UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
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.) |
300 Concord Plaza Drive, San Antonio, Texas 78216-6999
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
210-828-8484
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
There were 137,893,760 shares of the registrant’s Common Stock outstanding at July 31, 2008.
EXPLANATORY NOTE
Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended June 30, 2008 (the “Amendment”) is filed to restate certain financial information required by SEC Regulation S-X 3-10 to conform to the presentation in our 2007 Annual Report on Form 10-K/A. The restatement has no effect on the accompanying condensed consolidated balance sheets, condensed statements of consolidated operations or condensed statements of consolidated cash flows and does not amend, update or change any other information within Item 1 from our original Quarterly Report on Form 10-Q filed on August 6, 2008. This Amendment also does not reflect events that occurred after our initial filing date. The exhibits included in the original filing have been updated and are filed herein. The Amendment should be read in conjunction with our filings made subsequent to our original Quarterly Report on Form10-Q, including any amendments to prior filings.
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions except per share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions except per share amounts)
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 24 | $ | 23 | ||||
Receivables, less allowance for doubtful accounts | 2,677 | 1,243 | ||||||
Inventories | 1,083 | 1,200 | ||||||
Prepayments and other | 154 | 134 | ||||||
Total Current Assets | 3,938 | 2,600 | ||||||
PROPERTY, PLANT AND EQUIPMENT | ||||||||
Refining | 5,201 | 5,021 | ||||||
Retail | 617 | 642 | ||||||
Corporate and other | 203 | 193 | ||||||
6,021 | 5,856 | |||||||
Less accumulated depreciation and amortization | (1,072 | ) | (1,076 | ) | ||||
Net Property, Plant and Equipment | 4,949 | 4,780 | ||||||
OTHER NONCURRENT ASSETS | ||||||||
Goodwill | 92 | 92 | ||||||
Acquired intangibles, net | 279 | 290 | ||||||
Other, net | 382 | 366 | ||||||
Total Other Noncurrent Assets | 753 | 748 | ||||||
Total Assets | $ | 9,640 | $ | 8,128 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 3,542 | $ | 2,004 | ||||
Accrued liabilities | 474 | 488 | ||||||
Current maturities of debt | 3 | 2 | ||||||
Total Current Liabilities | 4,019 | 2,494 | ||||||
DEFERRED INCOME TAXES | 296 | 388 | ||||||
OTHER LIABILITIES | 573 | 537 | ||||||
DEBT | 1,783 | 1,657 | ||||||
COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, par value $0.162/3; authorized 200,000,000 shares; 145,085,836 shares issued (144,505,356 in 2007) | 24 | 24 | ||||||
Additional paid-in capital | 893 | 876 | ||||||
Retained earnings | 2,288 | 2,393 | ||||||
Treasury stock, 7,267,541 common shares (7,460,518 in 2007), at cost | (146 | ) | (151 | ) | ||||
Accumulated other comprehensive loss | (90 | ) | (90 | ) | ||||
Total Stockholders’ Equity | 2,969 | 3,052 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 9,640 | $ | 8,128 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions except per share amounts)
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
REVENUES (1) | $ | 8,754 | $ | 5,604 | $ | 15,285 | $ | 9,480 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Costs of sales and operating expenses (1) | 8,561 | 4,710 | 15,094 | 8,258 | ||||||||||||
Selling, general and administrative expenses | 58 | 73 | 110 | 142 | ||||||||||||
Depreciation and amortization | 99 | 89 | 189 | 158 | ||||||||||||
Loss on asset disposals and impairments | 9 | 3 | 23 | 5 | ||||||||||||
OPERATING INCOME (LOSS) | 27 | 729 | (131 | ) | 917 | |||||||||||
Interest and financing costs | (34 | ) | (30 | ) | (61 | ) | (47 | ) | ||||||||
Interest income | 1 | 11 | 3 | 25 | ||||||||||||
Other income | 4 | — | 49 | — | ||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | (2 | ) | 710 | (140 | ) | 895 | ||||||||||
Income tax provision (benefit) | (6 | ) | 267 | (62 | ) | 336 | ||||||||||
NET EARNINGS (LOSS) | $ | 4 | $ | 443 | $ | (78 | ) | $ | 559 | |||||||
NET EARNINGS (LOSS) PER SHARE: | ||||||||||||||||
Basic | $ | 0.03 | $ | 3.26 | $ | (0.57 | ) | $ | 4.13 | |||||||
Diluted | $ | 0.03 | $ | 3.17 | $ | (0.57 | ) | $ | 4.02 | |||||||
WEIGHTED AVERAGE COMMON SHARES: | ||||||||||||||||
Basic | 136.5 | 135.7 | 136.3 | 135.4 | ||||||||||||
Diluted | 138.9 | 139.6 | 136.3 | 139.2 | ||||||||||||
DIVIDENDS PER SHARE | $ | 0.10 | $ | 0.10 | $ | 0.20 | $ | 0.15 | ||||||||
(1) Includes excise taxes collected by our retail segment | $ | 71 | $ | 56 | $ | 146 | $ | 80 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES | ||||||||
Net earnings (loss) | $ | (78 | ) | $ | 559 | |||
Adjustments to reconcile net earnings (loss) to net cash from operating activities: | ||||||||
Depreciation and amortization | 189 | 158 | ||||||
Amortization of debt issuance costs and discounts | 5 | 8 | ||||||
Loss on asset disposals and impairments | 23 | 5 | ||||||
Stock-based compensation | 1 | 38 | ||||||
Deferred income taxes | (87 | ) | 19 | |||||
Excess tax benefits from stock-based compensation arrangements | — | (13 | ) | |||||
Other changes in non-current assets and liabilities | (36 | ) | (30 | ) | ||||
Changes in current assets and current liabilities: | ||||||||
Receivables | (1,434 | ) | (284 | ) | ||||
Inventories | 117 | (397 | ) | |||||
Prepayments and other | (24 | ) | (21 | ) | ||||
Accounts payable and accrued liabilities | 1,602 | 839 | ||||||
Net cash from operating activities | 278 | 881 | ||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES | ||||||||
Capital expenditures | (376 | ) | (314 | ) | ||||
Acquisitions | — | (2,101 | ) | |||||
Proceeds from asset sales | 6 | 2 | ||||||
Net cash used in investing activities | (370 | ) | (2,413 | ) | ||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | ||||||||
Net borrowings under revolving credit agreement | 125 | 250 | ||||||
Proceeds from debt offerings, net of issuance costs of $5 million | — | 495 | ||||||
Borrowings under term loan | — | 700 | ||||||
Debt Refinanced | — | (500 | ) | |||||
Repayments of debt | (1 | ) | (216 | ) | ||||
Repurchase of common stock | (3 | ) | (3 | ) | ||||
Dividend payments | (27 | ) | (20 | ) | ||||
Proceeds from stock options exercised | — | 8 | ||||||
Excess tax benefits from stock-based compensation arrangements | — | 13 | ||||||
Financing costs and other | (1 | ) | (12 | ) | ||||
Net cash from financing activities | 93 | 715 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1 | (817 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 23 | 986 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 24 | $ | 169 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
Interest paid, net of capitalized interest | $ | 38 | $ | 26 | ||||
Income taxes paid | $ | 6 | $ | 204 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES | ||||||||
Capital expenditures included in accounts payable and accrued liabilities | $ | 36 | $ | 74 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A — BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation (“Tesoro”) and its subsidiaries have been prepared by management without audit according to the rules and regulations of the SEC. The accompanying financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature. The consolidated balance sheet at December 31, 2007 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 SEC’s rules and regulations. However, management believes that the disclosures presented herein are adequate to make the information not misleading. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2007.
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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. We review our estimates on an ongoing basis, based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year.
NOTE B — EARNINGS PER SHARE
We compute basic earnings per share by dividing net earnings by the weighted average number of common shares outstanding during the period. The assumed conversion of common stock equivalents produced anti-dilutive results for the six months ended June 30, 2008, and was not included in the dilutive calculation. For the three months ended June 30, 2008 and the three and six months ended June 30, 2007, diluted earnings per share include the effects of potentially dilutive shares, principally consisting of common stock options and unvested restricted stock outstanding during the period. Share and per share calculations are presented below (in millions except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Basic: | ||||||||||||||||
Net earnings (loss) | $ | 4 | $ | 443 | $ | (78 | ) | $ | 559 | |||||||
Weighted average common shares outstanding | 136.5 | 135.7 | 136.3 | 135.4 | ||||||||||||
Basic Earnings (Loss) Per Share | $ | 0.03 | $ | 3.26 | $ | (0.57 | ) | $ | 4.13 | |||||||
Diluted: | ||||||||||||||||
Net earnings (loss) | $ | 4 | $ | 443 | $ | (78 | ) | $ | 559 | |||||||
Weighted average common shares outstanding | 136.5 | 135.7 | 136.3 | 135.4 | ||||||||||||
Dilutive effect of stock options and unvested restricted stock | 2.4 | 3.9 | — | 3.8 | ||||||||||||
Total diluted shares | 138.9 | 139.6 | 136.3 | 139.2 | ||||||||||||
Diluted Earnings (Loss) Per Share | $ | 0.03 | $ | 3.17 | $ | (0.57 | ) | $ | 4.02 | |||||||
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TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C — ACQUISITIONS
Los Angeles Assets
On May 10, 2007, we acquired a 100,000 barrels per day (“bpd”) refinery and a 42,000 bpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell® branded retail stations (128 company-operated) located throughout Southern California (collectively, the “Los Angeles Assets”) from Shell Oil Products U.S. (“Shell”). The purchase price for the Los Angeles Assets was $1.82 billion (which includes $257 million for petroleum inventories and direct costs of $16 million). The purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The purchase price allocation, including direct costs incurred in the Los Angeles Assets acquisition, is as follows (in millions):
Inventories (including materials and supplies of $7 million) | $ | 264 | ||
Property, plant and equipment | 1,304 | |||
Acquired intangibles | 160 | |||
Other assets | 112 | |||
Assumed employee costs and other liabilities | (21 | ) | ||
Total purchase price | $ | 1,819 | ||
Our unaudited pro forma financial information for the three and six months ended June 30, 2007 gives effect to the acquisition of the Los Angeles Assets and the related financings, including (i) the issuance of $500 million 61/2% senior notes due 2017, and (ii) $500 million in borrowings under our credit agreement, as if each had occurred at the beginning of the period presented. Included in the pro forma results below are allocations of corporate overhead reflected in the historical financial statements of the Los Angeles Assets totaling $5 million for the three months ended June 30, 2007 and $21 million for the six months ended June 30, 2007. The unaudited pro forma information is based on historical data (in millions except per share amounts), and we believe it is not indicative of the results of future operations.
Three Months Ended | Six Months Ended | |||||||
June 30, 2007 | June 30, 2007 | |||||||
Revenues | $ | 5,897 | $ | 10,352 | ||||
Net earnings | $ | 435 | $ | 548 | ||||
Net earnings per share: | ||||||||
Basic | $ | 3.21 | $ | 4.05 | ||||
Diluted | $ | 3.12 | $ | 3.94 |
USA Gasoline™Retail Stations
On May 1, 2007, we acquired 138 retail stations located primarily in California from USA Petroleum (the “USA Petroleum Assets”). The purchase price of the assets and the USA Gasoline ™ brand name was paid in cash totaling $286 million (including inventories of $15 million and direct costs of $3 million). We recorded $3 million of goodwill, none of which is expected to be deductible for tax purposes. The purchase price was allocated based upon fair market values at the date of acquisition.
7
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The purchase price allocation, including direct costs incurred in the acquisition of the USA Gasoline ™ stations, is as follows (in millions):
Inventories | $ | 15 | ||
Property, plant and equipment | 238 | |||
Goodwill | 3 | |||
Deferred tax asset | 2 | |||
Acquired intangibles | 35 | |||
Assumed employee post-retirement benefits | (7 | ) | ||
Total purchase price | $ | 286 | ||
Pro forma information has not been presented for the USA Petroleum Assets acquisition as it is insignificant to our consolidated financial statements.
NOTE D — INVENTORIES
Components of inventories were as follows (in millions):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Crude oil and refined products, at LIFO cost | $ | 962 | $ | 1,107 | ||||
Oxygenates and by-products, at FIFO cost | 38 | 17 | ||||||
Merchandise, at average cost | 14 | 15 | ||||||
Materials and supplies, at average cost | 69 | 61 | ||||||
Total Inventories | $ | 1,083 | $ | 1,200 | ||||
Inventories valued at LIFO cost were less than replacement cost by approximately $2.6 billion and $1.4 billion at June 30, 2008 and December 31, 2007, respectively. During 2008, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in the prior year. This LIFO liquidation resulted in a decrease of costs of sales of $78 million.
NOTE E — DEBT
Credit Agreement — Revolving Credit Facility
At June 30, 2008, our credit agreement provided for borrowings (including letters of credit) up to the lesser of the agreement’s total capacity, $1.86 billion, or the amount of a periodically adjusted borrowing base (approximately $3.4 billion as of June 30, 2008), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, net of the standard reserve, as defined. The total capacity was increased from $1.75 billion in May 2008. The credit agreement allows for further increases in capacity up to a total capacity of $2 billion. As of June 30, 2008, we had $245 million in borrowings and $820 million in letters of credit outstanding under the credit agreement, resulting in total unused credit availability of $795 million or 43% of the eligible borrowing base. Borrowings under the revolving credit facility bear interest at either a base rate (5.00% at June 30, 2008) or a Eurodollar rate (2.46% at June 30, 2008) plus an applicable margin. The applicable margin at June 30, 2008 was 0.875% in the case of the Eurodollar rate, but varies based upon our credit facility availability and credit ratings. Letters of credit outstanding under the revolving credit facility incur fees at an annual rate tied to the applicable margin described above (0.875% at June 30, 2008). We also incur commitment fees for the unused portion of the revolving credit facility at an annual rate of 0.25% as of June 30, 2008.
8
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The credit agreement contains covenants and conditions that, among other things, limit our ability to pay cash dividends, incur indebtedness, create liens and make investments. Tesoro is also required to maintain specified levels of tangible net worth. For the three and six months ended June 30, 2008 and the year ended December 31, 2007, we satisfied all of the financial covenants under the credit agreement. The credit agreement is guaranteed by substantially all of Tesoro’s active subsidiaries and is secured by substantially all of Tesoro’s cash and cash equivalents, petroleum inventories and receivables. In February 2008, we amended our credit agreement to allow up to $100 million of restricted payments during any four quarter period, subject to credit availability exceeding 20% of the borrowing base.
Letter of Credit Agreements
The credit agreement allows us to obtain up to $500 million under separate letter of credit agreements for the purchase of foreign crude oil. In April 2008, we entered into another letter of credit agreement providing up to $100 million in letters of credit. At June 30, 2008, our letters of credit capacity under our three agreements totaled $500 million, of which $276 million was outstanding. Letters of credit outstanding under these agreements incur fees at an annual rate ranging from 0.40% to 1.00% and are secured by the crude oil inventories supported by the issued letters of credit. The agreements will remain in effect until terminated by either party.
Capitalized Interest
We capitalize interest as part of the cost of major projects during extended construction periods. Capitalized interest, which is a reduction to interest and financing costs in the condensed statements of consolidated operations, totaled $6 million and $7 million for the three months ended June 30, 2008 and 2007, respectively, and $18 million and $12 million for the six months ended June 30, 2008 and 2007, respectively.
NOTE F — PENSION AND OTHER POSTRETIREMENT BENEFITS
Tesoro sponsors four defined benefit pension plans, including a funded employee retirement plan, an unfunded executive security plan, an unfunded non-employee director retirement plan and an unfunded restoration retirement plan. Although our funded employee retirement plan fully meets all funding requirements under applicable laws and regulations, during the six months ended June 30, 2008, we voluntarily contributed $10 million to improve the funded status of the employee retirement plan. The components of pension benefit expense included in the condensed statements of consolidated operations were (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Service Cost | $ | 10 | $ | 7 | $ | 18 | $ | 13 | ||||||||
Interest Cost | 6 | 5 | 12 | 10 | ||||||||||||
Expected return on plan assets | (8 | ) | (6 | ) | (14 | ) | (12 | ) | ||||||||
Amortization of prior service cost | 1 | 1 | 2 | 2 | ||||||||||||
Recognized net actuarial loss | 2 | 2 | 3 | 3 | ||||||||||||
Curtailment | 2 | — | 2 | — | ||||||||||||
Net Periodic Benefit Expense | $ | 13 | $ | 9 | $ | 23 | $ | 16 | ||||||||
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TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of other postretirement benefit expense, primarily for health insurance, included in the condensed statements of consolidated operations were (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Service Cost | $ | 5 | $ | 3 | $ | 8 | $ | 6 | ||||||||
Interest Cost | 4 | 3 | 9 | 6 | ||||||||||||
Recognized net actuarial loss | — | — | 1 | — | ||||||||||||
Net Periodic Benefit Expense | $ | 9 | $ | 6 | $ | 18 | $ | 12 | ||||||||
NOTE G — COMMITMENTS AND CONTINGENCIES
We are a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. Where required, we have made accruals in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” in order to provide for these matters. We cannot predict the ultimate effects of these matters with certainty, and we have made related accruals based on our best estimates, subject to future developments. We believe that the outcome of these matters will not result in a material adverse effect on our liquidity and consolidated financial position, although the resolution of certain of these matters could have a material adverse impact on interim or annual results of operations.
Tesoro is subject to audits by federal, state and local taxing authorities in the normal course of business. It is possible that tax audits could result in claims against Tesoro in excess of recorded liabilities. We believe, however, that when these matters are resolved, they will not materially affect Tesoro’s consolidated financial position or results of operations. During the six months ended June 30, 2008, we recognized a $6 million income tax benefit from the favorable settlement of federal tax audits for the years 1996 through 2005. All tax liabilities resulting from these audits were previously recorded as unrecognized tax benefits in our condensed consolidated balance sheet in accordance with FIN 48.
Tesoro is subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require 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 or changes in certain emission sources.
Conditions may develop that cause increases or decreases in future expenditures for our various sites, including, but not limited to, our refineries, tank farms, pipelines, retail stations (operating and closed locations) and refined products terminals, and for compliance with the Clean Air Act and other federal, state and local requirements. We cannot currently determine the amounts of such future expenditures.
Environmental Liabilities
We are currently involved in remedial responses and have incurred and expect to continue to incur cleanup expenditures associated with environmental matters at a number of sites, including certain of our previously owned properties. At June 30, 2008, our accruals for environmental expenses totaled $106 million. Our accruals for environmental expenses include retained liabilities for previously owned or operated properties, refining, pipeline and terminal operations and retail stations. We believe these accruals are adequate, based on currently available information, including the participation of other parties or former owners in remediation actions. These estimated environmental liabilities require judgment to assess and estimate the future costs to remediate. It is reasonably possible that additional remediation costs will be incurred as more information becomes available related to these environmental matters.
10
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In March 2007, we settled our dispute with a prior owner of our Golden Eagle refinery concerning soil and groundwater conditions at the refinery. We received $58.5 million in settlement proceeds in exchange for assuming responsibility for certain environmental liabilities arising from operations at the refinery prior to August 2000. At June 30, 2008, our accrual for these environmental liabilities totaled $78 million, which is included in the environmental accruals referenced above. We expect to have valid insurance claims under certain environmental insurance policies that provide coverage up to $140 million for liabilities in excess of the settlement proceeds. Amounts recorded for these environmental liabilities have not been reduced by possible insurance recoveries.
We are continuing to investigate environmental 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. A reserve to investigate these conditions is included in the environmental accruals referenced above.
In June 2008, we received an offer from the Bay Area Air Quality Management District (the “District”) to settle 44 Notices of Violation (“NOV”) for $740,000. The NOVs were issued from May 2006 to April 2008 and allege violations of air quality requirements at our Golden Eagle refinery. We are currently negotiating a settlement of this matter with the District. A reserve for this matter is included in the environmental accruals referenced above.
In March 2008, we settled 77 NOVs received from the District alleging violations of air quality at our Golden Eagle refinery for the years 2003 through 2006. We agreed to settle this matter for $1.4 million, which was paid in March 2008.
In January 2008, we received an offer of settlement from the Alaska Department of Environmental Conservation (“ADEC”) related to the grounding of a vessel in the Alaska Cook Inlet on February 2, 2006. The ADEC has alleged two vessels chartered by us violated provisions of our Cook Inlet Vessel Oil Prevention and Contingency Plan during the period from December 2004 to February 2006. The resolution of this matter will not have a material adverse effect on our financial position or results of operation. A reserve for this matter is included in the environmental accruals referenced above.
In October 2005, we received an NOV from the United States Environmental Protection Agency (“EPA”) concerning our Washington refinery. The EPA alleges certain modifications made to the fluid catalytic cracking unit at our Washington refinery prior to our acquisition of the refinery were made in violation of the Clean Air Act. We have investigated the allegations and we cannot estimate the amount of the ultimate resolution of this NOV. However, at this time we believe the final resolution of this NOV will not have a material adverse effect on our financial position or results of operations. We believe we have defenses to the allegation and intend to vigorously defend ourselves. In July 2008, we received a second NOV for the Washington refinery also alleging certain modifications made to the fluid catalytic cracking unit prior to our acquisition of the refinery were made in violation of the Clear Air Act. We are investigating the allegations contained in the July 2008 NOV, but believe the resolution of the NOV will not have a material adverse effect on our financial position or results of operations. A reserve for our response to the NOVs is included in the environmental accruals referenced above.
11
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Environmental Matters
We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. We have agreed to settle a number of the pending cases, subject to the completion of the terms and conditions of the settlement agreement. The defendants are being sued for having manufactured MTBE and having manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs, all in California, are generally water providers, governmental authorities and private well owners alleging, in part, the defendants are liable for manufacturing or distributing a defective product. The suits generally seek individual, unquantified compensatory and punitive damages and attorney’s fees. A reserve for the cases included in the settlement is included in accrued liabilities. We believe the final resolution of these cases will not have a material adverse effect on our financial position or results of operations, but at this time we cannot estimate the amount or the likelihood of the ultimate resolution of the cases not subject to the settlement. We believe we have defenses to the claims in the remaining cases and intend to vigorously defend ourselves in those lawsuits.
In December 2007, we received an NOV from ADEC alleging that our Alaska refinery violated provisions of its Clean Air Act Title V operating permit. We are negotiating a resolution of the NOV with ADEC and do not believe the resolution will have a material adverse effect on our financial position or results of operation.
In the ordinary course of business, we become party to or otherwise involved in lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large and sometimes unspecified damages or penalties may be sought from us in some matters for which the likelihood of loss may be reasonably possible but the amount of loss is not currently estimable, and some matters may require years for us to resolve. As a result, we have not established reserves for these matters. 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.
Claims Against Third-Parties
In 1996, Tesoro Alaska Company filed a protest of the intrastate rates charged for the transportation of its crude oil through the Trans Alaska Pipeline System (“TAPS”). Our protest asserted that the TAPS intrastate rates were excessive and should be reduced. The Regulatory Commission of Alaska (“RCA”) considered our protest of the intrastate rates for the years 1997 through 2000. The RCA set just and reasonable final rates for the years 1997 through 2000, and held that we were entitled to receive refunds, including interest. In accordance with the ruling, in March 2008 we received a refund from TAPS of $45 million, net of contingent legal fees. The $45 million refund is included as other income in our condensed statement of consolidated operations.
In 2002, the RCA rejected the TAPS Carriers’ proposed intrastate rate increases for 2001-2003 and maintained the permanent rate of $1.96 to the Valdez Marine Terminal. The rate decrease has been in effect since June 2003. In June 2008, the Alaska Supreme Court upheld the $1.96 permanent rate for the years 2001 through 2003 and we were awarded refunds including interest totaling $4 million, net of contingent legal fees, for the period 2001 through mid-June 2003. The rates paid from mid-June 2003 through June 2008 were also upheld. The $4 million refund is included as other income in our condensed statement of consolidated operations.
In January of 2005, Tesoro Alaska Company intervened in a protest before the Federal Energy Regulatory Commission (“FERC”), of the TAPS Carriers’ interstate rates for 2005 and 2006. In July 2005, the TAPS Carriers filed a proceeding at the FERC seeking to have the FERC assume jurisdiction under Section 13(4) of the Interstate Commerce Act and set future rates for intrastate transportation on TAPS. We filed a protest in that proceeding, which was consolidated with the other FERC proceeding seeking to set just and reasonable interstate rates on TAPS for 2005 and 2006. In June 2008, the FERC issued a final order in this consolidated FERC proceeding that lowered the interstate rates and refused to revise the current intrastate rates. The TAPS Carriers may appeal the FERC order. We cannot give assurances of whether they might do so, and if so, whether they would ultimately prevail in any such appeal.
12
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H — STOCKHOLDERS’ EQUITY
Cash Dividends
On July 30, 2008, our Board of Directors declared a quarterly cash dividend on common stock of $0.10 per share, payable on September 16, 2008 to shareholders of record on September 2, 2008. In March and June 2008, we paid quarterly cash dividends on common stock of $0.10 per share.
Shareholder Rights Plan
In March 2008, our Board of Directors approved the termination of the stockholder rights plan, dated as of November 20, 2007. The final expiration date of the rights was changed from November 20, 2010 to March 6, 2008. The rights agreement is of no further force and effect, and the rights were de-registered under the Securities Exchange Act of 1934.
NOTE I — STOCK-BASED COMPENSATION
Stock-based compensation expense included in our condensed statements of consolidated operations for our stock-based compensation plans was as follows (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Stock options | $ | 5 | $ | 6 | $ | 10 | $ | 11 | ||||||||
Restricted stock | 3 | 1 | 6 | 3 | ||||||||||||
Stock appreciation rights | (4 | ) | 7 | (12 | ) | 12 | ||||||||||
Phantom stock | (2 | ) | 4 | (3 | ) | 12 | ||||||||||
Total Stock-Based Compensation Expense | $ | 2 | $ | 18 | $ | 1 | $ | 38 | ||||||||
The income tax benefit realized from tax deductions associated with stock-based compensation totaled $0.5 million and $18 million for the six months ended June 30, 2008 and 2007, respectively. During 2007, all of the phantom stock options issued to our chief executive officer were exercised prior to termination in October 2007.
Stock Options
We amortize the estimated fair value of our stock options granted over the vesting period using the straight-line method. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model. During the six months ended June 30, 2008, we granted 767,800 options with a weighted-average exercise price of $39.91. The estimated weighted-average grant-date fair value per share of options granted was $17.60. These options will become exercisable after one year in 33% annual increments and expire ten years from the date of grant. Total unrecognized compensation cost related to non-vested stock options totaled $28 million as of June 30, 2008, which is expected to be recognized over a weighted-average period 1.8 years. A summary of our stock options as of June 30, 2008 is presented below:
Weighted-Average | ||||||||||||||||
Weighted-Average | Remaining | Intrinsic Value | ||||||||||||||
Shares | Exercise Price | Contractual Term | (In Millions) | |||||||||||||
Options Outstanding | 8,761,372 | $ | 20.67 | 5.7 years | $ | — | ||||||||||
Options Vested or Expected to Vest | 8,595,184 | $ | 20.34 | 5.7 years | $ | — | ||||||||||
Options Exercisable | 6,743,416 | $ | 14.84 | 4.8 years | $ | 33 |
13
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted Stock
We amortize the estimated fair value of our restricted stock granted over the vesting period using the straight-line method. The fair value of each restricted share on the date of grant is equal to its fair market price. During the six months ended June 30, 2008, we issued 575,110 shares of restricted stock with a weighted-average grant-date fair value of $40.37 per share. These restricted shares vest in annual increments ratably over three years. Total unrecognized compensation cost related to our non-vested restricted stock totaled $23 million as of June 30, 2008, which is expected to be recognized over a weighted-average period of 2.3 years. As of June 30, 2008 we had 1,278,296 shares of restricted stock outstanding at a weighted-average grant-date fair value of $25.53 per share.
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. During the six months ended June 30, 2008, we granted 956,110 SARs at 100% of the fair value of Tesoro’s common stock with a weighted-average grant price of $40.40 per SAR. The SARs granted in 2008 vest ratably over three years following the date of grant and expire seven years from the grant date. At June 30, 2008 and December 31, 2007, the liability associated with our SARs recorded in accrued liabilities totaled $5 million and $17 million, respectively.
Long-Term Incentive Plan
Effective June 5, 2008, our Board of Directors approved an amendment (the “Amendment”) to the 2006 Long-Term Incentive Plan (the “Plan”) to limit the authority of the Board to accelerate the vesting of awards granted from the Plan to the events of death, disability, retirement, or involuntary termination of employment as the result of a reduction in force program approved by the Board of Directors. Additionally, the Amendment increased the total numbers of shares authorized for issuance under the Plan from 3 million to 6 million shares of common stock.
14
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J — OPERATING SEGMENTS
We are an independent refiner and marketer of petroleum products and derive revenues from two operating segments, refining and retail. We evaluate our segments’ performance primarily based on segment operating income, which includes revenues and expenses directly attributable to managing each segment. Intersegment sales from refining to retail are made at prevailing market rates. Income taxes, interest and financing costs, interest income, other income, corporate depreciation and corporate general and administrative expenses are excluded from segment operating income. Identifiable assets are those assets utilized by the segment. Corporate assets are principally cash and other assets that are not associated with a specific operating segment. Segment information is as follows (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues | ||||||||||||||||
Refining: | ||||||||||||||||
Refined products | $ | 8,380 | $ | 5,390 | $ | 14,581 | $ | 9,069 | ||||||||
Crude oil resales and other (a) | 270 | 121 | 501 | 274 | ||||||||||||
Retail: | ||||||||||||||||
Fuel (b) | 1,241 | 690 | 2,260 | 918 | ||||||||||||
Merchandise and other | 64 | 56 | 122 | 88 | ||||||||||||
Intersegment Sales from Refining to Retail | (1,201 | ) | (653 | ) | (2,179 | ) | (869 | ) | ||||||||
Total Revenues | $ | 8,754 | $ | 5,604 | $ | 15,285 | $ | 9,480 | ||||||||
Segment Operating Income (Loss) | ||||||||||||||||
Refining | $ | 85 | $ | 791 | $ | (2 | ) | $ | 1,047 | |||||||
Retail (c) | (11 | ) | — | (39 | ) | (11 | ) | |||||||||
Total Segment Operating Income (Loss) | 74 | 791 | (41 | ) | 1,036 | |||||||||||
Corporate and Unallocated Costs | (47 | ) | (62 | ) | (90 | ) | (119 | ) | ||||||||
Operating Income (Loss) | 27 | 729 | (131 | ) | 917 | |||||||||||
Interest and Financing Costs | (34 | ) | (30 | ) | (61 | ) | (47 | ) | ||||||||
Interest Income | 1 | 11 | 3 | 25 | ||||||||||||
Other Income (d) | 4 | — | 49 | — | ||||||||||||
Earnings (Loss) Before Income Taxes | $ | (2 | ) | $ | 710 | $ | (140 | ) | $ | 895 | ||||||
Depreciation and Amortization | ||||||||||||||||
Refining | $ | 83 | $ | 79 | $ | 156 | $ | 141 | ||||||||
Retail | 10 | 7 | 22 | 11 | ||||||||||||
Corporate | 6 | 3 | 11 | 6 | ||||||||||||
Total Depreciation and Amortization | $ | 99 | $ | 89 | $ | 189 | $ | 158 | ||||||||
Capital Expenditures | ||||||||||||||||
Refining | $ | 123 | $ | 176 | $ | 288 | $ | 307 | ||||||||
Retail | 5 | 1 | 6 | 2 | ||||||||||||
Corporate | 8 | 12 | 17 | 20 | ||||||||||||
Total Capital Expenditures | $ | 136 | $ | 189 | $ | 311 | $ | 329 | ||||||||
15
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Identifiable Assets | ||||||||
Refining | $ | 8,557 | $ | 7,068 | ||||
Retail | 783 | 771 | ||||||
Corporate | 300 | 289 | ||||||
Total Assets | $ | 9,640 | $ | 8,128 | ||||
(a) | To balance or optimize our refinery supply requirements, we sometimes sell crude oil that we purchase under our supply contracts. | |
(b) | Federal excise and state motor fuel taxes on sales by our retail segment are included in revenues and costs of sales. These taxes totaled $71 million and $56 million for the three months ended June 30, 2008 and 2007, respectively, and $146 million and $80 million for the six months ended June 30, 2008 and 2007, respectively. | |
(c) | Retail operating loss for the six months ended June 30, 2008 includes impairment charges of $11 million related to certain retail stations. | |
(d) | During the three months ended June 30, 2008, we were awarded a net refund of $4 million from TAPS for prior year’s refinery transportation and distribution costs associated with our protest of intrastate rates between 2001 and 2003. During the first quarter of 2008, we received a net refund from TAPS of $45 million associated with our protest of intrastate pipeline rates between 1997 and 2000. See Note G for further information. |
NOTE K— NEW ACCOUNTING STANDARDS
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The standard establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels: level 1 — quoted prices in active markets for identical assets and liabilities; level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities; and level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157.” The FSP delays the effective date of SFAS No. 157 for Tesoro until January 1, 2009 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis. We have not adopted the standard’s provisions applicable to nonfinancial assets and nonfinancial liabilities, and we are currently evaluating the impact, if any, these provisions will have on our financial position and results of operations.
16
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The standard’s provisions for financial assets and financial liabilities which became effective as of January 1, 2008 had no material impact on our financial position or results of operations. At June 30, 2008, our only financial assets and financial liabilities that are measured at fair value on a recurring basis are our derivative instruments. Our derivative instruments measured at fair value by the three levels described above are as follows (in millions):
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
June 30, | Assets | Inputs | Inputs | |||||||||||||
2008 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Derivatives | $ | 24 | $ | 21 | $ | 3 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives | $ | (43 | ) | $ | (39 | ) | $ | (4 | ) | $ | — |
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to measure many financial instruments and certain other items at fair value at specified election dates that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings at each subsequent reporting date. The provisions of SFAS No. 159 were effective for Tesoro as of January 1, 2008. We elected not to adopt the fair value option under this standard.
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which requires that the assets acquired and liabilities assumed in a business combination be recorded at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items, including: (i) expensing acquisition related costs as incurred; (ii) valuing noncontrolling interests at fair value at the acquisition date; and (iii) expensing restructuring costs associated with an acquired business. The provisions of SFAS No. 141(R) will be applied prospectively to business combinations occurring on or after January 1, 2009.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities.” This standard changes the annual and interim disclosure requirements for derivative instruments and hedging activities. An entity with derivative instruments is required to disclose how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedge items affect an entity’s financial position, financial performance and cash flows. The standard is effective beginning January 1, 2009. The adoption of the standard will not have an impact on our financial position or results of operations.
17
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE L— CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In the filing of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, which was originally filed with the SEC on August 6, 2008, we have modified the required disclosure under SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. We have restated our financial statement footnotes to modify the information presented below.
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 and 61/2% senior notes due 2017. All guarantees are joint and several. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information. The following condensed consolidating financial information should be read in conjunction with the accompanying 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 Tesoro’s 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 Tesoro’s outstanding senior notes. The accounts for all companies reflected herein are presented using the equity method of accounting for investments in subsidiaries.
18
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of June 30, 2008
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 24 | $ | — | $ | $ | 24 | |||||||||||
Receivables, less allowance for doubtful accounts | 9 | 2,167 | 501 | — | 2,677 | |||||||||||||||
Inventories | — | 1,071 | 12 | — | 1,083 | |||||||||||||||
Prepayments and other | 70 | 84 | — | — | 154 | |||||||||||||||
Total Current Assets | 79 | 3,346 | 513 | — | 3,938 | |||||||||||||||
Net Property, Plant and Equipment | — | 4,818 | 131 | — | 4,949 | |||||||||||||||
Investment in Subsidiaries | 3,777 | (29 | ) | (1 | ) | (3,747 | ) | — | ||||||||||||
Long-Term Receivables from Affiliates | 1,581 | — | 145 | (1,726 | ) | — | ||||||||||||||
Other Noncurrent Assets | 42 | 711 | — | — | 753 | |||||||||||||||
Total Assets | $ | 5,479 | $ | 8,846 | $ | 788 | $ | (5,473 | ) | $ | 9,640 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 78 | $ | 3,259 | $ | 679 | $ | — | $ | 4,016 | ||||||||||
Current maturities of debt | — | 3 | — | — | 3 | |||||||||||||||
Total Current Liabilities | 78 | 3,262 | 679 | — | 4,019 | |||||||||||||||
Long-Term Payables to Affiliates | — | 1,726 | — | (1,726 | ) | — | ||||||||||||||
Debt | 1,760 | 23 | — | — | 1,783 | |||||||||||||||
Other Noncurrent Liabilities | 672 | 196 | 1 | — | 869 | |||||||||||||||
Stockholders’ Equity | 2,969 | 3,639 | 108 | (3,747 | ) | 2,969 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 5,479 | $ | 8,846 | $ | 788 | $ | (5,473 | ) | $ | 9,640 | |||||||||
19
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of December 31, 2007
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 23 | $ | — | $ | — | $ | 23 | ||||||||||
Receivables, less allowance for doubtful accounts | 1 | 1,157 | 85 | — | 1,243 | |||||||||||||||
Inventories | — | 1,102 | 98 | — | 1,200 | |||||||||||||||
Prepayments and other | 46 | 88 | — | — | 134 | |||||||||||||||
Total Current Assets | 47 | 2,370 | 183 | — | 2,600 | |||||||||||||||
Net Property, Plant and Equipment | — | 4,652 | 128 | — | 4,780 | |||||||||||||||
Investment in Subsidiaries | 3,854 | (1 | ) | — | (3,853 | ) | — | |||||||||||||
Long-Term Receivables from Affiliates | 1,527 | — | 62 | (1,589 | ) | — | ||||||||||||||
Other Noncurrent Assets | 44 | 703 | 1 | — | 748 | |||||||||||||||
Total Assets | $ | 5,472 | $ | 7,724 | $ | 374 | $ | (5,442 | ) | $ | 8,128 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 54 | $ | 2,178 | $ | 260 | $ | — | $ | 2,492 | ||||||||||
Current maturities of debt | — | 2 | — | — | 2 | |||||||||||||||
Total Current Liabilities | 54 | 2,180 | 260 | — | 2,494 | |||||||||||||||
Long-Term Payables to Affiliates | — | 1,589 | — | (1,589 | ) | — | ||||||||||||||
Debt | 1,632 | 25 | — | — | 1,657 | |||||||||||||||
Other Noncurrent Liabilities | 734 | 189 | 2 | — | 925 | |||||||||||||||
Stockholders’ Equity | 3,052 | 3,741 | 112 | (3,853 | ) | 3,052 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 5,472 | $ | 7,724 | $ | 374 | $ | (5,442 | ) | $ | 8,128 | |||||||||
20
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 June 30, 2008
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES | $ | — | $ | 10,549 | $ | 1,305 | $ | (3,100 | ) | $ | 8,754 | |||||||||
Costs and expenses | 1 | 10,525 | 1,301 | (3,100 | ) | 8,727 | ||||||||||||||
OPERATING INCOME (LOSS) | (1 | ) | 24 | 4 | — | 27 | ||||||||||||||
Equity in earnings (loss) of subsidiaries | 5 | (8 | ) | (1 | ) | 4 | — | |||||||||||||
Other income (expense) | — | (24 | ) | (5 | ) | — | (29 | ) | ||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | 4 | (8 | ) | (2 | ) | 4 | (2 | ) | ||||||||||||
Income tax provision (benefit) (1) | — | (6 | ) | — | — | (6 | ) | |||||||||||||
NET EARNINGS (LOSS) | $ | 4 | $ | (2 | ) | $ | (2 | ) | $ | 4 | $ | 4 | ||||||||
(1) | The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. |
21
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 June 30, 2007
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES | $ | — | $ | 6,345 | $ | 568 | $ | (1,309 | ) | $ | 5,604 | |||||||||
Costs and expenses | 2 | 5,604 | 578 | (1,309 | ) | 4,875 | ||||||||||||||
OPERATING INCOME (LOSS) | (2 | ) | 741 | (10 | ) | — | 729 | |||||||||||||
Equity in earnings of subsidiaries | 445 | 3 | — | (448 | ) | — | ||||||||||||||
Other income (expense) | — | (18 | ) | (1 | ) | — | (19 | ) | ||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | 443 | 726 | (11 | ) | (448 | ) | 710 | |||||||||||||
Income tax provision (benefit) (1) | — | 271 | (4 | ) | — | 267 | ||||||||||||||
NET EARNINGS (LOSS) | $ | 443 | $ | 455 | $ | (7 | ) | $ | (448 | ) | $ | 443 | ||||||||
(1) | The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. |
22
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2008
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES | $ | — | $ | 17,741 | $ | 2,192 | $ | (4,648 | ) | $ | 15,285 | |||||||||
Costs and expenses | 1 | 17,875 | 2,188 | (4,648 | ) | 15,416 | ||||||||||||||
OPERATING INCOME (LOSS) | (1 | ) | (134 | ) | 4 | — | (131 | ) | ||||||||||||
Equity in earnings (loss) of subsidiaries | (77 | ) | (28 | ) | (1 | ) | 106 | — | ||||||||||||
Other income (expense) | — | (1 | ) | (8 | ) | — | (9 | ) | ||||||||||||
LOSS BEFORE INCOME TAXES | (78 | ) | (163 | ) | (5 | ) | 106 | (140 | ) | |||||||||||
Income tax benefit (1) | — | (61 | ) | (1 | ) | — | (62 | ) | ||||||||||||
NET (LOSS) | $ | (78 | ) | $ | (102 | ) | $ | (4 | ) | $ | 106 | $ | (78 | ) | ||||||
(1) | The income tax benefit reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. |
23
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2007
(In millions)
(In millions)
Non- | ||||||||||||||||||||
Tesoro | Guarantor | Guarantor | ||||||||||||||||||
Corporation | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
REVENUES | $ | — | $ | 10,686 | $ | 981 | $ | (2,187 | ) | $ | 9,480 | |||||||||
Costs and expenses | 5 | 9,759 | 986 | (2,187 | ) | 8,563 | ||||||||||||||
OPERATING INCOME (LOSS) | (5 | ) | 927 | (5 | ) | — | 917 | |||||||||||||
Equity in earnings of subsidiaries | 563 | 4 | — | (567 | ) | — | ||||||||||||||
Other income (expense) | — | (21 | ) | (1 | ) | — | (22 | ) | ||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | 558 | 910 | (6 | ) | (567 | ) | 895 | |||||||||||||
Income tax provision (benefit) (1) | (1 | ) | 339 | (2 | ) | — | 336 | |||||||||||||
NET EARNINGS (LOSS) | $ | 559 | $ | 571 | $ | (4 | ) | $ | (567 | ) | $ | 559 | ||||||||
(1) | The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. |
24
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2008
(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 | $ | (12 | ) | $ | 213 | $ | 77 | $ | — | $ | 278 | |||||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES | ||||||||||||||||||||
Capital expenditures | — | (370 | ) | (6 | ) | — | (376 | ) | ||||||||||||
Intercompany notes, net | (82 | ) | — | — | 82 | — | ||||||||||||||
Other | — | 6 | — | — | 6 | |||||||||||||||
Net cash used in investing activities | (82 | ) | (364 | ) | (6 | ) | 82 | (370 | ) | |||||||||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | ||||||||||||||||||||
Net borrowings under revolver | 125 | — | — | — | 125 | |||||||||||||||
Repurchase of common stock | (3 | ) | — | — | — | (3 | ) | |||||||||||||
Dividend payments | (27 | ) | — | — | — | (27 | ) | |||||||||||||
Repayments of debt | — | (1 | ) | — | — | (1 | ) | |||||||||||||
Net intercompany borrowings (repayments) | — | 153 | (71 | ) | (82 | ) | — | |||||||||||||
Financing costs and other | (1 | ) | — | — | — | (1 | ) | |||||||||||||
Net cash from (used in) financing activities | 94 | 152 | (71 | ) | (82 | ) | 93 | |||||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | — | 1 | — | — | 1 | |||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | — | 23 | — | — | 23 | |||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | — | $ | 24 | $ | — | $ | — | $ | 24 | ||||||||||
25
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2007
(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 | ) | $ | 821 | $ | 62 | $ | — | $ | 881 | |||||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES | ||||||||||||||||||||
Capital expenditures | — | (311 | ) | (3 | ) | — | (314 | ) | ||||||||||||
Acquisitions | (1,816 | ) | (285 | ) | — | — | (2,101 | ) | ||||||||||||
Intercompany notes, net | 1,115 | — | — | (1,115 | ) | — | ||||||||||||||
Proceeds from asset sales | — | 2 | — | — | 2 | |||||||||||||||
Net cash used in investing activities | (701 | ) | (594 | ) | (3 | ) | (1,115 | ) | (2,413 | ) | ||||||||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | ||||||||||||||||||||
Proceeds from debt offerings, net of issuance costs of $5 | 495 | — | — | — | 495 | |||||||||||||||
Net borrowings under revolver | 250 | — | — | — | 250 | |||||||||||||||
Borrowings under term loan | 700 | — | — | — | 700 | |||||||||||||||
Debt Refinanced | (500 | ) | — | — | — | (500 | ) | |||||||||||||
Repurchase of common stock | (3 | ) | — | — | — | (3 | ) | |||||||||||||
Dividend payments | (20 | ) | — | — | — | (20 | ) | |||||||||||||
Repayments of debt | (215 | ) | (1 | ) | — | — | (216 | ) | ||||||||||||
Proceeds from stock options exercised | 8 | — | — | — | 8 | |||||||||||||||
Excess tax benefits from stock-based compensation arrangements | — | 13 | — | — | 13 | |||||||||||||||
Net intercompany borrowings (repayments) | — | (1,057 | ) | (58 | ) | 1,115 | — | |||||||||||||
Financing costs and other | (12 | ) | — | — | — | (12 | ) | |||||||||||||
Net cash from (used in) financing activities | 703 | (1,045 | ) | (58 | ) | 1,115 | 715 | |||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | — | (818 | ) | 1 | — | (817 | ) | |||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | — | 985 | 1 | — | 986 | |||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | — | $ | 167 | $ | 2 | $ | — | $ | 169 | ||||||||||
26
ITEM 6. EXHIBITS
(a) Exhibits
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. |
27
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 October 22, 2008 | /s/ BRUCE A. SMITH | |||
Bruce A. Smith | ||||
Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) | ||||
Date: October 22, 2008 | /s/ OTTO C. SCHWETHELM | |||
Otto C. Schwethelm | ||||
SVP, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||
28
EXHIBIT INDEX
Exhibit | ||
Number | ||
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. |
29