barrels per day)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(c)
|
|
|
177
|
|
|
|
192
|
|
|
|
159
|
|
Light crude
|
|
|
335
|
|
|
|
369
|
|
|
|
407
|
|
Other feedstocks
|
|
|
37
|
|
|
|
34
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Throughput
|
|
|
549
|
|
|
|
595
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Heavy Crude Oil of Total Refining Throughput (c)
|
|
|
32
|
%
|
|
|
32
|
%
|
|
|
27
|
%
|
Yield (thousand barrels per day)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
268
|
|
|
|
275
|
|
|
|
280
|
|
Jet Fuel
|
|
|
70
|
|
|
|
78
|
|
|
|
77
|
|
Diesel Fuel
|
|
|
114
|
|
|
|
143
|
|
|
|
129
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
127
|
|
|
|
129
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Yield
|
|
|
579
|
|
|
|
625
|
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
8.90
|
|
|
$
|
11.50
|
|
|
$
|
12.73
|
|
Manufacturing cost ($/throughput bbl)(d)
|
|
$
|
5.01
|
|
|
$
|
5.19
|
|
|
$
|
4.37
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(e)
|
|
$
|
1,783
|
|
|
$
|
2,506
|
|
|
$
|
2,762
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs
|
|
|
1,004
|
|
|
|
1,131
|
|
|
|
949
|
|
Other operating expenses
|
|
|
262
|
|
|
|
284
|
|
|
|
258
|
|
Selling, general and administrative
|
|
|
32
|
|
|
|
127
|
|
|
|
43
|
|
Depreciation and amortization(f)
|
|
|
359
|
|
|
|
326
|
|
|
|
314
|
|
Loss on asset disposals and impairments(g)
|
|
|
71
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
$
|
55
|
|
|
$
|
627
|
|
|
$
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales (thousand barrels per day)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
306
|
|
|
|
326
|
|
|
|
319
|
|
Jet fuel
|
|
|
84
|
|
|
|
92
|
|
|
|
96
|
|
Diesel fuel
|
|
|
121
|
|
|
|
144
|
|
|
|
131
|
|
Heavy oils, residual products and other
|
|
|
85
|
|
|
|
94
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
596
|
|
|
|
656
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin ($/barrel)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price
|
|
$
|
72.17
|
|
|
$
|
112.06
|
|
|
$
|
89.47
|
|
Average costs of sales
|
|
|
64.93
|
|
|
|
102.37
|
|
|
|
78.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin
|
|
$
|
7.24
|
|
|
$
|
9.69
|
|
|
$
|
11.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions except per barrel amounts)
|
|
|
Refining Data by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
California (Golden Eagle and Los Angeles)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(b)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Eagle
|
|
|
141
|
|
|
|
153
|
|
|
|
154
|
|
Los Angeles
|
|
|
100
|
|
|
|
105
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
241
|
|
|
|
258
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
897
|
|
|
$
|
1,332
|
|
|
$
|
1,317
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
10.18
|
|
|
$
|
14.08
|
|
|
$
|
16.33
|
|
Manufacturing cost ($/throughput bbl)(d)
|
|
$
|
6.86
|
|
|
$
|
7.18
|
|
|
$
|
6.94
|
|
Pacific Northwest (Washington and Alaska)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
84
|
|
|
|
103
|
|
|
|
121
|
|
Alaska
|
|
|
51
|
|
|
|
56
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
135
|
|
|
|
159
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
376
|
|
|
$
|
396
|
|
|
$
|
730
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
7.65
|
|
|
$
|
6.82
|
|
|
$
|
10.94
|
|
Manufacturing cost ($/throughput bbl)(d)
|
|
$
|
3.81
|
|
|
$
|
3.99
|
|
|
$
|
2.99
|
|
Mid-Pacific (Hawaii)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)
|
|
|
68
|
|
|
|
69
|
|
|
|
81
|
|
Gross refining margin(d)
|
|
$
|
90
|
|
|
$
|
170
|
|
|
$
|
35
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
3.62
|
|
|
$
|
6.72
|
|
|
$
|
1.18
|
|
Manufacturing cost ($/throughput bbl)(d)
|
|
$
|
3.18
|
|
|
$
|
3.30
|
|
|
$
|
2.23
|
|
Mid-Continent (North Dakota and Utah)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
54
|
|
|
|
56
|
|
|
|
58
|
|
Utah
|
|
|
51
|
|
|
|
53
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
105
|
|
|
|
109
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
418
|
|
|
$
|
603
|
|
|
$
|
701
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
10.95
|
|
|
$
|
15.12
|
|
|
$
|
17.51
|
|
Manufacturing cost ($/throughput bbl)(d)
|
|
$
|
3.49
|
|
|
$
|
3.44
|
|
|
$
|
3.07
|
|
|
|
|
(a) |
|
Losses associated with our derivative instruments have been
reclassified from Revenues (included in Crude
oil resales and other in the table above) to Costs
of sales and operating expenses in our statements of
consolidated operations for all periods presented. Our
derivative losses totaled $107 million and $61 million
for the year ended 2008 and 2007, respectively. Refined products
revenues include intersegment sales to our retail segment, at
prices which approximate market of $2.7 billion,
$3.9 billion and $2.8 billion in 2009, 2008 and 2007,
respectively. |
|
(b) |
|
Volumes for 2007 include amounts for the Los Angeles refinery
since acquisition in May 2007, averaged over the periods
presented. Throughput and yield averaged over 365 days
since acquisition in 2007 were 68 Mbpd and 73 Mbpd,
respectively. Throughput and yield averaged over the
235 days of operation in 2007 were 106 Mbpd and 114 Mbpd,
respectively. |
|
(c) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. |
|
(d) |
|
Management uses gross refining margin per barrel to evaluate
performance and compare profitability to other companies in the
industry. Gross refining margin per barrel is calculated by
dividing gross refining margin by total refining throughput and
may not be calculated similarly by other companies. Gross
refining margin is calculated as revenues less costs of
feedstocks, purchased refined products, transportation and
distribution. |
31
|
|
|
|
|
Management uses manufacturing costs per barrel to evaluate the
efficiency of refinery operations. Manufacturing costs per
barrel is calculated by dividing manufacturing costs by total
refining throughput and may not be comparable to similarly
titled measures used by other companies. Investors and analysts
use these financial measures to help analyze and compare
companies in the industry on the basis of operating performance.
These financial measures should not be considered alternatives
to segment operating income, revenues, costs of sales and
operating expenses or any other measure of financial performance
presented in accordance with U.S. GAAP. |
|
(e) |
|
Consolidated gross refining margin totals gross refining margin
for each of our regions adjusted for other costs not directly
attributable to a specific region. Gross refining margin
includes the effect of intersegment sales to the retail segment
at prices which approximate market. Gross refining margin
approximates total refining throughput times gross refining
margin per barrel. |
|
(f) |
|
Includes manufacturing depreciation and amortization per
throughput barrel of approximately $1.69, $1.40 and $1.37 for
2009, 2008 and 2007, respectively. |
|
(g) |
|
Includes a $43 million goodwill impairment charge in 2009. |
|
(h) |
|
Sources of total refined product sales included refined products
manufactured at the refineries and refined products purchased
from third parties. Total refined product sales margin includes
margins on sales of manufactured and purchased refined products. |
|
(i) |
|
We experienced reduced throughput due to scheduled turnarounds
at the Alaska and Golden Eagle refineries during the 2009 second
quarter, scheduled maintenance at the Washington refinery during
the 2009 first quarter, and scheduled turnarounds at the Golden
Eagle refinery during the 2008 first and second quarters and at
the Washington refinery during the 2008 first quarter. During
2007, we experienced reduced throughput due to scheduled
turnarounds at the Los Angeles, Golden Eagle, and Utah
refineries. |
2009
Compared to 2008
Overview. Operating income for our refining
segment decreased by $572 million during 2009. The decrease
primarily reflects a lower gross refining margin partially
offset by lower operating expenses of $149 million. The
impact of a lower per barrel gross refining margin decreased
total gross refining margins by $723 million during the
year. Operating income included a goodwill impairment charge at
our Washington refinery of $43 million during 2009 and a
charge of $91 million during 2008 to write-off a receivable
for which collection was deemed unlikely. Our operating income
in both periods benefited from a reduction in costs of sales by
decreasing LIFO inventory layers acquired at lower
per-barrel
costs. These inventory reductions resulted in operating income
improvements of $69 million during 2009 and
$138 million during 2008.
Gross Refining Margins. Our gross refining
margin per barrel decreased 23% to $8.90 per barrel in 2009 due
to significantly lower industry diesel fuel and jet fuel
margins, partially offset by higher industry margins for
gasoline and heavy products. The decrease in industry diesel
fuel margins throughout 2009 reflects lower global demand and
significantly higher U.S. inventories. Industry gasoline
margins on the U.S. West Coast improved in 2009 as compared
to 2008 primarily due to heavy industry downtime during the 2009
first quarter, unscheduled industry downtime during the 2009
third quarter and lower average gasoline inventories. We also
benefited from lower differentials on heavy products, such as
fuel oil. Fuel oil prices averaged approximately 93% of the
Alaska North Slope (ANS) crude oil price during 2009
versus approximately 84% during 2008. Our California region was
negatively impacted by a reduction of price differentials
between heavy and light crude oils that reduced gross refining
margin during 2009. Our California refineries run a high
proportion of heavy crude oils (66% of total refining throughput
during 2009). See Industry Overview for additional
information on the decrease in industry refining margins during
2009.
We periodically use derivative instruments to primarily manage
exposure to commodity price risks associated with the purchase
or sale of crude oil and finished products. We may also use
derivative instruments to manage price risks associated with
inventories above or below our target levels. Gains or losses
associated with our derivative instruments are included in gross
refining margin. Our losses totaled $68 million during 2009
versus $107 million during 2008. The decrease in our losses
reflects the impact of changing our hedging strategy. During the
2008 second quarter, we closed the majority of our crude oil
derivative positions associated with our long-haul strategy that
matched the price of long haul crude oils to crude oil prices at
the day of processing. We continue to monitor our hedging
strategy in 2010.
32
Refining Throughput. Total refining throughput
declined 46 thousand barrels per day (Mbpd) during
2009 primarily due to matching production to lower demand and
the following:
|
|
|
|
|
a refinery-wide turnaround and other unscheduled downtime at the
Alaska refinery during the 2009 second quarter;
|
|
|
|
a refinery-wide shutdown for repair of the crude tower at the
Washington refinery from mid-January to mid-February 2009;
|
|
|
|
unscheduled maintenance of the delayed coker and hydrocracker at
the Golden Eagle refinery during the 2009 third quarter and a
turnaround of the hydrocracker at the Golden Eagle refinery in
the 2009 second quarter; and
|
|
|
|
unscheduled downtime of the delayed coker at the Los Angeles
refinery primarily during the 2009 fourth quarter.
|
Total refining throughput during 2008 was impacted by
turnarounds at our Golden Eagle and Washington refineries.
Refined Products Sales. Revenues from sales of
refined products decreased 41% to $15.7 billion in 2009 as
compared to 2008, primarily due to significantly lower average
refined product sales prices and lower refined product sales
volumes. Our average product sales price decreased 36% to $72.17
per barrel in 2009 reflecting lower product demand and lower
average crude oil prices. Total refined product sales decreased
by 9% or 60 Mbpd from 2008, primarily reflecting lower product
demand.
Costs of Sales and Expenses. Our average costs
of sales decreased 37% to $64.93 per barrel during 2009
reflecting significantly lower average crude oil prices.
Manufacturing and other operating expenses decreased to
$1.3 billion in 2009, compared to $1.4 billion in
2008, primarily reflecting lower natural gas utility costs and
refining throughput. Depreciation and amortization increased by
$33 million during 2009 reflecting the completion of
several capital projects during 2008, including the
$600 million delayed coker unit at the Golden Eagle
refinery. The decrease in selling, general and administrative
costs of $95 million from 2008 is due to a $91 million
charge to write-off a receivable a year ago. The increase in
loss on asset disposals and impairments primarily reflects a
goodwill impairment of $43 million and a net termination
charge of $12 million related to cancelling the purchase of
equipment associated with a capital project at our Los Angeles
refinery. The equipment purchase was cancelled as we reevaluated
the scope and timing of the project.
2008
Compared to 2007
Overview. Operating income for our refining
segment decreased by $561 million during 2008 primarily due
to a lower gross refining margin and increased operating
expenses. A lower per barrel gross refining margin reduced our
total gross refining margins by $256 million during 2008.
Operating income in 2008 included a $91 million charge to
write-off a receivable and a LIFO liquidation benefit of
$138 million. The LIFO liquidation resulted from a
reduction in petroleum inventories by decreasing LIFO layers
acquired at lower
per-barrel
costs.
Gross Refining Margins. Our gross refining
margin per barrel decreased 10% to $11.50 per barrel in 2008,
reflecting significantly lower industry gasoline margins.
U.S. West Coast benchmark gasoline margins were down from
an average of $24 per barrel in 2007 to an average of $12 per
barrel in 2008 as a result of rapidly rising crude oil prices
during the first half of 2008 and weakening product demand.
During the second half of 2008, however, crude oil prices
declined primarily due to declining global crude oil demand. The
rapid decline in crude oil prices resulted in slightly improved
refining margins during the last six months of 2008 versus the
prior year as product prices declined more gradually. Weaker
industry gasoline margins were partially offset by higher diesel
fuel margins in 2008 reflecting strong global demand and low
inventories. Industry margins were higher in 2007 due to robust
market fundamentals during the first half of the year, including
strong demand for refined products, low refinery utilization,
low products inventories and the introduction of new lower
sulfur requirements for non-road diesel fuel which began in June
2007. Heavy industry turnaround activity and unscheduled
downtime on the U.S. West Coast benefited our gross
refining margins during the first half of 2007. Our gross
refining margin was also negatively impacted during 2008 due to
the rapid increase in crude oil prices during the first half of
2008 resulting in increased losses on our derivative positions
of $46 million year over year.
33
Refining Throughput. During both 2008 and
2007, total refining throughput averaged 595 Mbpd. Excluding the
Los Angeles refinery (acquired in May 2007), throughput
decreased by 37 Mbpd primarily reflecting throughput reductions
at our Alaska, Hawaii and Washington refineries to match
production to demand and a turnaround of five major units at our
Golden Eagle refinery from mid-March through April 2008 and a
turnaround of the fluid catalytic cracker and alkylation units
at our Washington refinery from late January to mid-February.
During 2007, total refining throughput was reduced by scheduled
turnarounds at our Los Angeles, Golden Eagle and Utah refineries
and unscheduled downtime at our Golden Eagle and Washington
refineries.
Refined Product Sales. Revenues from sales of
refined products increased 28% to $26.8 billion in 2008 as
compared to 2007, primarily due to significantly higher average
refined product sales prices and increased refined product sales
volumes. Our average refined product sales price increased 25%
to $112.06 per barrel in 2008, as higher average crude oil
prices put upward pressure on product prices. Total refined
product sales volumes increased reflecting additional sales
volumes from operating our Los Angeles refinery for a full year
in 2008. Excluding the Los Angeles refinery, total refined
product sales volumes decreased by 55 Mbpd reflecting declining
product demand.
Costs of Sales and Expenses. Our average costs
of sales increased 31% to $102.37 per barrel during 2008,
reflecting the significant increase in average crude oil prices
during the year. Manufacturing and other operating expenses
increased to $1.4 billion in 2008, compared with
$1.2 billion in 2007, with $110 million of the
increase incurred by the Los Angeles refinery. The remaining
increase of $98 million primarily reflects higher utility
costs. Selling, general and administrative expenses increased by
$84 million as a result of a $91 million charge to
write-off a receivable.
34
Retail
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions except per gallon amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
$
|
3,000
|
|
|
$
|
4,184
|
|
|
$
|
2,946
|
|
Merchandise and other
|
|
|
235
|
|
|
|
248
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
3,235
|
|
|
$
|
4,432
|
|
|
$
|
3,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons)
|
|
|
1,329
|
|
|
|
1,354
|
|
|
|
1,098
|
|
Fuel Margin ($/gallon)(a)
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
Merchandise Margin (in millions)
|
|
$
|
53
|
|
|
$
|
57
|
|
|
$
|
52
|
|
Merchandise Margin (percent of revenues)
|
|
|
25
|
%
|
|
|
26
|
%
|
|
|
26
|
%
|
Number of Retail Stations (end of year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
387
|
|
|
|
389
|
|
|
|
449
|
|
Jobber/dealer
|
|
|
499
|
|
|
|
490
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Stations
|
|
|
886
|
|
|
|
879
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Retail Stations (during the year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
388
|
|
|
|
422
|
|
|
|
362
|
|
Branded jobber/dealer
|
|
|
487
|
|
|
|
489
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
875
|
|
|
|
911
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
$
|
273
|
|
|
$
|
286
|
|
|
$
|
164
|
|
Merchandise and other non-fuel margin
|
|
|
77
|
|
|
|
78
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margins
|
|
|
350
|
|
|
|
364
|
|
|
|
233
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
202
|
|
|
|
216
|
|
|
|
182
|
|
Selling, general and administrative
|
|
|
23
|
|
|
|
24
|
|
|
|
24
|
|
Depreciation and amortization
|
|
|
39
|
|
|
|
49
|
|
|
|
28
|
|
Loss on asset disposals and impairments(c)
|
|
|
3
|
|
|
|
29
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
83
|
|
|
$
|
46
|
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Management uses fuel margin per gallon to compare profitability
to other companies in the industry. Fuel margin per gallon is
calculated by dividing fuel gross margin by fuel sales volumes
and may not be calculated similarly by other companies.
Investors and analysts use fuel margin per gallon to help
analyze and compare companies in the industry on the basis of
operating performance. This financial measure should not be
considered as an alternative to segment operating income and
revenues or any other measure of financial performance presented
in accordance with accounting principles generally accepted in
the United States of America. |
|
(b) |
|
Includes the effect of intersegment purchases from our refining
segment at prices which approximate market. |
|
(c) |
|
Includes impairment charges during 2008 related to the closure
of 42 Mirastar retail stations and a potential sale of 20 retail
stations. |
2009
Compared to 2008
Operating income for our retail segment increased
$37 million during 2009 as compared to 2008 reflecting
lower expenses partially offset by lower gross margins.
Operating income during 2008 included impairment charges of
$29 million related to closing 42 Mirastar retail stations
and a write-down of 20 other retail stations associated with a
potential sale. Total gross margins decreased to
$350 million in 2009 from $364 million in 2008,
reflecting
35
lower sales volumes due to lower gasoline demand and a lower
average retail station count. The decrease in average retail
station count from 2008 reflects closing the 42 Mirastar retail
stations.
Revenues on fuel sales decreased to $3.0 billion in 2009,
from $4.2 billion in 2008, reflecting significantly lower
sales prices and decreased fuel sales volumes. Costs of sales
decreased from 2008 due to lower prices for purchased fuel. Our
other expenses, excluding the loss on asset disposals and
impairments, decreased by $25 million to $264 million
during 2009 as compared to 2008 reflecting a lower average
retail station count.
2008
Compared to 2007
Operating income for our retail segment was $46 million in
2008, compared to an operating loss of $8 million in 2007.
The 2008 results included impairment charges of
$29 million. Total gross margins increased to
$364 million in 2008 from $233 million in 2007,
reflecting significantly increased fuel sales volumes combined
with higher fuel margin per gallon. Total gallons sold increased
to 1.4 billion gallons from 1.1 billion gallons in
2007, primarily reflecting additional volumes from the Shell and
USA Gasoline retail stations acquired in May 2007. Fuel margin
increased to $0.21 per gallon in 2008 from $0.15 per gallon in
2007, primarily reflecting retail prices lagging the rapid
decrease in crude oil prices during the last half of 2008. Our
Shell and USA Gasoline retail stations contributed additional
gross margins of $96 million and additional fuel sales of
266 million gallons during 2008 reflecting operation for a
full year in 2008. Excluding the acquired retail stations, total
gross margins increased by $36 million and fuel sales
volumes remained flat in 2008 as compared to 2007. The decrease
in our retail station count at December 31, 2008 was due to
closing 42 Mirastar retail stations, partially offset by our
strategy to grow our branded jobber/dealer presence in the
Mid-Continent region and on the U.S. West Coast.
Revenues on fuel sales increased to $4.2 billion in 2008,
from $2.9 billion in 2007, reflecting significantly higher
sales volumes and increased average sales prices. Excluding the
acquired retail stations, revenues on fuel sales increased
$191 million primarily due to higher average product sales
prices. Costs of sales increased in 2008 due to increased sales
volumes and higher average prices for purchased fuel. Operating
expenses increased by $34 million during 2008 as compared
to 2007. Shell and USA Gasoline retail stations contributed
$40 million in additional operating expenses in 2008.
Higher depreciation and amortization reflects operating the
Shell and USA Gasoline retail stations for a full year in 2008.
The loss on asset disposals and impairments increased by
$22 million during 2008 primarily reflecting closing 42
Mirastar retail stations and a write down for the potential sale
of 20 retail stations.
Consolidated
Results of Operations
Selling,
General and Administrative Expenses
Selling, general and administrative expenses totaled
$221 million for 2009 compared to $325 million in 2008
and $263 million in 2007. The decrease during 2009
primarily reflects a charge of $91 million in 2008 to
write-off a receivable for which collection was deemed unlikely.
Excluding the receivable charge, selling, general and
administrative expenses during 2008 as compared to 2007
decreased by $29 million primarily due to lower stock-based
and incentive compensation costs of $53 million, partially
offset by higher employee costs of $19 million. Stock-based
compensation for our stock appreciation rights and phantom stock
options was lower due to our declining stock price in 2008. Our
stock appreciation rights and phantom stock options are revalued
to fair value at the end of each reporting period.
Interest
and Financing Costs
Interest and financing costs were $130 million in 2009
compared to $111 million in 2008 and $91 million in
2007. The increase in 2009 reflects the issuance of our
$300 million senior notes in June 2009 partially offset by
lower outstanding revolver borrowings. The increase in 2008 over
2007 reflects the additional debt we incurred in May 2007 to
finance acquisitions.
Other
Income
Other income totaled $50 million in 2008 reflecting refunds
received from owners of the Trans Alaska Pipeline System in
connection with rulings by the Regulatory Commission of Alaska
concerning our protest of intrastate pipeline rates. We did not
earn other income during 2009 or 2007.
36
Income
Tax Provision
The income tax benefit amounted to $48 million in 2009
compared to a provision of $151 million in 2008 and
$339 million in 2007. The combined federal and state
effective income tax rates were 26%, 35% and 37% in 2009, 2008
and 2007, respectively. The 2009 tax rate was lower primarily
due to a $43 million impairment of goodwill for which there
was no corresponding tax basis. The 2008 tax rate benefited from
the favorable settlement of federal tax audits for the years
1996 through 2005.
CAPITAL
RESOURCES AND LIQUIDITY
Overview
We operate in an environment where our capital resources and
liquidity are impacted by changes in the price of crude oil and
refined products, availability of trade credit, market
uncertainty and a variety of additional factors beyond our
control. These factors include the level of consumer demand for
transportation fuels, weather conditions, fluctuations in
seasonal demand, governmental regulations, geo-political
conditions and overall market and global economic conditions.
See Important Information Regarding Forward-Looking
Statements on page 26 for further information related
to risks and other factors. Future capital expenditures, as well
as borrowings under our credit agreement and other sources of
capital, may be affected by these conditions.
Our primary sources of liquidity have been cash flows from
operations and borrowing availability under revolving lines of
credit. We ended 2009 with $413 million of cash and cash
equivalents, no borrowings under our revolver, and approximately
$1.1 billion in available borrowing capacity under our
credit agreement after $665 million in outstanding letters
of credit. At December 31, 2009, we also had three separate
letter of credit agreements with a total capacity of
$500 million, of which we had $168 million available
after $332 million in outstanding letters of credit. Our
total capacity of $1.81 billion under the credit agreement
can be increased up to a total capacity of $1.95 billion.
We can also increase capacity under our separate letter of
credit agreements. Our available borrowing capacity under the
credit agreement was temporarily reduced as of February 28,
2010 as the standard reserve, as defined, increased from
$50 million to $260 million as a result of not meeting
the fixed charge coverage ratio. Based on the fixed charge
coverage ratio, our total capacity as of February 28, 2010 was
$1.3 billion before outstanding letters of credit of
$711 million. The amount of available borrowing capacity
fluctuates and is based on a periodically adjusted borrowing
base consisting of our eligible cash and cash equivalents,
receivables and petroleum inventories, net of the standard
reserve.
In June 2009, we issued $300 million aggregate principal
amount of
93/4% senior
notes due 2019 for general corporate purposes. Excluding
proceeds from the notes issuance, we increased our cash position
by $111 million at December 31, 2009 from a year ago.
We believe available capital resources will be adequate to meet
our capital expenditure, working capital and debt service
requirements. Due to the current unfavorable economic conditions
in the refining industry, we continue to focus on our available
cash through the management of working capital, capital
expenditures and operating expenses. However, if industry
refining margins were to remain depressed for an extended period
of time, we may be required to materially alter our operations
which could include deferring capital expenditures, selling
assets or temporarily idling one or more of our refineries. We
may also seek to increase our available cash through the capital
markets.
In February 2010, we suspended our quarterly cash dividend
indefinitely to preserve cash and maintain a strong balance
sheet as we expect further refining margin volatility. This
action also provides us flexibility to allocate capital to our
quick return capital projects which we believe will deliver the
highest shareholder return in a low margin environment. During
2009, we paid cash dividends on common stock of $0.35 per share
totaling $49 million.
Our $300 million
93/4% senior
notes were issued at 96.172% of face value at an effective
interest rate of 10.375%. The notes have a ten-year maturity
with no sinking fund requirements and are subject to optional
redemption by Tesoro beginning June 1, 2014 at premiums of
4.875% through May 31, 2015, 3.25% from June 1, 2015
through May 31, 2016; 1.625% from June 1, 2016 through
May 31, 2017; and at par thereafter. We have the right to
redeem up to 35% of the aggregate principal amount at 109.75% of
face value with proceeds from certain equity issuances through
June 1, 2012. The indenture for the notes contains
covenants and restrictions that are customary for notes of this
nature. Substantially all of these covenants will terminate
before the notes mature if one of two specified ratings agencies
assigns the notes an investment grade rating and no events of
default exist under the indenture. The
37
terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of our domestic subsidiaries.
Capitalization
Our capital structure at December 31, 2009 was comprised of
(in millions):
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
Credit Agreement Revolving Credit Facility
|
|
$
|
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
93/4% Senior
Notes Due 2019 (net of unamortized discount of $11 million)
|
|
|
289
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $25)
|
|
|
125
|
|
Capital lease obligations and other
|
|
|
27
|
|
|
|
|
|
|
Total debt
|
|
|
1,841
|
|
Stockholders equity
|
|
|
3,087
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
4,928
|
|
|
|
|
|
|
At December 31, 2009, our debt to capitalization ratio was
37%, compared to 33% at year-end 2008, reflecting the issuance
of our $300 million senior notes during 2009 and a net loss
of $140 million in 2009.
Our credit agreement and senior notes impose various
restrictions and covenants on us that could potentially limit
our ability to respond to market conditions, raise additional
debt or equity capital, pay cash dividends, or repurchase stock.
The indentures for our senior notes contain covenants and
restrictions which are customary for notes of this nature. These
covenants and restrictions limit, among other things, our
ability to:
|
|
|
|
|
pay dividends and other distributions with respect to our
capital stock and purchase, redeem or retire our capital stock;
|
|
|
|
incur additional indebtedness and issue preferred stock;
|
|
|
|
sell assets unless the proceeds from those sales are used to
repay debt or are reinvested in our business;
|
|
|
|
incur liens on assets to secure certain debt;
|
|
|
|
engage in certain business activities;
|
|
|
|
engage in certain merger or consolidations and transfers of
assets; and
|
|
|
|
enter into transactions with affiliates.
|
The indentures also limit our subsidiaries ability to make
certain payments and distributions.
Credit
Agreement Revolving Credit Facility
In February 2010 and May 2009, we amended our credit agreement,
which among other things, modified the following:
|
|
|
|
|
lowered the minimum tangible net worth requirement, as defined;
|
|
|
|
the purchase or sale of certain assets is no longer subject to
the fixed charge coverage ratio test;
|
|
|
|
the covenant permitting additional unsecured indebtedness, as
defined, increased from $75 million to $600 million;
|
|
|
|
letters of credit allowed under separate letter of credit
agreements, previously capped at $500 million, are no
longer subject to a cap;
|
|
|
|
the applicable margin, as defined; and
|
|
|
|
the annual rate of commitment fees changed from 0.25% to 0.375%
in May 2009 and to 0.50% in February 2010 for the unused portion
of the revolving credit facility.
|
38
At December 31, 2009, our credit agreement provided for
borrowings (including letters of credit) up to the lesser of the
amount of a periodically adjusted borrowing base of
approximately $2.0 billion (based upon an Alaska North
Slope crude oil price of $80 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables
and petroleum inventories, net of the standard reserve as
defined, or the agreements total capacity of
$1.81 billion. The capacity can be further increased up to
$1.95 billion. As of December 31, 2009, we had no
borrowings and $665 million in letters of credit
outstanding under the credit agreement, resulting in total
unused credit availability of $1.14 billion or 63% of the
eligible borrowing base. Borrowings under the revolving credit
facility bear interest at either a base rate (3.25% at
December 31, 2009), or a Eurodollar rate (0.23% at
December 31, 2009) plus an applicable margin. The
applicable margin at December 31, 2009 was 1.50% in the
case of the Eurodollar rate, but varies based upon our credit
facility availability and credit ratings. Letters of credit
outstanding under the revolving credit facility incur fees at an
annual rate tied to the applicable margin described above (1.50%
at December 31, 2009). Our credit agreement expires in May
2012.
The credit agreement contains covenants and conditions that,
among other things, limit our ability to pay cash dividends,
incur indebtedness, create liens and make investments. Tesoro is
also required to maintain a minimum fixed charge coverage ratio
and specified levels of tangible net worth. We satisfied all of
the financial covenants under the credit agreement for the year
ended December 31, 2009. The credit agreement is guaranteed
by substantially all of Tesoros active domestic
subsidiaries. The credit agreement allows up to
$100 million of restricted payments during any four quarter
period subject to credit availability exceeding 20% of the
borrowing base.
Letter
of Credit Agreements
The credit agreement allows us to obtain letters of credit under
separate letter of credit agreements for foreign crude oil
purchases. At December 31, 2009, our letters of credit
capacity under these three agreements totaled $500 million,
of which $332 million was outstanding. Letters of credit
outstanding under these agreements incur fees and are secured by
the petroleum inventories supported by the issued letters of
credit. The agreements may be terminated by either party, at any
time.
Cash
Flow Summary
Components of our cash flows are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flows From (Used In):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
663
|
|
|
$
|
716
|
|
|
$
|
1,322
|
|
Investing Activities
|
|
|
(436
|
)
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
Financing Activities
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
393
|
|
|
$
|
(3
|
)
|
|
$
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities decreased to
$663 million in 2009 primarily due to less cash earnings,
partially offset by lower working capital requirements. Net cash
used in investing activities of $436 million in 2009 was
primarily for capital expenditures. Net cash from financing
activities primarily reflects the net proceeds from our senior
notes issuance partially offset by repayments on our revolver
and dividend payments. Gross borrowings under our revolving
credit agreement totaled $418 million, and we repaid
$484 million in borrowings during 2009. Working capital
(excluding cash) decreased $264 million at
December 31, 2009 from $185 million at
December 31, 2008, as payables increased, due to higher
crude oil prices at year end, by a larger amount than both
receivables and inventories. Inventories decreased by
approximately 4 million barrels from December 31, 2008
reflecting our initiatives to optimize working capital and the
impact of matching production to lower product demand.
Net cash from operating activities decreased during 2008 to
$716 million primarily due to lower cash earnings and
higher working capital requirements reflecting significantly
lower payables associated with falling crude oil prices at year
end. Net cash used in investing activities of $610 million
in 2008 was primarily for capital expenditures. Net cash used in
financing activities in 2008 primarily reflects payments under
our revolver and dividend payments of $55 million. Gross
borrowings under our revolving credit agreement totaled
$5.65 billion, and we repaid $5.71 billion in
borrowings during 2008. Working capital (excluding cash) totaled
$185 million at December 31, 2008 compared to
$83 million at December 31, 2007, primarily reflecting
lower payables, partially offset by decreased receivables and
inventories. Payables and receivables decreased due to the lower
prices of crude oil and refined products. Receivables decreased
less than payables as a result of product prices lagging sharply
falling crude oil prices. Inventories decreased from year end
due in part to our efforts to reduce inventories.
39
Capital
Expenditures
During 2010, we expect our capital spending to total
approximately $450 million. Our capital spending during
2009 was $401 million compared to our 2009 capital budget
of $460 million. Our 2010 projected and 2009 actual capital
spending amounts are comprised of the following project
categories at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Percent of 2010 Projected
|
|
|
Percent of 2009
|
|
Project Category
|
|
Capital Spending
|
|
|
Capital Spending
|
|
|
Regulatory
|
|
|
55
|
%
|
|
|
60
|
%
|
Sustaining
|
|
|
30
|
%
|
|
|
30
|
%
|
Income Improvement
|
|
|
15
|
%
|
|
|
10
|
%
|
See Business Strategy and Overview and
Environmental Capital Expenditures for additional
information.
Refinery
Turnaround Spending
We expect to spend approximately $150 million for refinery
turnarounds and catalyst in 2010. The turnaround spending is
primarily at our Utah refinery during the first quarter, our
North Dakota refinery during the second quarter and our Hawaii
refinery during the third quarter. Refining throughput and
yields in 2010 will be affected by these turnarounds. During
2009, we spent $141 million for refinery turnarounds and
catalyst, primarily at our Golden Eagle, Alaska and Los Angeles
refineries.
Long-Term
Commitments
Contractual
Commitments
We have numerous contractual commitments for purchases
associated with the operation of our refineries, debt service
and leases (see Notes J and N in our consolidated financial
statements in Item 8). We also have minimum contractual
spending requirements for certain capital projects. The
following table summarizes our annual contractual commitments as
of December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Long-term debt obligations(a)
|
|
$
|
132
|
|
|
$
|
132
|
|
|
$
|
726
|
|
|
$
|
93
|
|
|
$
|
92
|
|
|
$
|
1,483
|
|
Capital lease obligations(b)
|
|
|
5
|
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
|
|
17
|
|
Operating lease obligations(b)
|
|
|
243
|
|
|
|
208
|
|
|
|
160
|
|
|
|
108
|
|
|
|
84
|
|
|
|
400
|
|
Crude oil supply obligations(c)
|
|
|
4,313
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other purchase obligations(d)
|
|
|
279
|
|
|
|
112
|
|
|
|
103
|
|
|
|
98
|
|
|
|
100
|
|
|
|
443
|
|
Capital expenditure obligations
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
5,041
|
|
|
$
|
1,376
|
|
|
$
|
992
|
|
|
$
|
303
|
|
|
$
|
279
|
|
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes maturities of principal and interest payments,
excluding capital lease obligations. Amounts and timing may be
different from our estimated commitments due to potential
voluntary debt prepayments and borrowings. |
|
(b) |
|
Capital lease obligations include amounts classified as
interest. Operating lease obligations represent our future
minimum noncancellable lease commitments. Operating lease
commitments for 2010 include lease arrangements with initial
terms of less than one year, and are not reduced by minimum
rentals to be received by us under subleases. |
|
(c) |
|
Represents an estimate of our contractual purchase commitments
for crude oil, with remaining terms ranging from 1 year to
2 years. Prices under these term agreements generally
fluctuate due to market-responsive pricing provisions. To
estimate our annual commitments under these contracts, we
estimated crude oil prices using actual market prices as of
December 31, 2009, ranging by crude oil type from $60 per
barrel to $80 per barrel, and volumes based on the
contracts minimum purchase requirements. We also purchase
additional crude oil under short-term renewable contracts and in
the spot market, which are not included in the table above. |
|
(d) |
|
Represents primarily long-term commitments for the
transportation of crude oil and to purchase industrial gases,
chemical processing services and utilities at our refineries.
These purchase obligations are based on the contracts
minimum volume requirements. |
40
In addition to the amounts shown in the table above,
$29 million of unrecognized tax benefits have been recorded
as liabilities, $7 million of which is classified as
current in the consolidated balance sheet. With the exception of
amounts classified as current liabilities, we are uncertain as
to when such amounts may be settled. Related to these
unrecognized tax benefits, we have also recorded a liability for
potential interest and penalties of $28 million at
December 31, 2009, $21 million of which is classified
as current in the consolidated balance sheet. See Note L in
our consolidated financial statements in Item 8 for further
information.
Off-Balance
Sheet Arrangements
Other than our leasing arrangements described in Note N to
our consolidated financial statements, we have not entered into
any transactions, agreements or other contractual arrangements
that would result in off-balance sheet liabilities.
Environmental
and Other Matters
We are a party to various litigation and contingent loss
situations, including environmental and income tax matters,
arising in the ordinary course of business. Even though we
cannot predict the ultimate outcomes of these matters with
certainty, we have accrued for these outcomes based on our best
estimates. We believe that the outcome of these matters will not
materially impact our liquidity and consolidated financial
position, although the resolution of certain of these matters
could have a material impact on interim or annual results of
operations.
We are 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 us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications to certain emission
sources.
Future expenditures may be required to comply with the Clean Air
Act and other federal, state and local requirements for our
various sites, including our refineries, tank farms, pipelines,
operating and closed retail stations and operating and closed
refined products terminals. The impact of these legislative and
regulatory developments, if enacted or adopted, could result in
increased compliance costs, additional operating restrictions on
our business, and an increase in the cost of or reduced demand
for products we manufacture, all of which could have an adverse
impact on our financial position, results of operations, and
liquidity.
In December 2007, the U.S. Congress passed the Energy
Independence and Security Act that created a second Renewable
Fuels Standard (RFS2). This standard requires the
total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the
U.S. to reach 12.95 billion gallons in 2010 and rise
to 36 billion gallons by 2022. The requirements could
reduce future demand growth for petroleum products that we
manufacture. In the near term, the RFS2 presents ethanol
production and logistics challenges for the ethanol, alternative
fuel and refining and marketing industries which may require
additional expenditures to logistically accommodate the
increased use of renewable transportation fuels.
In California, Assembly Bill 32 (AB 32), created a
statewide cap on greenhouse gas emissions and requires that the
state return to 1990 emission levels by 2020. AB 32 focuses on
using market mechanisms, such as a
cap-and-trade
program and a Low Carbon Fuel Standard (LCFS) to
achieve emission reduction targets. The LCFS became effective in
January 2010 and requires a 10% reduction in the carbon
intensity of gasoline and diesel fuel by 2020. Final regulations
for all other aspects of AB 32, including cap and trade
requirements, are being developed by the California Air
Resources Board, will take effect in 2012 and will be fully
implemented by 2020. The implementation and implications of AB
32 will take many years to realize, and we cannot currently
predict its impact on our financial position, results of
operations and liquidity.
In 2009, the U.S. Environmental Protection Agency proposed
regulating greenhouse gas emissions under the Clean Air Act. The
proposed regulations may be finalized in 2010 and include
proposed standards for the control of greenhouse gas emissions
from light trucks and cars which could reduce the demand for
transportation fuels we manufacture. In addition, the proposed
regulations include permitting requirements for stationary
sources that emit greenhouse gases above a certain threshold.
The resulting permitting requirements could impose emission
controls which could require material capital expenditures at
our refineries. Also in 2009, the U.S. House of
Representatives passed legislation seeking to establish a
national
cap-and-trade
program beginning in 2012 to address greenhouse gas emissions
and climate change. The legislation as proposed would materially
increase our cost of compliance, however, the U.S. Senate
failed to pass similar legislation and we believe it will not do
so in 2010.
41
We are subject to audits by federal, state and local taxing
authorities in the normal course of business. It is possible
that tax audits could result in claims against us in excess of
recorded liabilities. We believe that when these matters are
resolved they will not materially affect our consolidated
financial position or results of operations. We believe it is
reasonably possible that unrecognized tax benefits could
decrease by as much as $25 million in the next twelve
months through settlements or other conclusions, primarily
regarding state tax issues.
We are also subject to extensive federal, state and local tax
laws and regulations. New tax laws and regulations and changes
in existing tax laws and regulations are continuously being
enacted or proposed that could result in increased expenditures
for tax liabilities in the future.
Environmental
Liabilities
We are currently, and expect to continue, incurring expenses for
environmental cleanup at a number of currently and previously
owned or operated refining, pipeline, terminal and retail
station properties. We have accrued liabilities for these
expenses and believe these accruals are adequate. However, our
environmental liabilities are based on estimates including
engineering assessments and it is reasonably possible that our
estimates will change and that additional remediation costs will
be incurred as more information becomes available.
We received $58.5 million in a settlement with a prior
owner of our Golden Eagle refinery in 2007 in exchange for
assuming responsibility for certain environmental liabilities
arising from operations at the refinery prior to August 2000.
These environmental liabilities totaled $73 million and
$87 million at December 31, 2009 and 2008,
respectively. We cannot presently determine the additional
remedial activities that may be required at the Golden Eagle
refinery. Therefore, it is reasonably possible that we will
incur additional remediation costs as more information becomes
available. We expect to file insurance claims under
environmental insurance policies that provide coverage up to
$140 million for expenditures in excess of the settlement
proceeds. Amounts recorded for environmental liabilities have
not been reduced for possible insurance recoveries.
We are continuing to investigate conditions at certain active
wastewater treatment units at our Golden Eagle refinery. This
investigation is driven by an order from the San Francisco
Bay Regional Water Quality Control Board that names us as well
as two previous owners of the Golden Eagle refinery. Costs to
investigate these conditions are included in our environmental
accruals. We cannot currently estimate the amount of the
ultimate resolution of the order but we believe it will not have
a material adverse effect on our financial position or results
of operations.
Other
Matters
In the ordinary course of business, we become party to lawsuits,
administrative proceedings and governmental investigations,
including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us
in some matters for which the likelihood of loss may be
reasonably possible but the amount of loss is not currently
estimable. As a result, we have not established reserves for
these matters and the matters described below. We believe that
the resolution of these matters, individually or in the
aggregate, will not have a material adverse effect on our
financial position or results of operations.
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are evaluating the alleged violations
contained in the suit.
We are a defendant, along with other manufacturing, supply and
marketing defendants, in five lawsuits alleging MTBE
contamination in ground water. The defendants are being sued for
having manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs in the five
cases, all in California, are municipalities and governmental
authorities. The plaintiffs allege, in part, that the defendants
are liable for manufacturing or distributing a defective
product. The suits generally seek individual, unquantified
compensatory and punitive damages and attorneys fees. We
intend to vigorously assert our defenses against these claims.
42
Prior to this year, we received two NOVs from the EPA for the
Washington refinery alleging that prior to our acquisition of
the refinery, certain modifications were made to the fluid
catalytic cracking unit in violation of the Clean Air Act. We
have investigated the allegations and believe we have defenses
to the allegations and intend to vigorously defend ourselves.
Prior to this year, we received a NOV from the EPA concerning
our Utah refinery alleging certain violations of the Clean Air
Act at the refinery beginning in 2004. We have investigated the
allegations contained in the NOV and sent the EPA additional
information in 2009.
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds (approximately $22 million)
as retroactive price adjustments under our previous crude oil
contracts with them. In December 2009, the trial court judge
issued an Order supporting Chevrons claim to receive a
share of the refunds. We disagree with, and are challenging the
Order. The exact amount of refunds subject to the Order has not
been determined, and some uncertainty remains about the scope of
the Order.
Environmental
Capital Expenditures
The EPA issued regulations in February 2007 that require the
reduction of benzene in gasoline. We spent $48 million in
2009, and plan to spend an additional $225 million through
2012 at five of our refineries to comply with the regulations.
Our California refineries will not require capital spending to
meet the benzene reduction standards. These cost estimates are
subject to further review and analysis.
Regulations issued by Californias South Coast Air Quality
Management District require the emission of nitrogen oxides to
be reduced through 2011 at our Los Angeles refinery. Currently,
we plan to meet this requirement by implementing operational
changes and a portfolio of small capital projects.
Other projects at our Los Angeles refinery include replacing
underground pipelines with above-ground pipelines to comply with
an Order from the California Regional Water Quality Control
Board. We spent $8 million in 2009, and expect to spend an
additional $50 million through 2015 to complete the project.
We completed installing equipment at our Golden Eagle refinery
in February 2010 to eliminate the use of atmospheric blowdown
towers as emergency relief systems. We spent $42 million in
2009, and we expect to spend $11 million in 2010, primarily
for an additional project to eliminate a blowdown tower at our
North Dakota refinery.
We will spend additional capital at our Golden Eagle refinery
for reconfiguring and replacing above-ground storage tank
systems. We spent $15 million in 2009, and expect to spend
an additional $50 million through 2015 for this project.
We are evaluating alternative projects for wharves at our Golden
Eagle refinery to meet engineering and maintenance standards
issued by the State of California in February 2006. These
projects could cost between $50 million and
$150 million through 2016. The timing of these projects is
being evaluated and is subject to change.
We are required under a consent decree with the EPA to reduce
air emissions at our North Dakota and Utah refineries. We spent
$16 million in 2009 and expect to spend an additional
$7 million in 2010 to install NOx emission controls on
boilers and heaters at these refineries. We plan to meet the
requirements in 2010.
The cost estimates for the environmental projects described
above are subject to further review and analysis and include
estimates for capitalized interest and labor costs.
Pension
Funding
We provide a qualified defined benefit retirement plan for all
eligible employees, with benefits based on years of service and
compensation. Our long-term expected return on plan assets is
8.5%, and our funded employee pension plan assets experienced a
gain of $34 million in 2009 and a loss of $94 million
in 2008. Based on a 5.80% discount rate and fair values of plan
assets as of December 31, 2009, the fair values of the
assets in our funded employee pension plan were equal to
approximately 60% of the projected benefit obligation as of the
end of 2009. At January 1, 2009 the adjusted funding target
attainment percentage (a funding measure defined under
applicable pension regulations) was 116%. Although Tesoro had no
minimum required contribution obligation to its funded
43
employee pension plan under applicable laws and regulations in
2009, we voluntarily contributed $35 million to improve the
funded status of the plan. We have no minimum required
contribution to our pension plan under applicable laws and
regulations. Future contributions are affected by returns on
plan assets, employee demographics and other factors. See
Note M in our consolidated financial statements in
Item 8 for further discussion.
ACCOUNTING
STANDARDS
Critical
Accounting Policies
Our accounting policies are described in Note A in our
consolidated financial statements in Item 8. We prepare our
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America,
which require us to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements
and accompanying footnotes. Actual results could differ from
those estimates. We consider the following policies to be the
most critical in understanding the judgments that are involved
in preparing our financial statements and the uncertainties that
could impact our financial condition and results of operations.
Receivables Our trade receivables are stated
at their invoiced amounts, less an allowance for potentially
uncollectible amounts. We monitor the credit and payment
experience of our customers and manage our loss exposure through
our credit policies and procedures. The estimated allowance for
doubtful accounts is based on our general loss experience and
identified loss exposures on individual accounts. Actual losses
could vary from estimates as global economic conditions and the
related credit environment could change.
Property, Plant and Equipment and Acquired
Intangibles We calculate depreciation and
amortization using the straight-line method based on estimated
useful lives and salvage values of our assets. When assets are
placed into service, we make estimates with respect to their
useful lives that we believe are reasonable. However, factors
such as maintenance levels, economic conditions impacting the
demand for these assets, and regulatory or environmental
requirements could cause us to change our estimates, thus
impacting the future calculation of depreciation and
amortization. We evaluate these assets for potential impairment
when an asset disposition is probable or when there are
indicators of impairment (for example, current period operating
losses combined with a history of operating losses or a
temporary shutdown of a refinery) and, if so, assessing whether
the asset net book values are recoverable from estimated future
undiscounted cash flows. The actual amount of an impairment loss
to be recorded, if any, is equal to the amount by which the
assets net book value exceeds its fair market value. Fair
market value is generally based on the present values of
estimated future cash flows in the absence of quoted market
prices. Estimates of future cash flows and fair market values of
assets require subjective assumptions with regard to several
factors, including an assessment of global market conditions,
future operating results and forecasts of the remaining useful
lives of the assets. Actual results could differ from those
estimates. At December 31, 2009, we evaluated certain of
our refineries for potential impairment and we determined that
no impairment was necessary.
Goodwill As of December 31, 2009 and
2008, we had goodwill of $46 million and $89 million,
respectively. Goodwill is not amortized, but is tested for
impairment annually or more frequently when indicators of
impairment exist for the underlying assets. We review the
recorded value of our goodwill for impairment annually during
the fourth quarter, or sooner if events or changes in
circumstances indicate the carrying amount may exceed fair
value. Recoverability is determined by comparing the estimated
fair value of a reporting unit to the carrying value, including
the related goodwill, of that reporting unit. We use an income
approach based on the present value of expected net cash flows
and a market approach based on recent sales transactions and
current stock prices to determine the estimated fair value of
our reporting units.
During 2009, deteriorating market conditions associated with the
economic recession, including excess product inventories and
rising crude oil costs, reduced current period and forecasted
earnings within our business and industry as well as quoted
market prices for comparable company common stocks and refinery
sales transactions. Decreased forecasted cash flows and quoted
market prices reduced our estimated fair value below carrying
value at our Washington refinery resulting in a goodwill
impairment of $43 million. At December 31, 2009, we
did not have any reporting units with material goodwill balances
at risk of impairment. The estimated fair value of our largest
remaining reporting unit with goodwill of approximately
$30 million exceeded its carrying value by approximately
100% at year-end. However, our impairment test is subject to
change from period to period as it requires us to make cash flow
assumptions about many things including, future margins,
volumes, operating costs, capital expenditures, growth rates and
discount rates. Our assumptions regarding future margins and
volumes require significant judgment as actual margins and
volumes have fluctuated in the past and will likely continue to
do so. Changes in market conditions could result in impairment
charges in the future.
44
Environmental Liabilities - At December 31, 2009 and
2008, our total environmental liabilities included in accrued
liabilities and other liabilities were $106 million and
$123 million, respectively. We record environmental
liabilities when environmental assessments
and/or
proposed environmental remedies are probable and can be
reasonably estimated. Generally, the timing of our accruals
coincides with assessing the liability and then completing a
feasibility study or committing to a formal plan of action. When
we complete our analysis or when we commit to a plan of action,
we accrue a liability based on the minimum range of the expected
costs, unless we consider another amount more likely. We base
our cost estimates on the extent of remedial actions required by
applicable governing agencies, experience gained from similar
environmental projects and the amounts to be paid by other
responsible parties. Accruals for our environmental liabilities
require judgment due to the uncertainties related to the
magnitude of the liability and timing of the remediation effort.
Our environmental liability estimates are subject to change due
to potential changes in environmental laws, regulations or
interpretations, additional information related to the extent
and nature of the liability, and potential improvements in
remediation technologies. We do not discount our estimated
liabilities to present value.
Income Taxes As part of the process of
preparing our consolidated financial statements, we must assess
the likelihood that our deferred income tax assets will be
recovered through future taxable income. We must establish a
valuation allowance to the extent we believe that recovery is
not likely. Significant management judgment is required in
determining any valuation allowance recorded against deferred
income tax assets. We have recorded a valuation allowance of
$9 million on certain state credit carryforwards as of
December 31, 2009 based on our estimates of taxable income
in each jurisdiction in which we operate and the period over
which deferred income tax assets will be recoverable. We may
need to establish an additional valuation allowance if actual
results differ from these estimates or we make adjustments to
these estimates in future periods. We also recognize the
financial statement effects of a tax position when it is more
likely than not that the position will be sustained upon
examination. Tax positions that are not recognized that we have
taken or expect to take, are recorded as liabilities. Our
liability for unrecognized tax benefits, including interest and
penalties totaled $57 million and $71 at December 31,
2009 and 2008, respectively.
Asset Retirement Obligations Our asset
retirement obligations totaled $34 million and
$35 million at December 31, 2009 and 2008,
respectively. We record asset retirement obligations in the
period in which the obligations are incurred and a reasonable
estimate of fair value can be made. We use the present value of
expected cash flows using third-party estimates or historical
data to estimate fair value. The calculation of fair value is
based on several estimates and assumptions, including projected
cash flows, inflation, a discount rate, the settlement dates or
a range of potential settlement dates and the probabilities
associated with settlement. We consider our past practice,
industry practice, managements intent and estimated
economic lives to estimate settlement dates. Our estimates are
subject to change due to potential changes in laws, regulations
or interpretations, additional information related to the extent
and nature of the retirement and technological improvements
associated with the retirement activities. We cannot currently
make reasonable estimates of the fair values of some retirement
obligations, principally those associated with our refineries,
pipelines and certain terminals and retail stations, because the
related assets have indeterminate useful lives which preclude
development of assumptions about the potential timing of
settlement dates. Such obligations will be recognized in the
period in which sufficient information exists to estimate a
range of potential settlement dates.
Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits
involves several assumptions and estimates including discount
rates, expected rate of return on plan assets, rates of
compensation, health care cost trends, inflation, retirement
rates and mortality rates. We must assume a rate of return on
funded pension plan assets in order to estimate our obligations
under our defined benefit plans. Due to the nature of these
calculations, we engage an actuarial firm to assist with these
estimates and the calculation of certain employee benefit
expenses. We record an asset for our plans overfunded status or
a liability if the plans are underfunded. The funded status
represents the difference between the fair value of our plans
assets and its projected benefit obligations. While we believe
the assumptions we used are appropriate, significant differences
in actual experience or significant changes in assumptions would
affect pension and other postretirement benefits costs and
obligations. We determine the discount rate primarily by
reference to rates of high quality corporate bonds that mature
in a pattern similar to the expected payments to be made under
our plans. The expected return on plan assets is based upon the
weighted averages of the expected long-term rates of return for
the broad categories of investments held in our plans. These
assumptions can have a significant effect on the amounts
reported in our consolidated financial statements.
45
A one-percentage-point change in the expected return on plan
assets and discount rate for the pension plans would have had
the following effects in 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Expected Rate of Return
|
|
|
|
|
|
|
|
|
Effect on net periodic pension expense
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
Discount Rate
|
|
|
|
|
|
|
|
|
Effect on net periodic pension expense
|
|
$
|
(6
|
)
|
|
$
|
6
|
|
Effect on projected benefit obligation
|
|
$
|
(42
|
)
|
|
$
|
49
|
|
See Note M in our consolidated financial statements in
Item 8 for more information regarding costs and assumptions.
Stock-Based Compensation We follow the fair
value method of accounting for stock-based compensation. We
estimate the fair value of options and certain other stock-based
awards using the Black-Scholes option-pricing model with
assumptions based primarily on historical data. The
Black-Scholes option-pricing model requires assumptions
including the expected term the stock-based awards are held
until exercised, the estimated volatility of our stock price
over the expected term, and the number of awards that will be
forfeited prior to vesting. Changes in our assumptions may
impact the expenses related to our stock-based awards. Our stock
appreciation rights and phantom stock options are revalued to
estimated fair value at the end of each reporting period.
Changes in our assumptions may impact our liabilities and
expenses associated with our stock-based awards.
New
Accounting Standards and Disclosures
See Note A in our consolidated financial statements in
Item 8.
46
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our primary source of market risk is the difference between the
prices we sell our refined products for and the prices we pay
for crude oil and other feedstocks. We have a risk management
committee whose responsibilities include reviewing a quarterly
assessment of risks to the corporation and presenting a
quarterly risk report to executive management for consideration.
Commodity
Price Risks
Our earnings and cash flows from operations depend on the
margin, relative to fixed and variable expenses (including the
costs of crude oil and other feedstocks), at which we are able
to sell our refined products. The prices of crude oil and
refined products have fluctuated substantially in recent years
and depend on many factors. These factors include the global
supply and demand for crude oil, diesel fuel and other refined
products. This demand is impacted by changes in the global
economy, the level of foreign and domestic production of crude
oil and refined products, geo-political conditions, the
availability of imports of crude oil and refined products, the
relative strength of the U.S. dollar, the marketing of
alternative and competing fuels and the impact of government
regulations. The prices we sell our refined products for are
also affected by local factors such as local market conditions
and the level of operations of other suppliers in our markets.
Prices for refined products are influenced by the 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. The timing, direction
and the overall change in refined product prices versus crude
oil prices will impact profit margins and could have a
significant impact on our earnings and cash flows. Assuming all
other factors remained constant, a $1 per barrel change in
average gross refining margins, based on our 2009 average
throughput of 549 Mbpd, would change annualized pretax operating
income by approximately $200 million.
We maintain inventories of crude oil, intermediate products and
refined products, the values of which are subject to
fluctuations in market prices. Our inventories of refinery
feedstocks and refined products totaled 20 million barrels
and 24 million barrels at December 31, 2009 and 2008,
respectively. The average cost of our refinery feedstocks and
refined products at December 31, 2009 was approximately $26
per barrel on a LIFO basis, compared to market prices of
approximately $82 per barrel. If market prices decline to a
level below the average cost of these inventories, we would be
required to write down the carrying value of our inventory to
market.
We periodically use non-trading derivative instruments,
primarily to manage exposure to commodity price risks associated
with the purchase or sale of crude oil and finished products. We
may also use derivative instruments to manage price risks
associated with inventories above or below our target levels.
These derivative instruments typically include exchange-traded
futures and
over-the-counter
swaps and options, generally with durations of less than one
year. During the 2008 second quarter, we closed the majority of
our crude oil derivative positions associated with our long-haul
strategy that matched the price of long haul crude oils to crude
oil prices at the day of processing. We continue to monitor our
hedging strategy in 2010.
We elected not to designate our derivative instruments as cash
flow or fair value hedges during 2009 and 2008. Therefore, we
mark-to-market
our derivative instruments and recognize the changes in their
fair value in Costs of sales and operating expenses.
Accordingly, no change in the value of the related underlying
physical commodity is recorded. We include the carrying amounts
of our derivatives in Prepayments and other or
Accrued liabilities.
Net earnings during 2009 and 2008 included net losses of
$68 million and $107 million, respectively, on our
derivative positions comprised of the following (dollars in
millions and volumes in millions of barrels):
|
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|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Contract
|
|
|
Net Gain
|
|
|
Contract
|
|
|
Net Gain
|
|
|
|
Volumes
|
|
|
(Loss)
|
|
|
Volumes
|
|
|
(Loss)
|
|
|
Unrealized gain or loss carried on open positions from prior year
|
|
|
1
|
|
|
$
|
(18
|
)
|
|
|
21
|
|
|
$
|
39
|
|
Settled derivative positions
|
|
|
287
|
|
|
|
(52
|
)
|
|
|
525
|
|
|
|
(164
|
)
|
Unrealized gain or loss on open positions
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
18
|
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|
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|
|
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|
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Net loss
|
|
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|
|
|
$
|
(68
|
)
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|
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$
|
(107
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)
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|
|
|
|
|
|
|
|
|
|
|
47
Our open positions at December 31, 2009 will expire at
various times primarily during 2010. We prepared a sensitivity
analysis to estimate our exposure to market risk associated with
our derivative instruments. This analysis may differ from actual
results. Based on our open net positions of 1 million
barrels at December 31, 2009, a $1.00
per-barrel
change in quoted market prices of our derivative instruments,
assuming all other factors remain constant, could change the
fair value of our derivative instruments and pretax operating
income by approximately $1 million.
Foreign
Currency Risk
We are exposed to exchange rate fluctuations on our monthly
purchases of Canadian crude oil. Beginning in August 2009, we
entered into forward contracts of Canadian dollars (C$) to
manage any monthly exchange rate fluctuations. As of
December 31, 2009, we had a forward contract to purchase
C$67 million that matured on January 25, 2010. Based
on our open forward contract position, a $0.01 change in the
Canadian dollar to U.S. dollar exchange rate would change
operating income by less than $1 million.
48
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited the accompanying consolidated balance sheets of
Tesoro Corporation as of December 31, 2009 and 2008, and
the related consolidated statements of operations, comprehensive
income and stockholders equity, and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Tesoro Corporation at December 31,
2009 and 2008, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Tesoro Corporations internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2010 expressed an
unqualified opinion thereon.
San Antonio, Texas
March 1, 2010
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited the accompanying consolidated statements of
operations, comprehensive income and stockholders equity,
and cash flows of Tesoro Corporation and subsidiaries (the
Company) for the year ended December 31, 2007.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the results of operations and
cash flows of Tesoro Corporation and subsidiaries for the
year-ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Houston, Texas
February 28, 2008 (October 21, 2008, as to Note R)
50
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions except per share amounts)
|
|
|
REVENUES(a)
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
|
$
|
21,976
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales and operating expenses(a)
|
|
|
16,208
|
|
|
|
27,177
|
|
|
|
20,369
|
|
Selling, general and administrative expenses
|
|
|
221
|
|
|
|
325
|
|
|
|
263
|
|
Depreciation and amortization
|
|
|
426
|
|
|
|
401
|
|
|
|
357
|
|
Loss on asset disposals and impairments
|
|
|
74
|
|
|
|
42
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(57
|
)
|
|
|
471
|
|
|
|
967
|
|
Interest and financing costs
|
|
|
(130
|
)
|
|
|
(111
|
)
|
|
|
(91
|
)
|
Interest income
|
|
|
4
|
|
|
|
7
|
|
|
|
33
|
|
Foreign currency exchange gain (loss)
|
|
|
(5
|
)
|
|
|
12
|
|
|
|
(4
|
)
|
Other income
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
(188
|
)
|
|
|
429
|
|
|
|
905
|
|
Income tax provision (benefit)
|
|
|
(48
|
)
|
|
|
151
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
Diluted
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
WEIGHTED AVERAGE COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
135.7
|
|
Diluted
|
|
|
138.2
|
|
|
|
139.2
|
|
|
|
139.5
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes excise taxes collected by our retail segment
|
|
$
|
283
|
|
|
$
|
278
|
|
|
$
|
240
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions except per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
413
|
|
|
$
|
20
|
|
Receivables, less allowance for doubtful accounts
|
|
|
1,116
|
|
|
|
738
|
|
Inventories
|
|
|
622
|
|
|
|
787
|
|
Prepayments and other
|
|
|
72
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,223
|
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Refining
|
|
|
5,789
|
|
|
|
5,468
|
|
Retail
|
|
|
647
|
|
|
|
599
|
|
Corporate and other
|
|
|
213
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,649
|
|
|
|
6,265
|
|
Less accumulated depreciation and amortization
|
|
|
(1,459
|
)
|
|
|
(1,184
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
5,190
|
|
|
|
5,081
|
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
46
|
|
|
|
89
|
|
Acquired intangibles, net
|
|
|
255
|
|
|
|
269
|
|
Other, net
|
|
|
356
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Assets
|
|
|
657
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,441
|
|
|
$
|
1,027
|
|
Accrued liabilities
|
|
|
444
|
|
|
|
412
|
|
Current maturities of debt
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,889
|
|
|
|
1,441
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES
|
|
|
505
|
|
|
|
416
|
|
OTHER LIABILITIES
|
|
|
752
|
|
|
|
749
|
|
DEBT
|
|
|
1,837
|
|
|
|
1,609
|
|
COMMITMENTS AND CONTINGENCIES (Note N)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.162/3;
authorized 200,000,000 shares; 147,295,424 shares
issued (145,755,260 in 2008)
|
|
|
24
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
947
|
|
|
|
916
|
|
Retained earnings
|
|
|
2,427
|
|
|
|
2,616
|
|
Treasury stock, 6,867,848 common shares (7,380,182 in 2008), at
cost
|
|
|
(140
|
)
|
|
|
(147
|
)
|
Accumulated other comprehensive loss
|
|
|
(171
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
3,087
|
|
|
|
3,218
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
TESORO
CORPORATION
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Income
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss)
|
|
|
|
(In millions)
|
|
|
AT JANUARY 1, 2007
|
|
|
|
|
|
|
143.4
|
|
|
$
|
24
|
|
|
$
|
829
|
|
|
$
|
1,876
|
|
|
|
(7.6
|
)
|
|
$
|
(159
|
)
|
|
$
|
(68
|
)
|
Net earnings
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(4
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
0.2
|
|
|
|
12
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of FASB Interpretation No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
benefit of $14)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2007
|
|
|
|
|
|
|
144.5
|
|
|
$
|
24
|
|
|
$
|
876
|
|
|
$
|
2,393
|
|
|
|
(7.5
|
)
|
|
$
|
(151
|
)
|
|
$
|
(90
|
)
|
Net earnings
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(5
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
0.3
|
|
|
|
9
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
benefit of $65)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2008
|
|
|
|
|
|
|
145.8
|
|
|
$
|
24
|
|
|
$
|
916
|
|
|
$
|
2,616
|
|
|
|
(7.4
|
)
|
|
$
|
(147
|
)
|
|
$
|
(191
|
)
|
Net loss
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(2
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
0.6
|
|
|
|
9
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
provision of $13)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2009
|
|
|
|
|
|
|
147.3
|
|
|
$
|
24
|
|
|
$
|
947
|
|
|
$
|
2,427
|
|
|
|
(6.9
|
)
|
|
$
|
(140
|
)
|
|
$
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
Adjustments to reconcile net earnings (loss) to net cash from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
426
|
|
|
|
401
|
|
|
|
357
|
|
Amortization of debt issuance costs and discounts
|
|
|
13
|
|
|
|
11
|
|
|
|
12
|
|
Loss on asset disposals and impairments
|
|
|
74
|
|
|
|
42
|
|
|
|
20
|
|
Stock-based compensation
|
|
|
46
|
|
|
|
14
|
|
|
|
53
|
|
Provision for bad debts
|
|
|
9
|
|
|
|
95
|
|
|
|
2
|
|
Deferred income taxes
|
|
|
95
|
|
|
|
89
|
|
|
|
(1
|
)
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(10
|
)
|
Other changes in non-current assets and liabilities
|
|
|
(103
|
)
|
|
|
(64
|
)
|
|
|
(76
|
)
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(387
|
)
|
|
|
410
|
|
|
|
(362
|
)
|
Inventories
|
|
|
165
|
|
|
|
413
|
|
|
|
(50
|
)
|
Prepayments and other
|
|
|
17
|
|
|
|
28
|
|
|
|
(34
|
)
|
Accounts payable and accrued liabilities
|
|
|
450
|
|
|
|
(998
|
)
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
663
|
|
|
|
716
|
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(437
|
)
|
|
|
(650
|
)
|
|
|
(747
|
)
|
Proceeds from asset sales
|
|
|
1
|
|
|
|
40
|
|
|
|
14
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
(2,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(436
|
)
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt offerings, net of discount and issuance costs
|
|
|
282
|
|
|
|
|
|
|
|
494
|
|
Borrowings under revolving credit agreement
|
|
|
418
|
|
|
|
5,658
|
|
|
|
1,060
|
|
Repayments on revolving credit agreement
|
|
|
(484
|
)
|
|
|
(5,712
|
)
|
|
|
(940
|
)
|
Repayments of debt
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(216
|
)
|
Dividend payments
|
|
|
(49
|
)
|
|
|
(55
|
)
|
|
|
(48
|
)
|
Proceeds from stock options exercised
|
|
|
4
|
|
|
|
5
|
|
|
|
9
|
|
Repurchases of common stock
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
2
|
|
|
|
3
|
|
|
|
10
|
|
Borrowings under term loan
|
|
|
|
|
|
|
|
|
|
|
700
|
|
Debt refinanced
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Financing costs and other
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
393
|
|
|
|
(3
|
)
|
|
|
(963
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
20
|
|
|
|
23
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
413
|
|
|
$
|
20
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$
|
95
|
|
|
$
|
84
|
|
|
$
|
70
|
|
Income taxes paid (refunded), net of refunds
|
|
$
|
(18
|
)
|
|
$
|
45
|
|
|
$
|
329
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities
|
|
$
|
34
|
|
|
$
|
70
|
|
|
$
|
101
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
TESORO
CORPORATION
|
|
NOTE A
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
and Nature of Business
Tesoro Corporation (Tesoro) was incorporated in
Delaware in 1968. Based in San Antonio, Texas, we are one
of the largest independent petroleum refiners and marketers in
the United States. Our subsidiaries, operating through two
business segments, primarily manufacture and sell transportation
fuels. Our refining operating segment (refining),
which operates seven refineries in the western and
mid-continental United States, refines crude oil and other
feedstocks into transportation fuels, such as gasoline, gasoline
blendstocks, jet fuel and diesel fuel, as well as other
products, including heavy fuel oils, liquefied petroleum gas,
petroleum coke and asphalt. Our refineries have a combined crude
oil capacity of 665 thousand barrels per day (Mbpd).
This operating segment sells refined products in wholesale and
bulk markets to a wide variety of customers within the
operations area. Our retail operating segment
(retail) sells transportation fuels and convenience
products in 15 states through a network of 886 retail
stations, primarily under the
Tesoro®,
Mirastar®,
Shell®,
and USA
Gasolinetm
brands.
Our earnings, cash flows from operations and liquidity depend
upon many factors, including producing and selling refined
products at margins above fixed and variable expenses. The
prices of crude oil and refined products have fluctuated
substantially in our markets. Our operating results have been
significantly influenced by the timing of changes in crude oil
costs and how quickly refined product prices adjust to reflect
these changes. These price fluctuations depend on numerous
factors beyond our control, including the global supply and
demand for crude oil, gasoline and other refined products, which
are subject to, among other things, changes in the global
economy and the level of foreign and domestic production of
crude oil and refined products, geo-political conditions,
availability of crude oil and refined product imports, the
infrastructure to transport crude oil and refined products,
weather conditions, earthquakes and other natural disasters,
seasonal variations, government regulations, threatened or
actual terrorist incidents or acts of war, and local factors,
including market conditions and the level of operations of other
suppliers in our markets. As a result of these factors, margin
fluctuations during any reporting period can have a significant
impact on our results of operations, cash flows, liquidity and
financial position.
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Tesoro and its subsidiaries. All intercompany
accounts and transactions have been eliminated. Certain
investments are carried at cost. These investments are not
material, either individually or in the aggregate, to
Tesoros financial position, results of operations or cash
flows. We have reclassified certain previously reported amounts
related to gains and losses on our derivative instruments to
conform to the current presentation (see Note Q). We have
evaluated subsequent events through the filing of this
Form 10-K.
Any material subsequent events that occurred during this time
have been properly recognized or disclosed in our financial
statements.
Use of
Estimates
We prepare our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America (U.S. GAAP), which requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the year. We review our estimates on an ongoing basis,
based on currently available information. Changes in facts and
circumstances may result in revised estimates and actual results
could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include bank deposits and low-risk
short-term investments with original maturities of three months
or less at the time of purchase. Our cash investment policy
excludes investments with sub-prime market exposure. Cash
equivalents are stated at cost, which approximates market value.
Receivables
Our receivables primarily consist of customer accounts
receivable, including proprietary credit card receivables.
Credit is extended based on an evaluation of the customers
financial condition and in certain circumstances,
55
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateral, such as letters of credit or guarantees, is
required. Our reserve for bad debts is based on factors
including current sales amounts, historical charge-offs and
specific accounts identified as high risk. Uncollectible
accounts receivable are charged against the allowance for
doubtful accounts when all reasonable efforts to collect the
amounts due have been exhausted.
Financial
Instruments
The carrying value of our financial instruments, including cash
and cash equivalents, receivables, accounts payable and certain
accrued liabilities approximate fair value because of the short
maturities of these instruments. We estimate the fair value for
our debt primarily using quoted market prices. Both the carrying
value and fair value of our debt at December 31, 2009 was
approximately $1.8 billion.
Inventories
Inventories are stated at the lower of cost or market. We use
last-in,
first-out (LIFO) as the primary method to determine
the cost of crude oil and refined product inventories in our
refining and retail segments. We determine the carrying value of
inventories of oxygenates and by-products using the
first-in,
first-out (FIFO) cost method. We value merchandise
along with materials and supplies at average cost.
Property,
Plant and Equipment
We capitalize the cost of additions, major improvements and
modifications to property, plant and equipment. We compute
depreciation of property, plant and equipment using the
straight-line method, based on the estimated useful life of each
asset. We record property under capital leases at the lower of
the present value of minimum lease payments using our
incremental borrowing rate or the fair value of the leased
property at the date of lease inception. We depreciate leasehold
improvements and property acquired under capital leases over the
lesser of the lease term or the economic life of the asset.
Depreciation expense totaled $276 million,
$253 million and $229 million for 2009, 2008 and 2007,
respectively.
We capitalize interest as part of the cost of major projects
during the construction period. Capitalized interest totaled
$25 million, $27 million and $30 million during
2009, 2008 and 2007, respectively, and is recorded as a
reduction to Interest and financing costs.
Asset
Retirement Obligations
An asset retirement obligation (ARO) is an estimated
liability for the cost to retire a tangible asset. We record
AROs at fair value in the period in which we have a legal
obligation to incur these costs and can make a reasonable
estimate of the fair value of the liability. When the liability
is initially recorded, we capitalize the cost by increasing the
book value of the related long-lived tangible asset. The
liability is accreted to its estimated settlement value and the
related capitalized cost is depreciated over the assets
useful life. We recognize a gain or loss at settlement for any
difference between the settlement amount and the recorded
liability. We estimate settlement dates by considering our past
practice, industry practice, managements intent and
estimated economic lives.
We cannot currently estimate the fair value for certain AROs
primarily because we cannot estimate settlement dates (or range
of dates) associated with these assets. These AROs include:
|
|
|
|
|
hazardous materials disposal (such as petroleum manufacturing
by-products, chemical catalysts, and sealed insulation material
containing asbestos), site restoration, and removal or
dismantlement requirements associated with the closure of our
refining facilities, terminal facilities or pipelines, including
the demolition or removal of certain major processing units,
buildings, tanks, pipelines or other equipment; and
|
|
|
|
removal of underground storage tanks at our owned retail
stations at or near the time of closure.
|
We have not historically incurred significant AROs for hazardous
materials disposal or other removal costs associated with asset
retirements or replacements during scheduled maintenance
projects. We believe that the majority of our tangible assets
have indeterminate useful lives. This precludes development of
assumptions about the potential timing of settlement dates based
on the following:
|
|
|
|
|
there are no plans or expectations of plans to retire or dispose
of these assets;
|
56
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
we plan on extending the assets estimated economic lives
through scheduled maintenance projects at our refineries and
other normal repair and maintenance and by continuing to make
improvements based on technological advances;
|
|
|
|
we have rarely retired similar assets in the past; and
|
|
|
|
industry practice for similar assets has historically been to
extend the economic lives through regular repair and maintenance
and implementation of technological advances.
|
Environmental
Matters
We capitalize environmental expenditures that extend the life or
increase the capacity of facilities as well as expenditures that
prevent environmental contamination. We expense costs that
relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation.
We record liabilities when environmental assessments
and/or
remedial efforts are probable and can be reasonably estimated.
Cost estimates are based on the expected timing and the extent
of remedial actions required by governing agencies, experience
gained from similar sites for which environmental assessments or
remediation have been completed, and the amount of our
anticipated liability considering the proportional liability and
financial abilities of other responsible parties. Generally, the
timing of these accruals coincides with the completion of a
feasibility study or our commitment to a formal plan of action.
Estimated liabilities are not discounted to present value.
Environmental expenses are recorded primarily in Costs of
sales and operating expenses.
Goodwill
and Acquired Intangibles
Goodwill represents the amount the purchase price exceeds the
fair value of net assets acquired in a business combination. We
do not amortize goodwill. We are required, however, to review
goodwill for impairment annually or more frequently if events or
changes in business circumstances indicate the book value of the
assets may not be recoverable.
Acquired intangibles are recorded at fair value as of the date
acquired and consist primarily of air emissions credits,
customer agreements and contracts and the USA Gasoline trade
name. We amortize acquired intangibles on a straight-line basis
over estimated useful lives of 2 to 31 years, and we
include the amortization in Depreciation and
amortization.
Other
Assets
We defer turnaround and certain catalyst costs and amortize the
costs on a straight-line basis over the expected periods of
benefit, generally ranging from 2 to 10 years. Turnaround
expenditures are amortized over the period of time until the
next planned turnaround of the processing unit. Certain
catalysts are used in refinery processing units for periods
exceeding one year. Amortization for these deferred costs, which
is included in Depreciation and amortization,
amounted to $129 million, $127 million and
$111 million in 2009, 2008 and 2007, respectively.
We defer debt issuance costs related to our credit agreement and
senior notes and amortize the costs over the terms of each
instrument. We include the amortization in Interest and
financing costs. We reassess the carrying value of debt
issuance costs when modifications are made to the related debt
instruments.
Impairment
of Long-Lived Assets
We review property, plant and equipment and other long-lived
assets, including acquired intangible assets for impairment
whenever events or changes in business circumstances indicate
the net book values of the assets may not be recoverable.
Impairment is indicated when the undiscounted cash flows
estimated to be generated by those assets are less than the
assets net book value. If this occurs, an impairment loss
is recognized for the difference between the fair value and net
book value. Factors that indicate potential impairment include:
a significant decrease in the market value of the asset,
operating or cash flow losses associated with the use of the
asset, and a significant change in the assets physical
condition or use.
57
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
We recognize revenues upon delivery of goods or services to a
customer. For goods, this is generally the point at which title
is transferred, and when payment has either been received or
collection is reasonably assured. Revenues for services are
recorded when the services have been provided. We record certain
transactions in Costs of sales and operating
expenses on a net basis. These transactions include crude
oil and refined product purchases and resales used for trading
purposes; nonmonetary crude oil and refined product exchange
transactions used to optimize our refinery supply; and sale and
purchase transactions entered into with the same counterparty
that are deemed to be in contemplation with one another. We
include transportation fees charged to customers in
Revenues, and we include the related costs in
Costs of sales and operating expenses.
Federal excise and state motor fuel taxes, which are remitted to
governmental agencies through our refining segment and collected
from customers in our retail segment, are included in both
Revenues and Costs of sales and operating
expenses. These taxes, primarily related to sales of
gasoline and diesel fuel, totaled $283 million,
$278 million and $240 million in 2009, 2008 and 2007,
respectively.
Income
Taxes
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their income tax bases. We base the measurement
of deferred tax assets and liabilities on enacted tax rates that
we expect will apply to taxable income in the year we expect to
settle or recover those temporary differences. We recognize the
effect on deferred tax assets and liabilities of any change in
income tax rates in the period that includes the enactment date.
We provide a valuation allowance for deferred tax assets if it
is more likely than not that those items will either expire
before we are able to realize their benefit or their future
deductibility is uncertain. We recognize the financial statement
effects of a tax position when it is more likely than not that
the position will be sustained upon examination. Tax positions
taken, or expected to be taken, that are not recognized are
recorded as liabilities.
Pension
and Other Postretirement Benefits
We recognize an asset for a plans overfunded status or a
liability for a plans underfunded status. A change in the
funded status of our defined benefit postretirement plan is
recognized in Other comprehensive income in the year
the change occurs.
Stock-Based
Compensation
Our stock-based compensation includes stock options, restricted
stock, stock-appreciation rights and phantom stock options. We
estimate the fair value of certain stock-based awards using the
Black-Scholes option-pricing model. The fair value of our
restricted stock awards on the date of grant is equal to the
market price of our common stock. We amortize the fair value of
our stock options and restricted stock using the straight-line
method over the vesting period. The fair values of our stock
appreciation rights and phantom stock options are estimated at
the end of each reporting period and are recorded as liabilities.
Derivative
Instruments
We periodically use non-trading derivative instruments,
primarily to manage exposure to commodity price risks associated
with the purchase or sale of crude oil and finished products. We
may also use derivative instruments to manage price risks
associated with inventories above or below our target levels.
These derivatives instruments typically include exchange-traded
futures and over-the-counter swaps and options, generally with
durations of one year or less.
All of our derivative instruments are matched against physical
crude oil or finished product barrels in our refining and
marketing operations. We do not hold or issue derivative
instruments for trading purposes and we do not use hedge
accounting. We mark to market our derivative instruments and
recognize the changes in their fair values in Costs of
sales and operating expenses. However, we do not record a
change in the value of the related underlying physical
commodity. The fair values of our derivatives are recorded in
Prepayments and other or Accrued
liabilities. We net our asset and liability positions
associated with multiple derivative instruments that are
58
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
executed with the same counterparty under master netting
arrangements. We did not designate or account for any derivative
instruments as cash flow or fair value hedges during 2009, 2008
or 2007.
Foreign
Currency Exchange
The functional currency for our foreign subsidiaries is the
U.S. dollar. The translation of our foreign operations into
U.S. dollars is computed for balance sheet accounts using
exchange rates in effect as of the balance sheet date and for
revenue and expense accounts using weighted-average exchange
rates during the year. Amounts are recorded in Foreign
currency exchange gain (loss).
New
Accounting Standards and Disclosures
FASB
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board
(FASB) established the FASB Accounting Standards
Codification (the Codification) as the exclusive
authoritative source for nongovernmental U.S. GAAP, except
for SEC rules and interpretive releases. The Codification is a
compilation of U.S. GAAP previously issued by several
standard setters. Future FASB accounting standards will update
the Codification and will be referred to as Accounting
Standards Updates. The Codification became effective for
Tesoro for the period ended September 30, 2009 and did not
impact our financial position or results of operations.
Business
Combinations
We adopted a standard on January 1, 2009, that requires the
assets acquired and liabilities assumed in a business
combination be recorded at the acquisition-date fair value. This
standard changed the accounting treatment for certain
acquisition related items, including requirements to:
|
|
|
|
|
expense acquisition related costs as incurred;
|
|
|
|
value noncontrolling interests at fair value at the acquisition
date; and
|
|
|
|
expense restructuring costs associated with an acquired business.
|
The adoption of this standard did not impact our financial
position or results of operations.
Disclosures
about Derivative Instruments and Hedging Activities
We adopted a standard on January 1, 2009, that changes the
annual and interim disclosure requirements for derivative
instruments and hedging activities. The standard requires us as
an entity with derivative instruments, to disclose how and why
we use derivative instruments, how we account for derivative
instruments and related hedged items and how those items affect
our financial position, financial performance and cash flows.
The adoption of this standard did not impact our financial
position or results of operations. The new disclosures under the
standard are included in Note H.
Employers
Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued a standard that requires
disclosure for each major category of plan assets within the
fair value hierarchy (i.e. level 1, level 2 and
level 3). The standard also requires disclosure of
investment policies and strategies, the fair value of plan
assets by major category, the nature and amount of any
concentrations of risk within categories, and the valuation
techniques and inputs used to develop fair value measurements of
plan assets. This standard became effective for the year ended
December 31, 2009 and did not impact our financial position
or results of operations. The new disclosures are included in
Note M.
59
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Measurements
We adopted a standard on January 1, 2009, that expanded the
framework and disclosures for measuring fair value to
nonfinancial assets and nonfinancial liabilities, including
acquired or impaired goodwill, the initial recognition of asset
retirement obligations and impaired property, plant and
equipment The adoption of this standard did not impact our
financial position or results of operations.
Subsequent
Events
We adopted a standard as of June 30, 2009, that establishes
general standards of accounting for and disclosure of subsequent
events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued.
The standard requires us to evaluate these events through the
date that the financial statements are issued and to disclose
the date of evaluation. The adoption of this standard did not
impact our financial position or results of operations.
Variable
Interest Entities
The FASB issued a standard in June 2009 that amends previous
guidance on accounting for variable interest entities. The
standard modifies the criteria for determining whether an entity
is a variable interest entity and requires ongoing reassessments
of whether an enterprise is the primary beneficiary of a
variable interest entity and an analysis to determine whether
the enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity.
This standard became effective January 1, 2010 and did not
impact our financial position or results of operations.
|
|
NOTE B
|
EARNINGS
PER SHARE
|
We compute basic earnings per share by dividing net earnings by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share include the effects of
potentially dilutive shares, principally consisting of common
stock options and unvested restricted stock outstanding during
the period. Common stock options for which the exercise prices
were greater than the average market price of our common stock
are excluded from potentially dilutive shares. These options
totaled 4.8 million shares, 3.3 million shares and
0.2 million shares for the years ended December 31,
2009, 2008 and 2007, respectively. As a result of the net loss
for the year ended December 31, 2009, the assumed
conversion of common stock equivalents produced anti-dilutive
results and therefore was not included in the dilutive
calculation. Share and per share calculations are presented
below (in millions except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
135.7
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
|
|
|
|
2.4
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted shares
|
|
|
138.2
|
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Receivables at December 31, 2009 and 2008 consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade receivables
|
|
$
|
966
|
|
|
$
|
675
|
|
Tax receivables
|
|
|
151
|
|
|
|
60
|
|
Other receivables
|
|
|
7
|
|
|
|
11
|
|
Allowance for doubtful accounts
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
1,116
|
|
|
$
|
738
|
|
|
|
|
|
|
|
|
|
|
Concentrations of credit risk with respect to accounts
receivable are influenced by the large number of customers
comprising our customer base and their dispersion across various
industry groups and geographic areas of operations. We perform
ongoing credit evaluations of our customers financial
condition, and in certain circumstances, require prepayments,
letters of credit or other collateral arrangements.
Components of inventories at December 31, 2009 and 2008
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Crude oil and refined products
|
|
$
|
507
|
|
|
$
|
680
|
|
Oxygenates and by-products
|
|
|
22
|
|
|
|
22
|
|
Merchandise
|
|
|
13
|
|
|
|
13
|
|
Materials and supplies
|
|
|
80
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
622
|
|
|
$
|
787
|
|
|
|
|
|
|
|
|
|
|
Crude oil and refined products inventories valued primarily at
LIFO cost were less than replacement cost by approximately
$1.1 billion and $405 million, at December 31,
2009 and 2008, respectively. During 2009 and 2008, reductions in
inventory quantities resulted in liquidations of applicable LIFO
inventory quantities carried at lower costs in prior years.
These LIFO liquidations resulted in a decrease in costs of sales
of $69 million and $138 million during 2009 and 2008,
respectively.
|
|
NOTE E
|
GOODWILL
AND ACQUIRED INTANGIBLES
|
Goodwill
Goodwill is not amortized but is tested for impairment at least
annually. We review the recorded value of goodwill for
impairment during the fourth quarter of each year, or sooner if
events or changes in circumstances indicate the carrying amount
may exceed fair value. Our annual evaluation of goodwill
impairment requires us to make significant estimates to
determine the fair value of our reporting units. Our estimates
may change from period to period because we must make
assumptions about future cash flows, profitability and other
matters. It is reasonably possible that future changes in our
estimates could have a material effect on the carrying amount of
goodwill. Goodwill in our refining segment totaled
$41 million and $84 million at December 31, 2009
and 2008, respectively. In our retail segment, goodwill totaled
$5 million at both December 31, 2009 and 2008. The
changes in the carrying amount of goodwill during 2009 and 2008
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of beginning of year
|
|
$
|
89
|
|
|
$
|
92
|
|
Goodwill impairment loss
|
|
|
43
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
46
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
61
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of our refining and retail reporting units are
estimated based on an income approach using the present value of
expected future cash flows for each reporting unit. We also use
a market approach to value our refining reporting units using
recent refinery sales transactions and quoted common stock
prices of comparable companies within the refining industry.
Deteriorating market conditions associated with the economic
recession, excess product inventories and rising crude oil costs
during 2009 reduced current period and forecasted earnings
within our business and industry as well as quoted market prices
for comparable company common stocks and refinery sales
transactions. Decreased forecasted cash flows and quoted market
prices reduced our estimated fair value below carrying value for
one of our refining reporting units resulting in a goodwill
impairment of $43 million. The impairment charge is
included in Loss on asset disposals and impairments.
We continue to carry goodwill for reporting units where
estimated fair values exceed carrying values.
Acquired
Intangibles
The following table provides the historical cost and accumulated
amortization for each major class of acquired intangible assets,
excluding goodwill (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Historical
|
|
|
Accumulated
|
|
|
Book
|
|
|
Historical
|
|
|
Accumulated
|
|
|
Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Air emissions credits
|
|
$
|
220
|
|
|
$
|
43
|
|
|
$
|
177
|
|
|
$
|
211
|
|
|
$
|
33
|
|
|
$
|
178
|
|
Customer agreements and contracts
|
|
|
50
|
|
|
|
31
|
|
|
|
19
|
|
|
|
50
|
|
|
|
28
|
|
|
|
22
|
|
USA Gasoline tradename
|
|
|
35
|
|
|
|
5
|
|
|
|
30
|
|
|
|
35
|
|
|
|
3
|
|
|
|
32
|
|
Software
|
|
|
20
|
|
|
|
16
|
|
|
|
4
|
|
|
|
20
|
|
|
|
9
|
|
|
|
11
|
|
Refinery permits and plans
|
|
|
17
|
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
|
|
5
|
|
|
|
12
|
|
Favorable leases
|
|
|
12
|
|
|
|
2
|
|
|
|
10
|
|
|
|
12
|
|
|
|
1
|
|
|
|
11
|
|
Other intangibles
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
360
|
|
|
$
|
105
|
|
|
$
|
255
|
|
|
$
|
351
|
|
|
$
|
82
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our acquired intangible assets are subject to
amortization. Amortization expense of acquired intangible assets
amounted to $23 million, $21 million and
$16 million for the years ended December 31, 2009,
2008 and 2007, respectively. Our estimated amortization expense
for each of the following five years is: 2010
$19 million; 2011 $19 million;
2012 $13 million;
2013 $12 million; and 2014
$12 million.
|
|
NOTE F
|
OTHER
NONCURRENT ASSETS
|
Other noncurrent assets at December 31, 2009 and 2008
consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred maintenance costs, including refinery turnarounds, net
of amortization
|
|
$
|
299
|
|
|
$
|
287
|
|
Debt issuance costs, net of amortization
|
|
|
25
|
|
|
|
22
|
|
Notes receivable
|
|
|
1
|
|
|
|
10
|
|
Other assets, net of amortization
|
|
|
31
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
$
|
356
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G
|
FAIR
VALUE MEASUREMENTS
|
We classify financial assets and financial liabilities into the
following fair value hierarchy: level 1 quoted
prices in active markets for identical assets and liabilities;
level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities;
and level 3 unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
During 2009, we did not measure any significant nonfinancial
assets or nonfinancial liabilities at fair value. Derivative
instruments are our only financial assets and financial
liabilities measured at fair value on a recurring basis.
62
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our derivative instruments consist primarily of exchange-traded
futures and over-the-counter swaps and options. Exchange-traded
futures are valued based on quoted prices from exchanges and are
categorized in Level 1 of the fair value hierarchy. Options
are valued using quoted prices from exchanges. Swaps are priced
using third-party broker quotes, industry pricing services, and
exchange-traded curves. Our swap and option instruments are both
categorized in Level 2 of the fair value hierarchy since
they have contractual terms that are not identical to
exchange-traded futures instruments with a comparable market
price.
The following table presents the fair value of our derivative
assets and liabilities by level within the fair value hierarchy
at December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
|
|
The following table presents the fair value of our derivative
assets and liabilities by level within the fair value hierarchy
at December 31, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
20
|
|
|
$
|
23
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
|
NOTE H
|
DERIVATIVE
INSTRUMENTS
|
The timing, direction and the overall change in refined product
prices versus crude oil prices impacts profit margins and has a
significant impact on our earnings and cash flows. To manage
these commodity price risks, we periodically use derivative
instruments primarily associated with the purchase or sale of
crude oil and finished products. We may also use derivative
instruments to manage price risks associated with inventories
above or below our target levels. These derivative instruments
typically include exchange-traded futures, over-the-counter
swaps and options, generally with maturity dates of less than
one year.
Futures contracts include a requirement to buy or sell the
commodity at a fixed price in the future. Swap contracts require
receipt of payment for the commodity based on the difference
between a fixed or floating price and the market price on the
settlement date. Option contracts provide the right, but not the
obligation, to buy or sell the commodity at a specified price in
the future. At December 31, 2009, we had open net long
swaps positions of 1.1 million barrels and open net short
futures positions of 1.2 million barrels. We have swap
derivative instruments that require cash collateral if our
liability position exceeds specified thresholds. At
December 31, 2009, we did not have any cash collateral
outstanding.
63
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the fair value (in millions) and
balance sheet classification of our non-hedging derivative
instruments as of December 31, 2009 and 2008. The fair
value amounts below are presented on a gross basis and do not
reflect the netting of asset and liability positions permitted
under the terms of our master netting arrangements. We have
elected to offset the fair value amounts recognized for multiple
derivative instruments executed with the same counterparty in
our financial statements. As a result, the asset and liability
amounts below will not agree with the amounts presented in our
consolidated balance sheet, nor will they agree to the fair
value information presented in Note G.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
December 31,
|
|
December 31,
|
|
Sheet
|
|
December 31,
|
|
December 31,
|
|
|
Location
|
|
2009
|
|
2008
|
|
Location
|
|
2009
|
|
2008
|
|
Commodity contracts
|
|
Prepayments and other
|
|
$
|
68
|
|
|
$
|
157
|
|
|
|
Accrued liabilities
|
|
|
$
|
66
|
|
|
$
|
140
|
|
The following information presents the gains and losses for our
non-hedging derivative instruments for the years ended
December 31, 2009 and 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
December 31,
|
|
|
Location of Gain (Loss)
|
|
2009
|
|
2008
|
|
Commodity contracts
|
|
|
Costs of sales and operating expenses
|
|
|
$
|
(68
|
)
|
|
$
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE I
|
ACCRUED
LIABILITIES
|
Our current accrued liabilities and noncurrent other liabilities
at December 31, 2009 and 2008 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued Liabilities Current:
|
|
|
|
|
|
|
|
|
Taxes other than income taxes, primarily excise taxes
|
|
$
|
153
|
|
|
$
|
156
|
|
Employee costs
|
|
|
72
|
|
|
|
63
|
|
Environmental liabilities
|
|
|
50
|
|
|
|
53
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
28
|
|
|
|
35
|
|
Deferred income tax liability
|
|
|
15
|
|
|
|
|
|
Interest
|
|
|
16
|
|
|
|
14
|
|
Pension and other postretirement benefits
|
|
|
15
|
|
|
|
10
|
|
Other
|
|
|
95
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Liabilities Current
|
|
$
|
444
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities Noncurrent:
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
$
|
590
|
|
|
$
|
570
|
|
Environmental liabilities
|
|
|
56
|
|
|
|
70
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
29
|
|
|
|
36
|
|
Asset retirement obligations
|
|
|
28
|
|
|
|
27
|
|
Other
|
|
|
49
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Total Other Liabilities Noncurrent
|
|
$
|
752
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
64
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2009 and 2008, debt consisted of (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Credit Agreement Revolving Credit Facility
|
|
$
|
|
|
|
$
|
66
|
|
93/4% Senior
Notes Due 2019 (net of unamortized discount of $11)
|
|
|
289
|
|
|
|
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
|
|
500
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
|
|
450
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
|
|
450
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $25 in 2009 and $32 in 2008)
|
|
|
125
|
|
|
|
118
|
|
Capital lease obligations and other
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,841
|
|
|
|
1,611
|
|
Less current maturities
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Debt, less current maturities
|
|
$
|
1,837
|
|
|
$
|
1,609
|
|
|
|
|
|
|
|
|
|
|
The aggregate maturities of Tesoros debt for each of the
five years following December 31, 2009 were:
2010 $4 million; 2011
$2 million; 2012 $602 million;
2013 $3 million; and 2014
$2 million.
See Note O for information related to limits imposed by our
debt agreements on restricted payments (as defined in our debt
agreements) which include cash dividends, stock repurchases or
voluntary prepayments of subordinated debt.
Credit
Agreement Revolving Credit Facility
In February 2010 and May 2009, we amended our credit agreement,
which among other things, modified the following:
|
|
|
|
|
lowered the minimum tangible net worth requirement, as defined;
|
|
|
|
the purchase or sale of certain assets is no longer subject to
the fixed charge coverage ratio test;
|
|
|
|
the covenant permitting additional unsecured indebtedness, as
defined, increased from $75 million to $600 million;
|
|
|
|
letters of credit allowed under separate letter of credit
agreements previously capped at $500 million are no longer
subject to a cap;
|
|
|
|
the applicable margin, as defined; and
|
|
|
|
the annual rate of commitment fees changed from 0.25% to 0.375%
in May 2009 and to 0.50% in February 2010 for the unused portion
of the revolving credit facility.
|
At December 31, 2009, our credit agreement provided for
borrowings (including letters of credit) up to the lesser of the
amount of a periodically adjusted borrowing base of
approximately $2.0 billion (based upon an Alaska North
Slope crude oil price of $80 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables
and petroleum inventories, net of the standard reserve as
defined, or the agreements total capacity of
$1.81 billion. The capacity can be further increased up to
$1.95 billion. As of December 31, 2009, we had no
borrowings and $665 million in letters of credit
outstanding under the credit agreement, resulting in total
unused credit availability of $1.14 billion or 63% of the
eligible borrowing base. Borrowings under the revolving credit
facility bear interest at either a base rate (3.25% at
December 31, 2009), or a Eurodollar rate (0.23% at
December 31, 2009) plus an applicable margin. The
applicable margin at December 31, 2009 was 1.50% in the
case of the Eurodollar rate, but varies based upon our credit
facility availability and credit ratings. Letters of credit
outstanding under the revolving credit facility incur fees at an
annual rate tied to the applicable margin described above (1.50%
at December 31, 2009). Our credit agreement expires in May
2012.
65
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The credit agreement contains covenants and conditions that,
among other things, limit our ability to pay cash dividends,
incur indebtedness, create liens and make investments. Tesoro is
also required to maintain a minimum fixed charge coverage ratio
and specified levels of tangible net worth. We satisfied all of
the financial covenants under the credit agreement for the year
ended December 31, 2009. The credit agreement is guaranteed
by substantially all of Tesoros active domestic
subsidiaries. The credit agreement allows up to
$100 million of restricted payments during any four quarter
period subject to credit availability exceeding 20% of the
borrowing base.
Letter
of Credit Agreements
The credit agreement allows us to obtain letters of credit under
separate letter of credit agreements for foreign crude oil
purchases. At December 31, 2009, our letters of credit
capacity under these three agreements totaled $500 million,
of which $332 million was outstanding. Letters of credit
outstanding under these agreements incur fees and are secured by
the petroleum inventories supported by the issued letters of
credit. The agreements may be terminated by either party, at any
time.
9
3/4% Senior
Notes Due 2019
In June 2009, we issued $300 million aggregate principal
amount of
93/4% senior
notes due June 2019 for general corporate purposes. The notes
were issued at 96.172% of face value at an effective interest
rate of 10.375%. The notes have a ten-year maturity with no
sinking fund requirements and are subject to optional redemption
by Tesoro beginning June 1, 2014 at premiums of 4.875%
through May 31, 2015, 3.25% from June 1, 2015 through
May 31, 2016; 1.625% from June 1, 2016 through
May 31, 2017; and at par thereafter. We have the right to
redeem up to 35% of the aggregate principal amount at 109.75% of
face value with proceeds from certain equity issuances through
June 1, 2012. The indenture for the notes contains
covenants and restrictions that are customary for notes of this
nature. Substantially all of these covenants will terminate
before the notes mature if one of two specified ratings agencies
assigns the notes an investment grade rating and no events of
default exist under the indenture. The terminated covenants will
not be restored even if the credit rating assigned to the notes
subsequently falls below investment grade. The notes are
unsecured and are guaranteed by substantially all of our
domestic subsidiaries.
61/2% Senior
Notes Due 2017
In May 2007, we issued $500 million aggregate principal
amount of
61/2% senior
notes due June 2017. The notes have a ten-year maturity with no
sinking fund requirements and are subject to optional redemption
by Tesoro beginning June 2012 at premiums of 3.25% through May
2013; 2.17% from June 2013 through May 2014; 1.08% from June
2014 through May 2015; and at par thereafter. We have the right
to redeem up to 35% of the aggregate principal amount at a
redemption price of 106.5% with proceeds from certain equity
issuances through June 1, 2010. The indenture for the notes
contains covenants and restrictions that are customary for notes
of this nature. Substantially all of these covenants will
terminate before the notes mature if either Standard and
Poors or Moodys assigns the notes an investment
grade rating and no events of default exist under the indenture.
The terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of our active domestic subsidiaries.
65/8% Senior
Notes Due 2015
In November 2005, we issued $450 million aggregate
principal amount of
65/8% senior
notes due November 2015. The notes have a ten-year maturity with
no sinking fund requirements and are subject to optional
redemption by Tesoro beginning November 2010 at premiums of 3.3%
through October 2011, 2.2% from November 2011 to October 2012,
1.1% from November 2012 to October 2013, and at par thereafter.
The indenture for the notes contains covenants and restrictions
that are customary for notes of this nature and are identical to
the covenants in the indenture for Tesoros
61/4% senior
notes due 2012. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies assigns the notes an investment grade rating
and no events of default exist under the indenture. The
terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
66
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
61/4% Senior
Notes Due 2012
In November 2005, we issued $450 million aggregate
principal amount of
61/4% senior
notes due November 2012. The notes have a seven-year maturity
with no sinking fund requirements and are not callable. The
indenture for the notes contains covenants and restrictions that
are customary for notes of this nature and are identical to the
covenants in the indenture for Tesoros
65/8% senior
notes due 2015. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies assigns the notes an investment grade rating
and no events of default exist under the indenture. The
terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
Junior
Subordinated Notes Due 2012
In May 2002, we issued junior subordinated notes. The notes
consist of: (i) a $100 million junior subordinated
note, due July 2012, which carries a 7.5% interest rate (through
May 2007 the note was non-interest bearing), and (ii) a
$50 million junior subordinated note, due July 2012, which
incurs interest at 7.5%. We recorded these two notes at a
combined present value of $61 million, discounted at rates
of 15.625% and 14.375%, respectively. We are amortizing the
discount over the term of the notes.
Capital
Lease Obligations
Our capital lease obligations relate primarily to the lease of
30 retail stations with initial terms of 17 years, with
four 5-year
renewal options. At December 31, 2009 and 2008, the total
cost of assets under capital leases was $38 million and
$37 million, respectively, with accumulated amortization of
$24 and $19 million for December 31, 2009 and 2008,
respectively. We include amortization of the cost of assets
under capital leases in Depreciation and
amortization. Future minimum annual lease payments,
including interest, as of December 31, 2009 for capital
leases were (in millions):
|
|
|
|
|
2010
|
|
$
|
5
|
|
2011
|
|
|
3
|
|
2012
|
|
|
3
|
|
2013
|
|
|
4
|
|
2014
|
|
|
3
|
|
Thereafter
|
|
|
17
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
35
|
|
Less amount representing interest
|
|
|
13
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
22
|
|
|
|
|
|
|
67
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE K
|
ASSET
RETIREMENT OBLIGATIONS
|
We have recorded asset retirement obligations for requirements
imposed by certain regulations pertaining to hazardous materials
disposal and other cleanup obligations. Our asset retirement
obligations primarily include obligations to clean or dispose of
hazardous waste related to replacing or disposing of equipment
or piping at our refineries. We also have recorded obligations
related to underground storage tank removal at our leased retail
stations. Changes in asset retirement obligations for the years
ended December 31, 2009 and 2008 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
35
|
|
|
$
|
82
|
|
Additions to accrual
|
|
|
5
|
|
|
|
4
|
|
Accretion expense
|
|
|
1
|
|
|
|
3
|
|
Settlements
|
|
|
(10
|
)
|
|
|
(12
|
)
|
Changes in timing and amount of estimated cash flows
|
|
|
3
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
34
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
The decrease in asset retirement obligations during 2008 was
primarily due to changes in timing and the estimated cash flows
for certain retirement projects at our Golden Eagle refinery.
The estimated liability for the retirement projects was reduced
based on lower actual and forecasted spending.
The components of income tax provision (benefit) were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(148
|
)
|
|
$
|
52
|
|
|
$
|
279
|
|
State
|
|
|
5
|
|
|
|
10
|
|
|
|
59
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
107
|
|
|
|
79
|
|
|
|
2
|
|
State
|
|
|
(12
|
)
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision (Benefit)
|
|
$
|
(48
|
)
|
|
$
|
151
|
|
|
$
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their income tax bases. Temporary differences
and the resulting deferred tax assets and liabilities at
December 31, 2009 and 2008 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Tax credit carryforwards
|
|
$
|
60
|
|
|
$
|
11
|
|
Accrued pension and other postretirement benefits
|
|
|
238
|
|
|
|
222
|
|
Asset retirement obligations
|
|
|
13
|
|
|
|
14
|
|
Accrued environmental remediation liabilities
|
|
|
40
|
|
|
|
36
|
|
Other accrued liabilities
|
|
|
47
|
|
|
|
48
|
|
Stock-based compensation
|
|
|
41
|
|
|
|
28
|
|
Other
|
|
|
18
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
$
|
457
|
|
|
$
|
375
|
|
Less: Valuation allowance
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
448
|
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
68
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation and property related items
|
|
$
|
735
|
|
|
$
|
571
|
|
Deferred maintenance costs, including refinery turnarounds
|
|
|
88
|
|
|
|
85
|
|
Amortization of intangible assets
|
|
|
40
|
|
|
|
42
|
|
Inventory
|
|
|
71
|
|
|
|
45
|
|
Other
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
$
|
966
|
|
|
$
|
775
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
518
|
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
We have recorded a valuation allowance as of December 31,
2009 and 2008, due to uncertainties related to our ability to
use certain state credit carryforwards. The valuation allowance
reduces the benefit of those carryforwards to the amount that
will more likely than not be realized, and is based on
anticipated taxable income in the various jurisdictions. The
realization of our other deferred tax assets depends on
Tesoros ability to generate future taxable income.
Although realization is not assured, we believe it is more
likely than not that we will realize those deferred tax assets.
The net deferred income tax liability is classified in the
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current Assets
|
|
$
|
2
|
|
|
$
|
7
|
|
Current Liabilities
|
|
$
|
15
|
|
|
$
|
|
|
Noncurrent Liabilities
|
|
$
|
505
|
|
|
$
|
416
|
|
The reconciliation of income tax expense (benefit) at the
U.S. statutory rate to the income tax provision (benefit)
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income Tax Provision (Benefit) at U.S. Federal Statutory Rate
|
|
$
|
(66
|
)
|
|
$
|
150
|
|
|
$
|
317
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax effect
|
|
|
(7
|
)
|
|
|
13
|
|
|
|
36
|
|
Manufacturing activities deduction
|
|
|
4
|
|
|
|
(7
|
)
|
|
|
(18
|
)
|
Goodwill impairment
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Income tax settlements
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Other
|
|
|
4
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision (Benefit)
|
|
$
|
(48
|
)
|
|
$
|
151
|
|
|
$
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, we have approximately
$55 million of federal and state alternative minimum tax
credit carryforwards which never expire. Additionally, we have
approximately $12 million of other state income tax credit
carryforwards, most of which expire in 2026. Due to our ability
to carry back our 2009 federal regular tax net operating loss,
we have no federal regular tax net operating loss carryforwards,
but have approximately $640 million of alternative minimum
tax net operating loss carryforwards that can be carried forward
to 2028. Various states in which we file will not allow the
carryback of our 2009 net operating loss. In those states
we have approximately $9 million of tax-effected net
operating loss carryforwards which expire between 2014 and 2029.
We are subject to income taxes in the U.S., multiple state
jurisdictions, and a few foreign jurisdictions. Our unrecognized
tax benefits totaled $36 million and $44 million as of
December 31, 2009 and 2008, respectively, of which,
$29 million and $44 million are recognized as
liabilities. For both years, $23 million (net of the tax
benefit on state issues) would affect the effective tax rate if
recognized. Within the next twelve months we believe it is
reasonably possible that we could settle or otherwise conclude
as much as $25 million of our uncertain tax positions, of
which $18 million is recognized as a liability, primarily
regarding state issues related to tax credits and to
apportionment of income. At December 31, 2009 and 2008, we
had accrued $28 million and $27 million,
69
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively, for interest and penalties. During the years ended
December 31, 2009, 2008, and 2007, we recognized
$5 million, $3 million, and $4 million in
interest and penalties associated with unrecognized tax
benefits. For interest and penalties relating to income taxes we
recognize accrued interest in Interest and financing
costs, and penalties in Selling, general and
administrative expenses in the statements of consolidated
operations. The federal tax years 2005 to 2008 remain open to
adjustment, and in general the state tax years open to
adjustment range from 1994 to 2008. A reconciliation of the
beginning and ending amounts of unrecognized tax benefits is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance as of beginning of year
|
|
$
|
44
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Increases related to prior year tax positions
|
|
|
1
|
|
|
|
5
|
|
|
|
1
|
|
Decreases related to prior year tax positions
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
(4
|
)
|
Increases related to current year tax positions
|
|
|
|
|
|
|
11
|
|
|
|
3
|
|
Decreases related to lapse of applicable statute of limitations
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Decreases related to settlements with taxing authorities
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
36
|
|
|
$
|
44
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and Other Postretirement Benefits
We sponsor four defined benefit pension plans, which are
described below.
|
|
|
|
|
The funded qualified employee retirement plan provides benefits
to all eligible employees based on years of service and
compensation. Although our funded employee retirement plan fully
meets all of the funding requirements under applicable laws and
regulations, during 2009 and 2008 we voluntarily contributed
$35 million and $18 million, respectively, to improve
the plans funded status.
|
|
|
|
The unfunded executive security plan provides certain executive
officers and other key personnel with supplemental death or
retirement benefits. These benefits are provided by a
nonqualified, noncontributory plan and are based on years of
service and compensation. During both 2009 and 2008, we made
payments of $1 million for current retiree obligations
under the plan.
|
|
|
|
The unfunded non-employee director retirement plan provided
eligible directors retirement payments upon meeting certain age
and other requirements. In 1997, the plan was frozen and only
those retired directors or beneficiaries who had begun to
receive benefits remained participants in the plan.
|
|
|
|
The unfunded restoration retirement plan provides for the
restoration of retirement benefits to certain executives and
other senior employees of Tesoro that are not available due to
the limits imposed by the Internal Revenue Code on our funded
employee retirement plan.
|
Tesoro provides health care benefits to retirees who met certain
service requirements and were participating in our group
insurance program at retirement. Tesoro also provides life
insurance benefits to qualified retirees. Health care is
available to qualified dependents of participating retirees.
Benefits are provided from unfunded, defined benefit plans
through self-insured health plans or fully insured health
benefit contracts which are provided by paying a premium to the
insurer. The health care plans are contributory, with retiree
contributions adjusted periodically, and contain other
cost-sharing features such as deductibles and coinsurance. The
life insurance plan is noncontributory. We fund our share of the
cost of postretirement health care and life insurance benefits
on a pay-as-you go basis.
Investment
Policies and Strategies
Our funded qualified retirement plan assets are invested using a
total return investment approach (including dividends, interest,
and realized and unrealized capital appreciation) whereby a mix
of equity securities, fixed income securities and other
investments are used to preserve asset values, diversify risk
and achieve our target investment return. Plan assets are
managed in a diversified portfolio comprised of two primary
components: an equity portion and a fixed income portion. The
expected role of the plans equity investments is to
maximize the
70
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
long-term real growth of plan assets, while the role of fixed
income investments is to generate current income, lower funded
status volatility and provide for more stable periodic returns
and provide protection against a prolonged decline in the equity
markets. Investment strategies and asset allocation decisions
are based on careful consideration of risk tolerance, plan
liabilities, the plans funded status and our financial
condition.
Our historical target allocation for plan assets has been
approximately 54% domestic equity, 24% fixed income, 14%
international equity, 6% real estate, and 2% cash equivalents.
In November 2009, we revised our investment policy to reduce
equity exposure and increase fixed income exposure while
extending the duration in order to better match the plans
liabilities. Our revised target allocation is as follows: 50%
fixed income (primarily longer duration bonds), 20% other
investments (comprised primarily of assets which provide
protection in inflationary periods and investments which target
a return regardless of market conditions), 15% domestic equity
and 15% international equity.
Fair
Value of Plan Assets
We classify our plan assets into three fair value
classifications or levels. Our level 1 investments include
interest-bearing cash equivalents and U.S. equity
securities based on market quotations from national securities
exchanges. Level 2 investments include equity and bond
securities valued at the last reported sales price or closing
price as reported by an independent pricing service. When market
prices are not readily available, the determination of fair
value may rely on factors such as significant market activity or
security specific events, changes in interest rates and credit
quality, and developments in foreign markets. Level 3
investments represent real estate holdings that are based upon
property appraisal reports prepared by independent real estate
appraisers using the cost, income and market valuation
approaches. We do not believe that there are any significant
concentrations of risk within our plan assets.
The table below presents information about the retirement
plans major asset categories measured at fair value on a
recurring basis by the three levels described above as of
December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Asset Category
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)(f)
|
|
|
Cash equivalents(a)
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
|
|
U.S. equities(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
95
|
|
|
|
32
|
|
|
|
63
|
|
|
|
|
|
U.S. small/mid cap
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
International equities(c)
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
Fixed income(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long duration bonds
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
Real estate(e)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262
|
|
|
$
|
56
|
|
|
$
|
195
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These assets include short-term securities in a prime money
market fund. |
|
(b) |
|
These mutual fund and commingled fund investments are invested
across a broad variety of industries. |
|
(c) |
|
These assets are comprised of commingled funds invested in
foreign securities of companies primarily located in developed
countries outside the United States, including the Americas,
Europe, the Far East, and Pacific Basin. |
|
(d) |
|
These assets are in a commingled fund comprised primarily of
obligations issued or guaranteed by the U.S. or foreign
governments, and investment grade debt obligations of both
domestic and foreign corporations. The fixed income securities
in this portfolio typically have maturities in excess of ten
years. |
|
(e) |
|
Represents holdings in a pooled separate account investing
primarily in completed, income-producing properties with cash
flows that are expected to increase over time and provide the
potential for capital appreciation. |
71
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(f) |
|
The following table sets forth the changes in fair value for our
real estate assets measured using significant unobservable
inputs (level 3) during 2009 (in millions): |
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
16
|
|
Investment income
|
|
|
1
|
|
Unrealized losses
|
|
|
(6
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
11
|
|
|
|
|
|
|
Pension
and Other Postretirement Financial Information
We recognize separately the overfunded or underfunded status of
our pension and other postretirement plans as an asset or
liability. The funded status represents the difference between
the projected benefit obligation and the fair value of the plan
assets. The projected benefit obligation is the present value of
benefits earned to date by plan participants, including the
effect of assumed future salary increases. Plan assets are
measured at fair value. We use a December 31 measurement date
for plan assets and obligations for all our retirement plans.
Changes in our projected benefit obligations and plan assets,
and the funded status for our pension plans and other
postretirement benefits as of December 31, 2009 and 2008,
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
|
$
|
437
|
|
|
$
|
375
|
|
|
$
|
353
|
|
|
$
|
292
|
|
Service cost
|
|
|
36
|
|
|
|
33
|
|
|
|
16
|
|
|
|
17
|
|
Interest cost
|
|
|
27
|
|
|
|
22
|
|
|
|
20
|
|
|
|
20
|
|
Actuarial (gain) loss
|
|
|
30
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
29
|
|
Benefits paid
|
|
|
(19
|
)
|
|
|
(26
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Plan amendments
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Curtailments
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
511
|
|
|
$
|
437
|
|
|
$
|
356
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
210
|
|
|
$
|
311
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
34
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
37
|
|
|
|
19
|
|
|
|
4
|
|
|
|
5
|
|
Benefits paid
|
|
|
(19
|
)
|
|
|
(26
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
262
|
|
|
$
|
210
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(249
|
)
|
|
$
|
(227
|
)
|
|
$
|
(356
|
)
|
|
$
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation is the present value of
benefits earned to date, assuming no future salary growth. The
accumulated benefit obligation for our pension plans at
December 31, 2009 and 2008 was $392 million
72
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $330 million, respectively. Liability amounts
recognized in our consolidated balance sheet related to our
defined benefit pension and postretirement plans as of
December 31, 2009 and 2008 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Accrued liabilities
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Other liabilities
|
|
|
243
|
|
|
|
225
|
|
|
|
348
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
249
|
|
|
$
|
227
|
|
|
$
|
356
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of pension and postretirement net periodic
benefit cost included in the consolidated statements of
operations for the years ended December 31, 2009, 2008 and
2007 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
36
|
|
|
$
|
33
|
|
|
$
|
27
|
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
15
|
|
Interest cost
|
|
|
27
|
|
|
|
22
|
|
|
|
20
|
|
|
|
20
|
|
|
|
20
|
|
|
|
16
|
|
Expected return on plan assets
|
|
|
(21
|
)
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Recognized net actuarial loss
|
|
|
15
|
|
|
|
6
|
|
|
|
7
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Special termination benefits
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized curtailment loss
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
61
|
|
|
$
|
42
|
|
|
$
|
36
|
|
|
$
|
38
|
|
|
$
|
40
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated other comprehensive
loss before income taxes as of December 31, 2009 and
2008 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
221
|
|
|
$
|
220
|
|
|
$
|
41
|
|
|
$
|
71
|
|
|
$
|
262
|
|
|
$
|
291
|
|
Prior service cost
|
|
|
12
|
|
|
|
15
|
|
|
|
6
|
|
|
|
7
|
|
|
|
18
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Total
|
|
$
|
233
|
|
|
$
|
235
|
|
|
$
|
47
|
|
|
$
|
78
|
|
|
$
|
280
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes amounts recognized in Other
comprehensive income before income taxes for the years
ended December 31, 2009, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net gain (loss) arising during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss)
|
|
$
|
(17
|
)
|
|
$
|
(148
|
)
|
|
$
|
(15
|
)
|
|
$
|
29
|
|
|
$
|
(30
|
)
|
|
$
|
(35
|
)
|
Prior service cost
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain reclassified into income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain
|
|
|
15
|
|
|
|
6
|
|
|
|
6
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
Prior service credit
|
|
|
4
|
|
|
|
7
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
2
|
|
|
$
|
(140
|
)
|
|
$
|
(5
|
)
|
|
$
|
31
|
|
|
$
|
(26
|
)
|
|
$
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts included in Accumulated other comprehensive
loss before income taxes as of December 31, 2009 that
are expected to be recognized as components of net periodic
benefit cost in 2010 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
Net loss
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
15
|
|
Prior service cost
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18
|
|
|
$
|
2
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The following weighted-average assumptions were used to
determine benefit obligations and net periodic benefit costs for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
Pension Benefits
|
|
Benefits
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)
|
|
|
5.80
|
%
|
|
|
6.28
|
%
|
|
|
6.10
|
%
|
|
|
6.36
|
%
|
|
|
6.14
|
%
|
|
|
6.40
|
%
|
Rate of compensation increase
|
|
|
4.57
|
%
|
|
|
4.57
|
%
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)
|
|
|
6.28
|
%
|
|
|
6.10
|
%
|
|
|
6.00
|
%
|
|
|
6.14
|
%
|
|
|
6.40
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
4.59
|
%
|
|
|
4.11
|
%
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected long-term return on plan assets(b)
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We determine the discount rate primarily by reference to rates
of high-quality, long-term corporate bonds that mature in a
pattern similar to the expected payments to be made under the
plans. |
|
(b) |
|
The expected return on plan assets reflects the weighted average
of the expected long-term rates of return for the broad
categories of investments held in the plans. The expected
long-term rate of return is adjusted when there are fundamental
changes in expected returns on the plans investments. |
The expected return on plan assets is based on our asset
allocation mix and our historical return, taking into account
current and expected market conditions. Recently, we revised our
investment policy to reduce equity exposure, add diversifying
assets, increase fixed income exposure and extend the plan
assets maturity dates to better match the plans
liabilities. Given the revised investment policy, we anticipate
using a lower expected long term rate of return assumption in
the future.
The assumed health care cost trend rates used to determine the
projected postretirement benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Health care cost trend rate assumed for next year
|
|
|
8.00
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2015
|
|
|
|
2015
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates could have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point
|
|
|
1-Percentage-Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on total of service and interest cost components
|
|
$
|
6
|
|
|
$
|
(5
|
)
|
Effect on postretirement benefit obligation
|
|
$
|
51
|
|
|
$
|
(41
|
)
|
74
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future
Benefit Payments
The following estimated future benefit payments, which reflect
expected future service, as appropriate, are expected to be paid
in the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pension
|
|
Postretirement
|
|
|
Benefits
|
|
Benefits
|
|
2010
|
|
$
|
37
|
|
|
$
|
9
|
|
2011
|
|
|
54
|
|
|
|
11
|
|
2012
|
|
|
46
|
|
|
|
13
|
|
2013
|
|
|
42
|
|
|
|
15
|
|
2014
|
|
|
44
|
|
|
|
18
|
|
2015-2019
|
|
|
278
|
|
|
|
120
|
|
Thrift
Plan
We sponsor an employee thrift plan that provides for
contributions, subject to certain limitations, by eligible
employees into designated investment funds with a matching
contribution by Tesoro. Employees may elect tax-deferred
treatment in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. We match 100%
of employee contributions, up to 7% of the employees
eligible earnings, with at least 50% of the matching
contribution directed for initial investment in our common
stock. Our contributions to the thrift plan amounted to
$24 million, $24 million and $20 million during
2009, 2008 and 2007, respectively, of which $8 million,
$9 million and $12 million consisted of treasury stock
reissuances in 2009, 2008 and 2007, respectively.
The unfunded executive deferred compensation plan provides the
ability to defer compensation and receive a matching
contribution by Tesoro to certain executives and other employees
that is not available under the employee thrift plan due to
limits imposed by the Internal Revenue Code.
Retail
Savings Plan
We sponsor a savings plan, in lieu of the thrift plan, for
eligible retail employees who have completed one year of service
and have worked at least 1,000 hours within that time.
Eligible employees receive a mandatory employer contribution
equal to 3% of eligible earnings. If employees elect to make
pretax contributions, we also contribute an employer match equal
to $0.50 for each $1.00 of employee contributions, up to 6% of
eligible earnings. At least 50% of the matching employer
contributions must be directed for initial investment in Tesoro
common stock. Our contributions amounted to $0.6 million,
$0.6 million, and $0.5 million in 2009, 2008 and 2007,
respectively, of which $0.1 million consisted of treasury
stock reissuances for each of the years in 2009, 2008 and 2007,
respectively.
|
|
NOTE N
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
We have various cancellable and noncancellable operating leases
related to land, office and retail facilities, ship charters,
tanks and equipment and other facilities used in the storage,
transportation, and sale of crude oil, feedstocks and refined
products. In general, these leases have remaining primary terms
up to 10 years and typically contain multiple renewal
options. Total rental expense for all operating leases,
including leases with a term of one month or less, amounted to
$374 million in 2009, $469 million in 2008 and
$386 million in 2007. See Note J for information
related to capital leases.
The majority of our future lease payments relate to marine
transportation, retail station, and tank storage leases. As of
December 31, 2009, we time chartered four
U.S.-flagged
ships and five foreign-flagged ships, used to transport crude
oil and refined products. Four of our time charters expire in
March and July 2010 with the remaining time charters expiring
between 2011 and 2013 with options to renew. Most of our time
charters contain terms of three to eight years generally with
renewal options and escalation clauses. We have also entered
into time charters for two
U.S.-flag
tankers to be built and delivered in 2010, each with three-year
terms and options to renew. We also time charter tugs and
product barges at our Alaska, Hawaii and Washington refineries
over varying terms ending in
75
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 2010 through 2016, with options to renew. Tesoro has
operating leases for most of its retail stations with primary
remaining terms up to 43 years, and generally containing
renewal options and escalation clauses. Our storage tank leases
run primarily through 2017.
Our minimum annual lease payments as of December 31, 2009,
for operating leases having initial or remaining noncancellable
lease terms in excess of one year were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ship
|
|
|
|
|
|
|
Charters(a)
|
|
Other
|
|
Total
|
|
2010
|
|
$
|
126
|
|
|
$
|
88
|
|
|
$
|
214
|
|
2011
|
|
|
123
|
|
|
|
85
|
|
|
|
208
|
|
2012
|
|
|
83
|
|
|
|
77
|
|
|
|
160
|
|
2013
|
|
|
38
|
|
|
|
70
|
|
|
|
108
|
|
2014
|
|
|
18
|
|
|
|
66
|
|
|
|
84
|
|
Thereafter
|
|
|
8
|
|
|
|
392
|
|
|
|
400
|
|
|
|
|
(a) |
|
Includes minimum annual lease payments for tugs and barges,
which range between $8 million and $39 million over
the next five years. |
Purchase
Obligations and Other Commitments
We have long-term
take-or-pay
commitments for the transportation of crude oil and to purchase
industrial gases, chemical processing services and utilities
associated with the operation of our refineries. The minimum
annual payments under these
take-or-pay
agreements are estimated to total $279 million in 2010,
$112 million in 2011, $103 million in 2012,
$98 million in 2013, and $100 million in 2014. The
remaining minimum commitments total approximately
$443 million over 16 years. We paid approximately
$300 million, $525 million and $108 million in
2009, 2008 and 2007, respectively, under these
take-or-pay
contracts.
Environmental
and Tax Matters
We are a party to various litigation and contingent loss
situations, including environmental and income tax matters,
arising in the ordinary course of business. Even though we
cannot predict the ultimate outcomes of these matters with
certainty, we have accrued for these outcomes based on our best
estimates. We believe that the outcome of these matters will not
materially impact our liquidity and consolidated financial
position, although the resolution of certain of these matters
could have a material impact on interim or annual results of
operations.
We are 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 us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications to certain emission
sources.
We are subject to audits by federal, state and local taxing
authorities in the normal course of business. It is possible
that tax audits could result in claims against us in excess of
recorded liabilities. We believe that when these matters are
resolved they will not materially affect our consolidated
financial position or results of operations. We believe it is
reasonably possible that unrecognized tax benefits could
decrease by as much as $25 million in the next twelve
months through settlements or other conclusions, primarily
regarding state tax issues.
We are also subject to extensive federal, state and local tax
laws and regulations. New tax laws and regulations and changes
in existing tax laws and regulations are continuously being
enacted or proposed that could result in increased expenditures
for tax liabilities in the future.
76
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Environmental
Liabilities
We are currently, and expect to continue, incurring expenses for
environmental cleanup at a number of currently and previously
owned or operated refining, pipeline, terminal and retail
station properties. We have accrued liabilities for these
expenses and believe these accruals are adequate. However, our
environmental liabilities are based on estimates including
engineering assessments and it is reasonably possible that our
estimates will change and that additional remediation costs will
be incurred as more information becomes available. Changes in
our environmental liabilities for the years ended
December 31, 2009 and 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
123
|
|
|
$
|
90
|
|
Additions
|
|
|
28
|
|
|
|
65
|
|
Expenditures
|
|
|
(45
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
106
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
We received $58.5 million in a settlement with a prior
owner of our Golden Eagle refinery in 2007 in exchange for
assuming responsibility for certain environmental liabilities
arising from operations at the refinery prior to August 2000.
These environmental liabilities totaled $73 million and
$87 million at December 31, 2009 and 2008,
respectively. We cannot presently determine the additional
remedial activities that may be required at the Golden Eagle
refinery. Therefore, it is reasonably possible that we will
incur additional remediation costs as more information becomes
available. We expect to file insurance claims under
environmental insurance policies that provide coverage up to
$140 million for expenditures in excess of the settlement
proceeds. Amounts recorded for environmental liabilities have
not been reduced for possible insurance recoveries.
We are continuing to investigate conditions at certain active
wastewater treatment units at our Golden Eagle refinery. This
investigation is driven by an order from the San Francisco
Bay Regional Water Quality Control Board that names us as well
as two previous owners of the Golden Eagle refinery. Costs to
investigate these conditions are included in our environmental
accruals. We cannot currently estimate the amount of the
ultimate resolution of the order but we believe it will not have
a material adverse effect on our financial position or results
of operations.
Other
Matters
In the ordinary course of business, we become party to lawsuits,
administrative proceedings and governmental investigations,
including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us
in some matters for which the likelihood of loss may be
reasonably possible but the amount of loss is not currently
estimable. As a result, we have not established reserves for
these matters and the matters described below. We believe that
the resolution of these matters, individually or in the
aggregate, will not have a material adverse effect on our
financial position or results of operations.
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are evaluating the alleged violations
contained in the suit.
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds (approximately $22 million)
as retroactive price adjustments under our previous crude oil
contracts with them. In December 2009, the trial court judge
issued an Order supporting Chevrons claim to receive a
share of the refunds. We disagree with, and are challenging the
Order. The exact amount of refunds subject to the Order has not
been determined, and some uncertainty remains about the scope of
the Order.
77
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE O
|
STOCKHOLDERS
EQUITY
|
Our credit agreement and senior notes each limit our ability to
pay cash dividends or repurchase stock. The limitation in each
of our debt agreements is based on limits on restricted payments
(as defined in our debt agreements), which include dividends,
stock repurchases or voluntary prepayments of subordinate debt.
The aggregate amount of restricted payments cannot exceed an
amount defined in each of the debt agreements. The indentures
for our senior notes also limit our subsidiaries ability to make
certain payments and distributions. We do not believe that the
limitations will restrict our ability to pay dividends or
repurchase stock under our current programs.
See Note P for information relating to stock-based
compensation and common stock reserved for exercise of options.
Cash
Dividends
During 2009, we paid cash dividends on common stock totaling
$0.35 per share. In February 2010, our Board of Directors
suspended indefinitely our quarterly cash dividend on common
stock. We did not have any cash dividends payable at
December 31, 2009.
|
|
NOTE P
|
STOCK-BASED
COMPENSATION
|
Stock-based compensation expense for our stock-based awards for
2009, 2008 and 2007 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock options
|
|
$
|
15
|
|
|
$
|
19
|
|
|
$
|
22
|
|
Restricted stock
|
|
|
13
|
|
|
|
12
|
|
|
|
6
|
|
Stock appreciation rights
|
|
|
11
|
|
|
|
(14
|
)
|
|
|
15
|
|
Phantom stock options
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-Based Compensation
|
|
$
|
46
|
|
|
$
|
14
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit realized from tax deductions associated
with stock-based compensation totaled $3 million,
$4 million and $22 million during 2009, 2008 and 2007,
respectively.
Stock-Based
Compensation Plans
We issue stock-based awards as described below to employees
under the 2006 Long-Term Incentive Plan and non-employee
directors under the 2005 Director Compensation Plan and the
1995 Non-Employee Director Stock Option Plan. We also have
outstanding awards under our Amended and Restated Executive
Long-Term Incentive Plan and Key Employee Stock Option Plan. At
December 31, 2009, Tesoro had 2,056,706 shares
available for future grants under our plans. Our plans are
described below.
|
|
|
|
|
The 2006 Long-Term Incentive Plan (2006 Plan)
permits the grant of options, restricted stock, deferred stock
units, performance stock awards, other stock-based awards and
cash-based awards. The 2006 Plan became effective in May 2006
and no awards may be granted under the 2006 Plan on or after May
2016. Stock options may be granted at exercise prices not less
than the fair market value on the date the options are granted.
Options granted become exercisable after one year in 33% annual
increments and expire ten years from the date of grant.
Generally, when stock options are exercised or when restricted
stock is granted we issue new shares rather than issuing
treasury shares.
|
78
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The 2005 Director Compensation Plan provided for the grant
of common stock to our eligible non-employee directors as
payment for a portion of director retainer fees. We granted
12,368 shares of common stock during 2009 at a
weighted-average grant-date price per share of $16.18. In
November 2009, the Board of Directors elected to cancel the
shares that were available for future grants under this plan.
|
|
|
|
The 1995 Non-Employee Director Stock Option Plan provided for
the grant of nonqualified stock options over the life of the
plan to eligible non-employee directors of Tesoro. These
automatic, non-discretionary stock options were granted at an
exercise price equal to the fair market value per share of
Tesoros common stock at the date of grant. The term of
each option is ten years, and an option becomes exercisable six
months after it is granted. The plan expired in February 2010
and no further options may be granted under the plan.
|
|
|
|
The Key Employee Stock Option Plan provided stock option grants
to eligible employees who were not executive officers of Tesoro.
The options, which become exercisable one year after grant in
25% annual increments, expire ten years after the date of grant.
Our Board of Directors suspended future grants under this plan
in 2003.
|
Stock
Options
A summary of stock option activity for all plans is set forth
below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Outstanding at January 1, 2009
|
|
|
7,977
|
|
|
$
|
21.49
|
|
|
|
5.6 years
|
|
|
$
|
|
|
Granted
|
|
|
583
|
|
|
$
|
14.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(558
|
)
|
|
$
|
6.56
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(71
|
)
|
|
$
|
30.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
7,931
|
|
|
$
|
21.91
|
|
|
|
5.3 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2009
|
|
|
7,893
|
|
|
$
|
21.93
|
|
|
|
5.2 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
6,448
|
|
|
$
|
19.86
|
|
|
|
4.6 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of our stock option plans, the exercise price of
options granted is equal to the fair market value of our common
stock on the date of grant. The fair value of each option is
estimated on the grant date using the Black-Scholes
option-pricing model. The estimated fair value of these stock
options is amortized over the vesting period using the
straight-line method. Our options generally become exercisable
after one year in 33% annual increments and expire ten years
from the date of grant. The estimated weighted-average
grant-date fair value per share of options granted during 2009,
2008 and 2007 was $6.45, $17.60 and $20.62, respectively. The
total intrinsic value for options exercised during 2009, 2008
and 2007 was $5 million, $6 million, and
$37 million, respectively. Total unrecognized compensation
cost related to non-vested stock options totaled $7 million
as of December 31, 2009, which is expected to be recognized
over a weighted-average period of 1.2 years. The income tax
benefit realized from tax deductions associated with stock
options exercised during 2009 totaled $2 million.
79
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expected life of options granted is based on historical data
and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on
the historical volatility of our stock. We use historical data
to estimate option exercise and employee termination within the
valuation model. Expected dividend yield is based on annualized
dividends at the date of grant. The risk-free rate for periods
within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Tesoros weighted average assumptions are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected life (years)
|
|
|
6
|
|
|
6
|
|
6
|
Expected volatility
|
|
|
58
|
%
|
|
45%
|
|
45% - 46%
|
Expected dividend yield
|
|
|
2.10
|
%
|
|
0.78% - 0.85%
|
|
0.53% - 1.00%
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
3.1%
|
|
4.8%
|
Restricted
Stock
The fair value of each restricted share on the grant date is
equal to the market price of our common stock on the date of
grant. The estimated fair value of our restricted stock is
amortized over the vesting period using the straight-line
method. These restricted shares vest in annual increments
ratably over three years. A summary of our restricted stock
activity is set forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Restricted Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2009
|
|
|
760
|
|
|
$
|
35.67
|
|
Granted
|
|
|
987
|
|
|
|
14.13
|
|
Vested
|
|
|
(360
|
)
|
|
|
30.30
|
|
Forfeited
|
|
|
(17
|
)
|
|
|
26.82
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
1,370
|
|
|
$
|
21.66
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value per share of
restricted stock granted during 2009, 2008 and 2007 was $14.13,
$40.37 and $41.78, respectively. Total unrecognized compensation
cost related to non-vested restricted stock totaled
$16 million as of December 31, 2009, which is expected
to be recognized over a weighted-average period of
1.6 years. The total fair value of restricted shares vested
in 2009, 2008 and 2007 was $6 million, $13 million,
and $13 million, respectively.
Stock
Appreciation Rights
The 2006 Long-Term Stock Appreciation Rights Plan (the SAR
Plan) permits the grant of stock appreciation rights
(SARs) to key managers and other employees of
Tesoro. A SAR granted under the SAR Plan entitles an employee to
receive cash in an amount equal to the excess of the fair market
value of one share of common stock on the date of exercise over
the grant price of the SAR. Unless otherwise specified, all SARs
under the SAR Plan vest ratably during a three-year period
following the date of grant and expire seven years from the date
of grant. We paid cash of $1 million to settle stock
appreciation rights upon exercise in 2007. The Black-Scholes
option-pricing model weighted-average assumptions used to
calculate the fair value of SARS are similar to those used to
calculate the fair value of options as described above. At
December 31, 2009 and 2008, the liability associated with
our SARs recorded in Accrued liabilities totaled
$13 million and $3 million, respectively.
80
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock appreciation right activity for the SAR plan
is set forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
|
SARs
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Outstanding at January 1, 2009
|
|
|
2,524
|
|
|
$
|
39.94
|
|
|
|
5.3 years
|
|
Granted
|
|
|
5,121
|
|
|
$
|
14.13
|
|
|
|
|
|
Forfeited
|
|
|
(159
|
)
|
|
$
|
22.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
7,486
|
|
|
$
|
22.65
|
|
|
|
5.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2009
|
|
|
7,228
|
|
|
$
|
22.92
|
|
|
|
5.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
1,540
|
|
|
$
|
39.11
|
|
|
|
4.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom
Stock Options
We granted 1,593,000 phantom stock options during 2009 to our
executive officers with a term of ten years at 100% of the fair
value of Tesoros common stock on the grant date of $14.13
per share. The fair value of each phantom stock option is
estimated at the end of each reporting period using the
Black-Scholes option-pricing model. The phantom stock options
vest ratably over three years following the date of grant and
expire ten years from the date of grant. The liability
associated with these executive phantom stock option awards
totaled $6 million at December 31, 2009.
Board
of Directors Deferred Compensation Plan
Effective May 1, 2009, our Non-Employee Director Phantom
Stock Plan was amended and restated as the Board of Directors
Deferred Compensation Plan. Under this plan, half of a
directors annual retainer will be paid in cash or deferred
(as elected) in a cash account or a stock account. The other
half of a directors annual retainer will be mandatorily
deferred into the stock account for three years. The annual
retainer is paid or deferred on the last business day of each
calendar quarter. New directors will receive sign-on awards that
will be mandatorily deferred into the stock account. The portion
of the annual retainer that is deferred into the stock account
will be converted into units, based on the closing market price
of Tesoros common stock on the date of credit. The value
of each stock account is a function of the changes in the market
value of Tesoros common stock, which is payable in cash
commencing at the separation of service, death, disability or in
the case of elective deferrals, an in-service lump sum. Payments
may be made as a total distribution or in annual installments,
not to exceed ten years.
|
|
NOTE Q
|
OPERATING
SEGMENTS
|
The Companys revenues are derived from our two operating
segments, refining and retail. Our refining segment owns and
operates seven petroleum refineries located in California,
Washington, Alaska, Hawaii, North Dakota and Utah. These
refineries manufacture gasoline and gasoline blendstocks, jet
fuel, diesel fuel, residual fuel oils and other refined
products. We sell these refined products, together with refined
products purchased from third parties, at wholesale through
terminal facilities and other locations. Our refining segment
also sells refined products to unbranded marketers and
occasionally exports refined products to foreign markets. Our
retail segment sells gasoline, diesel fuel and convenience store
items through company-operated retail stations and branded
jobber/dealers in 15 western states from Minnesota to Alaska and
Hawaii.
The operating segments adhere to the accounting policies used
for our consolidated financial statements, as described in
Note A. We evaluate the performance of our segments based
primarily on segment operating income. Segment operating income
includes those revenues and expenses that are directly
attributable to management of the respective segment.
Intersegment sales from refining to retail are made at
prevailing market rates. Income taxes, other income, foreign
currency exchange gain (loss), interest and financing costs,
interest income, corporate depreciation and corporate general
and administrative expenses are excluded from segment operating
income. Identifiable assets are those utilized by the segment.
Corporate assets are principally cash and other assets that are
not associated with a specific operating segment.
81
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment information as of and for each of the three years ended
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$
|
15,674
|
|
|
$
|
26,759
|
|
|
$
|
20,906
|
|
Crude oil resales and other(a)
|
|
|
691
|
|
|
|
1,126
|
|
|
|
688
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
|
3,000
|
|
|
|
4,184
|
|
|
|
2,946
|
|
Merchandise and other
|
|
|
235
|
|
|
|
248
|
|
|
|
221
|
|
Intersegment sales from Refining to Retail
|
|
|
(2,728
|
)
|
|
|
(3,901
|
)
|
|
|
(2,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
|
$
|
21,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining(c)
|
|
$
|
55
|
|
|
$
|
627
|
|
|
$
|
1,188
|
|
Retail(d)
|
|
|
83
|
|
|
|
46
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
138
|
|
|
|
673
|
|
|
|
1,180
|
|
Corporate and Unallocated Costs
|
|
|
(195
|
)
|
|
|
(202
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(57
|
)
|
|
|
471
|
|
|
|
967
|
|
Interest and Financing Costs
|
|
|
(130
|
)
|
|
|
(111
|
)
|
|
|
(91
|
)
|
Interest Income
|
|
|
4
|
|
|
|
7
|
|
|
|
33
|
|
Foreign Currency Exchange Gain (Loss)
|
|
|
(5
|
)
|
|
|
12
|
|
|
|
(4
|
)
|
Other Income(e)
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income Taxes
|
|
$
|
(188
|
)
|
|
$
|
429
|
|
|
$
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
359
|
|
|
$
|
326
|
|
|
$
|
314
|
|
Retail
|
|
|
39
|
|
|
|
49
|
|
|
|
28
|
|
Corporate
|
|
|
28
|
|
|
|
26
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
|
$
|
426
|
|
|
$
|
401
|
|
|
$
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
356
|
|
|
$
|
561
|
|
|
$
|
720
|
|
Retail
|
|
|
14
|
|
|
|
20
|
|
|
|
10
|
|
Corporate
|
|
|
31
|
|
|
|
38
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
401
|
|
|
$
|
619
|
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
6,690
|
|
|
$
|
6,542
|
|
|
$
|
7,068
|
|
Retail
|
|
|
656
|
|
|
|
649
|
|
|
|
771
|
|
Corporate
|
|
|
724
|
|
|
|
242
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We have reclassified our gains and losses associated with our
derivative instruments for all periods presented from
Revenues (included in Crude oil resales and
other in the table above) to Costs of sales and
operating expenses. The reclassifications totaled losses
of $68 million, $107 million and $61 million
during 2009, 2008 and 2007, respectively. Crude oil
resales and other primarily represents occasional sales of
crude oil that we have purchased to optimize our refinery supply. |
|
(b) |
|
Federal and state motor fuel taxes on sales by our retail
segment are included in both Revenues and
Costs of sales and operating expenses. These taxes
totaled $283 million, $278 million and
$240 million for the years ended December 31, 2009,
2008 and 2007, respectively. |
|
(c) |
|
Refining operating income for 2009 includes a $43 million
charge for goodwill impairment (see Note E). The charge is
included in Loss on asset disposals and impairments
in the statements of consolidated operations. |
|
(d) |
|
Retail operating income for 2008 includes impairment charges of
$29 million primarily related to closing 42 Mirastar retail
stations and the potential sale of 20 retail stations. |
|
(e) |
|
During 2008, we received net refunds totaling $50 million
from the Trans Alaska Pipeline System for previous years
refinery transportation and distribution costs associated with
our protest of intrastate tariffs charged between 1997 and 2003.
See Note N for further information. |
|
|
NOTE R
|
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
|
Separate condensed consolidating financial information of Tesoro
Corporation, subsidiary guarantors and non-guarantors are
presented below. Tesoro and certain subsidiary guarantors have
fully and unconditionally guaranteed our
61/4%% senior
notes due 2012,
65/8% senior
notes due 2015,
61/2% senior
notes due 2017 and
93/4% senior
notes due 2019. All guarantees are joint and several. As a
result of these guarantee arrangements, we are required to
present the following condensed consolidating financial
information. The following condensed consolidating financial
information should be read in conjunction with the accompanying
consolidated financial statements and notes. The following
condensed consolidating financial information is provided as an
alternative to providing separate financial statements for
guarantor subsidiaries. Separate financial statements of
Tesoros subsidiary guarantors are not included because the
guarantees are full and unconditional and these subsidiary
guarantors are 100% owned and jointly and severally liable for
Tesoros outstanding senior notes. The accounts for all
companies reflected herein are presented using the equity method
of accounting for investments in subsidiaries.
83
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
411
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
413
|
|
Receivables, less allowance for doubtful accounts
|
|
|
114
|
|
|
|
760
|
|
|
|
242
|
|
|
|
|
|
|
|
1,116
|
|
Inventories
|
|
|
|
|
|
|
610
|
|
|
|
12
|
|
|
|
|
|
|
|
622
|
|
Prepayments and other
|
|
|
28
|
|
|
|
43
|
|
|
|
1
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
142
|
|
|
|
1,824
|
|
|
|
257
|
|
|
|
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
5,019
|
|
|
|
171
|
|
|
|
|
|
|
|
5,190
|
|
Investment in Subsidiaries
|
|
|
3,999
|
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
(3,892
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
1,878
|
|
|
|
|
|
|
|
83
|
|
|
|
(1,961
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
42
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,061
|
|
|
$
|
7,356
|
|
|
$
|
506
|
|
|
$
|
(5,853
|
)
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
88
|
|
|
$
|
1,428
|
|
|
$
|
369
|
|
|
$
|
|
|
|
$
|
1,885
|
|
Current maturities of debt
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
88
|
|
|
|
1,432
|
|
|
|
369
|
|
|
|
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
1,961
|
|
|
|
|
|
|
|
(1,961
|
)
|
|
|
|
|
Debt
|
|
|
1,814
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
1,837
|
|
Other Noncurrent Liabilities
|
|
|
1,072
|
|
|
|
183
|
|
|
|
2
|
|
|
|
|
|
|
|
1,257
|
|
Stockholders Equity
|
|
|
3,087
|
|
|
|
3,757
|
|
|
|
135
|
|
|
|
(3,892
|
)
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
6,061
|
|
|
$
|
7,356
|
|
|
$
|
506
|
|
|
$
|
(5,853
|
)
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
Receivables, less allowance for doubtful accounts
|
|
|
16
|
|
|
|
567
|
|
|
|
155
|
|
|
|
|
|
|
|
738
|
|
Inventories
|
|
|
|
|
|
|
777
|
|
|
|
10
|
|
|
|
|
|
|
|
787
|
|
Prepayments and other
|
|
|
23
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
39
|
|
|
|
1,442
|
|
|
|
165
|
|
|
|
|
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
4,938
|
|
|
|
143
|
|
|
|
|
|
|
|
5,081
|
|
Investment in Subsidiaries
|
|
|
4,134
|
|
|
|
(49
|
)
|
|
|
(2
|
)
|
|
|
(4,083
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
1,619
|
|
|
|
|
|
|
|
47
|
|
|
|
(1,666
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
38
|
|
|
|
667
|
|
|
|
1
|
|
|
|
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,830
|
|
|
$
|
6,998
|
|
|
$
|
354
|
|
|
$
|
(5,749
|
)
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
64
|
|
|
$
|
1,160
|
|
|
$
|
215
|
|
|
$
|
|
|
|
$
|
1,439
|
|
Current maturities of debt
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
64
|
|
|
|
1,162
|
|
|
|
215
|
|
|
|
|
|
|
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
1,666
|
|
|
|
|
|
|
|
(1,666
|
)
|
|
|
|
|
Debt
|
|
|
1,584
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
1,609
|
|
Other Noncurrent Liabilities
|
|
|
964
|
|
|
|
199
|
|
|
|
2
|
|
|
|
|
|
|
|
1,165
|
|
Stockholders Equity
|
|
|
3,218
|
|
|
|
3,946
|
|
|
|
137
|
|
|
|
(4,083
|
)
|
|
|
3,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
5,830
|
|
|
$
|
6,998
|
|
|
$
|
354
|
|
|
$
|
(5,749
|
)
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
20,377
|
|
|
$
|
2,047
|
|
|
$
|
(5,552
|
)
|
|
$
|
16,872
|
|
Costs and expenses
|
|
|
7
|
|
|
|
20,428
|
|
|
|
2,046
|
|
|
|
(5,552
|
)
|
|
|
16,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(7
|
)
|
|
|
(51
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(57
|
)
|
Equity in earnings (loss) of subsidiaries
|
|
|
(135
|
)
|
|
|
(53
|
)
|
|
|
(3
|
)
|
|
|
191
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
(142
|
)
|
|
|
(235
|
)
|
|
|
(2
|
)
|
|
|
191
|
|
|
|
(188
|
)
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
(140
|
)
|
|
$
|
(189
|
)
|
|
$
|
(2
|
)
|
|
$
|
191
|
|
|
$
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
33,546
|
|
|
$
|
4,030
|
|
|
$
|
(9,160
|
)
|
|
$
|
28,416
|
|
Costs and expenses
|
|
|
4
|
|
|
|
33,111
|
|
|
|
3,990
|
|
|
|
(9,160
|
)
|
|
|
27,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(4
|
)
|
|
|
435
|
|
|
|
40
|
|
|
|
|
|
|
|
471
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
280
|
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
(230
|
)
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
276
|
|
|
|
345
|
|
|
|
38
|
|
|
|
(230
|
)
|
|
|
429
|
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
140
|
|
|
|
13
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
278
|
|
|
$
|
205
|
|
|
$
|
25
|
|
|
$
|
(230
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
24,707
|
|
|
$
|
2,390
|
|
|
$
|
(5,121
|
)
|
|
$
|
21,976
|
|
Costs and expenses
|
|
|
7
|
|
|
|
23,725
|
|
|
|
2,398
|
|
|
|
(5,121
|
)
|
|
|
21,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(7
|
)
|
|
|
982
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
967
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
571
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(549
|
)
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(58
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
564
|
|
|
|
902
|
|
|
|
(12
|
)
|
|
|
(549
|
)
|
|
|
905
|
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
344
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
566
|
|
|
$
|
558
|
|
|
$
|
(9
|
)
|
|
$
|
(549
|
)
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
86
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(11
|
)
|
|
$
|
598
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(399
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
(437
|
)
|
Intercompany notes, net
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
(155
|
)
|
|
|
(398
|
)
|
|
|
(38
|
)
|
|
|
155
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt borrowings
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Borrowings under revolver
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
Repayments on revolver
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(484
|
)
|
Repurchase of common stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Dividend payments
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Proceeds from stock options exercised
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
191
|
|
|
|
(36
|
)
|
|
|
(155
|
)
|
|
|
|
|
Financing costs and other
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
166
|
|
|
|
191
|
|
|
|
(36
|
)
|
|
|
(155
|
)
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
391
|
|
|
|
2
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
|
|
|
$
|
411
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(12
|
)
|
|
$
|
714
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(634
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(650
|
)
|
Intercompany notes, net
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
122
|
|
|
|
(594
|
)
|
|
|
(16
|
)
|
|
|
(122
|
)
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,658
|
|
Repayments under revolver
|
|
|
(5,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,712
|
)
|
Repurchase of common stock
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Dividend payments
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(124
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
|
|
Financing costs and other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(110
|
)
|
|
|
(123
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(3
|
)
|
|
$
|
1,281
|
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(734
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
(747
|
)
|
Acquisitions
|
|
|
(1,820
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,105
|
)
|
Intercompany notes, net
|
|
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
(1,278
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
10
|
|
|
|
4
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(542
|
)
|
|
|
(1,009
|
)
|
|
|
(9
|
)
|
|
|
(1,278
|
)
|
|
|
(2,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt offerings
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
Borrowings under revolver
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
Repayments under revolver
|
|
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(940
|
)
|
Borrowings under term loan
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700
|
|
Debt refinanced
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Repurchase of common stock
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Dividend payments
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
Repayments of debt
|
|
|
(214
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
Proceeds from stock options exercised
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(1,242
|
)
|
|
|
(36
|
)
|
|
|
1,278
|
|
|
|
|
|
Financing costs and other
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
545
|
|
|
|
(1,234
|
)
|
|
|
(36
|
)
|
|
|
1,278
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
(962
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(963
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
985
|
|
|
|
1
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE S
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
Total
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(a)
|
|
|
Year
|
|
|
|
(In millions except per share amounts)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,280
|
|
|
$
|
4,181
|
|
|
$
|
4,742
|
|
|
$
|
4,669
|
|
|
$
|
16,872
|
|
Costs of sales and operating expenses
|
|
$
|
3,008
|
|
|
$
|
4,036
|
|
|
$
|
4,492
|
|
|
$
|
4,672
|
|
|
$
|
16,208
|
|
Operating Income (loss)
|
|
$
|
112
|
|
|
$
|
(36
|
)
|
|
$
|
89
|
|
|
$
|
(222
|
)
|
|
$
|
(57
|
)
|
Net Earnings (loss)
|
|
$
|
51
|
|
|
$
|
(45
|
)
|
|
$
|
33
|
|
|
$
|
(179
|
)
|
|
$
|
(140
|
)
|
Net Earnings (loss) Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.30
|
)
|
|
$
|
(1.01
|
)
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.30
|
)
|
|
$
|
(1.01
|
)
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,606
|
|
|
$
|
8,887
|
|
|
$
|
8,682
|
|
|
$
|
4,241
|
|
|
$
|
28,416
|
|
Costs of sales and operating expenses
|
|
$
|
6,608
|
|
|
$
|
8,694
|
|
|
$
|
8,049
|
|
|
$
|
3,826
|
|
|
$
|
27,177
|
|
Operating Income (loss)
|
|
$
|
(158
|
)
|
|
$
|
27
|
|
|
$
|
452
|
|
|
$
|
150
|
|
|
$
|
471
|
|
Net Earnings (loss)
|
|
$
|
(82
|
)
|
|
$
|
4
|
|
|
$
|
259
|
|
|
$
|
97
|
|
|
$
|
278
|
|
Net Earnings (loss) Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.60
|
)
|
|
$
|
0.03
|
|
|
$
|
1.89
|
|
|
$
|
0.71
|
|
|
$
|
2.03
|
|
Diluted
|
|
$
|
(0.60
|
)
|
|
$
|
0.03
|
|
|
$
|
1.86
|
|
|
$
|
0.70
|
|
|
$
|
2.00
|
|
|
|
|
(a) |
|
During the 2009 fourth quarter, we incurred a $43 million
charge for goodwill impairment in our refining segment. During
the 2008 fourth quarter, we incurred a $91 million charge
to write-off a receivable for which collection was deemed
unlikely. |
90
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
We carried out an evaluation required by the Securities Exchange
Act of 1934, as amended (the Exchange Act), under
the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to
Rule 13a-15
under the Exchange Act as of the end of the year. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective. During the fourth quarter of 2009, there have
been no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Management
Report on Internal Control over Financial Reporting
We, as management of Tesoro Corporation and its subsidiaries
(the Company), are responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in the Securities Exchange Act of 1934,
Rule 13a-15(f).
The Companys internal control system is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America. Due to
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009, using the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control
Integrated Framework. Based on such assessment, we conclude
that as of December 31, 2009, the Companys internal
control over financial reporting is effective. There has been no
change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
The independent registered public accounting firm of
Ernst & Young LLP, as auditors of the Companys
consolidated financial statements, has issued an attestation
report on the effectiveness of the Companys internal
control over financial reporting, included herein.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
In February 2010, we amended our credit agreement (the
Amendment), which among other things, modified the
following:
|
|
|
|
|
the minimum tangible net worth requirement, as defined;
|
|
|
|
the purchase or sale of certain assets is no longer subject to
the fixed charge coverage ratio;
|
|
|
|
letters of credit allowed under separate letter of credit
agreements are no longer subject to a cap;
|
|
|
|
the applicable margin as defined; and
|
|
|
|
the annual rate of commitment fees increased to 0.50% from
0.375% for the unused portion of the revolving credit facility.
|
The Amendment is filed as Exhibit 10.4 to this Annual
Report on
Form 10-K
and is incorporated herein by reference.
91
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited Tesoro Corporations internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Tesoro
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Tesoro Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Tesoro Corporation as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income and
stockholders equity, and cash flows for the years then
ended and our report dated March 1, 2010 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 1, 2010
92
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required under this Item will be contained in the
Companys 2010 Proxy Statement, incorporated herein by
reference. See also Executive Officers of the Registrant under
Business in Item 1 hereof.
You can access our code of business conduct and ethics for
senior financial executives on our website at
www.tsocorp.com, and you may receive a copy, free of
charge by writing to Tesoro Corporation, Attention: Investor
Relations, 19100 Ridgewood Pkwy, San Antonio, Texas
78259-1828.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required under this Item will be contained in the
Companys 2010 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Equity
Compensation Plan Information
The following table summarizes, as of December 31, 2009,
certain information regarding equity compensation to our
employees, officers, directors and other persons under our
equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance under
|
|
|
|
Number of Securities to be
|
|
|
Weighted-Average Exercise
|
|
|
Equity Compensation
|
|
|
|
Issued Upon Exercise of
|
|
|
Price of Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
And Rights
|
|
|
the Second Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
7,700,800
|
|
|
$
|
22.42
|
|
|
|
2,056,706
|
|
Equity compensation plans not approved by security holders(a)
|
|
|
230,238
|
|
|
$
|
4.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,931,038
|
|
|
$
|
21.91
|
|
|
|
2,056,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Key Employee Stock Option Plan was approved by our Board of
Directors in November 1999 and provided for stock option grants
to eligible employees who are not our executive officers. The
options expire ten years after the date of grant. Our Board of
Directors suspended any future grants under this plan in 2003. |
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required under this Item will be contained in the
Companys 2010 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information required under this Item will be contained in the
Companys 2010 Proxy Statement, incorporated herein by
reference.
93
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)1. Financial Statements
The following consolidated financial statements of Tesoro
Corporation and its subsidiaries are included in Part II,
Item 8 of this
Form 10-K:
|
|
|
|
|
|
|
Page
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
2. Financial Statement Schedules
No financial statement schedules are submitted because of the
absence of the conditions under which they are required, the
required information is insignificant or because the required
information is included in the consolidated financial statements.
3. Exhibits
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
2
|
.1
|
|
|
|
Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc.
(incorporated by reference herein to Exhibit 2.1 to
Registration Statement
No. 333-51789).
|
|
2
|
.2
|
|
|
|
Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining Company and
the Company (incorporated by reference herein to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 1998, File
No. 1-3473).
|
|
2
|
.3
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco Oil
Company (incorporated by reference herein to Exhibit 2.1 to
the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
|
2
|
.4
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco Oil
Company (incorporated by reference herein to Exhibit 2.2 to
the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
|
2
|
.5
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and BP Pipelines
(North America) Inc. (incorporated by reference herein to
Exhibit 2.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2001, File
No. 1-3473).
|
|
2
|
.6
|
|
|
|
Asset Purchase Agreement by and between the Company and Shell
Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.1 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
|
2
|
.7
|
|
|
|
Sale and Purchase Agreement for Golden Eagle Refining and
Marketing Assets, dated February 4, 2002, by and among
Ultramar Inc. and Tesoro Refining and Marketing Company,
including First Amendment dated February 20, 2002 and
related Purchaser Parent Guaranty dated February 4, 2002,
and Second Amendment dated May 3, 2002 (incorporated by
reference herein to Exhibit 2.12 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001, File
No. 1-3473,
and Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed on May 9, 2002, File
No. 1-3473).
|
|
2
|
.8
|
|
|
|
Asset Purchase and Sale Agreement by and between the Company and
Shell Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.2 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
94
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
2
|
.9
|
|
|
|
Purchase and Sale Agreement and Joint Escrow Instructions by and
among the Company and USA Petroleum Corporation, USA Gasoline
Corporation, Palisades Gas and Wash, Inc. and USA San Diego
LLC dated as of January 26, 2007 (incorporated by reference
herein to Exhibit 2.3 to the Companys Current Report
on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
|
**2
|
.10
|
|
|
|
Letter Agreement to the Purchase and Sale Agreement and Joint
Escrow Instructions dated April 30, 2007 between the
Company and USA Petroleum Corporation, Palisades Gas and Wash,
Inc. and USA San Diego, LLC (incorporated by reference
herein to Exhibit 2.1 to the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended June 30, 2007, File
No. 1-3473).
|
|
3
|
.1
|
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
|
3
|
.2
|
|
|
|
Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors
Liability (incorporated by reference herein to Exhibit 3(b)
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
|
3
|
.3
|
|
|
|
Certificate of Amendment, dated as of May 4, 2006, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
common stock from 100 million to 200 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2006, File
No. 1-3473).
|
|
3
|
.4
|
|
|
|
Certificate of Amendment, dated as of February 9, 1994, to
Restated Certificate of Incorporation of the Company amending
Article IV, Article V, Article VII and
Article VIII (incorporated by reference herein to
Exhibit 3(e) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
|
3
|
.5
|
|
|
|
Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50 million to 100 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 1998, File
No. 1-3473).
|
|
3
|
.6
|
|
|
|
Certificate of Ownership of Merger merging Tesoro Merger Corp.
into Tesoro Petroleum Corporation and changing the name of
Tesoro Petroleum Corporation to Tesoro Corporation, dated
November 8, 2004 (incorporated by reference herein to
Exhibit 3.1 to the Current Report on
Form 8-K
filed on November 9, 2004).
|
|
3
|
.7
|
|
|
|
Amended and Restated Bylaws of Tesoro Corporation dated as of
October 29, 2008 (incorporated by reference herein to
Exhibit (3ii) to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2008, File
No. 1-3473).
|
|
4
|
.1
|
|
|
|
Form of Indenture relating to the
61/4% Senior
Notes due 2012, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
|
4
|
.2
|
|
|
|
Form of Indenture relating to the
65/8% Senior
Notes due 2015, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.2 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
|
4
|
.3
|
|
|
|
Form of Indenture relating to the
61/2% Senior
Notes due 2017, dated as of May 29, 2007, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on June 4, 2007, File
No. 1-3473)
|
|
4
|
.4
|
|
|
|
Form of Indenture relating to the
93/4% Senior
Notes due 2019, dated as of May 29, 2007, among Tesoro
Corporation, certain subsidiary guarantors and J.P. Morgan
Securities Inc., as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on June 5, 2009, File
No. 1-3473).
|
|
10
|
.1
|
|
|
|
Fourth Amended and Restated Credit Agreement, dated as of
May 11, 2007, among the Company, JPMorgan Chase Bank, N.A
as administrative agent and a syndicate of banks, financial
institutions and other entities (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on May 15, 2007, File
No. 1-3473).
|
95
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.2
|
|
|
|
First Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of February 22, 2008, among the
Company, JP Morgan Chase Bank, NA as administrative agent and a
syndicate of banks, financial institutions and other entities.
(incorporated by reference herein to Exhibit 10.2 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, File
No. 1-3473).
|
|
10
|
.3
|
|
|
|
Second Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of May 28, 2009, among the Company, JP
Morgan Chase Bank, NA as administrative agent and a syndicate of
banks, financial institutions and other entities. (incorporated
by reference herein to Exhibit 10.1 to the Companys
Current Report on
Form 8-K
for file on May 28, 2009, File
No. 1-3473).
|
|
*10
|
.4
|
|
|
|
Third Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of February 23, 2010, among the
Company, JP Morgan Chase Bank, NA as administrative agent and a
syndicate of banks, financial institutions and other entities.
|
|
10
|
.5
|
|
|
|
$100 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc. (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K
filed on May 24, 2002, File
No. 1-3473).
|
|
10
|
.6
|
|
|
|
$50 million Promissory Note, dated as of May 17, 2002,
payable by the Company to Ultramar Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K
filed on May 24, 2002, File
No. 1-3473).
|
|
10
|
.7
|
|
|
|
Amended and Restated Executive Security Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
*10
|
.8
|
|
|
|
Amendment No. 1 to the Amended and Restated Executive Security
Plan effective as of January 1, 2010.
|
|
10
|
.9
|
|
|
|
Amended and Restated Executive Long-Term Incentive Plan
effective as of February 2, 2006 (incorporated by reference
herein to Exhibit 10.3 to the Companys Current Report
on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.10
|
|
|
|
2006 Long-Term Incentive Plan dated effective January 1,
2009 (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.11
|
|
|
|
Tesoro Corporation 2006 Executive Deferred Compensation Plan
effective January 1, 2009 (incorporated by reference to
Exhibit 10.6 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.12
|
|
|
|
Tesoro Corporation Restoration Retirement Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.5 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
*10
|
.13
|
|
|
|
Amendment No. 1 to the Tesoro Corporation Restoration
Retirement Plan effective January 1, 2010.
|
|
10
|
.14
|
|
|
|
Copy of the Companys Key Employee Stock Option Plan dated
November 12, 1999 (incorporated by reference herein to
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2002, File
No. 1-3473).
|
|
10
|
.15
|
|
|
|
2006 Long-Term Stock Appreciation Rights Plan of Tesoro
Corporation (incorporated by reference herein to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.16
|
|
|
|
Amended and Restated Employment Agreement between the Company
and Bruce A. Smith dated December 3, 2003 (incorporated by
reference herein to Exhibit 10.14 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003, File
No. 1-3473).
|
|
10
|
.17
|
|
|
|
Form of First Amendment to Amended and Restated Employment
Agreement between the Company and Bruce A. Smith dated as of
February 2, 2006 (incorporated by reference herein to
Exhibit 10.4 to the Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.18
|
|
|
|
Second Amendment to the Amended and Restated Employment
Agreement between the Company and Bruce A. Smith dated as of
November 1, 2006 (incorporated by reference herein to
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2006, File
No. 1-3473).
|
96
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.19
|
|
|
|
Third Amendment to the Amended and Restated Employment Agreement
between Tesoro and Bruce A. Smith (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.20
|
|
|
|
Fourth Amendment to the Amended and Restated Employment
Agreement between Tesoro and Bruce A. Smith dated as of
August 4, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed August 4, 2009, File
No. 1-3473).
|
|
10
|
.21
|
|
|
|
Employment Agreement between the Company and William J. Finnerty
dated as of February 2, 2005 (incorporated by reference
herein to Exhibit 10.1 to the Companys Current Report
on
Form 8-K/A
filed on February 8, 2005, File
No. 1-3473).
|
|
10
|
.22
|
|
|
|
Form of First Amendment to Employment Agreement between the
Company and William J. Finnerty dated as of February 2,
2006 (incorporated by reference herein to Exhibit 10.5 to
the Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.23
|
|
|
|
Form of Second Amendment to Employment Agreement between the
Company and William J. Finnerty dated as of July 11, 2007
(incorporated by reference herein to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on July 16, 2007, File
No. 1-3473).
|
|
10
|
.24
|
|
|
|
Employment Agreement between the Company and Everett D. Lewis
dated as of February 2, 2005 (incorporated by reference
herein to Exhibit 10.2 to the Companys Current Report
on
Form 8-K/A
filed on February 8, 2005, File
No. 1-3473).
|
|
10
|
.25
|
|
|
|
Form of First Amendment to Employment Agreement between the
Company and Everett D. Lewis dated as of February 2, 2006
(incorporated by reference herein to Exhibit 10.6 to the
Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.26
|
|
|
|
Form of Second Amendment to Employment Agreement between the
Company and Everett D. Lewis dated as of July 11, 2007
(incorporated by reference herein to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed on July 16, 2007, File
No. 1-3473).
|
|
10
|
.27
|
|
|
|
Employment Agreement between the Company and Gregory A. Wright
dated as of August 26, 2004 (incorporated by reference
herein to Exhibit 10.4 to the Companys Current Report
on
Form 8-K
filed on August 31, 2004, File
No. 1-3473).
|
|
10
|
.28
|
|
|
|
Form of First Amendment to Employment Agreement between the
Company and Gregory A. Wright dated as of February 2, 2006
(incorporated by reference herein to Exhibit 10.7 to the
Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.29
|
|
|
|
Second Amendment to Employment Agreement between the Company and
Gregory A. Wright dated as of June 8, 2007 (incorporated by
reference herein to Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed on June 13, 2007, File
No. 1-3473).
|
|
10
|
.30
|
|
|
|
Third Amendment to Employment Agreement between the Company and
Gregory A. Wright dated as of August 4, 2009 (incorporated
by reference herein to Exhibit 10.2 to the Companys
Current Report on
Form 8-K
filed on August 4, 2009, File
No. 1-3473).
|
|
10
|
.31
|
|
|
|
Employment Agreement between the Company and Charles S. Parrish
dated as of May 7, 2009 (incorporated by reference herein
to Exhibit 10.1 to the Companys Current Report on
Form 8-K/A
filed on May 8, 2009, File
No. 1-3473).
|
|
10
|
.32
|
|
|
|
Management Stability Agreement between the Company and Arlen O.
Glenewinkel, Jr.
dated August 2,
2005 (incorporated by reference herein to Exhibit 10.28 to
the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, File
No. 1-3473).
|
|
10
|
.33
|
|
|
|
Copy of the Companys Non-Employee Director Retirement Plan
dated December 8, 1994 (incorporated by reference herein to
Exhibit 10(t) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1994, File
No. 1-3473).
|
|
10
|
.34
|
|
|
|
Amended and Restated 1995 Non-Employee Director Stock Option
Plan, as amended through March 15, 2000 (incorporated by
reference herein to Exhibit 10.2 to the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2002, File
No. 1-3473).
|
|
10
|
.35
|
|
|
|
Amendment to the Companys Amended and Restated 1995
Non-Employee Director Stock Option Plan (incorporated by
reference herein to Exhibit 10.41 to the Companys
Registration Statement
No. 333-92468).
|
|
10
|
.36
|
|
|
|
Amendment to the Companys 1995 Non-Employee Director Stock
Option Plan effective as of May 11, 2004 (incorporated by
reference herein to Exhibit 4.19 to the Companys
Registration Statement
No. 333-120716).
|
97
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.37
|
|
|
|
Amended and Restated Board of Directors Deferred Compensation
Plan effective May 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, File
No. 1-3473).
|
|
10
|
.38
|
|
|
|
Board of Directors Deferred Compensation Trust dated
February 23, 1995 (incorporated by reference herein to
Exhibit 10(v) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1994, File
No. 1-3473).
|
|
10
|
.39
|
|
|
|
Board of Directors Deferred Phantom Stock Plan effective
January 1, 2009, (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.40
|
|
|
|
2005 Director Compensation Plan (incorporated by reference
herein to Exhibit A to the Companys Proxy Statement
for the Annual Meeting of Stockholders held on May 4, 2005,
File
No. 1-3473).
|
|
10
|
.41
|
|
|
|
Form of Indemnification Agreement between the Company and its
officers (incorporated by reference herein to Exhibit 10.2
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
|
10
|
.42
|
|
|
|
Form of Indemnification Agreement between the Company and its
directors (incorporated by reference herein to Exhibit 10.3
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
|
14
|
.1
|
|
|
|
Code of Business Conduct and Ethics for Senior Financial
Executives (incorporated by reference herein to
Exhibit 14.1 to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003, File
No. 1-3473).
|
|
*21
|
.1
|
|
|
|
Subsidiaries of the Company.
|
|
*23
|
.1
|
|
|
|
Consent of Independent Registered Public Accounting Firm
(Ernst & Young LLP).
|
|
*23
|
.2
|
|
|
|
Consent of Independent Registered Public Accounting Firm
(Deloitte & Touche LLP).
|
|
*31
|
.1
|
|
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*31
|
.2
|
|
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*32
|
.1
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
*32
|
.2
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Confidential treatment has been granted for certain portions of
this Exhibit pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, which portions have been omitted and filed
separately with the Securities and Exchange Commission. |
|
|
|
Identifies management contracts or compensatory plans or
arrangements required to be filed as an exhibit hereto pursuant
to Item 14(a)(3) of
Form 10-K. |
Copies of exhibits filed as part of this
Form 10-K
may be obtained by stockholders of record at a charge of $0.15
per page, minimum $5.00 each request. Direct inquiries to the
Corporate Secretary, Tesoro Corporation, 19100 Ridgewood Pkwy,
San Antonio, Texas,
78259-1828.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TESORO CORPORATION
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: March 1, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ BRUCE
A. SMITH
Bruce
A. Smith
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 27, 2010
|
|
|
|
|
|
/s/ GREGORY
A. WRIGHT
Gregory
A. Wright
|
|
Executive Vice President, Chief Financial Officer (Principal
Financial Officer)
|
|
February 27, 2010
|
|
|
|
|
|
/s/ ARLEN
O. GLENEWINKEL, JR.
Arlen
O. Glenewinkel, Jr.
|
|
Vice President and Controller (Principal Accounting Officer)
|
|
February 27, 2010
|
|
|
|
|
|
/s/ STEVEN
H. GRAPSTEIN
Steven
H. Grapstein
|
|
Lead Director
|
|
February 27, 2010
|
|
|
|
|
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/s/ RODNEY
F. CHASE
Rodney
F. Chase
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Director
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|
February 27, 2010
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/s/ ROBERT
W. GOLDMAN
Robert
W. Goldman
|
|
Director
|
|
February 27, 2010
|
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|
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/s/ WILLIAM
J. JOHNSON
William
J. Johnson
|
|
Director
|
|
February 27, 2010
|
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/s/ J.W.
NOKES
J.W.
Nokes
|
|
Director
|
|
February 27, 2010
|
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/s/ DONALD
H. SCHMUDE
Donald
H. Schmude
|
|
Director
|
|
February 27, 2010
|
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|
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/s/ MICHAEL
E. WILEY
Michael
E. Wiley
|
|
Director
|
|
February 27, 2010
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99