Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - ANDEAVOR | Financial_Report.xls |
EX-32.2 - EX-32.2 - ANDEAVOR | d81294exv32w2.htm |
EX-32.1 - EX-32.1 - ANDEAVOR | d81294exv32w1.htm |
EX-31.2 - EX-31.2 - ANDEAVOR | d81294exv31w2.htm |
EX-31.1 - EX-31.1 - ANDEAVOR | d81294exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-3473
TESORO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 95-0862768 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
210-626-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
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 definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.:
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There
were 143,770,191 shares of the registrants Common Stock outstanding at April 30, 2011.
TESORO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
26 | ||||||||
45 | ||||||||
47 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
49 | ||||||||
50 | ||||||||
51 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(Dollars in millions except per share amounts) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents |
$ | 724 | $ | 648 | ||||
Receivables, less allowance for doubtful accounts |
1,231 | 908 | ||||||
Inventories |
1,467 | 1,257 | ||||||
Prepayments and other |
176 | 115 | ||||||
Total Current Assets |
3,598 | 2,928 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Refining |
6,016 | 5,984 | ||||||
Retail |
660 | 659 | ||||||
Corporate and other |
205 | 204 | ||||||
Gross Property, Plant and Equipment |
6,881 | 6,847 | ||||||
Less accumulated depreciation and amortization |
(1,738 | ) | (1,677 | ) | ||||
Net Property, Plant and Equipment |
5,143 | 5,170 | ||||||
OTHER NONCURRENT ASSETS |
||||||||
Acquired intangibles, net |
241 | 246 | ||||||
Other, net |
376 | 388 | ||||||
Total Other Noncurrent Assets |
617 | 634 | ||||||
Total Assets |
$ | 9,358 | $ | 8,732 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 2,338 | $ | 1,852 | ||||
Accrued liabilities |
517 | 492 | ||||||
Current maturities of debt |
82 | 152 | ||||||
Total Current Liabilities |
2,937 | 2,496 | ||||||
DEFERRED INCOME TAXES |
682 | 616 | ||||||
OTHER NONCURRENT LIABILITIES |
565 | 562 | ||||||
DEBT |
1,845 | 1,843 | ||||||
COMMITMENTS AND CONTINGENCIES (Note H) |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock, par value $0.162/3; authorized 200,000,000 shares;
149,637,117 shares issued (149,105,570 in 2010) |
25 | 25 | ||||||
Additional paid-in capital |
978 | 970 | ||||||
Retained earnings |
2,505 | 2,398 | ||||||
Treasury stock, 6,051,893 common shares (5,925,541 in 2010), at cost |
(129 | ) | (128 | ) | ||||
Accumulated other comprehensive loss |
(50 | ) | (50 | ) | ||||
Total Stockholders Equity |
3,329 | 3,215 | ||||||
Total Liabilities and Stockholders Equity |
$ | 9,358 | $ | 8,732 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions except per share amounts) | ||||||||
REVENUES (a) |
$ | 6,526 | $ | 4,607 | ||||
COSTS AND EXPENSES: |
||||||||
Cost of sales (a) |
5,735 | 4,247 | ||||||
Operating expenses |
371 | 373 | ||||||
Selling, general and administrative expenses |
95 | 67 | ||||||
Depreciation and amortization expense |
103 | 100 | ||||||
Loss on asset disposals and impairments |
3 | 22 | ||||||
OPERATING INCOME (LOSS) |
219 | (202 | ) | |||||
Interest and financing costs |
(43 | ) | (37 | ) | ||||
Foreign currency exchange gain |
1 | | ||||||
EARNINGS (LOSS) BEFORE INCOME TAXES |
177 | (239 | ) | |||||
Income tax expense (benefit) |
70 | (84 | ) | |||||
NET EARNINGS (LOSS) |
$ | 107 | $ | (155 | ) | |||
NET EARNINGS (LOSS) PER SHARE: |
||||||||
Basic |
$ | 0.76 | $ | (1.11 | ) | |||
Diluted |
$ | 0.74 | $ | (1.11 | ) | |||
WEIGHTED AVERAGE COMMON SHARES: |
||||||||
Basic |
141.6 | 139.5 | ||||||
Diluted |
144.0 | 139.5 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||
(a) Includes excise taxes collected by our retail
segment |
$ | 91 | $ | 68 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in millions except per share amounts) | ||||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
||||||||
Net earnings (loss) |
$ | 107 | $ | (155 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash from (used in) operating activities: |
||||||||
Depreciation and amortization expense |
103 | 100 | ||||||
Amortization of debt issuance costs and discounts |
6 | 4 | ||||||
Loss on asset disposals and impairments |
3 | 22 | ||||||
Stock-based compensation expense |
48 | 13 | ||||||
Deferred income taxes |
60 | (83 | ) | |||||
Excess tax benefits from stock-based compensation arrangements |
(4 | ) | (1 | ) | ||||
Other changes in non-current assets and liabilities |
(9 | ) | (14 | ) | ||||
Changes in current assets and current liabilities: |
||||||||
Receivables |
(323 | ) | (65 | ) | ||||
Inventories |
(210 | ) | (241 | ) | ||||
Prepayments and other |
(54 | ) | (17 | ) | ||||
Accounts payable and accrued liabilities |
484 | 402 | ||||||
Net cash from (used in) operating activities |
211 | (35 | ) | |||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(48 | ) | (86 | ) | ||||
Proceeds from asset sales |
| 1 | ||||||
Net cash used in investing activities |
(48 | ) | (85 | ) | ||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
||||||||
Borrowings under revolving credit agreements |
60 | 66 | ||||||
Repayments on revolving credit agreements |
(130 | ) | (66 | ) | ||||
Repayments of debt |
| (1 | ) | |||||
Proceeds from stock options exercised |
4 | 3 | ||||||
Repurchases of common stock |
(3 | ) | (2 | ) | ||||
Excess tax benefits from stock-based compensation arrangements |
4 | 1 | ||||||
Financing costs and other |
(22 | ) | (4 | ) | ||||
Net cash used in financing activities |
(87 | ) | (3 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
76 | (123 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
648 | 413 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 724 | $ | 290 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES |
||||||||
Interest paid, net of capitalized interest |
$ | (2 | ) | $ | (6 | ) | ||
Income taxes paid (refunded), net |
$ | 1 | $ | (85 | ) | |||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES |
||||||||
Capital expenditures included in accounts payable and accrued
liabilities at end of period |
$ | 17 | $ | 15 |
The accompanying notes are an integral part of these condensed consolidated financial
statements.
5
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
NOTE A BASIS OF PRESENTATION
As used in this report, the terms Tesoro, we, us, or our may refer to Tesoro Corporation,
one or more of its consolidated subsidiaries or all of them taken as a whole.
The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation and
its subsidiaries have been prepared by management without audit according to the rules and
regulations of the SEC. The accompanying condensed consolidated financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature, unless otherwise
disclosed. The consolidated balance sheet at December 31, 2010, has been condensed from the audited
consolidated financial statements at that date. Certain information and notes normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) have been condensed or omitted pursuant to the SECs rules
and regulations. However, management believes that the disclosures presented herein are adequate
to fairly present the information. The accompanying condensed consolidated financial statements and
notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December
31, 2010.
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, to disclose contingent assets and liabilities at the date of the financial
statements and to report revenues and expenses for the periods presented. We review our estimates
on an ongoing basis using currently available information. Changes in facts and circumstances may
result in revised estimates and actual results could differ from those estimates. The results of
operations for any interim period are not necessarily indicative of results for the full year.
Certain prior year balances have been disaggregated in order to conform to the current year
presentation.
NOTE B EARNINGS (LOSS) PER SHARE
We compute basic earnings (loss) per share by dividing net earnings (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings (loss) per share include
the effects of potentially dilutive shares, principally consisting of common stock options and
unvested restricted stock outstanding during the period.
Share and per share calculations are presented below (in millions except per share amounts):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Basic: |
||||||||
Net earnings (loss) |
$ | 107 | $ | (155 | ) | |||
Weighted average common shares outstanding |
141.6 | 139.5 | ||||||
Basic Earnings (Loss) Per Share |
$ | 0.76 | $ | (1.11 | ) | |||
Diluted: |
||||||||
Net earnings (loss) |
$ | 107 | $ | (155 | ) | |||
Weighted average common shares outstanding |
141.6 | 139.5 | ||||||
Common stock equivalents |
2.4 | | ||||||
Total diluted shares |
144.0 | 139.5 | ||||||
Diluted Earnings (Loss) Per Share |
$ | 0.74 | $ | (1.11 | ) | |||
6
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Potentially dilutive common stock equivalents were excluded from the calculation of diluted
earnings (loss) per share, as the effect of including such securities would have been
anti-dilutive, were as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Common stock equivalents (a) |
| 1.4 | ||||||
Stock options (b) |
3.2 | 5.4 |
(a) | For the three months ended March 31, 2010, common stock equivalents, including stock options, were excluded as a result of the net loss reported during the period. | |
(b) | Common stock options presented above were excluded as the exercise prices were greater than the average market price of the common stock during each respective reporting period. |
NOTE C INVENTORIES
Components of inventories were as follows (in millions):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Domestic crude oil and refined products |
$ | 903 | $ | 954 | ||||
Foreign subsidiary crude oil |
439 | 177 | ||||||
Oxygenates and by-products |
28 | 30 | ||||||
Merchandise |
14 | 14 | ||||||
Materials and supplies |
83 | 82 | ||||||
Total Inventories |
$ | 1,467 | $ | 1,257 | ||||
We use the last-in, first-out (LIFO) cost method as the primary method to determine the carrying
value of domestic crude oil and refined product inventories in our refining and retail segments. We
determine the carrying value of inventories of oxygenates, by-products, and foreign
subsidiary-owned crude oil, using the first-in, first-out (FIFO) cost method. The total carrying
value of our crude oil and refined product inventories was less than replacement cost by
approximately $1.9 billion and $1.4 billion at March 31, 2011 and December 31, 2010, respectively.
NOTE D 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 quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability; 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. |
We measure fair value using level 1 inputs, when available, because they provide the most reliable
evidence of fair value. Derivative instruments are our only financial assets and financial
liabilities measured at fair value on a recurring basis. See Note E for further information on the Companys derivative instruments.
7
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our derivative instruments consist primarily of options, exchange-traded futures (Futures
Contracts), over-the-counter swaps and options (OTC Swap Contracts and OTC Option Contracts,
respectively), and physical commodity forward purchase and sale contracts (Forward Contracts).
Options are valued using quoted prices from exchanges and are categorized in level 1 of the fair
value hierarchy. Futures Contracts are valued based on quoted prices from exchanges and are
categorized in level 1 or level 2 of the fair value hierarchy based on the liquidity of the
instrument. OTC Swap Contracts, OTC Option Contracts and Forward Contracts are valued using
third-party broker quotes, industry pricing services and price curves derived from commodity
exchange postings, with consideration of counterparty credit risk. These quotes are corroborated
with market data and are categorized in level 2 of the fair value hierarchy. We did not have any
derivative assets or liabilities classified as level 3 at March 31, 2011 or December 31, 2010. The
fair values of our derivative assets and liabilities by level within the fair value hierarchy were
as follows (in millions):
March 31, 2011 | Level 1 | Level 2 | ||||||||||
Assets: |
||||||||||||
Commodity Futures Contracts |
$ | 22 | $ | | $ | 22 | ||||||
Commodity OTC Swap Contracts |
1 | | 1 | |||||||||
Commodity Forward Contracts |
6 | | 6 | |||||||||
Total Assets |
29 | | 29 | |||||||||
Liabilities: |
||||||||||||
Commodity Futures Contracts |
67 | 67 | | |||||||||
Commodity OTC Swap Contracts |
4 | | 4 | |||||||||
Total Liabilities |
71 | 67 | 4 | |||||||||
Net Assets (Liabilities) |
$ | (42 | ) | $ | (67 | ) | $ | 25 | ||||
December 31, | ||||||||||||
2010 | Level 1 | Level 2 | ||||||||||
Assets: |
||||||||||||
Commodity Futures Contracts |
$ | 6 | $ | | $ | 6 | ||||||
Commodity OTC Swap Contracts |
1 | | 1 | |||||||||
Commodity Forward Contracts |
1 | | 1 | |||||||||
Total Assets |
8 | | 8 | |||||||||
Liabilities: |
||||||||||||
Commodity Futures Contracts |
17 | 17 | | |||||||||
Total Liabilities |
17 | 17 | | |||||||||
Net Assets (Liabilities) |
$ | (9 | ) | $ | (17 | ) | $ | 8 | ||||
Certain of our derivative contracts, under master netting arrangements, include both asset and
liability positions. We have elected to offset both the fair value amounts and any related cash
collateral amounts recognized for multiple derivative instruments executed with the same
counterparty when there is a legally enforceable right and an intention to settle net or
simultaneously.
The physical inventory associated with the futures contracts included in the above table and
selected for fair value hedge accounting treatment is adjusted to fair value at the end of the period. At December 31,
2010, the fair value adjustment related to the physical inventory was approximately $4 million.
There were no material fair value adjustments to the physical inventory at March 31, 2011.
8
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The fair value of our debt was estimated primarily using quoted
market prices. The carrying value and fair value of our debt at March 31, 2011, were approximately
$1.9 billion and $2.0 billion, respectively. Both the carrying value and fair value of our debt at
December 31, 2010, were approximately $2.0 billion.
The fair value of certain nonfinancial assets measured on a non-recurring basis as of December 31,
2010, were as follows (in millions):
December 31, | ||||||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
Assets: |
||||||||||||||||||||
Refining equipment |
$ | 4 | $ | | $ | | $ | 4 | $ | 20 | ||||||||||
Goodwill |
$ | 36 | $ | | $ | | $ | 36 | $ | 10 |
We continue to evaluate the recoverability of the value of certain capital projects currently in
progress. This evaluation resulted in an impairment charge of $20 million related to the deferral
of a capital project at our Los Angeles refinery, recognized during the three months ended March
31, 2010. The impairment charge is included in loss on asset disposals and impairments. Equipment
specifically manufactured and uniquely configured for this project was written down from a carrying
value of $20 million to a fair value of $4 million for a loss of $16 million. The estimated
recovery amounts were based on direct equipment cost recoverable if sold to an end user, in the
principal or most advantageous market for the asset, in an orderly transaction. An additional $4
million loss was related to certain engineering costs that were determined to not be recoverable.
The amounts presented represent our estimates for unobservable inputs that require significant
judgment, for which there is little or no market data.
We reviewed the recorded value of goodwill for impairment during the fourth quarter of 2010 as part
of our annual goodwill impairment test. This review resulted in a write-off included in loss on
asset disposals and impairments. There were no material goodwill or asset impairments, asset
retirement obligations or indefinite lived intangible assets that were measured at fair value
during the three months ended March 31, 2011.
NOTE E DERIVATIVE INSTRUMENTS
The timing, direction and overall change in refined product prices versus crude oil prices impacts
profit margins and has a significant impact on our earnings and cash flows. Consequently, we
periodically use non-trading derivative instruments to manage exposure to commodity price risks
associated with the purchase or sale of feedstocks, products and energy supplies to or from the
Companys refineries, terminals, retail operations and customers. We may also use non-trading
derivative instruments to manage price risks associated with inventories above or below our target
levels. To achieve our objectives, we may use derivative instruments such as options, Futures
Contracts, OTC Swap Contracts, OTC Option Contracts, and Forward Contracts, all generally with
maturity dates of less than one year. We believe that there is minimal credit risk with respect to
our counterparties.
We may use our excess storage capacity in Panama to take advantage of contango markets when the
future price of crude oil is higher than the current spot price. We use commodity derivatives to
hedge crude oil held in connection with these arbitrage opportunities.
9
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accounting for changes in the fair value of a commodity derivative depends on whether the
derivative has been designated in a hedging relationship and whether we have elected the normal
purchases and normal sales exception. The accounting for the change in fair value can be
summarized as follows:
Derivative Treatment | Accounting Method | |
Normal purchases and normal sales exception
|
Accrual accounting | |
Designated in qualifying hedging relationship
|
Hedge accounting | |
All other derivatives
|
Mark-to-market accounting |
The primary derivative instruments that we use have the following characteristics. Option
contracts provide the right, but not the obligation to buy or sell the commodity at a specified
price in the future. Futures Contracts include a requirement to buy or sell the commodity at a
fixed price in the future. OTC Swap Contracts, OTC Option Contracts and Forward Contracts require
cash settlement for the commodity based on the difference between a fixed or floating price and the
market price on the settlement date. Certain of these contracts require cash collateral if our
liability position exceeds specified thresholds. At March 31, 2011, we did not have any cash
collateral outstanding.
The following table presents the fair value (in millions) and balance sheet classification of our
derivative instruments as of March 31, 2011 and December 31, 2010. Net derivative assets and net
derivative liabilities are presented in prepayments and other and accrued liabilities in the
consolidated balance sheet, respectively. 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 recognized fair value amounts 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 with the fair value information presented in Note
D.
Derivative Assets | Derivative Liabilities | |||||||||||||||
Derivatives Not Designated as Fair Value | March 31, | December 31, | March 31, | December 31, | ||||||||||||
Hedging Instruments: | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Commodity Future Contracts |
$ | 385 | $ | 88 | $ | (427 | ) | $ | (96 | ) | ||||||
Commodity OTC Swap Contracts |
3 | 3 | (6 | ) | (2 | ) | ||||||||||
Commodity Forward Contracts |
6 | 2 | | (1 | ) | |||||||||||
Total Derivative Instruments |
$ | 394 | $ | 93 | $ | (433 | ) | $ | (99 | ) | ||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||
Derivatives Designated as Fair Value | March 31, | December 31, | March 31, | December 31, | ||||||||||||
Hedging Instruments: | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Commodity Future Contracts |
$ | | $ | | $ | (3 | ) | $ | (3 | ) | ||||||
Total Derivative Instruments |
$ | | $ | | $ | (3 | ) | $ | (3 | ) | ||||||
10
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Losses for our non-hedging derivative instruments for the three months ended March 31, 2011 and
2010, were as follows (in millions):
Three months ended March 31, | ||||||||
Derivatives Not Designated as Hedging Instruments (a): | 2011 | 2010 | ||||||
Commodity Future Contracts |
$ | (56 | ) | $ | (12 | ) | ||
Commodity OTC Swap Contracts |
(1 | ) | | |||||
Commodity Forward Contracts |
7 | | ||||||
Total Non-Hedging Derivative Instruments |
$ | (50 | ) | $ | (12 | ) | ||
(a) | Derivative gains (losses) are recognized in either revenues or cost of sales depending on the purpose for acquiring and holding the derivative. All derivative losses in the three months ended March 31, 2010, were recorded in cost of sales. Derivative losses recognized during the three months ended March 31, 2011, recorded in revenues and cost of sales, were $16 million and $34 million, respectively. |
Losses on our fair value hedging derivative instruments during the three months ended March
31, 2011, were as follows (in millions). We did not acquire any fair value hedging derivative
instruments during the three months ended March 31, 2010.
Amount of Loss | Amount of Gain | Amount of Loss | ||||||||||
Recognized in | Recognized in | Recognized in Income | ||||||||||
Derivatives Designated as Fair Value | Income on | Income on Hedged | on Ineffective Portion | |||||||||
Hedging Instruments: | Derivatives | Item | of Derivative (c) | |||||||||
Commodity Futures Contracts (b) |
$ | (1 | ) | $ | | $ | (1 | ) |
(b) | Gains (losses) recognized in income on the derivative and the hedged item are included in cost of sales in the statements of consolidated operations. | |
(c) | For fair value hedges, no component of the derivative instruments gains or losses was excluded from the assessment of hedge effectiveness. No amounts were recognized in income for hedged firm commitments that no longer qualify as fair value hedges. |
Open Short Positions
All of our open positions are scheduled to mature within the next twelve months. The information
below presents the net volume of outstanding contracts by type of instrument and year of maturity
as of March 31, 2011, (volumes in thousands of barrels):
Fair value hedges | Mark-to-market derivatives | |||||||||||
Derivative instrument | Derivative instrument and | |||||||||||
and Year of maturity | Contract Volumes | Year of maturity | Contract Volumes | |||||||||
Swaps |
Swaps |
|||||||||||
2011 |
| 2011 |
1,234 | |||||||||
2012 |
| 2012 |
71 | |||||||||
Futures |
Futures |
|||||||||||
2011 |
150 | 2011 |
4,957 | |||||||||
2012 |
| 2012 |
25 | |||||||||
Forwards |
Forwards |
|||||||||||
2011 |
| 2011 |
1,148 |
11
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F DEBT
For additional information regarding our outstanding debt, see Capital Resources and Liquidity in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 2.
Tesoro Corporation Revolving Credit Facility (Revolving Credit Facility)
We amended our Revolving Credit Facility in March 2011. Modifications included: a change to the
total available capacity to $1.85 billion which can be increased up to an aggregate $2.25 billion,
subject to receiving increased commitments from the lending group. The Revolving Credit Facility
is guaranteed by substantially all of Tesoros active domestic subsidiaries, excluding Tesoro
Logistics LP and its subsidiaries and is secured by substantially all of the petroleum inventory,
cash and receivables of Tesoros active domestic subsidiaries. For additional information regarding
Tesoro Logistics LP and the redemption of the Junior Subordinated Notes, see Note L.
At March 31, 2011, our Revolving Credit Facility provided for borrowings (including letters of
credit) up to the lesser of the amount of a periodically adjusted borrowing base of approximately
$2.7 billion (based upon a West Texas Intermediate crude oil price of $97 per barrel), consisting
of Tesoros eligible cash and cash equivalents, receivables and petroleum inventories, net of the
standard reserve as defined, or the Revolving Credit Facilitys total capacity of $1.85 billion.
As of March 31, 2011, we had no borrowings and $876 million in letters of credit outstanding under
the Revolving Credit Facility, resulting in total unused credit availability of approximately $974
million or 53% of the eligible borrowing base.
Borrowings under the Revolving Credit Facility bear interest at either a base rate (3.25% at March
31, 2011), or a Eurodollar rate (0.24% at March 31, 2011) plus an applicable margin. The applicable
margin at March 31, 2011, was 1.75% in the case of the Eurodollar rate, but varies based upon our
Revolving Credit Facilitys credit ratings. Letters of credit outstanding under the Revolving
Credit Facility incur fees at an annual rate tied to the applicable margin described above (1.75%
at March 31, 2011). We also incur commitment fees for the unused portion of the Revolving Credit
Facility at an annual rate of 0.375% as of March 31, 2011.
Our Revolving Credit Facility is scheduled to mature, and the
committments will terminate, on March 16, 2016, unless the Company
does not (a) refinance or pay in
full, the Companys 6¼% notes due November 2012 on or prior to the stated
maturity date, or (b) refinance or pay in full, the Companys
6⅝% notes due November 2015 on or prior to the stated maturity
date, at which point the Revolving Credit Facility would be immediately terminated.
Letter of Credit Agreements
The Revolving Credit Facility allows us to obtain letters of credit under separate letter of credit
agreements for foreign crude oil purchases. At March 31, 2011, we had three separate letter of
credit agreements with a total capacity of $540 million, of which $459 million was outstanding.
Letters of credit outstanding under these agreements incur fees and are secured by the petroleum
inventories for which they are issued. The letter of credit agreements may be terminated by either
party, at any time.
Tesoro Panama Company Sociedad Anonima (TPSA) Revolving Credit Facility
TPSA, a directly and wholly owned subsidiary of Tesoro, entered into a 364-day uncommitted, secured
revolving credit agreement that expires in October 2011. TPSA is an excluded and unrestricted
subsidiary from the Revolving Credit Facility and outstanding indentures. The TPSA Revolving Credit
Facility is non-recourse to Tesoro and is guaranteed by TPSAs assets. The TPSA Revolving Credit
Facility includes two uncommitted facilities, which provide for revolving borrowings, swing line
loans and daylight overdraft loans and letters of credit.
At March 31, 2011, our TPSA Revolving Credit
Facility provided for borrowings (including letters of
credit) up to the lesser of the amount of a periodically adjusted
collateral pool consisting of TPSA
eligible receivables and petroleum inventories, net of reserves, or the agreements capacity based
on the net worth of TPSA. As of March 31, 2011, TPSAs
capacity was $350 million, consisting of $245 million under the first facility and $105 million
under the second facility. Our total capacity under the TPSA facilities can be further increased
up to $700 million provided the facilities maximum amounts
do not exceed $550 million or $350
million,
respectively. At March 31, 2011, we had $80 million in borrowings outstanding under this agreement
and letters of credit outstanding of $54 million.
12
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving borrowings bear interest at a Eurodollar rate plus an applicable margin (2.75% as of
March 31, 2011), or an alternative base rate (3.25% as of March 31, 2011) plus an applicable margin
(1.75% as of March 31, 2011). Letters of credit outstanding under the TPSA Revolving Credit
Facility incur fees at the Eurodollar rate (0.24% as of March 31, 2011) plus an annual base rate
(1.75% at March 31, 2011).
NOTE G BENEFIT PLANS
Tesoro sponsors the following four defined benefit pension plans: the funded qualified employee
retirement plan, the unfunded nonqualified executive security plan, the unfunded nonqualified
restoration retirement plan and the unfunded nonqualified supplemental executive retirement plan.
Although our funded employee retirement plan fully meets all funding requirements under applicable
laws and regulations, during the three months ended March 31, 2011, we voluntarily contributed $12
million to improve the funded status of the plan. The components of pension benefit expense and
other postretirement benefit expense included in the condensed statements of consolidated
operations for the three months ended March 31, 2011 and 2010, were (in millions):
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost |
$ | 7 | $ | 10 | $ | 1 | $ | 4 | ||||||||
Interest cost |
7 | 7 | 1 | 6 | ||||||||||||
Expected return on plan assets |
(5 | ) | (5 | ) | | | ||||||||||
Amortization of prior service cost (credit) |
| 1 | (9 | ) | | |||||||||||
Recognized net actuarial loss |
5 | 3 | 3 | | ||||||||||||
Recognized curtailment loss |
2 | 1 | | | ||||||||||||
Net Periodic Benefit Expense (Income) |
$ | 16 | $ | 17 | $ | (4 | ) | $ | 10 | |||||||
NOTE H COMMITMENTS AND CONTINGENCIES
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. Although we cannot predict the
ultimate outcomes of these matters with certainty, we have accrued for the estimated liabilities
when appropriate. 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. Additionally, if
applicable, we accrue receivables for probable insurance or other third-party recoveries.
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, equipment or facilities.
We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax
laws and regulations, and changes in existing tax laws and regulations, could result in increased
expenditures in the future. We are also subject to audits by federal, state and foreign 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 resolution of any such claim(s)
would not materially affect our consolidated financial position or results of operations. We
believe it is possible that unrecognized tax benefits could decrease by as much as $11 million in
the next twelve months through settlements or other conclusions, primarily regarding state tax
issues.
13
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Environmental Liabilities
We are, and expect to continue, incurring expenses for environmental liabilities 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.
At March 31, 2011 and December 31, 2010, our accruals for environmental expenditures totaled $102
million and $108 million, respectively. Our environmental accruals are based on estimates including
engineering assessments, and it is possible that our estimates will change and that additional
costs will be recorded 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 $59
million and $62 million at March 31, 2011 and December 31, 2010, respectively. We cannot reasonably
determine the full extent of remedial activities that may be required at the Golden Eagle refinery.
Therefore, it is possible that we will identify additional remediation costs as more information
becomes available. We have filed insurance claims under environmental insurance policies that
provide coverage up to $190 million for expenditures in excess of $50 million in self-insurance.
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.
Washington Refinery Fire
In April 2010, the naphtha hydrotreater unit at our Washington refinery was involved in a fire,
which fatally injured seven employees and rendered the unit inoperable. The Washington State
Department of Labor & Industries (L&I), the U.S. Chemical Safety and Hazard Investigation Board
(CSB) and the U.S. Environmental Protection Agency (EPA) initiated separate investigations of
the fire. In October 2010, L&I completed its investigation, issued citations and assessed a $2.4
million fine, which we appealed. L&I reassumed jurisdiction of the citation and affirmed the
allegations in December 2010. We disagree with L&Is characterizations of Tesoros operations at
our Washington refinery and believe, based on available evidence and scientific reviews, that many
of the agencys conclusions are mistaken. In January 2011, we filed an appeal of the citation. The
EPA and CSB investigations are ongoing. We have incurred charges related to the incident of $2
million and $27 million during the first quarter of 2011 and year ended December 31, 2010,
respectively.
In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants
were named in a lawsuit brought by the estates and families of six of the seven fatally injured
employees arising from the April 2010 incident. In addition, a third-party truck driver has
alleged damages in the lawsuit. The lawsuit includes allegations of negligence, premises liability,
strict liability, product liability and seeks unspecified compensatory and punitive damages. This
case, Donald and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro Refining and Marketing et
al., is proceeding in the Superior Court of the State of Washington, Skagit County. The Company
believes that it has defenses to the allegations contained in the lawsuit, and we currently believe
that the outcome will not materially impact our liquidity or consolidated financial position.
Our business interruption insurance deductible is satisfied after we have exceeded both 60 days of
operational disruption and $25 million in losses primarily based on the operating plan that existed
prior to the incident. Our property damage insurance has a $10 million deductible. We have filed
business interruption insurance claims and
property damage claims related to this incident. We collected $55 million in business interruption
insurance recoveries that relate to downtime from April 2010 to August 2010, which were recorded as
an offset to cost of sales in the consolidated statement of operations for the year-ended December
31, 2010. We also accrued $12 million for property
14
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
damage recoveries as an offset to operating expenses. We collected $10 million related to the
property damage claims during the three months ended March 31, 2011.
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. As a result, we
have not established accruals for these matters unless a likelihood of loss may be reasonably
possible and the amount of loss is currently estimable. On the basis of existing information, 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.
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 through 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 for retroactive price adjustments
under our previous crude oil contracts with them. In September 2010, the trial court judge granted
Chevrons motion for summary judgment and awarded them $16 million, including interest. We disagree
with the trial court and have appealed the decision to the Alaska Supreme Court in which the
proceeding is now pending. We have established an accrual for this matter and believe that the
outcome will not materially impact our liquidity, results of
operations or consolidated financial position.
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
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 discussing the alleged violations contained in
the suit with the EPA and the U.S. Department of Justice and have not established an accrual for
this matter. On the basis of existing information, we believe that the resolution of this matter
will not have a material adverse effect on our financial position or results of operations.
NOTE I STOCKHOLDERS EQUITY
Our Revolving Credit Agreement and senior notes each limit our restricted payments (as defined)
including our ability to pay cash dividends, repurchase stock or make voluntary repayments 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. See Note J for information relating to
stock-based compensation and common stock reserved for exercise of options.
15
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J STOCK-BASED COMPENSATION
Stock-based compensation expense included in our condensed statements of consolidated operations
was as follows (in millions):
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Restricted common stock |
$ | 2 | $ | 3 | ||||
Stock options |
| 2 | ||||||
Stock appreciation rights |
35 | 5 | ||||||
Phantom stock options |
11 | 3 | ||||||
Total Stock-Based Compensation Expense |
$ | 48 | $ | 13 | ||||
The income tax benefit recognized in the income statement for stock-based compensation was $19
million and $5 million for the three months ended March 31, 2011 and 2010, respectively. The income
tax benefit recognized from tax deductions resulting from exercises and vestings under all of our
stock-based compensation arrangements totaled $10 million and $4 million for the three months ended
March 31, 2011 and 2010, respectively.
Restricted Common Stock
The fair value of each restricted share on the grant date is equal to the market price of our
common stock on that date. The estimated fair value of our restricted common stock is amortized
over the vesting period using the straight-line method. These awards generally vest in annual
increments ratably over three years. Unrecognized compensation cost related to our non-vested
restricted stock totaled $13.2 million as of March 31, 2011. This cost is expected to be
recognized over a weighted-average period of 1.8 years. The fair value of non-vested restricted
common stock as of March 31, 2011, totaled $36.5 million.
A summary of our restricted common stock activity for the three months ended March 31, 2011, is set
forth below (shares in thousands):
Weighted-Average | ||||||||
Number of | Grant-Date | |||||||
Restricted Shares | Fair Value | |||||||
Nonvested at January 1, 2011 |
1,762 | $ | 15.46 | |||||
Granted |
29 | $ | 25.63 | |||||
Vested |
(406 | ) | $ | 23.03 | ||||
Forfeited |
(26 | ) | $ | 13.73 | ||||
Nonvested at March 31, 2011 |
1,359 | $ | 13.45 | |||||
16
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
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. These awards generally will become exercisable in annual increments
ratably over three years following the date of grant and expire ten years from the date of grant.
Total unrecognized compensation cost related to non-vested stock options totaled $3.9 million as of
March 31, 2011, which is expected to be recognized over a weighted average period of 1.9 years.
The income tax benefit realized from tax deductions associated with stock options exercised during
the three months ended March 31, 2011, totaled $4 million. A summary of our stock options for the
three months ended March 31, 2011, is presented below (shares in thousands):
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
(In millions) | ||||||||||||||||
Outstanding at January 1, 2011 |
7,428 | $ | 23.23 | 5.0 years | $ | 31 | ||||||||||
Granted |
15 | $ | 25.63 | |||||||||||||
Exercised |
(529 | ) | $ | 8.44 | ||||||||||||
Forfeited or expired |
(5 | ) | $ | 12.93 | ||||||||||||
Outstanding at March 31, 2011 |
6,909 | $ | 24.37 | 5.0 years | $ | 56 | ||||||||||
Vested or expected to vest at March 31, 2011 |
6,909 | $ | 24.37 | 5.0 years | $ | 56 | ||||||||||
Exercisable at March 31, 2011 |
6,183 | $ | 25.66 | 4.6 years | $ | 47 | ||||||||||
Stock Appreciation Rights
A stock appreciation right (SAR) 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. The fair value of each SAR is estimated at the end of each reporting period
using the Black-Scholes option-pricing model. We did not grant SARs to our employees during the
three months ended March 31, 2011. We have accrued $68 million and $39 million in accrued
liabilities associated with our SARs awards at March 31, 2011 and December 31, 2010, respectively.
A summary of our stock appreciation right activity for the three months ended March 31, 2011, is
set forth below (shares in thousands):
Weighted- | Weighted-Average | |||||||||||
Number of | Average | Remaining | ||||||||||
SARs | Exercise Price | Contractual Term | ||||||||||
Outstanding at January 1, 2011 |
7,372 | $ | 22.34 | 4.6 years | ||||||||
Exercised |
(544 | ) | $ | 14.13 | ||||||||
Forfeited |
(79 | ) | $ | 19.57 | ||||||||
Outstanding at March 31, 2011 |
6,749 | $ | 23.03 | 4.3 years | ||||||||
Vested or expected to vest at March 31, 2011 |
6,748 | $ | 23.03 | 4.3 years | ||||||||
Exercisable at March 31, 2011 |
4,798 | $ | 26.76 | 4.0 years | ||||||||
17
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Executive Phantom Stock Options
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 executive phantom stock options vest ratably over
three years following the date of grant and expire ten years from the date of grant. We did not
grant phantom stock options to our executive officers during the three months ended March 31, 2011.
We have accrued $21 million and $15 million in other noncurrent liabilities associated with these
executive phantom stock option awards at March 31, 2011 and December 31, 2010, respectively. A
summary of our executive phantom stock option activity is set forth below (shares in thousands):
Weighted-Average | ||||||||
Number of Options | Exercise Price | |||||||
Outstanding at January 1, 2011 |
1,487 | $ | 14.13 | |||||
Exercised |
(256 | ) | ||||||
Outstanding at March 31, 2011 |
1,231 | $ | 14.13 | |||||
NOTE K OPERATING SEGMENTS
The Companys revenues are derived from two operating segments, refining and retail. We own and
operate 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 18
states from Minnesota to Alaska and Hawaii. We do not have significant operations in foreign
countries. Therefore, revenue in foreign countries and long-lived assets located in foreign
countries are not material to our operations.
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 used by the segments,
whereas corporate assets are principally cash and other assets that are not associated with a
specific operating segment.
18
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment information is as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Revenues |
||||||||
Refining: |
||||||||
Refined products |
$ | 6,270 | $ | 4,245 | ||||
Crude oil resales and other |
155 | 237 | ||||||
Retail: |
||||||||
Fuel (a) |
1,115 | 814 | ||||||
Merchandise and other |
52 | 53 | ||||||
Intersegment sales from Refining to Retail |
(1,066 | ) | (742 | ) | ||||
Total Revenues |
$ | 6,526 | $ | 4,607 | ||||
Segment Operating Income (Loss) |
||||||||
Refining (b) |
$ | 303 | $ | (169 | ) | |||
Retail |
2 | 24 | ||||||
Total Segment Operating Income (Loss) |
305 | (145 | ) | |||||
Corporate and unallocated costs |
(86 | ) | (57 | ) | ||||
Operating Income (Loss) |
219 | (202 | ) | |||||
Interest and financing costs |
(43 | ) | (37 | ) | ||||
Foreign currency exchange gain |
1 | | ||||||
Earnings (Loss) Before Income Taxes |
$ | 177 | $ | (239 | ) | |||
Depreciation and Amortization Expense |
||||||||
Refining |
$ | 91 | $ | 85 | ||||
Retail |
9 | 10 | ||||||
Corporate |
3 | 5 | ||||||
Total Depreciation and Amortization Expense |
$ | 103 | $ | 100 | ||||
Capital Expenditures |
||||||||
Refining |
$ | 38 | $ | 65 | ||||
Retail |
3 | 2 | ||||||
Corporate |
1 | | ||||||
Total Capital Expenditures |
$ | 42 | $ | 67 | ||||
March 31, 2011 | December 31, 2010 | |||||||
(in millions) | ||||||||
Identifiable Assets |
||||||||
Refining |
$ | 7,756 | $ | 7,303 | ||||
Retail |
642 | 619 | ||||||
Corporate |
960 | 810 | ||||||
Total Assets |
$ | 9,358 | $ | 8,732 | ||||
(a) | Federal and state motor fuel taxes on sales by our retail segment are included in both revenues and cost of sales in our condensed statements of consolidated operations. These taxes totaled $91 million and $68 million for the three months ended March 31, 2011 and 2010, respectively. | |
(b) | Includes a $20 million impairment charge related to refining equipment at our Los Angeles refinery for the three months ended March 31, 2010. |
19
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE L INITIAL PUBLIC OFFERING OF TESORO LOGISTICS LP (TLLP)
On April 26, 2011, TLLP closed its initial public offering of 14,950,000 common units at a price of
$21.00 per unit, which included a 1,950,000 share over-allotment option that was exercised by the
underwriters. Net proceeds to TLLP from the sale of the units was approximately $283 million, net
of estimated offering costs and underwriters commissions of $31 million. We own a 52% interest in
TLLP, including the general partner interest. The initial public offering represented the sale by
us of a 48% interest in TLLP. TLLP was formed by Tesoro Corporation to own, operate, develop and
acquire crude oil and refined products logistics assets. Headquartered in San Antonio, Texas,
TLLPs initial assets consist of a crude oil gathering system in the Bakken Shale/Williston Basin
area, eight refined products terminals in the western United States, and a crude oil and refined
products storage facility and five related short-haul pipelines in Utah.
On April 26, 2011, TLLP entered into a senior secured revolving credit agreement (TLLP Revolving Credit Facility) with
a syndicate of banks and financial institutions, including Bank of America, N.A. as administrative
agent. The TLLP Revolving Credit Facility provides for total loan availability of $150
million and permits TLLP to request that the availability be increased up to an aggregate of $300
million, subject to receiving increased commitments from the lenders. At the closing of the offering, TLLP borrowed
$50 million under the TLLP Revolving Credit Facility. TLLP distributed total proceeds to us of
approximately $330 million, which includes $280 million from the offering and $50 million from the
TLLP Revolving Credit Facility, in consideration of assets contributed and to reimburse us for
certain capital expenditures incurred with respect to these assets.
We redeemed the $150 million Junior Subordinated Notes due in 2012 in May 2011 with cash proceeds from the offering.
The TLLP Revolving Credit
Facility is non-recourse to Tesoro and is guaranteed by all of TLLPs subsidiaries and secured by
substantially all of TLLPs assets. Borrowings available under the TLLP Revolving Credit Facility are
up to the total available revolving capacity of the facility. The TLLP Revolving Credit Facility is
scheduled to mature on April 25, 2014.
Borrowings bear interest at either a base
rate (3.25% at April 26, 2011), plus the applicable
margin, or a Eurodollar rate (0.21% at April 26, 2011), plus an applicable margin. The applicable
margin at April 26, 2011, was 1.50% in the case of the base rate and 2.50% in the case of the
Eurodollar rate but varies based upon Consolidated Leverage Ratio, as defined. The annual rate of
commitment fees is 0.50%.
Reconciliation of Cash Proceeds (in millions) | ||||
Total proceeds from the offering |
$ | 314 | ||
Offering and underwriters costs, net debt issuance costs* |
(29 | ) | ||
Proceeds from the offering, net offering and underwriters costs |
285 | |||
Less: Debt issuance costs* |
(2 | ) | ||
Net proceeds from the offering |
283 | |||
Less: Cash retained by TLLP |
(3 | ) | ||
Net proceeds to Tesoro from the offering |
280 | |||
Borrowings under TLLP Revolving |
50 | |||
Gross proceeds to Tesoro |
$ | 330 | ||
* | Total offering and underwriters costs equal $31 million. |
NOTE M 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. 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
condensed 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 information is
presented using the equity method of accounting for investments in subsidiaries.
20
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of March 31, 2011
(in millions)
(in millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 699 | $ | 25 | $ | | $ | 724 | ||||||||||
Receivables, less allowance for doubtful accounts |
7 | 1,100 | 124 | | 1,231 | |||||||||||||||
Inventories |
| 1,028 | 439 | | 1,467 | |||||||||||||||
Prepayments and other |
51 | 118 | 7 | | 176 | |||||||||||||||
Total Current Assets |
58 | 2,945 | 595 | | 3,598 | |||||||||||||||
Net Property, Plant and Equipment |
| 4,983 | 160 | | 5,143 | |||||||||||||||
Investment in Subsidiaries |
4,120 | (159 | ) | (5 | ) | (3,956 | ) | | ||||||||||||
Long-Term Receivables from Affiliates |
2,146 | | | (2,146 | ) | | ||||||||||||||
Other Noncurrent Assets |
49 | 568 | | | 617 | |||||||||||||||
Total Assets |
$ | 6,373 | $ | 8,337 | $ | 750 | $ | (6,102 | ) | $ | 9,358 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 144 | $ | 2,401 | $ | 310 | $ | | $ | 2,855 | ||||||||||
Current maturities of debt |
| 2 | 80 | | 82 | |||||||||||||||
Total Current Liabilities |
144 | 2,403 | 390 | | 2,937 | |||||||||||||||
Long-Term Payables to Affiliates |
| 1,960 | 186 | (2,146 | ) | | ||||||||||||||
Debt |
1,826 | 19 | | | 1,845 | |||||||||||||||
Other Noncurrent Liabilities |
1,074 | 174 | (1 | ) | | 1,247 | ||||||||||||||
Stockholders Equity |
3,329 | 3,781 | 175 | (3,956 | ) | 3,329 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 6,373 | $ | 8,337 | $ | 750 | $ | (6,102 | ) | $ | 9,358 | |||||||||
21
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of December 31, 2010
(in millions)
(in millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 612 | $ | 36 | $ | | $ | 648 | ||||||||||
Receivables, less allowance for doubtful accounts |
8 | 719 | 181 | | 908 | |||||||||||||||
Inventories |
| 1,080 | 177 | | 1,257 | |||||||||||||||
Prepayments and other |
29 | 78 | 8 | | 115 | |||||||||||||||
Total Current Assets |
37 | 2,489 | 402 | | 2,928 | |||||||||||||||
Net Property, Plant and Equipment |
| 5,008 | 162 | | 5,170 | |||||||||||||||
Investment in Subsidiaries |
4,011 | (147 | ) | (5 | ) | (3,859 | ) | | ||||||||||||
Long-Term Receivables from Affiliates |
2,037 | | 88 | (2,125 | ) | | ||||||||||||||
Other Noncurrent Assets |
34 | 597 | 3 | | 634 | |||||||||||||||
Total Assets |
$ | 6,119 | $ | 7,947 | $ | 650 | $ | (5,984 | ) | $ | 8,732 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 76 | $ | 1,940 | $ | 328 | $ | | $ | 2,344 | ||||||||||
Current maturities of debt |
| 2 | 150 | | 152 | |||||||||||||||
Total Current Liabilities |
76 | 1,942 | 478 | | 2,496 | |||||||||||||||
Long-Term Payables to Affiliates |
| 2,125 | | (2,125 | ) | | ||||||||||||||
Debt |
1,823 | 20 | | | 1,843 | |||||||||||||||
Other Noncurrent Liabilities |
1,005 | 174 | (1 | ) | | 1,178 | ||||||||||||||
Stockholders Equity |
3,215 | 3,686 | 173 | (3,859 | ) | 3,215 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 6,119 | $ | 7,947 | $ | 650 | $ | (5,984 | ) | $ | 8,732 | |||||||||
22
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2011
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 8,241 | $ | 688 | $ | (2,403 | ) | $ | 6,526 | |||||||||
Costs and expenses |
4 | 8,023 | 683 | (2,403 | ) | 6,307 | ||||||||||||||
OPERATING INCOME (LOSS) |
(4 | ) | 218 | 5 | | 219 | ||||||||||||||
Equity in earnings (loss) of subsidiaries |
109 | (12 | ) | | (97 | ) | | |||||||||||||
Other expense |
| (40 | ) | (2 | ) | | (42 | ) | ||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES |
105 | 166 | 3 | (97 | ) | 177 | ||||||||||||||
Income tax expense (benefit) (a) |
(2 | ) | 71 | 1 | | 70 | ||||||||||||||
NET EARNINGS (LOSS) |
$ | 107 | $ | 95 | $ | 2 | $ | (97 | ) | $ | 107 | |||||||||
(a) | The income tax expense (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 Three Months Ended March 31, 2010
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 5,824 | $ | 559 | $ | (1,776 | ) | $ | 4,607 | |||||||||
Costs and expenses |
2 | 6,027 | 556 | (1,776 | ) | 4,809 | ||||||||||||||
OPERATING INCOME (LOSS) |
(2 | ) | (203 | ) | 3 | | (202 | ) | ||||||||||||
Equity in earnings (loss) of subsidiaries |
(154 | ) | (7 | ) | | 161 | | |||||||||||||
Other expense |
| (37 | ) | | | (37 | ) | |||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES |
(156 | ) | (247 | ) | 3 | 161 | (239 | ) | ||||||||||||
Income tax expense (benefit) (a) |
(1 | ) | (84 | ) | 1 | | (84 | ) | ||||||||||||
NET EARNINGS (LOSS) |
$ | (155 | ) | $ | (163 | ) | $ | 2 | $ | 161 | $ | (155 | ) | |||||||
(a) | The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. |
23
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2011
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 5 | $ | 422 | $ | (216 | ) | $ | | $ | 211 | |||||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
| (48 | ) | | | (48 | ) | |||||||||||||
Intercompany notes, net |
16 | | | (16 | ) | | ||||||||||||||
Net cash from (used in) investing activities |
16 | (48 | ) | | (16 | ) | (48 | ) | ||||||||||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
||||||||||||||||||||
Borrowings under revolver |
| | 60 | | 60 | |||||||||||||||
Repayments under revolver |
| | (130 | ) | | (130 | ) | |||||||||||||
Proceeds from stock options exercised |
4 | | | | 4 | |||||||||||||||
Repurchases of common stock |
(3 | ) | | | | (3 | ) | |||||||||||||
Excess tax benefits from stock-based compensation
arrangements |
| 4 | | | 4 | |||||||||||||||
Net intercompany borrowings (repayments) |
| (291 | ) | 275 | 16 | | ||||||||||||||
Financing costs and other |
(22 | ) | | | | (22 | ) | |||||||||||||
Net cash from (used in) financing activities |
(21 | ) | (287 | ) | 205 | 16 | (87 | ) | ||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 87 | (11) | | 76 | |||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 612 | 36 | | 648 | |||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | | $ | 699 | $ | 25 | $ | | $ | 724 | ||||||||||
24
Table of Contents
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2010
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 2 | $ | (7 | ) | $ | (30 | ) | $ | | $ | (35 | ) | |||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
| (86 | ) | | | (86 | ) | |||||||||||||
Intercompany notes, net |
1 | | | (1 | ) | | ||||||||||||||
Proceeds from asset sales |
| 1 | | | 1 | |||||||||||||||
Net cash from (used in) investing activities |
1 | (85 | ) | | (1 | ) | (85 | ) | ||||||||||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
||||||||||||||||||||
Borrowings under revolver |
66 | | | | 66 | |||||||||||||||
Repayments under revolver |
(66 | ) | | | | (66 | ) | |||||||||||||
Repayments of debt |
| (1 | ) | | | (1 | ) | |||||||||||||
Proceeds from stock options exercised |
3 | | | | 3 | |||||||||||||||
Repurchases of common stock |
(2 | ) | | | | (2 | ) | |||||||||||||
Excess tax benefits from stock-based compensation
arrangements |
| 1 | | | 1 | |||||||||||||||
Net intercompany borrowings (repayments) |
| (34 | ) | 33 | 1 | | ||||||||||||||
Financing costs and other |
(4 | ) | | | | (4 | ) | |||||||||||||
Net cash from (used in) financing activities |
(3 | ) | (34 | ) | 33 | 1 | (3 | ) | ||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| (126 | ) | 3 | | (123 | ) | |||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 411 | 2 | | 413 | |||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | | $ | 285 | $ | 5 | $ | | $ | 290 | ||||||||||
25
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Those statements in this section that are not historical in nature should be deemed forward-looking
statements that are inherently uncertain. See Important Information Regarding Forward-Looking
Statements on page 44 for a discussion of the factors that could cause actual results to differ
materially from those projected in these statements. This section should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2010.
BUSINESS STRATEGY AND OVERVIEW
Strategy and Goals
Our vision is to be the premier low-cost supplier of transportation fuels in the refining and
marketing business within our markets, providing value for our customers while delivering industry
leading returns for our shareholders and conducting ourselves responsibly in the communities in
which we operate. To achieve these goals we are pursuing the following strategic priorities:
| improve operational efficiency and effectiveness by focusing on safety and reliability, system improvements and cost leadership; | ||
| drive commercial excellence by strengthening our supply and trading activities to provide additional value to the business; | ||
| strengthen our financial position by exercising capital discipline and focusing on improving our liquidity; and | ||
| capture value-driven growth through a focus on our logistics assets and growing our marketing business. |
During the first quarter, the improved margin environment, more reliable refinery utilization,
increased throughputs and crude supply advantages have contributed to higher total operating
income. We expect to implement our strategy and goals discussed above to strengthen our financial
position in 2011. Relative to these goals, during the first quarter of 2011 we:
| increased operational reliability which resulted in higher utilization of approximately 84% and a 19% increase in total throughputs as compared to the first quarter of 2010. Our utilization in the California and Mid-Continent regions was approximately 94%; | ||
| announced plans to expand the crude oil throughput capacity at our Mandan, North Dakota refinery from 58,000 bpd to 68,000 bpd. The current expected capital investment for the expansion will be approximately $35 million, including capital spending at Tesoro Logistics, and is expected to be completed by the second quarter of 2012; | ||
| amended and extended the maturity of the Tesoro Corporation Revolving Credit Facility to 2016. The amended facility includes reductions in borrowing rates and easing of certain covenants; and | ||
| expanded our retail marketing presence through the addition of wholesale supply contracts for approximately 300 Shell-branded stations in our Mid-Continent region. |
Tesoro Logistics LP (TLLP)
As part of our business strategy, we formed TLLP to own, operate, develop and acquire crude oil
and refined products logistics assets. In April 2011, TLLP completed its initial public offering
of 14,950,000 common units at a price of $21.00 per unit, which included a 1,950,000 share
over-allotment option that was exercised by the underwriters. Tesoro Logistics GP, LLC, a 100%
consolidated subsidiary, serves as the general partner of TLLP. Headquartered in San Antonio,
Texas, TLLPs initial assets consist of a crude oil gathering system in the Bakken
Shale/Williston Basin area, eight refined products terminals in the western United States, and a
crude oil and refined products storage facility and five related short-haul pipelines in Utah.
26
Table of Contents
TLLP intends to expand its business through organic growth, including constructing new
assets, increasing the utilization of existing assets, and by acquiring assets from us and third
parties. Although we have historically operated our logistics assets primarily to support our
refining and marketing business, we intend to grow our logistics operations in order to maximize
the integrated value of our assets within the midstream and downstream value chain. TLLP believes
they are well positioned to achieve their primary business objectives and execute business
strategies based on the following competitive strengths: long-term fee-based contracts, their
relationship with us, assets positioned in the high demand Bakken Shale/Williston Basin area and
financial flexibility.
We hold an approximately 52% interest in TLLP, including the interest of the general partner. This
interest includes 304,890 common units, 15,254,890 subordinated units and 622,649 general partner
units. We received net proceeds of approximately $280 million from this offering, after deducting
underwriting discounts, structuring and advisory fees, and estimated offering expenses of $31
million. TLLP retained $3.0 million for working capital purposes and $2.0 million in connection
with entering into their revolving credit facility.
Effective on the closing date of the offering, TLLP entered into a senior secured revolving credit agreement (TLLP
Revolving Credit Facility) with a syndicate of banks and financial institutions, which will
provide for borrowings under a revolving credit facility with total loan availability of
$150 million. At the closing of the offering, TLLP borrowed $50 million under the TLLP Revolving
Credit Facility. TLLP distributed total proceeds to us of $330 million, which includes $280 million
from the offering and $50 million from the TLLP Revolving Credit Facility, in consideration of
assets contributed and to reimburse us for certain capital expenditures incurred with respect to
these assets. We redeemed the $150 million Junior Subordinated Notes due in 2012 in May 2011 with cash proceeds from the offering. The TLLP Revolving Credit Facility is
non-recourse to Tesoro, and is guaranteed by all of TLLPs subsidiaries and secured by
substantially all of TLLPs assets. For additional information regarding our credit facilities, see
Capital Resources and Liquidity.
Reconciliation of Cash Proceeds (in millions) | ||||
Total proceeds from the offering |
$ | 314 | ||
Offering and underwriters costs, net debt issuance costs* |
(29 | ) | ||
Proceeds from the offering, net offering and underwriters costs |
285 | |||
Less: Debt issuance costs* |
(2 | ) | ||
Net proceeds from the offering |
283 | |||
Less: Cash retained by TLLP |
(3 | ) | ||
Net proceeds to Tesoro from the offering |
280 | |||
Borrowings under TLLP Revolving |
50 | |||
Gross proceeds to Tesoro |
$ | 330 | ||
* | Total offering and underwriters costs equal $31 million. |
Industry Overview
Our profitability is heavily influenced by the cost of crude oil, the aggregate value of the
products we make from that crude oil and changes in economic conditions. Product values and crude
oil costs are set by the market and are outside of the control of independent refiners.
Crude Oil and Product Price Analysis
Average Key Commodity Prices and Differentials
(Dollars per barrel)
(Dollars per barrel)
27
Table of Contents
The U.S. economy continues its gradual recovery despite rising commodity prices and geopolitical risk
concerns. U.S. oil statistics show signs of demand growth in the first quarter of 2011, most
apparent in nationwide demand but to a lesser extent on the West Coast. A similar pattern is
evident in labor market trends, where both the unemployment rate and initial unemployment claims
show higher declines in nationwide data than in West Coast data. The nationwide unemployment rate
fell by 0.6% over the course of the first quarter of 2011, while nationwide weekly initial
unemployment claims broke below 400,000 for the first time since the third quarter of 2008. The
California unemployment rate had declined 0.5% year to date through March 31, 2011.
Stronger economic growth has been seen in emerging Asian markets, where recovery started over a
year ago. Recovery in Asian oil demand has outpaced recovery in North American and European
markets, and this demand growth has been reflected in Singapore refining margins. U.S. refined
product exports have increased for both West and Gulf Coast refiners in the first quarter of 2011
due to stronger Asian refined product prices and weather-related oil demand strength in certain
Latin American markets.
Recovery in Asian markets has improved global middle distillate values. During the first quarter
of 2011, U.S. West Coast benchmark diesel fuel margins increased by approximately 28% as compared
to the fourth quarter of 2010. Additionally, West Coast gasoline margins were up 23% from the
fourth quarter of 2010.
Outlook
Several events occurred in the first quarter of 2011 for which the effects are still difficult to
predict accurately but, in the short-term, have impacted global commodity prices and other economic
indicators. Although our financial position has not been directly impacted by these events, we are
uncertain what the long-term effects will be.
The effects of the earthquake and resulting tsunami and nuclear accidents in Japan are impacting
supply and demand in oil markets, particularly for low sulfur fuel oil for power generation.
Additionally, the macroeconomic effects have already begun to impact the global economy as
reductions in Japanese exports of automotive components, semiconductors and other intermediates are
causing a variety of manufacturing and assembly bottlenecks globally, the magnitude of which
remains uncertain.
The Libyan oil export disruption has increased uncertainty related to the supply of crude oil.
Other OPEC member countries have reportedly increased production, but concerns remain as to the
duration and magnitude of decreased Libyan supply, how effectively OPEC can replace the quality of
the disrupted Libyan barrels and how reduced OPEC excess capacity could impact OPECs ability to
manage crude oil supply during other future events.
In addition to current market conditions, there are long-term factors that may impact the supply
and demand of refined products in the U.S. including:
| escalating crude oil prices; | ||
| higher fuel efficiency standards for vehicles; | ||
| mandated renewable fuels standards; | ||
| potential and enacted climate change legislation, including the EPA regulation of greenhouse gas emissions under the Clean Air Act; and | ||
| competing refineries being built overseas. |
28
Table of Contents
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2011 COMPARED WITH THREE MONTHS ENDED MARCH
31, 2010
A discussion and analysis of the factors contributing to our results of operations is presented
below. The accompanying condensed consolidated financial statements, 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.
Summary
Our net earnings were $107 million ($0.74 per diluted share) for the three months ended March 31,
2011 (2011 Quarter), compared with a net loss of $155 million ($1.11 per diluted share) for the
three months ended March 31, 2010 (2010 Quarter). The increase in net earnings of $1.85 per
diluted share during the 2011 Quarter was primarily due to the following:
| significantly higher industry distillate and gasoline margins driven by increased fuel exports and feedstock advantages recognized in the Mid-Continent region; | ||
| a significant increase in the total throughput of our refining system; | ||
| a $20 million impairment charge during the 2010 Quarter related to the deferral of a capital project at our Los Angeles refinery; and | ||
| a $7 million after-tax charge during the 2010 Quarter as a result of the passage of health care legislation. |
The increase in net earnings during the 2011 Quarter relative to the 2010 Quarter was partially
offset by the following:
| increased losses on derivative instruments of $39 million, and | ||
| a $37 million increase in incentive and stock-based compensation expense. |
29
Table of Contents
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in millions except | ||||||||
Refining Segment | per barrel amounts) | |||||||
Revenues |
||||||||
Refined products (a) |
$ | 6,270 | $ | 4,245 | ||||
Crude oil resales and other |
155 | 237 | ||||||
Total Revenues |
$ | 6,425 | $ | 4,482 | ||||
Throughput (thousand barrels per day) |
||||||||
Heavy crude (b) |
186 | 167 | ||||||
Light crude |
338 | 276 | ||||||
Other feedstocks |
37 | 28 | ||||||
Total Throughput |
561 | 471 | ||||||
% Heavy Crude Oil of Total Refining Throughput (b) |
33 | % | 35 | % | ||||
Yield (thousand barrels per day) |
||||||||
Gasoline and gasoline blendstocks |
289 | 233 | ||||||
Jet fuel |
79 | 70 | ||||||
Diesel fuel |
126 | 94 | ||||||
Heavy oils, residual products, internally produced fuel and other |
100 | 103 | ||||||
Total Yield |
594 | 500 | ||||||
Gross refining margin ($/throughput barrel) (c) |
$ | 14.33 | $ | 6.36 | ||||
Manufacturing Cost before Depreciation and Amortization Expense
($/throughput bbl) (c) |
$ | 5.22 | $ | 5.94 |
(a) | Refined products sales include intersegment sales to our retail segment at prices, which approximate market of $1.1 billion and $742 million for the three months ended March 31, 2011 and 2010, respectively. | |
(b) | We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less. | |
(c) | Management uses gross refining margin per barrel to evaluate performance and compare profitability to other companies in the industry. There are a variety of ways to calculate gross refining margin per barrel; different companies may calculate it in different ways. We calculate gross refining margin per barrel by dividing gross refining margin (revenue less costs of feedstocks, purchased refined products, transportation and distribution) by total refining throughput. Management uses manufacturing costs per barrel to evaluate the efficiency of refining operations. There are a variety of ways to calculate manufacturing costs per barrel; different companies may calculate it in different ways. We calculate manufacturing costs per barrel by dividing manufacturing costs by total refining throughput. 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 accounting principles generally accepted in the United States of America (U.S. GAAP). |
30
Table of Contents
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in millions except | ||||||||
Refining Segment | per barrel amounts) | |||||||
Segment Operating Income (Loss) |
||||||||
Gross refining margin (d) |
$ | 724 | $ | 270 | ||||
Expenses |
||||||||
Manufacturing costs |
264 | 252 | ||||||
Other operating expenses |
56 | 72 | ||||||
Selling, general and administrative expenses |
8 | 9 | ||||||
Depreciation and amortization expense (e) |
91 | 85 | ||||||
Loss on asset disposals and impairments (f) |
2 | 21 | ||||||
Segment Operating Income (Loss) |
$ | 303 | $ | (169 | ) | |||
Refined Product Sales (thousand barrels per day) (g) |
||||||||
Gasoline and gasoline blendstocks |
325 | 284 | ||||||
Jet fuel |
86 | 89 | ||||||
Diesel fuel |
130 | 97 | ||||||
Heavy oils, residual products and other |
74 | 77 | ||||||
Total Refined Product Sales |
615 | 547 | ||||||
Refined Product Sales Margin ($/barrel) (g) |
||||||||
Average sales price |
$ | 113.33 | $ | 87.08 | ||||
Average costs of sales |
99.98 | 82.82 | ||||||
Refined Product Sales Margin |
$ | 13.35 | $ | 4.26 | ||||
(d) | Consolidated gross refining margin combines gross refining margin for each of our regions adjusted for other amounts not directly attributable to a specific region. Other amounts resulted in an increase of $5 million and $2 million for the three months ended March 31, 2011 and 2010, respectively. 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 multiplied by the gross refining margin per barrel. | |
(e) | Includes manufacturing depreciation and amortization expense per throughput barrel of approximately $1.72 and $1.88 for the three months ended March 31, 2011 and 2010, respectively. | |
(f) | Includes a $20 million impairment charge related to refining equipment at our Los Angeles refinery for the three months ended March 31, 2010. Loss on asset disposals and impairments is included in the refining segment operating income but excluded from the regional operating costs per barrel. | |
(g) | Sources of total refined product sales includes refined products manufactured at our refineries and refined products purchased from third-parties. Total refined product sales margins include margins on sales of manufactured and purchased refined products. |
31
Table of Contents
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in millions | ||||||||
Refining Data by Region | except per barrel amounts) | |||||||
California (Golden Eagle and Los Angeles) |
||||||||
Refining throughput (thousand barrels per day) (h) |
248 | 190 | ||||||
Gross refining margin |
$ | 372 | $ | 132 | ||||
Gross refining margin ($/throughput barrel) (c) |
$ | 16.66 | $ | 7.74 | ||||
Manufacturing cost before depreciation and
amortization expense (c) ($/throughput bbl) |
$ | 6.68 | $ | 8.84 | ||||
Pacific Northwest (Washington and Alaska) |
||||||||
Refining throughput (thousand barrels per day) |
135 | 122 | ||||||
Gross refining margin |
$ | 163 | $ | 64 | ||||
Gross refining margin ($/throughput barrel) (c) |
$ | 13.39 | $ | 5.85 | ||||
Manufacturing cost before depreciation and
amortization expense (c) ($/throughput bbl) |
$ | 4.08 | $ | 4.36 | ||||
Mid-Pacific (Hawaii) |
||||||||
Refining throughput (thousand barrels per day) |
69 | 66 | ||||||
Gross refining margin |
$ | (19 | ) | $ | | |||
Gross refining margin ($/throughput barrel) (c) |
$ | (3.05 | ) | $ | 0.05 | |||
Manufacturing cost before depreciation and
amortization expense (c) ($/throughput bbl) |
$ | 4.69 | $ | 2.78 | ||||
Mid-Continent (North Dakota and Utah) |
||||||||
Refining throughput (thousand barrels per day) (h) |
109 | 93 | ||||||
Gross refining margin |
$ | 203 | $ | 72 | ||||
Gross refining margin ($/throughput barrel) (c) |
$ | 20.77 | $ | 8.60 | ||||
Manufacturing cost before depreciation and
amortization expense (c) ($/throughput bbl) |
$ | 3.65 | $ | 4.34 |
(h) | There were no major turnarounds at our refineries during the 2011 Quarter; however, we experienced reduced throughput due to scheduled turnarounds at our Golden Eagle and Utah refineries during the 2010 Quarter. |
Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010
Overview. Operating income for our refining segment increased by $472 million, or 279%, to $303
million during the 2011 Quarter as compared to the 2010 Quarter. The increase is primarily due to
an improved margin environment and higher refinery throughput during the 2011 Quarter.
Gross Refining Margins. Our gross refining margin per barrel increased by $7.97 per barrel, or
125%, to $14.33 per barrel in the 2011 Quarter as compared to the 2010 Quarter, reflecting stronger
industry margins in both the Mid-Continent and West Coast markets. Industry distillate and gasoline
margins on the U.S. West Coast increased approximately 139% and 35%, respectively. Our margins were
driven by advantaged crude cost relative to industry benchmarks and reliable operating performance
during the quarter. In the Mid-Continent region, crude oils priced off WTI traded at a significant
discount to waterborne crude oil benchmarks due to over supplied inventories of domestic inland crude oils. The significantly higher gross refining margin per
barrel positively impacted total gross refining margins by $454 million during the 2011 Quarter as
compared to the 2010 Quarter. Our Mid-Pacific gross refining margin per barrel decreased by $3.10
per barrel to $(3.05) per barrel in the 2011 Quarter as compared to the 2010 Quarter, reflecting
increased crude oil costs and lagging refined product prices.
32
Table of Contents
We periodically use non-trading derivative instruments to manage exposure to commodity price risks
associated with the purchase or sale of crude oil and finished products. We may also use
non-trading 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 $51 million during the 2011 Quarter versus $12
million during the 2010 Quarter as crude oil prices increased significantly during the 2011
Quarter compared to marginal increases during the 2010 Quarter.
Refining Throughput. Total refining throughput increased 90 thousand barrels per day (Mbpd), or
19%, to 561 Mbpd during the 2011 Quarter as compared to the 2010 Quarter due to increased
reliability at our California and Mid-Continent refineries combined with turnarounds at our Golden
Eagle and Utah refineries in the 2010 Quarter.
Refined Products Sales. Revenues from sales of refined products increased $2.0 billion, or 48% to
$6.3 billion in the 2011 Quarter as compared to the 2010 Quarter, primarily due to significantly
higher average refined product sales prices and increased refined product sales volumes. Our
average product sales price increased $26.25 per barrel, or 30%, to $113.33 per barrel in the 2011
Quarter as compared to the 2010 Quarter, as higher crude oil prices put upward pressure on product
prices. Total refined product sales increased by 68 Mbpd, or 12%, to 615 Mbpd in the 2011 Quarter
as compared to the 2010 Quarter. Refined product sales volumes were impacted by increased demand
for diesel fuel and gasoline and additional retail site supply agreements.
Costs of Sales and Expenses. Our average costs of sales increased by $17.16 per barrel, or 21%,
to $99.98 per barrel during the 2011 Quarter as compared to the 2010 Quarter, reflecting higher
crude oil prices impacted by global market events discussed in Business Strategy and Overview.
Manufacturing and other operating expenses decreased by $4 million, or 1%, to $320 million in the
2011 Quarter as compared to the 2010 Quarter despite higher refining throughputs. The decreases
were primarily related to the changes to our post-retirement medical and pension benefit programs
in 2010. The loss on asset disposals and impairments in the 2010 Quarter primarily relates to the
deferral of a capital project at our Los Angeles refinery, which resulted in a write-down to fair
value of equipment.
33
Table of Contents
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Retail Segment | (Dollars in millions except per gallon amounts) | |||||||
Revenues |
||||||||
Fuel |
$ | 1,115 | $ | 814 | ||||
Merchandise and other |
52 | 53 | ||||||
Total Revenues |
$ | 1,167 | $ | 867 | ||||
Fuel Sales (millions of gallons) |
355 | 316 | ||||||
Fuel Margin ($/gallon) (a) (c) |
$ | 0.14 | $ | 0.23 | ||||
Merchandise Margin (in millions) |
$ | 12 | $ | 12 | ||||
Merchandise Margin (percent of revenues) |
26 | % | 26 | % | ||||
Average Number of Stations (during the period) |
||||||||
Company-operated |
380 | 386 | ||||||
Branded jobber/dealer (b) |
719 | 498 | ||||||
Total Average Retail Stations |
1,099 | 884 | ||||||
Segment Operating Income |
||||||||
Gross Margins |
||||||||
Fuel (c) |
$ | 49 | $ | 72 | ||||
Merchandise and other non-fuel |
18 | 18 | ||||||
Total Gross Margins |
67 | 90 | ||||||
Expenses |
||||||||
Operating expenses |
51 | 49 | ||||||
Selling, general and administrative expenses |
4 | 6 | ||||||
Depreciation and amortization expense |
9 | 10 | ||||||
Loss on asset disposals and impairments |
1 | 1 | ||||||
Segment Operating Income |
$ | 2 | $ | 24 | ||||
(a) | Management uses fuel margin per gallon to compare profitability to other companies in the industry. There are a variety of ways to calculate fuel margin per gallon; different companies may calculate it in different ways. We calculate fuel margin per gallon by dividing fuel gross margin by fuel sales volumes. 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 U.S. GAAP. | |
(b) | Reflects the phased expansion of our branded marketing presence through the addition of wholesale supply contracts for approximately 300 Shell-branded stations predominantly in the Mid-Continent region. | |
(c) | Includes the effect of intersegment purchases from our refining segment at prices which approximate market. |
Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010
Operating Income. Operating income for our retail segment decreased $22 million, or 92%, to $2
million during the 2011 Quarter as compared to the 2010 Quarter due to a significant decrease in
fuel margin per gallon. Retail fuel margin per gallon decreased 39% to $0.14 per gallon during the
2011 Quarter leading fuel gross margins to decline $23 million from the 2010 Quarter. During the
2011 Quarter, rapidly rising wholesale fuel costs outpaced increases in retail street prices, which
negatively impacted retail margins. This was partially offset by a 39 million gallon, or 12%,
increase in fuel sales volumes during the 2011 Quarter as compared to the 2010 Quarter led by the
addition of wholesale supply contracts for approximately 300
Shell-branded stations which transitioned in the
2011 Quarter. Merchandise and other
non-fuel gross margin remained constant at $18 million during the 2011 Quarter. As a result, total
gross margin decreased $23 million, or 26%, to $67 million during the 2011 Quarter as compared to
the 2010 Quarter.
34
Table of Contents
Fuel sales revenues increased $301 million, or 37%, to $1.1 billion in the 2011 Quarter as compared
to $814 million in the 2010 Quarter, reflecting significantly higher average sales prices and
increased fuel sales volumes. Costs of sales increased from the 2010 Quarter due to higher prices
for purchased fuel. Our expenses remained relatively consistent as compared to the 2010 Quarter.
Consolidated Results of Operations
Selling, General and Administrative Expenses. Our selling, general and administrative expenses
increased $28 million, or 42%, to $95 million in the 2011 Quarter from $67 million in the 2010
Quarter. The increase was primarily due to the impact of higher stock prices on stock-based
compensation expense recorded for our stock appreciation rights and phantom stock options which
increased by $30 million and $8 million, respectively. Our stock appreciation rights and phantom
stock options are adjusted to fair value at the end of each reporting period using a Black-Scholes
method where stock price is a significant assumption. Our stock price increased 45% and 3% during
the 2011 and 2010 Quarters, respectively.
Interest and Financing Costs. Interest and financing costs increased $6 million, or 16%, to $43
million in the 2011 Quarter from $37 million during the 2010 Quarter. The increase reflects
interest on borrowings outstanding under the TPSA Revolving Credit Facility, which was entered into
in October 2010.
Income Tax Provision. Our income tax expense totaled $70 million in the 2011 Quarter versus a
benefit of $84 million in the 2010 Quarter. The combined federal and state effective income tax
rate was 40% and 35% during the 2011 Quarter and the 2010 Quarter, respectively. The 2010 Quarter
benefit was reduced by $7 million of income tax expense related to health care legislation enacted
in the 2010 Quarter.
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 44 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 the first quarter of 2011 with $724 million of cash and
cash equivalents, no borrowings under the Tesoro Corporation Revolving Credit Facility and $80
million in borrowings under the TPSA Revolving Credit Facility. We believe available capital
resources will be adequate to meet our capital expenditure, working capital and debt service
requirements. We had borrowing ability under our credit agreements as follows (in millions):
Amount | Outstanding | |||||||||||||||
Total | Borrowed | Letters | Available | |||||||||||||
Capacity | to date | of Credit | Capacity | |||||||||||||
Tesoro Corporation
Revolving Credit Facility (a) |
$ | 1,850 | $ | | $ | 876 | $ | 974 | ||||||||
Letter of Credit Agreements |
540 | | 459 | 81 | ||||||||||||
TPSA Revolving Credit Facility |
350 | 80 | 54 | 216 | ||||||||||||
Total credit agreements |
$ | 2,740 | $ | 80 | $ | 1,389 | $ | 1,271 | ||||||||
(a) | Borrowing base is the lesser of the amount of the periodically adjusted borrowing base or the agreements total capacity. |
35
Table of Contents
Credit Facilities
Tesoro Corporation Revolving Credit Facility (Revolving Credit Facility)
We amended our Revolving Credit Facility in March 2011. Modifications included: a change to the
total available capacity to $1.85 billion which can be increased up to an aggregate $2.25 billion,
subject to receiving increased commitments from the lending group. The Revolving Credit Facility
is guaranteed by substantially all of Tesoros active domestic subsidiaries, excluding Tesoro
Logistics LP and its subsidiaries and is secured by substantially all of the petroleum inventory,
cash and receivables of Tesoros active domestic subsidiaries.
Our Revolving Credit Facility and senior notes impose various restrictions and covenants 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 make 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; | ||
| make certain payments and distributions from our subsidiaries; | ||
| engage in certain mergers or consolidations and transfers of assets; and | ||
| enter into transactions with affiliates. |
Borrowing availability under the Revolving Credit Facility is based on a minimum fixed charge
coverage ratio. In addition, we have a default covenant, which requires us to maintain specified
levels of tangible net worth. We were in compliance with our debt covenants for the three months
ended March 31, 2011.
At March 31, 2011, our Revolving Credit Facility provided for borrowings (including letters of
credit) up to the lesser of the amount of a periodically adjusted borrowing base of approximately
$2.7 billion (based upon a West Texas Intermediate crude oil price of $97 per barrel), consisting
of Tesoros eligible cash and cash equivalents, receivables and petroleum inventories, net of the
standard reserve as defined, or the Revolving Credit Facilitys total capacity of $1.85 billion.
As of March 31, 2011, we had unused credit availability of approximately 53% of the eligible
borrowing base.
Borrowings under the Revolving Credit Facility bear interest at either a base rate (3.25% at March
31, 2011), or a Eurodollar rate (0.24% at March 31, 2011) plus an applicable margin. The applicable
margin at March 31, 2011, was 1.75% in the case of the Eurodollar rate, but varies based upon our
Revolving Credit Facilitys credit ratings. Letters of credit outstanding under the Revolving
Credit Facility incur fees at an annual rate tied to the applicable margin described above (1.75%
at March 31, 2011). We also incur commitment fees for the unused portion of the Revolving Credit
Facility at an annual rate of 0.375% as of March 31, 2011.
Our Revolving Credit Facility is scheduled to mature, and the committments will terminate, on March 16, 2016, unless the Company
does not (a) refinance or pay in full, the Companys 6¼% notes due in November 2012 on or prior to the stated maturity date, or (b) refinance or pay in full, the
Companys 6⅝% notes due November 2015 on or prior to the stated maturity date, at which point the Revolving Credit Facility would be immediately terminated.
36
Table of Contents
Letter of Credit Agreements
The Revolving Credit Facility allows us to obtain letters of credit under separate letter of credit
agreements for foreign crude oil purchases. At March 31, 2011, we had three separate letter of
credit agreements. Letters of credit outstanding under these agreements incur fees and are secured
by the petroleum inventories for which they are issued. The letter of credit agreements may be
terminated by either party, at any time.
Tesoro Panama Company Sociedad Anonima (TPSA) Revolving Credit Facility
As part of our business strategy, we formed TPSA, a directly and wholly owned subsidiary of Tesoro,
to further utilize our leased pipeline and tank facilities in Panama. TPSA, entered into a 364-day
uncommitted, secured revolving credit agreement that expires in October 2011. TPSA is an excluded
and unrestricted subsidiary from the Revolving Credit Facility and outstanding indentures. The TPSA
Revolving Credit Facility is non-recourse to Tesoro and is guaranteed by TPSAs assets. The TPSA
Revolving Credit Facility includes two uncommitted facilities, which provide for revolving
borrowings, swing line loans and daylight overdraft loans and letters of credit.
At March 31, 2011, our TPSA Revolving Credit
Facility provided for borrowings (including letters of
credit) up to the lesser of the amount of a periodically adjusted
collateral pool consisting of TPSA
eligible receivables and petroleum inventories, net of reserves or the agreements capacity based
on the net worth of TPSA. As of March 31,
2011, TPSAs capacity was $350 million, consisting of $245 million under the first facility and $105 million
under the second facility. Our total capacity under the TPSA facilities can be further increased
up to $700 million provided the facilities maximum amounts
do not exceed $550 million or $350
million, respectively. During the 2011 Quarter we reduced our borrowings under this facility by
$70 million.
Revolving borrowings bear interest at a Eurodollar rate plus an applicable margin (2.75% as of
March 31, 2011), or an alternative base rate (3.25% as of March 31, 2011) plus an applicable margin
(1.75% as of March 31, 2011). Letters of credit outstanding under the TPSA Revolving Credit
Facility incur fees at the Eurodollar rate of (0.24% as of March 31, 2011) plus an annual base rate
(1.75% at March 31, 2011).
The TPSA Revolving Credit Facility contains certain default covenants and conditions relative to
TPSAs financial results that, among other things, limit TPSAs ability to incur indebtedness or
carry inventory levels above certain defined maximums. TPSA is also required to maintain specified
levels of adjusted tangible net worth (as defined) and adjusted net working capital (as defined).
We were in compliance with all TPSA Revolving Credit Facility covenants and conditions as of March
31, 2011.
TLLP Revolving Credit Facility
On April 26, 2011, TLLP entered into a senior
secured revolving credit agreement, the TLLP Revolving Credit
Facility, with
a syndicate of banks and financial institutions, including Bank of America, N.A. as administrative
agent. The TLLP Revolving Credit Facility provides for total loan availability of $150
million and permits TLLP to request that the availability be increased up to an aggregate of $300
million, subject to receiving increased commitments from the lenders. At the closing of the offering, TLLP borrowed
$50 million under the TLLP Revolving Credit Facility. TLLP distributed total proceeds to us of
$330 million, which includes $280 million from the offering and $50 million from the TLLP Revolving
Credit Facility, in consideration of assets contributed and to reimburse us for certain capital
expenditures incurred with respect to these assets.
We redeemed the $150 million Junior Subordinated Notes due in 2012 in May 2011 with cash proceeds from the offering.
TLLP Revolving Credit Facility is non-recourse to Tesoro and is guaranteed by all of
TLLPs subsidiaries and secured by substantially all of
TLLPs assets. Borrowings available under the
TLLP Revolving Credit Facility are up to the total available revolving capacity of the facility.
The TLLP Revolving Credit Facility is scheduled to mature on April 25, 2014.
Borrowings bear interest at either a base rate (3.25% at April 26, 2011), plus the applicable
margin or a Eurodollar rate (0.21% at April 26, 2011), plus an applicable margin. The applicable
margin at April 26, 2011, was 1.50% in the case of the base rate and 2.50% in the case of the
Eurodollar rate but varies based upon Consolidated Leverage Ratio, as
defined. The annual rate of commitment fees is 0.50%.
37
Table of Contents
The TLLP Revolving Credit Facility contains affirmative and negative covenants that, among other
things, limit or restrict TLLPs ability (as well as those of TLLPs subsidiaries) to:
| incur certain additional indebtedness and incur liens on assets to secure certain debt; | ||
| pay and make certain restricted payments; | ||
| make distributions from its subsidiaries under certain conditions; | ||
| dispose of assets in excess of an annual threshold amount; | ||
| make certain amendments, modifications or supplements to organization documents and material contracts; | ||
| engage in certain business activities; | ||
| engage in certain mergers or consolidations and transfers of assets; and | ||
| enter into non-arms-length transactions with affiliates. |
Additionally,
covenants require TLLP to maintain certain interest coverage and
leverage ratios.
Capitalization
Our capital structure at March 31, 2011, was comprised of the following (in millions):
Debt, including current maturities: |
||||
Tesoro Corporation Revolving Credit Facility |
$ | | ||
TPSA Revolving Credit Facility |
80 | |||
93/4% Senior Notes Due 2019 (net of unamortized discount of $10) |
290 | |||
61/2% Senior Notes Due 2017 |
500 | |||
6⅝% Senior Notes Due 2015 |
450 | |||
61/4% Senior Notes Due 2012 |
450 | |||
Junior subordinated notes due 2012 (net of unamortized discount of $14) |
136 | |||
Capital lease obligations and other |
21 | |||
Total Debt |
1,927 | |||
Stockholders Equity |
3,329 | |||
Total Capitalization |
$ | 5,256 | ||
At March 31, 2011, our debt to capitalization ratio decreased to 37% compared to 38% at year-end
2010, reflecting earnings during the first quarter of 2011 and a reduction in outstanding
borrowings of $70 million on the TPSA Revolving Credit Facility.
Cash Flow Summary
Components of our cash flows are set forth below (in millions):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash Flows From (Used in): |
||||||||
Operating activities |
$ | 211 | $ | (35 | ) | |||
Investing activities |
(48 | ) | (85 | ) | ||||
Financing activities |
(87 | ) | (3 | ) | ||||
Increase (Decrease) in Cash and Cash Equivalents |
$ | 76 | $ | (123 | ) | |||
38
Table of Contents
Net cash from operating activities during the 2011 Quarter totaled $211 million, as compared to net
cash used in the 2010 Quarter of $35 million. The significant increase in net cash from operating
activities of $246 million was primarily due to higher cash earnings. Net cash used in investing
activities decreased $37 million, or 44%, to $48 million in the 2011 Quarter as compared to $85
million in the 2010 Quarter due to decreased capital expenditures. Net cash used in financing
activities during the 2011 Quarter totaled $87 million as compared to $3 million in the 2010
Quarter. The significant increase of net cash used in financing activities of $84 million is
primarily due to repayments on the TPSA Revolving Credit Facility and increased financing costs
related to our revolving credit facilities.
Working capital requirements (excluding cash) used $153 million in the quarter ending March 31,
2011, primarily related to net repayments of $70 million of borrowings on the TPSA Revolving Credit
Facility. A significant increase in crude and product prices during the quarter increased inventory
values and related payables, trade receivables and prepayments of derivative margin accounts.
Additionally, feedstock inventories increased by approximately 2 million barrels from December 31,
2010, in preparation for historically higher demand periods during the summer months.
Capital Expenditures
Our 2011 capital budget is $380 million. Our capital budget excludes our expected spending to
expand the crude oil throughput capacity of the Mandan, North Dakota refinery from 58,000 barrels
per day to 68,000 barrels per day by the second quarter of 2012, subject to permitting
requirements. The current expected capital investment for the expansion will be approximately $35
million, including capital spending by TLLP. The expansion will allow the refinery to process
additional crude from the nearby Bakken Shale/Williston Basin area delivered via the Tesoro High
Plains Pipeline system.
Capital spending during the 2011 Quarter was $42 million. Our 2011 Quarter and 2011 full-year
expected capital spending amounts are comprised of the following project categories:
Percent of | Percent of | |||||||
2011 Quarter Capital | 2011 Expected Capital | |||||||
Project Category | Spending | Spending | ||||||
Regulatory |
50% | 40% | ||||||
Sustaining |
35% | 30% | ||||||
Income Improvement |
15% | 30% |
See Business Strategy and Overview and Environmental Capital Expenditures for additional
information.
Refinery Turnaround Spending
We spent $9 million for refinery turnarounds and catalysts during the 2011 Quarter, primarily at
our California refineries. During the remainder of 2011, we expect to spend approximately $150
million, which is within our 2011 refinery turnaround and catalyst budget, primarily at our Golden
Eagle and Los Angeles refineries. Refining throughput and yields will be affected by scheduled
turnarounds at our Golden Eagle refinery during the second and fourth quarters and our Los Angeles
refinery during the third quarter.
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements that would
result in off-balance sheet liabilities.
39
Table of Contents
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. Although we cannot predict the
ultimate outcomes of these matters with certainty, we have accrued for the estimated liabilities
when appropriate. 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. Additionally, if
applicable, we accrue receivables for probable insurance or other third-party recoveries.
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, equipment or facilities.
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 retail stations, closed retail stations, operating refined-products terminals and closed
refined products terminals. The impact of these legislative and regulatory developments, including
any greenhouse gas cap-and-trade program or low carbon fuel standards, could result in increased
compliance costs, additional operating restrictions on our business and an increase in the cost of
the products we manufacture, which could have an adverse impact on our financial position, results
of operations, and liquidity.
On May 6,
2011, we met with the U.S. Department of Justice (DOJ)
and the U.S. Environmental Protection Agency (EPA) to
discuss potential claims by the EPA under the Clean Air Act concerning
our Alaska, Washington, Golden Eagle and Hawaii refineries. At this
meeting, DOJ and EPA alleged that we have violated the Clean Air Act,
regulations under the Clean Air Act and/or Clean Air Act permits at
each of these refineries. We previously received a
notice of violation in March 2011 from the EPA alleging violations of Title V of
the Clean Air Act at our Alaska refinery. The alleged violations in
the notice of violation arise from a 2007 state of Alaska inspection
and inspections by EPA in 2008 and 2010. We are evaluating these
allegations. The ultimate resolution of this matter could require us
to incur material capital expenditures and/or civil penalties. While
we cannot currently estimate the amount or timing of the resolution
of this matter and currently believe that the outcome of this matter
will not materially impact our liquidity and consolidated financial
position, the ultimate resolution could have a material impact on our
interim or annual results of operations.
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 13.95 billion gallons in 2011, 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. Additional expenditures could be required
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 emissions 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
emissions 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. We currently
have $5 million accrued related to this matter for agency fees in 2011.
In 2009, the U.S. Environmental Protection Agency proposed regulating greenhouse gas emissions
under the Clean Air Act. The first of these regulations, finalized on April 1, 2010, sets
standards for the control of greenhouse gas emissions from light trucks and cars. It could reduce
the demand for our manufactured transportation fuels. In addition, other proposed regulations
include permitting requirements for stationary sources that emit greenhouse gases above a certain
threshold. The resulting permitting requirements could impose emission controls that increase
required capital expenditures at our refineries.
We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax
laws and regulations, and changes in existing tax laws and regulations, could result in increased
expenditures in the future. We are also subject to audits by federal, state and foreign 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 resolution of any such claim(s) would
not materially affect our consolidated financial position or results of operations. We believe it
is possible that unrecognized tax benefits could decrease by as much as $11 million in the next twelve
months through settlements or other conclusions, primarily regarding state tax issues.
40
Table of Contents
Environmental Liabilities
We are, and expect to continue, incurring expenses for environmental liabilities 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.
At March 31, 2011 and December 31, 2010, our accruals for environmental expenditures totaled $102
million and $108 million, respectively. Our environmental accruals are based on estimates including
engineering assessments, and it is possible that our estimates will change and that additional
costs will be recorded 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 $59
million and $62 million at March 31, 2011 and December 31, 2010, respectively. We cannot
reasonably determine the full extent of remedial activities that may be required at the Golden
Eagle refinery. Therefore, it is possible that we will identify additional remediation costs as
more information becomes available. We have filed insurance claims under environmental insurance
policies that provide coverage up to $190 million for expenditures in excess of $50 million in
self-insurance. 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.
Washington Refinery Fire
In April 2010, the naphtha hydrotreater unit at our Washington refinery was involved in a fire,
which fatally injured seven employees and rendered the unit inoperable. Subsequent to the incident,
refinery processing was temporarily shut down until after the unit reconstruction was completed.
The Washington refinery resumed operations at planned rates in November 2010.
In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants
were named in a lawsuit brought by the estates and families of six of the seven fatally injured
employees arising from the April 2010 incident. In addition, a third-party truck driver has alleged
damages in the lawsuit. The lawsuit includes allegations of negligence, premises liability, strict
liability, product liability and seeks unspecified compensatory and punitive damages. This case,
Donald and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro Refining and Marketing et al.,
is proceeding in the Superior Court of the State of Washington, Skagit County. The Company believes
that it has defenses to the allegations contained in the lawsuit, and we currently believe that the
outcome will not materially impact our liquidity or consolidated financial position.
We maintain comprehensive property (including business interruption), workers compensation, and
general liability insurance policies with significant loss limits. Our business interruption
insurance deductible is satisfied after we have exceeded both 60 days of operational disruption and
$25 million in losses primarily based on the operating plan that existed prior to the incident.
Our property damage insurance has a $10 million deductible. We have filed business interruption
insurance claims and property damage claims related to this incident.
41
Table of Contents
We collected $55 million in business interruption insurance recoveries that relate to downtime from
April 2010 to August 2010, which were recorded as an offset to cost of sales in the consolidated
statement of operations for the year ended December 31, 2010. We have filed additional business
interruption insurance claims for the period subsequent to August 2010 through the time the
refinery began running at planned rates and expect to settle remaining matters in the first half
of 2011. We originally filed claims for $22 million in property damages and recorded $12 million in
property insurance recoveries, net of the $10 million deductible. These amounts were recorded in
operating expenses in the consolidated statement of operations in 2010, and payments related to the
property damage claims were received in three months ended March 31, 2011. We do not believe that
this tragic incident will 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. As a result, we
have not established accruals for these matters unless a likelihood of loss may be reasonably
possible and the amount of loss is currently estimable. On the basis of existing information, 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.
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 through 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 for retroactive price adjustments
under our previous crude oil contracts with them. In September 2010, the trial court judge granted
Chevrons motion for summary judgment and awarded them $16 million, including interest. We disagree
with the trial court and have appealed the decision to the Alaska Supreme Court in which the
proceeding is now pending. We have established an accrual for this matter and believe that the
outcome will not materially impact our liquidity, results of
operations or consolidated financial position.
We are a defendant, along with other manufacturing, supply and marketing defendants, in six
lawsuits alleging MTBE contamination in groundwater. We were served with the sixth lawsuit in April
2010. The defendants are being sued for having manufactured MTBE and having manufactured, supplied
and distributed gasoline containing MTBE. The plaintiffs in the six 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.
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
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 discussing the alleged violations contained in
the suit with the EPA and the U.S. Department of Justice and have not established an accrual for
this matter. On the basis of existing information, we believe that the resolution of this matter
will not have a material adverse effect on our financial position or results of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the
Financial Reform Act of 2010, was signed into law. Key provisions of the act require that
standardized swaps be cleared through a registered clearinghouse and executed on a registered
trading platform with specific margin requirements. These requirements could make these products
more complicated or costly by creating new regulatory risks and increasing reporting, capital, and
administrative requirements for companies that use derivatives for hedging and trading activities.
Final rules on provisions in the legislation will be established and will take effect twelve months
after the date of enactment. Although we cannot predict the ultimate outcome of this legislation,
new regulations in this area may result
in increased hedging costs and cash collateral requirements, and ultimately affect liquidity and
working capital requirements.
42
Table of Contents
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.
Environmental Capital Expenditures
The EPA issued regulations in February 2007 that require the reduction of benzene in gasoline. We
expect to spend approximately $85 million through 2013 at five of our refineries to comply with the
regulations, including $11 million spent in the first quarter of 2011. Our California refineries
will not require capital spending to meet the benzene reduction standards.
We have evaluated alternatives for the wharves at our Golden Eagle refinery to meet engineering and
maintenance standards issued by the State of California in February 2006. These alternatives could
significantly reduce our capital spending requirements. Based on the updated alternatives, we
expect to spend $15 million through 2013. The timing is being evaluated and subject to change.
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.
43
Table of Contents
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (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 Quarterly Report
on Form 10-Q, 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; |
44
Table of Contents
| 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. |
Many of these factors, as well as other factors, are described in our filings with the SEC. 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 Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report
on Form 10-Q. 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 Quarterly
Report on Form 10-Q.
ITEM 3. 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 may use derivative instruments to
manage the risks from changes in the prices of crude oil and refined products, fluctuations in
foreign currency exchange rates, or to capture market opportunities. We have a risk 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
Tesoro Refining and Marketing Company
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 and 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 rolling 12-month average throughput
of 503 Mbpd, would change annualized pre-tax operating income by approximately $184 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 29 million barrels and 27 million barrels at March 31, 2011 and December
31, 2010, respectively. The average cost of our refinery feedstocks and refined products at March
31, 2011, was approximately $47 per barrel on a LIFO basis, compared to market prices of
approximately $118 per barrel. If market prices decline to a level below the LIFO average cost of
these inventories, we would be required to write down the carrying value of our inventory to
market.
45
Table of Contents
We periodically use non-trading derivative instruments to manage exposure to commodity price risks
associated with the purchase or sale of crude oil and finished products. We may also use
non-trading derivative instruments to manage price risks associated with inventories above or below
our target levels. These derivative instruments typically involve exchange-traded futures and
over-the-counter swaps and options, generally with durations of less than one year. Our hedging
strategies are continuously monitored.
We mark-to-market our derivative instruments and recognize the changes in their fair value in our
statements of consolidated operations. We elected for Tesoro Refining and Marketing Company not to
designate derivative instruments as fair value hedges during the three months ended March 31, 2010
and 2011. We use fair value hedge accounting for a portion of our TPSA inventory.
Net earnings during the 2011 and 2010 first quarters included net losses of $51 million and $12
million, respectively, on our derivative positions comprised of the following (dollars in millions
and volumes in millions of barrels):
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Contract Volumes | Net Gain (Loss) | Contract Volumes | Net Gain (Loss) | |||||||||||||
Unrealized gain (loss) carried on open
derivative positions from prior year |
5 | $ | 11 | 1 | $ | (2 | ) | |||||||||
Realized gain (loss) on settled derivative positions |
103 | (18 | ) | 78 | 3 | |||||||||||
Unrealized loss on open net short derivative
positions |
8 | (44 | ) | 1 | (13 | ) | ||||||||||
Net loss |
$ | (51 | ) | $ | (12 | ) | ||||||||||
Note: | This table includes derivative positions associated with crude oil hedges held by TPSA. |
Our open positions at March 31, 2011, will expire at various times primarily during 2011 and
2012. 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 8 million barrels at March 31, 2011, 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 pre-tax operating income by
approximately $8 million.
Tesoro Panama Company Sociedad Anonima (TPSA)
We formed TPSA to use our leased pipeline and tank facilities in Panama by enhancing strategic
partnerships, developing economies of scale around freight and storage opportunities, providing
discretionary crude oil trading, expanding global commercial relationships and evaluating
opportunities to source crude from alternative supply markets. We may use our excess storage
capacity in Panama to take advantage of contango markets when the price of crude oil is higher in
the future than the current spot price. We use commodity derivatives to hedge crude oil held in
connection with these arbitrage opportunities. The table above and sensitivity analysis includes
approximately 6 million barrels in open derivative positions at March 31, 2011, entered into to
manage exposure to commodity price risks associated with TPSA. The sensitivity analysis, as it
relates to these derivative instruments on a stand-alone basis, would not materially change the
fair value of trading derivative instruments or pre-tax operating income.
We use fair value hedge accounting for certain derivatives instruments acquired by TPSA and the
crude oil inventory underlying these instruments. If we designate a hedging relationship as a fair
value hedge, we record the changes in fair value of the hedged asset or liability and any
ineffective portion in cost of sales in our statements of consolidated operations.
46
Table of Contents
Risk Management
The Company has a system of governance and management oversight and has put in place a number of
controls to ensure procedures are properly followed and accountability is present at the
appropriate levels. For example, the Company has put in place controls designed to:
| create and maintain a comprehensive risk management policy; | ||
| provide for authorization by the appropriate levels of management; | ||
| provide for segregation of duties; | ||
| maintain an appropriate level of knowledge regarding the execution of and the accounting for derivative instruments; and | ||
| have key performance indicators in place to adequately measure the performance of its hedging activities. |
The Company believes the governance structure that it has in place is adequate given the size and
sophistication of its hedging program.
Counterparty Credit Risk
We have exposure to concentrations of credit risk related to the ability of our counterparties to
meet their contractual payment obligations, and the potential non-performance of counterparties to
deliver contracted commodities or services at the contracted price. We have risk management
policies in place, and continue to monitor closely the status of our counterparties. We perform
ongoing credit evaluations of our customers financial condition, and in certain circumstances,
require prepayments, letters of credit or other collateral.
Foreign Currency Risk
We are exposed to exchange rate fluctuations on our purchases of Canadian crude oil. Beginning in
August 2009, we have entered into forward contracts of Canadian dollars to manage monthly exchange
rate fluctuations. As of March 31, 2011, we had a forward contract to purchase 70.1 million
Canadian dollars that matured on April 25, 2011. 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.
ITEM 4. 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(b) under the Exchange
Act as of the end of the period. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective. Our
disclosure controls and procedures are designed to provide reasonable assurance that the
information that we are required to disclose in reports we file under the Exchange Act is
accumulated and communicated to management, as appropriate.
During the quarter ended March 31, 2011, 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.
47
Table of Contents
PART II - OTHER INFORMATION
ITEM 1. 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 these matters described below will not have a material adverse effect on our
financial position or results of operations.
On May 6,
2011, we met with the U.S. Department of Justice (DOJ)
and the U.S. Environmental Protection Agency (EPA) to
discuss potential claims by the EPA under the Clean Air Act concerning
our Alaska, Washington, Golden Eagle and Hawaii refineries. At this
meeting, DOJ and EPA alleged that we have violated the Clean Air Act,
regulations under the Clean Air Act and/or Clean Air Act permits at
each of these refineries. We previously received a
notice of violation in March 2011 from the EPA alleging violations of Title V of
the Clean Air Act at our Alaska refinery. The alleged violations in
the notice of violation arise from a 2007 state of Alaska inspection
and inspections by EPA in 2008 and 2010. We are evaluating these
allegations. The ultimate resolution of this matter could require us
to incur material capital expenditures and/or civil penalties. While
we cannot currently estimate the amount or timing of the resolution
of this matter and currently believe that the outcome of this matter
will not materially impact our liquidity and consolidated financial
position, the ultimate resolution could have a material impact on our
interim or annual results of operations.
In April 2011, we received a Notice of Violation (NOV)
from the California Air Resources Board (CARB). The CARB alleges certain batches of fuels produced in 2009 and 2010
at our Golden Eagle and Los Angeles refineries violated fuel standards within the California Code of Regulations. We are investigating the allegations but
do not believe the ultimate resolution of the NOV will have a
material effect on our results of operations or our financial position.
In
April 2011, we received an offer from the California Attorney Generals office to settle alleged
violations at twelve of our retail gasoline sites in California for $500,000. In February 2011, we
received notice from the California Attorney General that the State Water Resources Control Board
referred an investigation to the Attorney General alleging violations of the California Health and
Safety Code at these sites. The allegations relate to the testing, monitoring, repairing and reporting
of information concerning the underground storage tanks at the sites. We are evaluating the
allegations, but we believe the resolution of this matter will not have a material impact on our results of
operations or financial position.
In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants
were named in a lawsuit brought by the estates and families of six of the seven fatally injured
employees arising from the April 2010 incident. In addition, a third-party truck driver has alleged
damages in the lawsuit. The lawsuit includes allegations of negligence, premises liability, strict
liability, product liability and seeks unspecified compensatory and punitive damages. This case,
Donald and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro Refining and Marketing et al.,
is proceeding in the Superior Court of the State of Washington, Skagit County. The Company believes
that it has defenses to the allegations contained in the lawsuit, and we currently believe that the
outcome will not materially impact our liquidity or consolidated financial position.
ITEM 1A. RISK FACTORS
There have been no significant changes from the risk factors previously disclosed in Item 1A of our
2010 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below provides a summary of all repurchases by Tesoro of its common stock during the
three-month period ended March 31, 2011.
Total Number of Shares | Average Price Paid | |||||||
Period | Purchased* | per Share | ||||||
January 2011 |
45,844 | $ | 19.25 | |||||
February 2011 |
80,508 | $ | 23.64 | |||||
March 2011 |
| $ | | |||||
Total |
126,352 | |||||||
* | All of the shares acquired during the three-month period ended March 31, 2011, were surrendered to Tesoro to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to certain employees. These shares were not acquired under a stock repurchase program. |
48
Table of Contents
ITEM 6. EXHIBITS
(a) | Exhibits |
Exhibit Number | Description of Exhibit | |
3.1
|
First Amended and Restated Agreement of Limited Partnership of Tesoro Logistics LP dated April 26, 2011. (incorporated by reference herein to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473) | |
10.1
|
Fifth Amended and Restated Credit Agreement, dated as of March 16, 2011 (incorporated by reference herein to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 22, 2011, File No. 1-3473). | |
10.2
|
Credit Agreement, dated as of April 26, 2011, among Tesoro Logistics LP, Bank of America, N.A., as administrative agent, L/C Issuer and lender, and the other lenders party thereto. (incorporated by reference herein to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.3
|
Contribution, Conveyance and Assumption Agreement, dated as of April 26, 2011, among Tesoro Corporation, Tesoro Alaska Company, Tesoro Refining and Marketing Company and Tesoro High Plains Pipeline Company LLC, Tesoro Logistics LP, Tesoro Logistics GP, LLC, Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.4
|
Omnibus Agreement, dated as of April 26, 2011, among Tesoro Corporation, Tesoro Refining and Marketing Company, Tesoro Companies, Inc., Tesoro Alaska Company, Tesoro Logistics LP and Tesoro Logistics GP, LLC. (incorporated by reference herein to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.5
|
Transportation Services Agreement (SLC Short Haul Pipelines), dated as of April 26, 2011, between Tesoro Refining and Marketing Company and Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.6
|
Salt Lake City Storage and Transportation Services Agreement, dated as of April 26, 2011, between Tesoro Refining and Marketing Company and Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
*31.1
|
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2
|
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1
|
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.2
|
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
**101
|
The following materials from Tesoro Corporations Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Statements of Consolidated Operations, (iii) Condensed Statements of Consolidated Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
* | Filed herewith. | |
** | Submitted electronically herewith. |
In accordance with Rule 402 of Regulation S-T,
the XBRL information in Exhibit 101 to this
Quarterly Report on Form 10-Q shall not be deemed
to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended
(Exchange Act), or otherwise subject to the
liability of that section, and shall not be
incorporated by reference into any registration
statement or other document filed under the
Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set
forth by specific reference in such filing.
49
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
TESORO CORPORATION |
||||
Date: May 9, 2011 | /s/ GREGORY J. GOFF | |||
Gregory J. Goff | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: May 9, 2011 | /s/ G. SCOTT SPENDLOVE | |||
G. Scott Spendlove | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
50
Table of Contents
EXHIBIT INDEX
Exhibit Number | Description of Exhibit | |
3.1
|
First Amended and Restated Agreement of Limited Partnership of Tesoro Logistics LP dated April 26, 2011. (incorporated by reference herein to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473) | |
10.1
|
Fifth Amended and Restated Credit Agreement, dated as of March 16, 2011 (incorporated by reference herein to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 22, 2011, File No. 1-3473). | |
10.2
|
Credit Agreement, dated as of April 26, 2011, among Tesoro Logistics LP, Bank of America, N.A., as administrative agent, L/C Issuer and lender, and the other lenders party thereto. (incorporated by reference herein to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.3
|
Contribution, Conveyance and Assumption Agreement, dated as of April 26, 2011, among Tesoro Corporation, Tesoro Alaska Company, Tesoro Refining and Marketing Company and Tesoro High Plains Pipeline Company LLC, Tesoro Logistics LP, Tesoro Logistics GP, LLC, Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.4
|
Omnibus Agreement, dated as of April 26, 2011, among Tesoro Corporation, Tesoro Refining and Marketing Company, Tesoro Companies, Inc., Tesoro Alaska Company, Tesoro Logistics LP and Tesoro Logistics GP, LLC. (incorporated by reference herein to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.5
|
Transportation Services Agreement (SLC Short Haul Pipelines), dated as of April 26, 2011, between Tesoro Refining and Marketing Company and Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
10.6
|
Salt Lake City Storage and Transportation Services Agreement, dated as of April 26, 2011, between Tesoro Refining and Marketing Company and Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). | |
*31.1
|
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2
|
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1
|
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.2
|
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
**101
|
The following materials from Tesoro Corporations Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Statements of Consolidated Operations, (iii) Condensed Statements of Consolidated Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
* | Filed herewith. | |
** | Submitted electronically herewith. |
In accordance with Rule 402 of Regulation S-T,
the XBRL information in Exhibit 101 to this
Quarterly Report on Form 10-Q shall not be deemed
to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended
(Exchange Act), or otherwise subject to the
liability of that section, and shall not be
incorporated by reference into any registration
statement or other document filed under the
Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set
forth by specific reference in such filing.
51