UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ........... TO ...........
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-0862768
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218
(Address of Principal Executive Offices) (Zip Code)
210-828-8484
(Registrant's Telephone Number, Including Area Code)
=============================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No _____
=============================
There were 26,789,655 shares of the Registrant's Common Stock outstanding at
April 30, 1997.
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations - Three Months
Ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Three Months
Ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1997 1996<F1>
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . $ 31,363 22,796
Receivables, less allowance for doubtful
accounts of $1,499 ($1,515 at
December 31, 1996). . . . . . . . . . . . . . . . 84,480 128,013
Inventories:
Crude oil and wholesale refined products,
at LIFO. . . . . . . . . . . . . . . . . . . . . 58,423 55,858
Merchandise and other refined products. . . . . . 14,045 13,539
Materials and supplies. . . . . . . . . . . . . . 5,109 5,091
Prepayments and other . . . . . . . . . . . . . . . 8,329 12,046
------- -------
Total Current Assets. . . . . . . . . . . . . . . 201,749 237,343
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Refining and marketing. . . . . . . . . . . . . . . 331,401 328,522
Exploration and production:
Oil and gas (full cost method of accounting). . . 202,794 191,777
Gas transportation. . . . . . . . . . . . . . . . 6,703 6,703
Marine services . . . . . . . . . . . . . . . . . . 35,645 33,820
Corporate . . . . . . . . . . . . . . . . . . . . . 12,639 12,531
------- -------
589,182 573,353
Less accumulated depreciation, depletion and
amortization. . . . . . . . . . . . . . . . . . 268,471 256,842
------- -------
Net Property, Plant and Equipment . . . . . . 320,711 316,511
------- -------
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . 29,511 28,733
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . $ 551,971 582,587
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . $ 54,639 80,747
Accrued liabilities . . . . . . . . . . . . . . . . 30,556 33,256
Current income taxes payable. . . . . . . . . . . . 1,597 13,822
Current portion of long-term debt and other
obligations . . . . . . . . . . . . . . . . . . . 10,241 10,043
------- -------
Total Current Liabilities . . . . . . . . . . . 97,033 137,868
------- -------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . 20,577 19,151
------- -------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 44,884 42,243
------- ------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS
CURRENT PORTION . . . . . . . . . . . . . . . . . . 79,063 79,260
------- -------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Common Stock, par value $.16-2/3; authorized
50,000 shares; 26,439 shares issued and
outstanding (26,414 in 1996). . . . . . . . . . . 4,406 4,402
Additional paid-in capital. . . . . . . . . . . . . 189,582 189,368
Retained earnings . . . . . . . . . . . . . . . . . 116,426 110,295
------- -------
Total Stockholders' Equity. . . . . . . . . . . . 310,414 304,065
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $ 551,971 582,587
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<FN>
<F1> The balance sheet at December 31, 1996 has been taken from the audited
consolidated financial statements at that date and condensed.
3
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
REVENUES:
Refining and marketing . . . . . . . . . . . . . . . $ 174,400 187,779
Exploration and production . . . . . . . . . . . . . 23,358 27,521
Marine services. . . . . . . . . . . . . . . . . . . 35,495 23,282
Other income . . . . . . . . . . . . . . . . . . . . 1,599 5,005
------- -------
Total Revenues. . . . . . . . . . . . . . . . . . . 234,852 243,587
------- -------
OPERATING COSTS AND EXPENSES:
Refining and marketing . . . . . . . . . . . . . . . 171,154 187,257
Exploration and production . . . . . . . . . . . . . 2,845 3,406
Marine services. . . . . . . . . . . . . . . . . . . 34,216 22,481
Depreciation, depletion and amortization . . . . . . 11,597 9,767
------- -------
Total Operating Costs and Expenses. . . . . . . . . 219,812 222,911
------- -------
OPERATING PROFIT. . . . . . . . . . . . . . . . . . . 15,040 20,676
General and Administrative. . . . . . . . . . . . . . (3,038) (2,971)
Interest Expense. . . . . . . . . . . . . . . . . . . (1,570) (3,945)
Interest Income . . . . . . . . . . . . . . . . . . . 434 409
Other Expense, Net. . . . . . . . . . . . . . . . . . (1,291) (5,432)
------- -------
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . 9,575 8,737
Income Tax Provision. . . . . . . . . . . . . . . . . 3,444 2,767
------- -------
NET EARNINGS. . . . . . . . . . . . . . . . . . . . . $ 6,131 5,970
======= =======
NET EARNINGS PER SHARE. . . . . . . . . . . . . . . . $ .23 .23
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES. . . . . . . . . . . . . . . . . . 26,829 25,674
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . $ 6,131 5,970
Adjustments to reconcile net earnings to net
cash from operating activities:
Depreciation, depletion and amortization . . . . 11,747 9,979
Amortization of deferred charges and other . . . 51 404
Changes in operating assets and liabilities:
Receivable from Tennessee Gas Pipeline Company - (6,521)
Receivables, other trade . . . . . . . . . . . 43,533 (8,929)
Inventories. . . . . . . . . . . . . . . . . . (3,089) 16,582
Other assets . . . . . . . . . . . . . . . . . 3,487 297
Accounts payable and other current liabilities (40,741) (1,396)
Obligation payments to State of Alaska . . . . (1,064) (940)
Deferred income taxes. . . . . . . . . . . . . 1,426 1,919
Other liabilities and obligations. . . . . . . 2,276 669
------- -------
Net cash from operating activities . . . . . 23,757 18,034
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (16,300) (14,249)
Acquisition of Coastwide Energy Services, Inc.. . . - (7,720)
Other . . . . . . . . . . . . . . . . . . . . . . . (479) (2,042)
------- -------
Net cash used in investing activities. . . . (16,779) (24,011)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Borrowings, net of repayments of $1,000 in 1997
and $4,200 in 1996, under revolving credit
facilities . . . . . . . . . . . . . . . . . . . . 2,182 -
Payments of long-term debt. . . . . . . . . . . . . (764) (1,004)
Other . . . . . . . . . . . . . . . . . . . . . . . 171 16
------- -------
Net cash from (used in) financing activities 1,589 (988)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . 8,567 (6,965)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . 22,796 13,941
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 31,363 6,976
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . $ 1,010 2,988
======= =======
Income taxes paid . . . . . . . . . . . . . . . . . $ 14,245 835
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Tesoro Petroleum
Corporation and its subsidiaries (collectively, the "Company" or "Tesoro") have
been prepared by management without audit pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, the
accompanying financial statements reflect all adjustments that, in the opinion
of management, are necessary for a fair presentation of results for the periods
presented. Such adjustments are of a normal recurring nature. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
The preparation of these condensed consolidated financial statements required
the use of management's best estimates and judgment that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from
those estimates. The results of operations for any interim period are not
necessarily indicative of results for the full year. Certain reclassifications
have been made to amounts previously reported for the interim period of 1996 to
conform to the current presentation of financial information.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which change frequently, regulate the discharge of
materials into the environment and may require the Company to remove or mitigate
the environmental effects of the disposal or release of petroleum or chemical
substances at various sites or install additional controls or other
modifications or changes in use for certain emission sources. The Company is
currently involved with a waste disposal site near Abbeville, Louisiana, at
which it has been named a potentially responsible party under the Federal
Superfund law. Although this law might impose joint and several liability upon
each party at the site, the extent of the Company's allocated financial
contributions to the cleanup of the site is expected to be limited based upon
the number of companies, volumes of waste involved and an estimated total cost
of approximately $500,000 among all of the parties to close the site. The
Company is currently involved in settlement discussions with the Environmental
Protection Agency ("EPA") and other potentially responsible parties at the
Abbeville, Louisiana site. The Company expects, based on these discussions,
that its liability will not exceed $25,000. The Company is also involved in
remedial responses and has incurred cleanup expenditures associated with
environmental matters at a number of sites, including certain of its own
properties.
At March 31, 1997, the Company's accruals for environmental expenses amounted to
$8.8 million, which included a noncurrent liability of approximately $3.3
million for remediation of Kenai Pipe Line Company's ("KPL") properties that has
been funded by the former owners of KPL through a restricted escrow deposit.
Based on currently available information, including the participation of other
parties or former owners in remediation actions, the Company believes these
accruals are adequate. In addition, to comply with environmental laws and
regulations, the Company anticipates that it will make capital improvements of
approximately $6 million in 1997 and $3 million in 1998. The Company also
expects to spend approximately $6 million by the year 2002 for secondary
containment systems for existing storage tanks in Alaska.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refinery, retail gasoline
outlets (current and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act. The amount of such future expenditures cannot
currently be determined by the Company.
6
NOTE 3 - STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
On May 7, 1997, the Company's Board of Directors authorized the repurchase of up
to 3 million shares (approximately 11 percent of the current outstanding shares)
of Tesoro Common Stock in a buyback program that will extend through the end of
1998. Under the program, subject to certain conditions, the Company may
repurchase from time to time Tesoro Common Stock in the open market and through
privately negotiated transactions. Purchases will depend on price, market
conditions and other factors and will be made primarily from cash flow. The
repurchased Common Stock will be accounted for as treasury stock and may be used
for employee benefit plan requirements and other corporate purposes. For
further information on the repurchase program and related restrictions, see
"Capital Resources and Liquidity" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 herein.
INCENTIVE COMPENSATION STRATEGY
In June 1996, the Company's Board of Directors unanimously approved a special
incentive compensation strategy in order to encourage a longer-term focus for
all employees to perform at an outstanding level. The strategy provides
eligible employees with incentives to achieve a significant increase in the
market price of the Company's Common Stock. Under the strategy, awards would be
earned only if the market price of the Company's Common Stock reaches an average
price per share of $20 or higher over any 20 consecutive trading days after June
30, 1997 and before December 31, 1998 (the "Performance Target"). In connection
with this strategy, non-executive employees will be able to earn cash bonuses
equal to 25% of their individual payroll amounts for the previous twelve
complete months and certain executives have been granted, from the Company's
Amended and Restated Executive Long-Term Incentive Plan ("Plan"), a total of
340,000 stock options at an exercise price of $11.375 per share, the fair market
value (as defined in the Plan) of a share of the Company's Common Stock on the
date of grant, and 350,000 shares of restricted Common Stock, all of which vest
only upon achieving the Performance Target.
NOTE 4 - ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128, which establishes standards for computing and presenting earnings per
share, is effective for periods ending after December 15, 1997 and requires
restatement of earnings per share data presented in prior periods. Early
adoption is not permitted. The Company believes that the adoption of SFAS No.
128 will not materially impact its earnings per share computations.
7
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
SUMMARY
Net earnings of $6.1 million, or $.23 per share, for the three months ended
March 31, 1997 ("1997 quarter") compare with net earnings of $6.0 million, or
$.23 per share, for the three months ended March 31, 1996 ("1996 quarter").
Comparability between the results for the 1997 and 1996 quarters was impacted by
certain significant items. The 1996 quarter included revenues from sales of
natural gas at above-market prices under a contract with Tennessee Gas Pipeline
Company ("Tennessee Gas") which was terminated effective October 1, 1996.
Results of operations in 1997 and future years will no longer benefit from the
pricing provisions in the contract. In the 1996 quarter, results included $7.9
million pretax from the excess of these contract prices over spot market prices.
The Company's results of operations in the 1996 quarter also included income
related to retroactive severance tax refunds of $5.0 million pretax, compared to
refunds of $1.6 million pretax in the 1997 quarter. Partially offsetting the
benefits in the 1996 quarter were pretax charges of approximately $4 million
primarily related to a shareholder consent solicitation resolved in April 1996,
write-off of deferred financing costs and employee termination costs. Excluding
these significant items, the increase in pretax net earnings in the 1997 quarter
was largely due to higher natural gas spot market prices, better refining and
marketing margins, and improved marine services profitability. Additionally, at
the corporate level, interest expense was reduced by nearly 60% due to
redemptions of the Company's public debt in late 1996.
A discussion and analysis of the factors contributing to these results are
presented below. The Company conducts its operations in the following business
segments: Refining and Marketing, Exploration and Production, and Marine
Services.
8
REFINING AND MARKETING Three Months Ended
March 31,
-------------------
(Dollars in millions except per unit amounts) 1997 1996
---- ----
Gross Operating Revenues:
Refined products . . . . . . . . . . . . . . . . . $ 155.8 146.7
Other, primarily crude oil resales and
merchandise . . . . . . . . . . . . . . . . . . . 18.6 41.0
------ ------
Gross Operating Revenues . . . . . . . . . . . . $ 174.4 187.7
====== ======
Operating Profit (Loss):
Gross margin . . . . . . . . . . . . . . . . . . . $ 24.7 22.4
Operating expenses . . . . . . . . . . . . . . . . 21.5 21.8
Depreciation and amortization. . . . . . . . . . . 3.1 3.0
------ ------
Operating Profit (Loss). . . . . . . . . . . . . $ .1 (2.4)
====== ======
Capital Expenditures . . . . . . . . . . . . . . . . $ 2.9 1.8
====== ======
Refining and Marketing - Total Product Sales
(average daily barrels)<F1>:
Gasoline. . . . . . . . . . . . . . . . . . . . . 16,738 20,022
Middle distillates. . . . . . . . . . . . . . . . 26,253 29,355
Heavy oils and residual product . . . . . . . . . 17,890 17,086
------ ------
Total Product Sales. . . . . . . . . . . . . . . 60,881 66,463
====== ======
Refining and Marketing - Total Product Sales Prices
($/barrel):
Gasoline. . . . . . . . . . . . . . . . . . . . . $ 33.64 27.66
Middle distillates. . . . . . . . . . . . . . . . $ 32.09 25.81
Heavy oils and residual product . . . . . . . . . $ 18.19 17.63
Refining and Marketing - Gross Margins on
Total Product Sales ($/barrel)<F2>:
Average sales price. . . . . . . . . . . . . . . . $ 28.43 24.26
Average costs of sales . . . . . . . . . . . . . . 24.63 21.22
------ ------
Gross margin. . . . . . . . . . . . . . . . . . . $ 3.80 3.04
====== ======
Refinery Throughput
Barrels per day. . . . . . . . . . . . . . . . . . 49,140 45,047
% Alaska North Slope crude oil . . . . . . . . . . 79% 68%
Refined Products Manufactured (average daily
barrels):
Gasoline. . . . . . . . . . . . . . . . . . . . . 12,887 13,714
Middle distillates. . . . . . . . . . . . . . . . 20,829 18,083
Heavy oils and residual product . . . . . . . . . 14,539 12,321
Other . . . . . . . . . . . . . . . . . . . . . . 2,647 2,754
------ ------
Total Refined Products Manufactured. . . . . . . 50,902 46,872
====== ======
Refinery Operations - Product Spread ($/barrel)<F3>:
Average yield value of products manufactured . . . $ 25.44 21.81
Cost of raw materials. . . . . . . . . . . . . . . 20.54 17.92
------ ------
Refinery Product Spread . . . . . . . . . . . . . 4.90 3.89
Operating costs. . . . . . . . . . . . . . . . . . 2.81 2.90
Depreciation . . . . . . . . . . . . . . . . . . . .55 .57
------ ------
Net Refinery Margin . . . . . . . . . . . . . . . $ 1.54 .42
====== ======
Non-Refinery Margin, included in operating profit
above ($ millions)<F4> . . . . . . . . . . . . . . $ 3.1 6.5
====== ======
<FN>
<F1> Sources of total products sales include products manufactured at the
refinery, products drawn from inventory balances and products purchased
from third parties. The Company's purchases of refined products for resale
were approximately 11,500 and 11,000 average daily barrels for the three
months ended March 31, 1997 and 1996, respectively.
<F2> Margins on sales of purchased products, together with the effect of changes
in inventories, are included in the gross margin on total product sales.
<F3> Refinery product spread represents the excess of yield value of the
products manufactured at the refinery over the cost of raw materials used
to manufacture such products.
<F4> Includes intrasegment transportation revenues of $2.8 million for both
quarters presented.
9
REFINING AND MARKETING
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Results from the Company's Refining and Marketing segment improved during
the 1997 quarter with operating profit of $.1 million, compared with an
operating loss of $2.4 million in the 1996 quarter. Generally, results from
this segment are weak in the first quarter due to low, seasonal demand for
gasoline during the winter months in Alaska. However, during the 1997 quarter
the Company benefited from several operating improvements made during 1996,
primarily the use of an improved catalyst in the hydrocracker unit. The
improved catalyst provides for increased production of jet fuel, for which
Alaska is in short supply, and reduced production of lower valued gasoline.
Production of middle distillates, including jet fuel, increased by 15% to 20,829
barrels per day in the 1997 quarter from 18,083 barrels per day in the 1996
quarter, while gasoline production declined by 6%. Results for the 1997 quarter
also reflected improvements in the Company's retail marketing activities.
Gasoline sales in Alaska increased by 2.4 million gallons in the 1997 quarter,
as compared to the 1996 quarter.
The Company was able to achieve a refinery product spread of $4.90 per barrel in
the 1997 quarter, a 26% improvement from the $3.89 per barrel spread in the 1996
quarter. The Company's refined product yield values increased by 17% to $25.44
per barrel in the 1997 quarter from $21.81 per barrel in the 1996 quarter, while
the Company's feedstock costs increased by 15% to $20.54 per barrel in the 1997
quarter from $17.92 per barrel in the 1996 quarter. To further increase jet
fuel production, the Company intends to modify the refinery hydrocracker during
1997, at an estimated cost of $17 million. In conjunction with the modification
and other initiatives, a refinery downtime of approximately 30 days is
anticipated during 1997. The Company is also expanding its Alaskan retail
operations with the construction of new outlets and remodeling of existing
outlets.
Revenues from sales of refined products in the Company's Refining and Marketing
segment increased due primarily to higher sales prices, which rose 17% to $28.43
per barrel in the 1997 quarter from $24.26 per barrel in the 1996 quarter.
Partially offsetting this increase were reduced sales volumes which averaged
60,881 barrels per day in the 1997 quarter, compared to 66,463 barrels per day
in the 1996 quarter. This decrease in sales volumes was primarily due to the
discontinuance of certain West Coast operations. The Company at times resells
previously purchased crude oil, sales of which decreased to $10.7 million in the
1997 quarter compared to $34.5 million in the 1996 quarter. During the 1997
quarter, the Company had less crude oil available for resale as refinery
throughput averaged 4,093 barrels per day more than in the 1996 quarter and no
spot purchases of crude oil were made. Costs of sales decreased in the 1997
quarter due to lower volumes, partially offset by higher prices for crude oil
and refined products.
Results from the Company's Refining and Marketing segment for the 1997 quarter
improved over the prior year quarter due primarily to operating efficiencies and
marketing initiatives implemented by the Company during the past year and, in
part, by overall improvement in market conditions. Future profitability of this
segment will continue to be influenced by market conditions, particularly as
these conditions influence costs of crude oil relative to prices received for
sales of refined products, and other additional factors that are beyond the
control of the Company.
10
EXPLORATION AND PRODUCTION Three Months Ended
March 31,
-------------------
(Dollars in millions except per unit amounts) 1997 1996
---- ----
U.S. OIL AND GAS:
Gross operating revenues. . . . . . . . . . . . . $ 20.1 23.1
Other income - retroactive severance tax
refunds . . . . . . . . . . . . . . . . . . . . 1.6 5.0
Production costs. . . . . . . . . . . . . . . . . 1.7 1.4
Administrative support and other operating
expenses . . . . . . . . . . . . . . . . . . . . .4 1.0
Depreciation, depletion and amortization. . . . . 7.8 6.3
------ ------
Operating Profit - U.S. Oil and Gas<F1> . . . . 11.8 19.4
------ ------
U.S. GAS TRANSPORTATION:
Gross operating revenues . . . . . . . . . . . . . 1.4 1.4
Operating expenses . . . . . . . . . . . . . . . . .1 .1
Depreciation and amortization. . . . . . . . . . . .1 .1
------ ------
Operating Profit - U.S. Gas Transportation. . . 1.2 1.2
------ ------
BOLIVIA:
Gross operating revenues . . . . . . . . . . . . . 1.9 3.1
Production costs . . . . . . . . . . . . . . . . . .2 .2
Administrative support and other operating
expenses. . . . . . . . . . . . . . . . . . . . . .5 .7
Depreciation, depletion and amortization . . . . . .2 .3
------ ------
Operating Profit - Bolivia. . . . . . . . . . . 1.0 1.9
------ ------
TOTAL OPERATING PROFIT - EXPLORATION AND
PRODUCTION. . . . . . . . . . . . . . . . . . . . . $ 14.0 22.5
====== ======
U.S.:
Capital expenditures . . . . . . . . . . . . . . . $ 7.0 9.5
====== ======
Net natural gas production (average daily Mcf) -
Spot market and other. . . . . . . . . . . . . . 94,103 79,642
Tennessee Gas Contract<F1> . . . . . . . . . . . - 14,452
------ ------
Total production. . . . . . . . . . . . . . . 94,103 94,094
====== ======
Average natural gas sales prices ($/Mcf) -
Spot market<F2>. . . . . . . . . . . . . . . . . $ 2.34 1.70
Tennessee Gas Contract<F1> . . . . . . . . . . . $ - 8.17
Average. . . . . . . . . . . . . . . . . . . . $ 2.34 2.69
Average operating expenses ($/Mcfe) -
Lease operating expenses . . . . . . . . . . . . $ .16 .13
Severance taxes. . . . . . . . . . . . . . . . . .04 .03
------ ------
Total production costs . . . . . . . . . . . . .20 .16
Administrative support . . . . . . . . . . . . . .05 .12
------ ------
Total operating expenses . . . . . . . . . . . $ .25 .28
====== ======
Depletion ($/Mcfe) . . . . . . . . . . . . . . . . $ .91 .73
====== ======
BOLIVIA:
Capital expenditures . . . . . . . . . . . . . . . $ 4.0 2.1
Net natural gas production (average daily Mcf) . . 10,999 19,058
Average natural gas sales price ($/Mcf). . . . . . $ 1.32 1.32
Net condensate production (average daily barrels) 316 550
Average condensate price ($/barrel) . . . . . . . $ 19.28 15.72
Average operating expenses ($/Mcfe) -
Production costs . . . . . . . . . . . . . . . . $ .16 .10
Value-added taxes . . . . . . . . . . . . . . . . - .07
Administrative support . . . . . . . . . . . . . .41 .30
------ ------
Total operating expenses . . . . . . . . . . . $ .57 .47
====== ======
Depletion ($/Mcfe) . . . . . . . . . . . . . . . . $ .15 .13
====== ======
<FN>
<F1> Results for the three months ended March 31, 1996 included revenues from
above-market pricing provisions of a contract with Tennessee Gas which was
terminated effective October 1, 1996. Operating profit for the 1996
quarter included $7.9 million for the excess of these contract prices over
spot market prices.
<F2> Includes effects of the Company's natural gas price arrangements which
amounted to losses of $.19 per Mcf and $.08 per Mcf for the three months
ended March 31, 1997 and 1996, respectively.
<F3> Mcf is defined as one thousand cubic feet; Mcfe is defined as net
equivalent one thousand cubic feet.
11
U. S. OIL AND GAS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Operating profit of $11.8 million from the Company's U.S. oil and gas
operations in the 1997 quarter compares to operating profit of $19.4 million in
the 1996 quarter. Comparability between these quarters was impacted by certain
significant items. The 1996 quarter included revenues from the sale of natural
gas at above-market prices under a contract with Tennessee Gas, which was
terminated effective October 1, 1996. Results of operations in 1997 and future
years will no longer benefit from the pricing provisions of this contract. In
the 1996 quarter, Exploration and Production's operating profit included $7.9
million from the excess of these contract prices over spot market prices.
Operating profit also included income related to retroactive severance tax
refunds, which amounted to $5.0 million in the 1996 quarter and $1.6 million in
the 1997 quarter. Excluding the incremental value of the Tennessee Gas contract
and retroactive severance tax refunds, operating profit from the Company's U.S.
oil and gas operations would have been $10.2 million in the 1997 quarter
compared to $6.5 million in the 1996 quarter. The resulting increase of $3.7
million was primarily due to higher spot market prices for sales of natural gas,
as industry demand increased due to unusually cold weather combined with
below-normal storage levels.
Prices realized by the Company on its spot market natural gas production
increased 38% to $2.34 per Mcf in the 1997 quarter from $1.70 per Mcf in the
1996 quarter. On a weighted-average basis, the Company's natural gas sales
price was $2.69 per Mcf in the 1996 quarter due to sales under the Tennessee Gas
contract. The Company's natural gas production averaged 94.1 Mmcf per day in
both the 1997 and 1996 quarters.
Gross operating revenues from the Company's U.S. oil and gas operations, after
excluding amounts related to Tennessee Gas, increased due to the higher spot
market prices. Production costs increased by $.3 million in the 1997 quarter
due to higher lease operating expenses, while administrative and other operating
expenses were reduced by $.6 million. Depreciation and depletion increased by
$1.5 million, or 24%, due to a higher depletion rate.
From time to time, the Company enters into commodity price agreements to reduce
the risk caused by fluctuation in the prices of natural gas in the spot market.
In addition, the Company has entered into price agreements with collars, under
which no payments will be made by either party unless the price falls below a
designated floor price or above a designated ceiling price, at which time the
Company receives or pays the difference, respectively. During the 1997 and 1996
quarters, the Company used such agreements to set the price of 34% and 42%,
respectively, of the natural gas production that it sold in the spot market.
The Company recognized a loss of $1.6 million ($.19 per Mcf) and $.6 million
($.08 per Mcf) in the 1997 and 1996 quarters, respectively, related to these
price agreements. As of March 31, 1997, the Company has no remaining price
agreements for 1997.
Bolivia
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Operating profit from the Company's Bolivian operations decreased to $1.0
million in the 1997 quarter, from $1.9 million in the 1996 quarter, as
production of natural gas and condensate fell by 42%. During the 1997 quarter,
the Company's Bolivian natural gas production was reduced due to curtailment by
the Bolivian government to balance over-production requested by the government
during 1996. Production of natural gas was also reduced due to constraints
arising from repairs to a flood-damaged pipeline that transports gas from
Bolivia to Argentina. A temporary replacement pipeline is now operational,
which has essentially restored full capacity until a permanent line can be
constructed in the second half of 1997. Partially offsetting the decrease in
production in the 1997 quarter was a 23% rise in condensate sales prices. Total
operating costs and depreciation, depletion and amortization declined in
aggregate, but increased on a per unit basis due to the lower production
volumes.
In 1996, a new Hydrocarbons Law was passed by the Bolivian government that
significantly impacts the Company's operations in Bolivia. The new law, among
other matters, granted the Company the option to convert its Contracts of
Operation to new Shared Risk Contracts. During 1996, the Company signed
agreements to convert its Contracts of Operation to Shared Risk Contracts
subject to recision at the option of the Company if the Company is not satisfied
with modifications to the Bolivian fiscal law. The Company expects to complete
this conversion during the third quarter of 1997. The new contracts extend the
Company's term of operation, provide more favorable acreage relinquishment terms
and provide for a more favorable fiscal regime of royalties and taxes. The new
contracts will extend the term of the Company's operations for Block 18 ten
additional years to the year 2017. For Block 20, the new contract extends the
Company's term 21 additional years to the year 2029 for acreage that is in the
exploration phase of the contract, and 10 additional years to the year 2018 for
an area
12
within Block 20 that is designated as being in the development phase of the new
contract. The new contract provisions, along with a substantial discovery
during 1996, significantly increased the Company's reserves at year-end 1996.
The Company's Bolivian natural gas production is sold to Yacimientos
Petroliferos Fiscales Bolivianos ("YPFB"), which in turn sells the natural gas
to Yacimientos Petroliferos Fiscales, SA ("YPF"), a publicly-held company based
in Argentina. Currently, the Company is selling its natural gas production to
YPFB based on the volume and pricing terms in the contract between YPFB and YPF.
The contract to sell gas to YPF expired March 31, 1997 and a contract extension
was signed effective April 1, 1997 extending the contract term two years to
March 31, 1999 with an option to extend the contract a maximum of one year if
the pipeline from Bolivia to Brazil is not complete. In the contract extension,
YPF negotiated an 11% reduction in the minimum contract volume it is required to
import from Bolivia, which in turn resulted in a corresponding 11% reduction of
Tesoro's minimum contract volume. The pipeline from Bolivia to Brazil is
scheduled to begin construction in the second half of 1997, with first gas
deliveries expected in 1999.
MARINE SERVICES Three Months Ended
March 31,
-------------------
(Dollars in millions) 1997 1996
---- ----
Gross Operating Revenues:
Fuels. . . . . . . . . . . . . . . . . . . . . . . $ 28.2 18.9
Lubricants and other . . . . . . . . . . . . . . . 3.7 2.5
Services . . . . . . . . . . . . . . . . . . . . . 3.6 1.9
------ ------
Gross Operating Revenues . . . . . . . . . . . . 35.5 23.3
Costs of Goods Sold. . . . . . . . . . . . . . . . . 27.3 18.6
------ ------
Gross Profit . . . . . . . . . . . . . . . . . . . 8.2 4.7
Operating and Other Expenses . . . . . . . . . . . . 6.9 4.0
Depreciation and Amortization. . . . . . . . . . . . .4 .1
------ ------
Operating Profit . . . . . . . . . . . . . . . . . $ .9 .6
====== ======
Capital Expenditures . . . . . . . . . . . . . . . . $ 2.2 .7
====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel. . . . . . . . . . . . . . 39.6 30.4
Lubricants . . . . . . . . . . . . . . . . . . . . .7 .5
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. On February 20, 1996, the Company acquired Coastwide Energy Services,
Inc. ("Coastwide") and combined these operations with the Company's marine
petroleum products distribution business. Operating results from Coastwide have
been included in the Company's Marine Services segment since the date of
acquisition. Accordingly, results for the 1997 quarter included three full
months of Coastwide activities compared to the 1996 quarter which included only
a portion of Coastwide's activities.
Revenues from fuels and lubricants increased $10.5 million, or 49%, in the 1997
quarter, mainly due to added locations and associated volumes stemming from the
Coastwide acquisition together with internal growth initiatives. In addition,
higher market prices for fuel increased total revenues. Service revenues
increased by $1.7 million due to the expanded activity related to the Coastwide
acquisition. Costs of goods sold during the 1997 quarter increased due to the
higher volumes and prices and also included a $.7 million loss associated with
an inventory valuation as market prices declined from year-end levels. The
improved gross profit of $8.2 million in the 1997 quarter was partially offset
by higher operating and other expenses associated with the increased activity.
Depreciation and amortization increased during the 1997 quarter due to capital
additions made in 1996.
The Marine Services segment's business is largely dependent upon the volume of
oil and gas drilling, workover, construction and seismic activity in the Gulf of
Mexico.
INTEREST EXPENSE
Interest expense of $1.6 million for the 1997 quarter compares with $3.9 million
in the 1996 quarter. In November 1996, the Company redeemed $74.1 million of
public debt resulting in interest expense savings of $2.5 million in the 1997
quarter.
13
OTHER EXPENSE, NET
Other expense of $1.3 million in the 1997 quarter compares with $5.4 million in
the 1996 quarter. Included in other expense in the prior year quarter were
shareholder consent solicitation costs of $2.3 million which was resolved in
April 1996 together with a write-off of deferred financing costs and employee
termination costs. There were no material comparable costs recorded in the 1997
quarter.
INCOME TAXES
Income taxes of $3.5 million in the 1997 quarter compare with $2.8 million in
the 1996 quarter. This increase, primarily in Federal income taxes, was due to
a higher effective tax rate in the 1997 quarter as available net operating
losses were fully utilized in 1996. Foreign income taxes were lower due to
reduced revenues from the Company's Bolivian operations, partially offset by
higher Bolivian tax rates resulting from changes in the Hydrocarbons Law.
IMPACT OF CHANGING PRICES
The Company's operating results and cash flows are sensitive to the volatile
changes in energy prices. Major shifts in the cost of crude oil used for
refinery feedstocks and the price of refined products can result in a change in
margin from the refining and marketing operations, as prices received for
refined products may or may not keep pace with changes in crude oil costs.
These energy prices, together with volume levels, also determine the carrying
value of crude oil and refined product inventory. The Company uses the last-in,
first-out ("LIFO") method of accounting for inventories of crude oil and U.S.
wholesale refined products. This method results in inventory carrying amounts
that are less likely to represent current values and in costs of sales which
more closely represent current costs.
Likewise, changes in natural gas prices impact revenues and the present value of
estimated future net revenues and cash flows from the Company's exploration and
production operations. The Company may increase or decrease its natural gas
production in response to market conditions. The carrying value of oil and
natural gas assets may be subject to noncash writedowns based on changes in
natural gas prices and other determining factors.
Changes in natural gas prices also influence the level of drilling activity in
the Gulf of Mexico. The Company's marine services operation, whose customers
include offshore drilling contractors and related industries, could be impacted
by significant fluctuations in natural gas prices.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash and cash equivalents,
internal cash generation and external financing. Accomplishments in 1996,
including the resolution of litigation with Tennessee Gas and termination of the
remainder of the Tennessee Gas Contract combined with redemptions of public
debt, have strengthened the Company's financial condition and improved its
ability to access capital markets.
The Company has developed strategic plans to make operational improvements and
continues to assess its existing asset base in order to maximize returns and
develop full value through strategic diversification and acquisitions in all of
its operating segments. This ongoing assessment includes, in the Exploration
and Production segment, evaluating ways in which the Company could diversify its
oil and gas reserve base and offset the impact of declining production through
domestic development, exploration and acquisition outside of the Bob West Field.
In the Refining and Marketing segment, the Company has been engaged in studies
to improve profitability and has also evaluated possible joint ventures,
strategic alliances or business combinations; such evaluations have not resulted
in any transaction but operating strategies have been developed to optimize the
product and feedstock slates, improve efficiencies and reliability, and expand
marketing to increase placement of products in Alaska. The Company continues to
evaluate its Marine Services segment, pursuing opportunities for expansion as
well as optimizing existing operations.
The Company operates in an environment where its liquidity and capital resources
are impacted by changes in the supply of and demand for crude oil, natural gas
and refined petroleum products, market uncertainty and a variety
14
of additional risks that are beyond the control of the Company. These risks
include, among others, the level of consumer product demand, weather conditions,
the proximity of the Company's natural gas reserves to pipelines, the capacities
of such pipelines, fluctuations in seasonal demand, governmental regulations,
the price and availability of alternative fuels and overall market and economic
conditions. The Company's future capital expenditures as well as borrowings
under its credit facility and other sources of capital will be affected by these
conditions.
STOCK REPURCHASE PROGRAM
On May 7, 1997, the Company's Board of Directors authorized the repurchase of up
to 3 million shares (approximately 11 percent of the current outstanding shares)
of Tesoro Common Stock in a buyback program that will extend through the end of
1998. Under the program, subject to certain conditions, the Company may
repurchase from time to time Tesoro Common Stock in the open market and through
privately negotiated transactions. Purchases will depend on price, market
conditions and other factors and will be made primarily from cash flow. The
repurchased Common Stock will be accounted for as treasury stock and may be used
for employee benefit plan requirements and other corporate purposes.
Repurchases of Common Stock are subject to the restricted payments provision of
the Credit Facility as described below.
CREDIT ARRANGEMENTS
The Company has financing and credit arrangements with a consortium of nine
banks under a corporate revolving credit agreement ("Credit Facility") which
provides total commitments of $150 million. The Credit Facility, which extends
through April 2000, provides for cash borrowings up to $100 million and issuance
of letters of credit, subject to a borrowing base (which was approximately $128
million at March 31, 1997). The Company, at its option, has currently activated
total commitments of $100 million. Outstanding obligations under the Credit
Facility are secured by liens on substantially all of the Company's trade
accounts receivable and product inventory and by mortgages on the Company's
refinery and South Texas natural gas reserves. Under the terms of the Credit
Facility, the Company is required to maintain specified levels of consolidated
working capital, tangible net worth, cash flow and interest coverage. Among
other matters, the Credit Facility contains covenants which limit the incurrence
of additional indebtedness and restricted payments. At March 31, 1997, the
Company had outstanding letters of credit of $45 million with no cash borrowings
outstanding. Cash borrowings made under the Credit Facility were minimal during
the 1997 quarter.
The terms of the Credit Facility allow for the payment of cash dividends and
open market stock repurchases subject to a cumulative amount available for
restricted payments (defined as the difference of (i) the sum since December 31,
1995, of (a) $5 million and (b) 50% of consolidated net earnings of the Company
in any calendar year and (ii) any restricted payments made since June 1996). At
March 31, 1997, the cumulative amount available for restricted payments was
approximately $45 million. Annually, however, the aggregate of cash dividends
and other restricted payments cannot exceed a maximum of $5 million. In
addition, the Credit Facility permits the Company to repurchase a limited amount
of Common Stock up to $5 million annually, specifically for oddlot buyback
programs and employee benefit plans. While the Board of Directors has no
present plans to pay dividends, from time to time the Board of Directors
reevaluates the feasibility of declaring future dividends.
In addition to the Credit Facility, a subsidiary of the Company has a three-year
line of credit with a bank which provides up to $10 million for the purchase of
real estate and equipment for the Company's Marine Services segment at the
bank's prime rate. The loan facility is not guaranteed by the Company and is
secured only by such real estate and equipment that are financed. Beginning in
March 1998, credit availability is reduced quarterly by 6.667%. At March 31,
1997, $ 3.1 million was outstanding under the loan facility.
To further enhance its financial flexibility, the Company is pursuing separate
financing for the modification of its refinery hydrocracker in Kenai, Alaska.
The Company is negotiating for interim construction financing and a seven-year
term loan for the lesser of 90% of the project costs, or $16.2 million, at a
rate less than prime. The Company anticipates that this financing, which is
subject to final approval by the lenders, will be completed during the third
quarter of 1997.
CAPITAL SPENDING
For the year 1997, the Company has a total capital budget of approximately $156
million, including $54 million for potential acquisitions. The Company expects
to finance its non-acquisition capital expenditures primarily with available
cash reserves and internally-generated cash flows from operations. In addition,
the Company is
15
pursuing outside financing, as discussed above, for the modification to the
refinery hydrocracker. Acquisitions, if consummated, are anticipated to be
funded primarily with external borrowings under the Company's Credit Facility.
For the three months ended March 31, 1997, capital spending totaled $16 million,
which was financed by the Company's cash flows from operations.
The Exploration and Production segment accounts for $76 million of the budget
with $68 million planned for U.S. activities and $8 million in Bolivia. Planned
U.S. expenditures include $30 million for property acquisitions; $19 million for
development drilling (participation in 19 wells) and workovers; $9 million for
leasehold, geological and geophysical; and $10 million for exploratory drilling
(participation in 15 wells). In Bolivia, the drilling program is budgeted at $2
million for one exploratory well, with the remainder planned for
three-dimensional seismic activity. For the first three months of 1997, actual
U.S. expenditures were $7 million, principally for participation in the drilling
of four development wells (one completed) and six exploratory wells (three
completed). In Bolivia, capital spending for the first three months of 1997
totaled $4 million, primarily for exploratory drilling and workovers. Although
the Company continues to pursue exploratory, development and acquisition
opportunities, actual capital expenditures for the remainder of the year may
vary from budget due to a number of factors, including the timing of drilling
projects and the extent to which proved properties are acquired.
Capital spending for the Refining and Marketing segment is projected to be $50
million for the year, of which $3 million was spent during the first three
months of 1997. The capital budget for the year includes $17 million for
modification and expansion of the refinery hydrocracker to improve the product
slate and $20 million towards a three-year capital program to build new retail
outlets and remodel existing stations.
In the Marine Services segment, capital spending for 1997 is budgeted at $29
million, of which $2 million was spent during the first three months of 1997.
The capital budget for the year is primarily directed towards expansion of its
operations along the Gulf of Mexico and potential acquisitions.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING
Components of the Company's cash flows are set forth below (in millions):
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Cash Flows From (Used In):
Operating Activities . . . . . . . . . . . . . . . $ 23.8 18.0
Investing Activities . . . . . . . . . . . . . . . (16.8) (24.0)
Financing Activities . . . . . . . . . . . . . . . 1.6 (1.0)
------ ------
Increase (Decrease) in Cash and Cash Equivalents . . $ 8.6 (7.0)
====== ======
Net cash from operating activities of $24 million during the 1997 quarter, which
compares to $18 million during the 1996 quarter, included improved profitability
plus noncash items, such as depreciation, depletion and amortization.
Additionally, receivables decreased due in part to collections related to the
higher sales volumes at year-end but were partially offset by income tax and
other payments. Net cash used in investing activities of $17 million during the
1997 quarter included capital expenditures of $11 million for the Company's
exploration and production activities, $3 million for refining and marketing
operations and $2 million for marine services. Net cash from financing
activities of $2 million during the 1997 quarter was primarily due to borrowings
under a loan facility for the marine services sector partially offset by
payments of other long-term debt. At March 31, 1997, the Company's net working
capital totaled $105 million, which included cash and cash equivalents of $31
million.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which change frequently, regulate the discharge of
materials into the environment and may require the Company to remove or mitigate
the environmental effects of the disposal or release of petroleum or chemical
substances at various sites or install additional controls or other
modifications or changes in use for certain emission sources. The Company is
currently involved in remedial responses and has incurred cleanup expenditures
associated with environmental matters at a number of sites, including certain of
its own properties. At March 31, 1997, the Company's accruals for environmental
expenses amounted to $8.8 million, which included a noncurrent liability of $3.3
million for remediation of Kenai Pipe Line Company's ("KPL") properties that has
been funded by the
16
former owners of KPL through a restricted escrow deposit. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
In addition, to comply with environmental laws and regulations, the Company
anticipates that it will make capital improvements of approximately $6 million
in 1997 and $3 million in 1998. The Company also expects to spend approximately
$6 million by the year 2002 for secondary containment systems for existing
storage tanks in Alaska.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refinery, retail gasoline
outlets (current and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act. The amount of such future expenditures cannot
currently be determined by the Company. For further information on
environmental contingencies, see Note 2 of Notes to Condensed Consolidated
Financial Statements.
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q, including those contained in
the foregoing discussion and other items herein, concerning the Company which
are (a) projections of revenues, earnings, earnings per share, capital
expenditures or other financial items, (b) statements of plans and objectives
for future operations, (c) statements of future economic performance, or (d)
statements of assumptions or estimates underlying or supporting the foregoing
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The ultimate accuracy of forward-looking statements is subject to a wide range
of business risks and changes in circumstances, and actual results and outcomes
often differ from expectations. Any number of important factors could cause
actual results to differ materially from those in the forward-looking statements
herein, including the following: the timing and extent of changes in commodity
prices and underlying demand and availability of crude oil and other refinery
feedstocks, refined products, and natural gas; actions of our customers and
competitors; changes in the cost or availability of third-party vessels,
pipelines and other means of transporting feedstocks and products; state and
federal environmental, economic, safety and other policies and regulations, any
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; execution of planned capital projects; weather conditions
affecting the Company's operations or the areas in which the Company's products
are marketed; future well performance; the extent of Tesoro's success in
acquiring oil and gas properties and in discovering, developing and producing
reserves; political developments in foreign countries, the conditions of the
capital markets and equity markets during the periods covered by the
forward-looking statements; earthquakes or other natural disasters affecting
operations; adverse rulings, judgments, or settlements in litigation or other
legal matters, including unexpected environmental remediation costs in excess of
any reserves; and adverse changes in the credit ratings assigned to the
Company's trade credit. For more information with respect to the foregoing, see
the Company's Annual Report on Form 10-K. The Company undertakes no obligation
to publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index immediately preceding the exhibits filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: May 15, 1997 /s/ BRUCE A. SMITH
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 15, 1997 /s/ DON E. BEERE
Don E. Beere
Vice President, Controller
(Chief Accounting Officer)
19
EXHIBIT INDEX
Exhibit
Number
10 Copy of the Company's Board of Directors Deferred Phantom Stock Plan.
27 Financial Data Schedule.
20