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 SEPTEMBER 30, 1998
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 32,333,116 shares of the registrant's Common Stock outstanding at
October 31, 1998.
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations - Three Months
and Nine Months Ended September 30, 1998 and 1997. . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Nine Months
Ended September 30, 1998 and 1997. . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . . 28
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1998 1997<F1>
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 3,454 $ 8,352
Receivables, less allowance for doubtful accounts of $1,613
($1,373 at December 31, 1997). . . . . . . . . . . . . . . . . . 167,582 76,282
Inventories:
Crude oil and wholesale refined products, at LIFO. . . . . . . . 184,368 68,227
Merchandise and other refined products . . . . . . . . . . . . . 21,832 13,377
Materials and supplies . . . . . . . . . . . . . . . . . . . . . 18,896 5,755
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . 9,193 9,842
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 405,325 181,835
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing. . . . . . . . . . . . . . . . . . . . . . 835,166 370,174
Exploration and production (full-cost method of accounting) . . . 394,538 291,411
Marine services . . . . . . . . . . . . . . . . . . . . . . . . . 49,862 43,072
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,922 13,689
---------- ----------
1,297,488 718,346
Less accumulated depreciation, depletion and amortization. . . . 352,345 304,523
---------- ----------
Net Property, Plant and Equipment. . . . . . . . . . . . . . . . 945,143 413,823
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,233 32,150
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,481,701 $ 627,808
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 156,527 $ 58,767
Accrued liabilities and current income taxes payable. . . . . . . 91,742 31,726
Current maturities of long-term debt and other obligations. . . . 6,386 17,002
---------- ----------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . 254,655 107,495
---------- ----------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . 79,388 28,824
---------- ----------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 62,781 43,211
---------- ----------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS
CURRENT MATURITIES . . . . . . . . . . . . . . . . . . . . . . . 483,245 115,314
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes E and F)
STOCKHOLDERS' EQUITY
Preferred Stock, no par value; authorized 5,000,000 shares:
7.25% Mandatorily Convertible Preferred Stock,
103,500 shares issued and outstanding. . . . . . . . . . . . . . 164,953 -
Common stock, par value $0.16-2/3; authorized 100,000,000 shares
(50,000,000 in 1997); 32,653,138 shares issued
(26,506,601 in 1997) . . . . . . . . . . . . . . . . . . . . . 5,442 4,418
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 278,594 190,925
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 158,052 140,980
Treasury stock, 320,022 common shares (216,453 in 1997), at cost (5,409) (3,359)
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . 601,632 332,964
---------- ----------
Total Liabilities and Stockholders' Equity. . . . . . . . . . . $ 1,481,701 $ 627,808
========== ==========
<FN>
<F1> The balance sheet at December 31, 1997 has been taken from the audited
consolidated financial statements at that date and condensed.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Refining and marketing. . . . . . . . . . . . . . . . . . . $ 424,776 $ 198,815 $ 772,495 $ 534,986
Exploration and production. . . . . . . . . . . . . . . . . 19,374 19,821 63,130 61,769
Marine services . . . . . . . . . . . . . . . . . . . . . . 28,392 32,433 90,367 98,266
Other income. . . . . . . . . . . . . . . . . . . . . . . . 192 403 21,610 4,609
-------- -------- -------- --------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . 472,734 251,472 947,602 699,630
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Refining and marketing. . . . . . . . . . . . . . . . . . . 397,672 188,014 711,119 508,926
Exploration and production. . . . . . . . . . . . . . . . . 3,833 3,054 11,248 8,836
Marine services . . . . . . . . . . . . . . . . . . . . . . 24,821 29,691 82,292 93,406
Depreciation, depletion and amortization. . . . . . . . . . 17,885 11,357 45,683 34,183
-------- -------- -------- --------
Total Segment Operating Costs and Expenses . . . . . . . . 444,211 232,116 850,342 645,351
-------- -------- -------- --------
SEGMENT OPERATING PROFIT . . . . . . . . . . . . . . . . . . 28,523 19,356 97,260 54,279
Other Operating Costs and Expenses . . . . . . . . . . . . . - - (7,934) -
General and Administrative . . . . . . . . . . . . . . . . . (4,465) (3,416) (11,689) (9,599)
Interest and Financing Costs, Net of Capitalized Interest. . (10,884) (1,893) (20,681) (5,819)
Interest Income. . . . . . . . . . . . . . . . . . . . . . . 1,532 135 1,945 1,459
Other Expense, Net . . . . . . . . . . . . . . . . . . . . . (813) (821) (15,079) (2,280)
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . 13,893 13,361 43,822 38,040
Income Tax Provision . . . . . . . . . . . . . . . . . . . . 6,126 5,382 19,119 14,292
-------- -------- -------- --------
EARNINGS BEFORE EXTRAORDINARY ITEM . . . . . . . . . . . . . 7,767 7,979 24,703 23,748
Extraordinary Loss on Extinguishment of Debt, Net of
Income Tax Benefit of $2,401 in 1998. . . . . . . . . . . . - - (4,641) -
-------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . 7,767 7,979 20,062 23,748
Preferred Dividend Requirements. . . . . . . . . . . . . . . 2,990 - 2,990 -
-------- -------- -------- --------
NET EARNINGS APPLICABLE TO COMMON. . . . . . . . . . . . . . $ 4,777 $ 7,979 $ 17,072 $ 23,748
======== ======== ======== ========
NET EARNINGS PER SHARE - BASIC . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90
======== ======== ======== ========
NET EARNINGS PER SHARE - DILUTED . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES - BASIC . . . . . . . . . . . 32,331 26,439 28,394 26,431
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND POTENTIALLY
DILUTIVE COMMON SHARES - DILUTED. . . . . . . . . . . . . . 32,876 26,938 28,955 26,857
======== ======== ======== ========
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)
Nine Months Ended
September 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,062 $ 23,748
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation, depletion and amortization. . . . . . . . . . . . . . . . . . 46,355 34,643
Extraordinary loss on extinguishment of debt, net of income tax benefit . . 4,641 -
Amortization of goodwill, deferred charges and other. . . . . . . . . . . . 2,718 652
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,725) 45,882
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,090) 358
Accounts payable and other current liabilities . . . . . . . . . . . . . . 70,407 (38,557)
Obligation payments to State of Alaska . . . . . . . . . . . . . . . . . . (3,008) (3,406)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,199 5,401
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,200 2,350
---------- ----------
Net cash from operating activities. . . . . . . . . . . . . . . . . . . 98,759 71,071
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,316) (95,082)
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (527,916) -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (204) (3,155)
---------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (659,436) (98,237)
---------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings under revolving credit facilities, net of repayments. . . . . . . (24,111) 15,828
Borrowings under term loans, net of repayments . . . . . . . . . . . . . . . 150,000 -
Proceeds from equity and debt offerings, net . . . . . . . . . . . . . . . . 532,765 -
Refinancing and repayments of debt and obligations . . . . . . . . . . . . . (92,185) (3,287)
Financing costs and other. . . . . . . . . . . . . . . . . . . . . . . . . . (10,690) (792)
---------- ----------
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . 555,779 11,749
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . (4,898) (15,417)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 8,352 22,796
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 3,454 $ 7,379
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of $56 capitalized in 1998 and $313 capitalized in 1997 . $ 9,779 $ 1,654
========== ==========
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,490 $ 20,764
========== ==========
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 A - BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of
Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company"
or "Tesoro") have been prepared by management without audit pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, the accompanying financial statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature.
Certain information and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
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.
Earnings per share have been restated for prior periods to conform with the
requirements of Statement of Financial Accounting Standard ("SFAS") No. 128
which established standards for computing and presenting basic and diluted
earnings per share calculations. In addition, certain reclassifications have
been made to information previously reported to conform to current
presentations.
NOTE B - ACQUISITIONS
Refining and Marketing
On May 29, 1998, the Company completed the acquisition (the "Hawaii
Acquisition") of all of the outstanding capital stock of BHP Petroleum Americas
Refining Inc. and BHP Petroleum South Pacific Inc. (together, "BHP Hawaii") from
BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc. ("BHP Sellers"),
affiliates of The Broken Hill Proprietary Company Limited ("BHP"). The Hawaii
Acquisition included a 95,000-barrel per day refinery (the "Hawaii Refinery")
and 32 retail gasoline stations located in Hawaii. In addition, Tesoro and a
BHP affiliate entered into a two-year crude supply agreement pursuant to which
the BHP affiliate will assist Tesoro in acquiring crude oil feedstock sourced
outside of North America and arrange for the transportation of such crude oil to
the Hawaii Refinery. Tesoro paid $252.2 million in cash for the Hawaii
Acquisition, including $77.2 million for net working capital. In addition,
Tesoro issued an unsecured, non-interest bearing, promissory note ("BHP Note")
for the purchase in the amount of $50 million, payable in five equal annual
installments of $10 million each, beginning in 2009. The BHP Note provides for
early payment to the extent of one-half of the amount by which earnings from the
acquired assets, before interest expense, income taxes and depreciation and
amortization, as specified in the BHP Note, exceed $50 million in any calendar
year.
On August 10, 1998, the Company completed the acquisition (the "Washington
Acquisition" and together with the Hawaii Acquisition, the "Acquisitions") of
all of the outstanding stock of Shell Anacortes Refining Company ("Shell
Washington"), an affiliate of Shell Oil Company ("Shell"). The Washington
Acquisition included an 108,000-barrel per day refinery (the "Washington
Refinery") in Anacortes, Washington and related assets. The total cash purchase
price for the Washington Acquisition was $237 million plus $39.6 million for
estimated working capital, which is subject to post-closing adjustments.
The Acquisitions were accounted for as purchases whereby the purchase prices
were allocated to the assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The accompanying
financial statements reflect preliminary allocations of the purchase prices, as
the purchase price allocations have not been finalized. The Company is awaiting
certain financial information regarding assets acquired and liabilities assumed,
including final appraisals on property acquired and valuations on certain
assumed liabilities. Included in the preliminary allocation of the Hawaii
Acquisition was an estimated $14.6 million present value of the BHP Note.
6
The effects of accelerated payments under the BHP Note, if required, would be
accounted for as additional costs of the acquired assets and amortized over the
remaining life of the assets.
Under purchase accounting, financial results of BHP Hawaii and Shell Washington
have been included in Tesoro's consolidated financial statements since the date
of acquisition. Had these results been included in Tesoro's results since
January 1, 1997, and the Refinancing and Offerings completed (as defined in Note
C below), Tesoro's consolidated results for the nine months ended September 30,
1998 on a pro forma basis would have reflected revenues of approximately $1.7
billion, earnings before extraordinary item of $26 million ($0.54 per basic and
$0.53 per diluted share after preferred dividends) and net earnings of $22
million ($0.40 per basic and $0.39 per diluted share after preferred dividends).
Tesoro's consolidated results for the nine months ended September 30, 1997, on a
pro forma basis would have reflected revenues of approximately $2.2 billion and
net earnings of $28 million ($0.59 per basic and diluted share after preferred
dividends).
Exploration and Production
In August 1998, the Company purchased a 50% working interest in the Stiles Ranch
Field, which included 11,400 gross acres (5,750 net) located in Wheeler County
in the Texas Panhandle that are adjacent to 9,900 gross acres (3,750 net)
acquired earlier in the year. The acquisition price included $8 million in cash
plus the conveyance of a 25% working interest in an undeveloped prospect owned
by the Company in South Texas.
In September 1998, the Company purchased oil and gas assets for $10.4 million,
which included a 25% to 50% working interest in eight producing wells and 37,500
gross (11,800 net) undeveloped acres in the Morrow gas play located in Wheeler
County in the Texas Panhandle. Also included in the transaction were 14,400
gross (6,200 net) undeveloped acres in prospective areas of the onshore Texas
Gulf Coast.
Also in 1998, the Company acquired additional interests in 43,300 gross acres
(29,400 net) for $4.2 million, located primarily in the onshore Gulf Coast of
Texas and in Wheeler County in the Texas Panhandle.
NOTE C - LONG-TERM DEBT AND EQUITY
Interim Credit Facility and Senior Credit Facility
In conjunction with closing the Hawaii Acquisition (see Note B), on May 29,
1998, Tesoro refinanced substantially all of its then-existing indebtedness (the
"Refinancing"). The Company recorded an extraordinary loss on early
extinguishment of debt of approximately $7.0 million pretax ($4.6 million
aftertax, or $0.17 per basic and diluted share) for the Refinancing during the
second quarter of 1998.
The total amount of funds required by Tesoro to complete the Hawaii Acquisition
and the Refinancing, to pay related fees and expenses and for general corporate
purposes was approximately $432 million, which was financed through a secured
credit facility (the "Interim Credit Facility") provided by Lehman Commercial
Paper Inc. ("LCPI"), an affiliate of Lehman Brothers Inc. The Interim Credit
Facility replaced the Company's previous corporate revolving credit agreement.
In the third quarter of 1998, the Company refinanced all borrowings under the
Interim Credit Facility with net proceeds from the Offerings (as defined below)
and borrowings under the Senior Credit Facility (as defined below).
On July 2, 1998, and in connection with the Notes Offering (defined below) and
the Washington Acquisition, the Company entered into a senior credit facility
(the "Senior Credit Facility") with a group of lenders led by LCPI in the amount
of $500 million. The Senior Credit Facility is comprised of term loan
facilities aggregating $200 million (two $100 million tranches, the "Tranche A
Term Loans" and the "Tranche B Term Loan") and a $300 million revolving credit
facility (the "Revolver"). In addition, the Company may borrow up to $50
million under the Tranche A Term Loans, in up to five draws, for a period of up
to six months following July 2, 1998. The Senior Credit Facility is guaranteed
by substantially all of the Company's active direct and indirect subsidiaries
(the "Guarantors") and is secured by substantially all of the domestic assets of
the Company and each of the Guarantors. The Senior Credit Facility requires the
Company to maintain specified levels of consolidated leverage and interest
coverage and contains other covenants and restrictions customary in credit
arrangements of this kind. The terms of the Senior
7
Credit Facility allow for payment of cash dividends on the Company's Common
Stock not to exceed an aggregate of $10 million in any year and also allow for
payment of required dividends on its 7.25% Mandatorily Convertible Preferred
Stock.
The Revolver and the Tranche A Term Loans bear interest, at the Company's
election, at either the Base Rate (as defined in the Senior Credit Facility)
plus a margin ranging from 0.00% to 0.625% or the Eurodollar Rate (as defined in
the Senior Credit Facility) plus a margin ranging from 1.125% to 2.125%. The
Tranche B Term Loan bears interest, at the Company's election, at either the
Base Rate plus a margin ranging from 0.50% to 0.625% or the Eurodollar Rate plus
a margin ranging from 2.00% to 2.125%. Provisions of the Senior Credit Facility
require prepayments to the Tranche A Term Loans and Tranche B Term Loan, with
customary exceptions, in an amount equal to 100% of the net proceeds of certain
incurred indebtedness, 100% of the net proceeds received by the Company and its
subsidiaries (other than certain net proceeds reinvested in the business of the
Company or its subsidiaries) from the disposition of any assets, including
proceeds from the sale of stock of any of the Company's subsidiaries and a
percentage of excess cash flow, depending on certain credit statistics.
In addition to funding the cash consideration of the Acquisitions and
Refinancing, the Senior Credit Facility provides the Company with enhanced
financial flexibility, such as increased working capital capacity and funds for
general corporate purposes.
Equity Offerings
On May 4, 1998, the Company filed a universal shelf registration statement
("Universal Shelf Registration Statement") with the SEC for $600 million of debt
or equity securities for acquisitions or general corporate purposes. The
Universal Shelf Registration Statement was declared effective by the SEC on May
14, 1998. The Company offered Premium Income Equity Securities ("PIES") and
Common Stock (collectively, the "Equity Offerings") from the Universal Shelf
Registration Statement to provide partial funding for the Acquisitions discussed
in Note B. On July 1, 1998, the Company issued 9,000,000 PIES, representing
fractional interests in the Company's 7.25% Mandatorily Convertible Preferred
Stock, with gross proceeds of approximately $143.4 million, and 5,000,000 shares
of Common Stock, with gross proceeds of $79.7 million. Upon exercise of the
over-allotment options granted to the underwriters of the Equity Offerings, on
July 8, 1998, the Company issued 1,350,000 PIES with gross proceeds of $21.5
million and 750,000 shares of Common Stock with gross proceeds of $11.9 million.
Holders of PIES are entitled to receive a cash dividend. The PIES will
automatically convert into shares of Common Stock on July 1, 2001, at a rate
based upon a formula dependent upon the market price of Common Stock. Before
July 1, 2001, each PIES is convertible, at the option of the holder thereof,
into 0.8455 shares of Common Stock, subject to adjustment in certain events.
Notes Offering
On July 2, 1998, concurrently with the syndication of the Senior Credit
Facility, the Company issued $300 million aggregate principal amount of 9%
Senior Subordinated Notes ("Senior Subordinated Notes") due 2008 (the "Notes
Offering", and together with the Equity Offerings, the "Offerings") through a
private offering eligible for Rule 144A. The Senior Subordinated Notes have a
ten-year maturity without sinking fund requirements and are subject to optional
redemption by the Company after five years at declining premiums. The indenture
(the "Indenture") for the Senior Subordinated Notes contains covenants and
restrictions which are customary for notes of this nature. The restrictions
under the Indenture are less restrictive than those in the Senior Credit
Facility. To the extent the Company's fixed charge coverage ratio, as defined
in the Indenture, allows for the incurrence of additional indebtedness, the
Company will be allowed to pay cash dividends on Common Stock.
On August 7, 1998, a Registration Statement was declared effective by the SEC
whereby the Company offered, upon the terms and subject to the conditions set
forth in the related Prospectus, to exchange $1,000 principal amount of its
registered 9% Senior Subordinated Notes due 2008, Series B (the "Exchange
Notes"), for each $1,000 principal amount of its unregistered and outstanding
Senior Subordinated Notes due 2008. The terms of the Exchange Notes are
identical in all material respects to the terms of the Senior Subordinated
Notes, except as described in the Prospectus. The offer to exchange was
completed in September 1998.
8
Borrowings under the Senior Credit Facility, together with the net proceeds from
the Offerings, were used to fund the cash purchase price of the Washington
Acquisition, to refinance the Interim Credit Facility (a portion of which was
used to finance the Hawaii Acquisition), to pay certain fees and expenses
related to these transactions and for general corporate purposes (including
working capital requirements and capital expenditures).
Other
In connection with filing the Universal Shelf Registration Statement in May
1998, the Company's Board of Directors approved terminating the repurchase of
Tesoro's Common Stock under a repurchase program that was initiated in May 1997.
At the 1998 Annual Meeting of Stockholders held on July 29, 1998, the Company's
shareholders approved, among other proposals, to (i) amend the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 50,000,000 to 100,000,000 and (ii)
increase the number of shares which can be granted under the Company's Amended
and Restated Executive Long-Term Incentive Plan from 2,650,000 to 4,250,000.
9
NOTE D - BUSINESS SEGMENTS
The Company has adopted SFAS No. 131 which establishes standards for reporting
information about operating segments in annual financial statements and requires
that selected information be included in interim financial reports. Segment
operating profit includes those revenues and expenses that are directly
attributable to management of the respective segment. For the periods presented
below, revenues were generated from sales to external customers and there were
no intersegment revenues. Segment information for the three months and nine
months ended September 30, 1998 and 1997 is as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Refining and Marketing:
Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $ 424.7 $ 198.8 $ 772.5 $ 535.0
Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 397.7 188.0 711.7 509.0
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 7.9 3.4 15.2 9.7
----- ----- ----- -----
Total Refining and Marketing Segment Operating Profit. . . . . . . . 19.1 7.4 45.6 16.3
----- ----- ----- -----
Exploration and Production:
Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 19.3 19.7 63.1 61.7
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . - - 21.8 4.1
Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 3.6 2.9 11.0 8.7
Depreciation, depletion and amortization. . . . . . . . . . . . . . . 9.3 7.5 28.7 23.2
----- ----- ----- -----
Total Exploration and Production Segment Operating
Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 9.3 45.2 33.9
----- ----- ----- -----
Marine Services:
Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 28.5 32.5 90.4 98.3
Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 24.7 29.4 82.1 93.0
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 0.7 0.4 1.8 1.2
----- ----- ----- -----
Total Marine Services Segment Operating Profit. . . . . . . . 3.1 2.7 6.5 4.1
----- ----- ----- -----
Total Segment Operating Profit . . . . . . . . . . . . . . . . . . . . $ 28.6 $ 19.4 $ 97.3 $ 54.3
===== ===== ===== =====
Total assets for each operating segment are as follows (in millions):
September 30, December 31,
1998 1997
------------- ------------
Refining and Marketing . . . . . . . . . . . . . . . . . . . . . . . $ 1,087.5 $ 337.4
Exploration and Production . . . . . . . . . . . . . . . . . . . . . 284.0 209.0
Marine Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 61.3 59.3
------- -------
Total Segment Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 1,432.8 $ 605.7
======= ======
NOTE E - COMMITMENTS AND CONTINGENCIES
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 with a waste disposal site near Abbeville, Louisiana and the
Casmalia Disposal Site in Santa Barbara County, California. The Company has
been named a potentially responsible party ("PRP") under Federal Superfund law
at both sites. Although this law might impose joint and several liability upon
each party at the sites, the extent of the Company's allocated financial
contributions for cleanup is expected to be de minimis based upon the number of
companies, volumes of waste involved and total estimated costs to close each
site. The Company is currently involved in settlement discussions with the
Environmental Protection Agency ("EPA") and other PRPs
10
pertaining to the Abbeville Site. The Company believes, based on these
discussions, that its liability will not exceed $25,000. The Company believes
that its liability at the Casmalia Site is de minimus based on the EPA's October
14, 1998 notification. 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 current and prior-owned properties.
At September 30, 1998, the Company's accruals for environmental expenses totaled
$11.4 million. Based on currently available information, including the
participation of other parties or former owners in remediation actions, the
Company believes these accruals to be adequate.
In connection with the Hawaii Acquisition discussed in Note B, the BHP Sellers
and the Company have executed a separate environmental agreement, whereby the
BHP Sellers have indemnified the Company for environmental costs arising out of
conditions which existed at or prior to closing. This indemnification is
subject to a maximum limit of $9.5 million and expires after a period of ten
years. Under the environmental agreement, the first $5.0 million of these
liabilities will be the responsibility of the BHP Sellers and the next $6.0
million will be shared on the basis of 75% by the BHP Sellers and 25% by the
Company. Certain environmental claims arising out of prior operations will not
be subject to the $9.5 million limit or the ten-year time limit.
Under the agreement related to the Washington Acquisition discussed in Note B,
Shell Refining Holding Company, a subsidiary of Shell (the "Shell Seller"),
generally has agreed to indemnify the Company for environmental liabilities at
the Washington Refinery arising out of conditions which existed at or prior to
the closing date and identified by the Company prior to August 1, 2001. The
Company is responsible for environmental costs up to the first $0.5 million each
year, after which the Shell Seller will be responsible for annual environmental
costs up to $1.0 million. Annual costs greater than $1.0 million will be shared
on a 50%/50% basis between the Company and the Shell Seller, subject to an
aggregate maximum of $5.0 million and a ten-year term.
In addition to environmental expenses, the Company anticipates it will make
capital improvements totaling approximately $10 million in 1998 and $7 million
in 1999 to comply with environmental laws and regulations affecting its Alaska,
Hawaii, Pacific Northwest and Gulf Coast operations. In addition, capital
expenditures for alternate secondary containment systems for existing storage
tank facilities in Alaska are estimated to be $2 million in 1998 and $2 million
in 1999, with a remaining $ 5 million to be spent by the end of year 2002.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refineries, retail stations
(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 regarding environmental matters, see Legal Proceedings
in Part II, Item 1, included herein.
Other
The Company's results for the nine months ended September 30, 1998 included
receipt totaling approximately $21 million pretax ($14 million aftertax) from an
operator in the Bob West Field, representing funds that are no longer needed as
a contingency reserve for litigation.
On October 1, 1998, the Attorney General for the State of Hawaii filed a lawsuit
in the U.S. District Court for the District of Hawaii against thirteen oil
companies, including Tesoro Petroleum Corporation and Tesoro Hawaii Corporation,
alleging anti-competitive marketing practices in violation of Federal and State
anti-trust laws. The complaint seeks injunctive relief and compensatory and
treble damages and civil penalties against all defendants in an amount in excess
of $500 million. The Company believes that it has not engaged in any
anti-competitive activities and that this proceeding is subject to the indemnity
provision of the Stock Sale Agreement between the BHP Sellers and the Company
which provides for indemnification in excess of $2 million and not to exceed $65
million. The Company will defend this litigation vigorously.
11
NOTE F - LONG-TERM INCENTIVE COMPENSATION
1996 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 provided
eligible employees with incentives to achieve a significant increase in the
market price of the Company's Common Stock. Under the strategy, awards were
earned when the market price of the Company's Common Stock reached an average
price per share of $20 or higher over 20 consecutive trading days after June 30,
1997 and before December 31, 1998 (the "Performance Target"). In connection
with this strategy, non-executive employees earned cash bonuses equal to 25% of
their individual payroll amounts for the previous twelve complete months and
certain executives were granted, from the Company's Amended and Restated
Executive Long-Term Incentive Plan ("Incentive 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 Incentive 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
vested upon achieving the Performance Target.
On May 12, 1998, the Performance Target was achieved which resulted in a pretax
charge of approximately $20 million ($10 million related to the vesting of
restricted stock awards and stock options and $10 million in cash) in the second
quarter of 1998. The pretax charge included approximately $8 million in other
operating costs and expenses and approximately $12 million in other expense. On
an after tax basis, the charge was approximately $13 million, representing
approximately 5% of the total aggregate increase in shareholder value since
approval of the special incentive strategy in 1996.
1998 Performance Incentive Compensation Plan
In October 1998, the Company's Board of Directors unanimously approved the 1998
Performance Incentive Compensation Plan (the "Performance Plan"), which is
intended to advance the best interests of the Company and its stockholders by
directly targeting Company performance to align with the ninetieth percentile
historical stock-price growth rate for the Company's peer group. In addition,
the Performance Plan will provide the Company's employees with additional
compensation, contingent upon achievement of the targeted objectives, thereby
encouraging them to continue in the employ of the Company. Under the
Performance Plan, targeted objectives are comprised of the fair market value of
the Company's Common Stock equaling or exceeding an average of $35 per share
(the "First Performance Target") and $45 per share (the "Second Performance
Target") on any 20 consecutive trading days during a period commencing on
October 1, 1998 and ending on the earlier of September 30, 2002, or the date on
which the Second Performance Target is achieved (the "Performance Period"). The
Performance Plan has several tiers of awards, with the award generally
determined by job level. Most eligible employees have contingent cash bonus
opportunities of 25% of their annual "basic compensation" (as defined in the
Performance Plan) and three executive officers have contingent awards of phantom
stock. Upon achievement of the First Performance Target, one-fourth of the
contingent awards will be earned, with payout deferred until the end of the
Performance Period. The remaining 75% will be earned only upon achievement of
the Second Performance Target, with payout occurring 30 days thereafter.
Employees will need to have at least one year of regular, full-time service at
the time the Performance Period ends in order to be eligible for a payment. The
Company estimates that it will incur aftertax costs of approximately 1% of the
total aggregate increase in shareholder value if the First Performance Target is
reached and will incur an additional 2% aftertax charge if the Second
Performance Target is reached.
NOTE G - EARNINGS PER SHARE
Earnings per share have been calculated in accordance with SFAS No. 128. Basic
earnings per share is determined by dividing net earnings applicable to common
stock by the weighted average number of common shares outstanding during the
period. The Company's calculation of diluted earnings per share takes into
account the effect of potentially dilutive stock options outstanding during the
period. The assumed conversion of preferred stock to common stock for the three
months and nine months ended September 30, 1998 (approximately 8,750,000 and
2,917,000 shares, respectively) produced an anti-dilutive result and, in
accordance with SFAS No. 128, was not included in the dilutive calculation.
Earnings per share calculations for the three months and nine months ended
September 30, 1998 and 1997 are presented below (in millions except per share
amounts):
12
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Basic:
Numerator:
Earnings Before Extraordinary Item . . . . . . . . . . . . $ 7.8 $ 8.0 $ 24.7 $ 23.8
Extraordinary Loss on Extinguishments of Debt, Aftertax. . - - (4.6) -
------ ------ ------ ------
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . 7.8 8.0 20.1 23.8
Less Preferred Dividends . . . . . . . . . . . . . . . . . 3.0 - 3.0 -
------ ------ ------ ------
Net Earnings Applicable To Common. . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8
====== ====== ====== ======
Denominator:
Weighted Average Common Shares Outstanding . . . . . . . . 32.3 26.4 28.4 26.4
====== ====== ====== ======
Basic Earnings Per Share:
Before extraordinary item. . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.77 $ 0.90
Extraordinary loss, aftertax . . . . . . . . . . . . . . . - - (0.17) -
------ ------ ------ ------
Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90
====== ====== ====== ======
Diluted:
Numerator:
Net Earnings Applicable to Common. . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8
Plus Income Impact of Assumed Conversions of
Preferred Stock (only if dilutive) <F1> . . . . . . . . . - - - -
------ ------ ------ ------
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8
====== ====== ====== ======
Denominator:
Weighted Average Common Shares Outstanding . . . . . . . . 32.3 26.4 28.4 26.4
Add Potential Dilutive Securities:
Incremental dilutive shares from assumed conversion
of stock options and other. . . . . . . . . . . . . . . 0.6 0.5 0.6 0.5
Incremental dilutive shares from assumed conversion
of preferred stock <F1> . . . . . . . . . . . . . . . . - - - -
------ ------ ------ ------
Total Diluted Shares . . . . . . . . . . . . . . . . . . . 32.9 26.9 29.0 26.9
====== ====== ====== ======
Diluted Earnings Per Share <F1>:
Before extraordinary item . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.76 $ 0.88
Extraordinary loss, aftertax. . . . . . . . . . . . . . . - - (0.17) -
------ ------ ------ ------
Net . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88
====== ====== ====== ======
<FN>
<F1> Anti-dilutive impact of assumed conversion of preferred stock into common stock is not considered in the calculation.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Those statements in the Management's Discussion and Analysis that are not
historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Forward-Looking Statements" on page 26 for
discussion of the factors which could cause actual results to differ materially
from those projected in such statements.
GENERAL
The Company's strategy is to (i) maximize return on capital employed and
increase the competitiveness of each of its business units by reducing costs,
increasing operating efficiencies and optimizing existing assets and (ii) expand
its overall market presence through a combination of internal growth initiatives
and selective acquisitions which are both accretive to earnings and provide
significant operational synergies. The Company plans to further improve
profitability in the Refining and Marketing segment by enhancing processing
capabilities, strengthening marketing channels and improving supply and
transportation functions. In the Exploration and Production segment, the
strategy includes evaluating ways in which the Company can continue to diversify
its oil and gas reserve base through both acquisitions and the drill bit and
enhanced technical capabilities. The Company has made significant progress in
diversifying its U.S. operations to areas other than the Bob West Field and has
taken steps to begin serving emerging markets in South America. Improved
profitability has positioned the Marine Services segment to participate in the
consolidation of the industry by pursuing opportunities for expansion, as well
as optimizing existing operations.
Tesoro acquired the refining and marketing assets of two subsidiaries of BHP in
May 1998 and acquired a refinery and related assets from a subsidiary of Shell
in August 1998. The Acquisitions are expected to triple Tesoro's historical
annual revenues and significantly increase the scope of its refining and
marketing operations. Tesoro expects that the results of the Acquisitions will
be accretive to earnings and cash flows beginning in 1999. The impact of the
Acquisitions on earnings and cash flows may be neutral in 1998 primarily due to
the mid-year timing of the Acquisitions and a planned maintenance turnaround at
the Hawaii Refinery in the summer of 1998. The Company believes that there are
significant cost saving and revenue enhancement opportunities available by
integrating the Hawaii Refinery and Washington Refinery with its Alaskan
operations and has currently identified $25 million of potential annual cost
saving and revenue enhancing synergies. Management expects to begin to realize
such synergies in the fourth quarter of 1998 with the full annual impact to be
achieved in the fiscal year ending December 31, 1999. The Company will continue
to pursue other opportunities that are operationally and geographically
complementary with its asset base.
The Company operates in an environment where its results and cash flows are
sensitive to 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 in its Refining and
Marketing segment. This method results in inventory carrying amounts that are
less likely to represent current values and in costs of sales which more closely
represent current costs. Similarly, changes in natural gas, condensate and oil
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 gas assets may be subject to
noncash write-downs based on changes in natural gas prices and other determining
factors. Changes in crude oil and 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 crude oil and
natural gas prices. The Company's Marine Services segment uses the first-in,
first-out ("FIFO") method of accounting for inventories of fuels. Changes in
fuel prices can significantly impact inventory valuations and costs of sales in
this segment.
14
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
SUMMARY
Tesoro's net earnings of $7.8 million for the three months ended September 30,
1998 ("1998 Quarter") compare with net earnings of $8.0 million for the three
months ended September 30, 1997 ("1997 Quarter"). Net earnings per share for
the 1998 Quarter were $0.15 (basic and diluted), after preferred dividends,
compared to $0.30 (basic and diluted) in the 1997 Quarter. The Company's net
earnings remained relatively unchanged from quarter to quarter. Higher
downstream profits from the Company's refining and marketing and marine services
operations, together with increased production in its Exploration and Production
segment, were substantially offset by the impact of lower Bolivian natural gas
prices and increased interest and financing costs. On a per share basis, the
Company's net earnings were reduced by dividends on preferred stock and the
impact of issuing additional shares of Common Stock during the quarter.
For the year-to-date period, net earnings of $20.1 million ($0.60 per basic
share, $0.59 per diluted share) for the nine months ended September 30, 1998
("1998 Period") compare with net earnings of $23.8 million ($0.90 per basic
share, $0.88 per diluted share) for the nine months ended September 30, 1997
("1997 Period"). Significant items which affect the comparability between
results for 1998 and 1997 are highlighted in the table below (in millions except
per share amounts):
Three Months Ended Nine Months
September 30, September 30,
------------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Net Earnings as Reported . . . . . . . . . . . . . . . . . . . . $ 7.8 $ 8.0 $ 20.1 $ 23.8
Extraordinary Loss on Debt Extinguishments, Net of Income Tax
Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 4.6 -
------ ------ ------ ------
Earnings Before Extraordinary Item . . . . . . . . . . . . . . . 7.8 8.0 24.7 23.8
------ ------ ------ ------
Significant Items Affecting Comparability, Pretax:
Income from receipt of contingency funds from an operator . . . - - 21.3 -
Charge for special incentive compensation strategy. . . . . . . - - (19.9) -
Income from retroactive severance tax refunds . . . . . . . . . - - - 1.8
Income from collection of Bolivian receivable . . . . . . . . . - - - 2.2
------ ------ ------ ------
Total Significant Items, Pretax. . . . . . . . . . . . . . . . - - 1.4 4.0
Income Tax Effect. . . . . . . . . . . . . . . . . . . . . . . - - 0.5 1.2
------ ------ ------ ------
Total Significant Items, Aftertax. . . . . . . . . . . . . . . - - 0.9 2.8
------ ------ ------ ------
Net Earnings Excluding Significant Items and Extraordinary Item. 7.8 8.0 23.8 21.0
Preferred Dividend Requirements. . . . . . . . . . . . . . . . . 3.0 - 3.0 -
------ ------ ------ ------
Net Earnings Applicable to Common Stock, Excluding
Significant Items and Extraordinary Items . . . . . . . . . . . $ 4.8 $ 8.0 $ 20.8 $ 21.0
====== ====== ====== ======
Earnings Per Share - Basic:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - - (0.17) -
Effect of other significant items . . . . . . . . . . . . . . . - - 0.04 0.11
------ ------ ------ ------
Excluding significant items and extraordinary item. . . . . . . $ 0.15 $ 0.30 $ 0.73 $ 0.79
====== ====== ====== ======
Earnings Per Share - Diluted:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - - (0.17) -
Effect of other significant items . . . . . . . . . . . . . . . - - 0.04 0.10
------ ------ ------ ------
Excluding significant items and extraordinary item. . . . . . . $ 0.15 $ 0.30 $ 0.72 $ 0.78
====== ====== ====== ======
For the year-to-date periods, excluding significant items, net earnings would
have been $20.8 million ($0.73 per basic share, $0.72 per diluted share) for the
1998 Period compared to $21.0 million ($0.79 per basic share, $0.78 per diluted
share) for the 1997 Period. The decrease in net earnings in the 1998 Period was
primarily due to higher interest and financing costs and income taxes, which
were substantially offset by increased refining and marketing results.
A discussion and analysis of the factors contributing to the Company's results
of operations are presented below.
15
REFINING AND MARKETING
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions except per barrel amounts)
Gross Operating Revenues:
Refined products. . . . . . . . . . . . . . . . . . . . . . . . $ 406.2 $ 177.5 $ 713.8 $ 486.9
Other, primarily crude oil resales and merchandise. . . . . . . 18.5 21.3 58.7 48.1
----- ----- ----- -----
Gross Operating Revenues . . . . . . . . . . . . . . . . . . . $ 424.7 $ 198.8 $ 772.5 $ 535.0
===== ===== ===== =====
Total Operating Profit:
Gross margin:
Refinery <F1><F2>. . . . . . . . . . . . . . . . . . . . . . . $ 99.3 $ 30.4 $ 182.4 $ 85.3
Non-refinery <F2>. . . . . . . . . . . . . . . . . . . . . . . 4.3 3.8 15.0 9.5
----- ----- ----- -----
Total gross margins . . . . . . . . . . . . . . . . . . . . . 103.6 34.2 197.4 94.8
Operating expenses and other. . . . . . . . . . . . . . . . . . 76.6 23.4 136.6 68.8
Depreciation and amortization . . . . . . . . . . . . . . . . . 7.9 3.4 15.2 9.7
----- ----- ----- -----
Segment Operating Profit . . . . . . . . . . . . . . . . . . . $ 19.1 $ 7.4 $ 45.6 $ 16.3
===== ===== ===== =====
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . $ 13.7 $ 11.8 $ 20.9 $ 30.6
===== ===== ===== =====
Refinery Throughput (thousands of barrels/day):
Alaska. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.6 43.2 58.2 48.2
Hawaii <F3> . . . . . . . . . . . . . . . . . . . . . . . . . . 80.7 - 76.8 -
Washington <F3> . . . . . . . . . . . . . . . . . . . . . . . . 106.6 - 106.6 -
----- ----- ----- -----
Total Refinery Throughput 245.9 43.2 241.6 48.2
===== ===== ===== =====
Refined Products Manufactured (thousands of barrels per day) <F3>:
Gasoline and gasoline blendstocks . . . . . . . . . . . . . . . 72.4 11.3 36.3 12.5
Jet fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.4 11.9 33.6 14.6
Diesel fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 29.9 6.1 14.6 5.8
Heavy oils and residual products. . . . . . . . . . . . . . . . 48.3 12.6 29.1 14.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 1.9 6.6 2.5
----- ----- ----- -----
Total Refined Products Manufactured. . . . . . . . . . . . . . 217.4 43.8 120.2 49.5
===== ===== ===== =====
Refinery Product Spread ($/barrel) . . . . . . . . . . . . . . . $ 5.14 $ 7.65 $ 5.74 $ 6.48
===== ===== ===== =====
Segment Product Sales (thousands of barrels per day) <F3><F4>:
Gasoline and gasoline blendstocks . . . . . . . . . . . . . . . 76.0 18.6 40.0 18.2
Middle distillates. . . . . . . . . . . . . . . . . . . . . . . 100.9 37.8 60.3 30.1
Heavy oils, residual products and other . . . . . . . . . . . . 50.1 13.8 31.8 17.7
----- ----- ----- -----
Total Product Sales. . . . . . . . . . . . . . . . . . . . . . 227.0 70.2 132.1 66.0
===== ===== ===== =====
Total Segment Gross Margins on Product Sales ($/barrel) <F5>:
Average sales price . . . . . . . . . . . . . . . . . . . . . . $ 19.45 $ 27.49 $ 19.79 $ 27.03
Average costs of sales. . . . . . . . . . . . . . . . . . . . . 14.82 22.88 14.72 22.36
----- ----- ----- -----
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.63 $ 4.61 $ 5.07 $ 4.67
===== ===== ===== =====
<FN>
<F1> Represents throughput at the Company's refineries times refinery product spread.
<F2> Amounts reported for 1997 have been reclassified to conform with current presentation, primarily to
reclassify retail margins and intrasegment transportation revenues from non-refinery to refinery product
spread. Non-refinery margin includes merchandise margins, margins on products purchased and resold, and
adjustments due to selling a volume and mix of products that is different than actual volumes
manufactured.
<F3> Sales and manufactured volumes for 1998 include amounts from the acquired Hawaii and Washington
operations since the date of acquisitions, averaged over the periods presented. Throughput volumes for
the Hawaii and Washington refineries are since the date of acquisitions, averaged over the periods owned
only.
<F4> Sources of total products sales include products manufactured at the refineries, products drawn from
inventory balances and products purchased from third parties.
<F5> Gross margins on total product sales include margins on sales of purchased products, together with the
effect of changes in inventories. Amounts reported for 1997 have been reclassified to conform with
current presentation.
16
REFINING AND MARKETING
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit for the Company's Refining and Marketing
operations was $19.1 million in the 1998 Quarter, an increase of $11.7 million
from segment operating profit of $7.4 million in the 1997 Quarter. The
improvement in results from Refining and Marketing was primarily due to higher
throughput volumes, primarily stemming from its recently acquired operations
(see Note B of Notes to Condensed Consolidated Financial Statements), and
improved refined product yields in Alaska. Higher sales within the segment's
Alaska, Hawaii and Northwest markets also contributed to the improved
profitability.
The 1998 Quarter benefited from an expansion completed in October 1997 of the
Company's hydrocracker unit at its Alaska refinery, which increased the unit's
capacity by approximately 25% and enables the Company to produce more jet fuel,
a product in short supply in Alaska. The expansion began to favorably impact
this segment's results in the fourth quarter of 1997. Financial results for the
acquired operations have been included since the dates of acquisition. The
Hawaii Acquisition was completed on May 29, 1998 and the Washington Acquisition
on August 10, 1998. The acquired operations contributed positively to the
segment's results for the 1998 Quarter, but are expected, after interest and
financing costs, to have a neutral impact for the year.
During the 1998 Quarter, throughput at the Alaska refinery increased by 15,400
barrels per day, a 36% increase over the 1997 Quarter, which included a 30-day
maintenance turnaround. Throughput averaged 80,700 barrels per day at the
Hawaii Refinery and 106,600 barrels per day at the Washington Refinery during
the 1998 Quarter. The improved Alaska product slate, together with results from
the acquired operations, contributed to a total refined product gross margin of
$4.63 per barrel in the 1998 Quarter compared to $4.61 per barrel in the 1997
Quarter. Total product sales volumes tripled to 227,000 barrels per day due to
the Acquisitions and higher throughput volumes.
Revenues from sales of refined products increased during the 1998 Quarter
primarily due to the higher sales and throughput volumes, partially offset by a
reduction in average sales prices. Merchandise revenues increased in the 1998
Quarter due to the Hawaii Acquisition, which included 32 retail stations. Other
revenues included crude oil resales of $6.1 million in the 1998 Quarter compared
with $12.3 million in the 1997 Quarter. The increase in costs of sales also
reflected the higher volumes associated with the Acquisitions and marketing
efforts in Alaska, partly offset by lower feedstock prices. Margins from
non-refinery activities increased to $4.3 million in the 1998 Quarter due
primarily to higher merchandise sales. Operating expenses and other increased
during the 1998 Quarter primarily due to the Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit from the Refining and Marketing operations
totaled $45.6 million in the 1998 Period compared to $16.3 million in the 1997
Period. As discussed above, this increase was due to a number of factors,
including higher throughput volumes from the Acquisitions and improved refined
product yields in Alaska.
During the 1998 Period, throughput at the Alaska refinery increased by 10,000
barrels per day, a 21% increase over the 1997 Period. Production of jet fuel at
this refinery increased by approximately 35% over the 1997 Period due to the
hydrocracker expansion completed in October 1997 together with the higher
throughput levels and an improved feedstock slate. The improved refined product
yield, together with results from the acquired operations, contributed to sales
volumes of 132,100 barrels per day and a refined product gross margin of $5.07
per barrel in the 1998 Period. Refined product gross margin was $4.67 per
barrel in the 1997 Period.
Revenues from sales of refined products in the Company's Refining and Marketing
segment increased during the 1998 Period due to the Acquisitions partially
offset by lower sales prices. Other revenues included $29.9 million and $23.0
million in crude oil resales in the 1998 Period and 1997 Period, respectively.
The increase in cost of sales was primarily due to higher volumes associated
with the Acquisitions partly offset by lower feedstock costs. Margins on
non-refinery activities increased to $15.0 million in the 1998 Period as
compared to $9.5 million in the 1997 Period due primarily to higher merchandise
sales. Operating expenses and other were higher in the 1998 Period due
primarily to the Acquisitions.
The Company's initiatives to enhance its product slate and sell more product
within core markets have improved the fundamental earnings potential of this
segment. Certain of these initiatives, such as the Alaska hydrocracker
expansion and improved feedstock slate, were completed in the fourth quarter of
1997. Management expects that future quarters will continue to benefit from the
impact of these initiatives. In addition, Tesoro expects that the results of
the Acquisitions will be accretive to earnings and cash flows beginning in 1999.
The revenues and scope of the Refining and Marketing segment have been
significantly increased with the Acquisitions (see Note B of Notes to Condensed
Consolidated Financial Statements). Future profitability of this segment,
however, 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.
17
EXPLORATION AND PRODUCTION
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions except per unit amounts)
U.S. <F1>:
Gross operating revenues. . . . . . . . . . . . . . . . . . . $ 16.5 $ 15.9 $ 54.3 $ 53.3
Other income. . . . . . . . . . . . . . . . . . . . . . . . . - - 22.3 1.9
Production costs . . . . . . . . . . . . . . . . . . . . . . 2.3 1.5 6.8 5.0
Administrative support and other operating expenses . . . . . 0.4 0.6 1.4 1.7
Depreciation, depletion and amortization. . . . . . . . . . . 8.5 7.0 26.7 22.2
--------- -------- -------- ---------
Segment Operating Profit - U.S.. . . . . . . . . . . . . . . 5.3 6.8 41.7 26.3
--------- -------- -------- ---------
BOLIVIA:
Gross operating revenues. . . . . . . . . . . . . . . . . . . 2.8 3.8 8.8 8.4
Other income (expense). . . . . . . . . . . . . . . . . . . . - - (0.5) 2.2
Production costs. . . . . . . . . . . . . . . . . . . . . . . 0.3 0.3 0.8 0.7
Administrative support and other operating expenses . . . . . 0.6 0.5 2.0 1.3
Depreciation, depletion and amortization. . . . . . . . . . . 0.8 0.5 2.0 1.0
--------- -------- -------- ---------
Segment Operating Profit - Bolivia . . . . . . . . . . . . . 1.1 2.5 3.5 7.6
--------- -------- -------- ---------
Total Segment Operating Profit - Exploration and Production. . $ 6.4 $ 9.3 $ 45.2 $ 33.9
========= ======== ======== =========
U.S.:
Average Daily Net Production:
Natural gas (thousand cubic feet, "Mcf") . . . . . . . . . . 83,563 79,683 91,871 86,317
Oil (barrels). . . . . . . . . . . . . . . . . . . . . . . . 239 93 223 119
Total (thousand cubic feet equivalent, "Mcfe"). . . . . . . 84,997 80,241 93,209 87,031
Average Prices:
Natural gas ($/Mcf) <F2> . . . . . . . . . . . . . . . . . . $ 2.02 $ 2.01 $ 2.03 $ 2.08
Oil ($/barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 11.07 $ 18.23 $ 12.46 $ 19.44
Average Operating Expenses ($/Mcfe):
Lease operating expenses . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.21 $ 0.23 $ 0.18
Severance taxes. . . . . . . . . . . . . . . . . . . . . . . 0.03 - 0.04 0.03
--------- -------- -------- ---------
Total production costs. . . . . . . . . . . . . . . . . . . 0.30 0.21 0.27 0.21
Administrative support and other . . . . . . . . . . . . . . 0.06 0.09 0.05 0.07
--------- -------- -------- ---------
Total Operating Expenses. . . . . . . . . . . . . . . . . . $ 0.36 $ 0.30 $ 0.32 $ 0.28
========= ======== ======== =========
Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . . . $ 1.07 $ 0.93 $ 1.03 $ 0.92
========= ======== ======== =========
Capital Expenditures. . . . . . . . . . . . . . . . . . . . . $ 38.0 $ 16.3 $ 76.5 $ 32.5
========= ======== ======== =========
BOLIVIA:
Average Daily Net Production:
Natural gas (Mcf). . . . . . . . . . . . . . . . . . . . . . 31,921 26,856 27,083 18,452
Condensate (barrels) . . . . . . . . . . . . . . . . . . . . 640 760 726 529
Total (Mcfe). . . . . . . . . . . . . . . . . . . . . . . . 35,761 31,416 31,439 21,626
Average Prices:
Natural gas ($/Mcf). . . . . . . . . . . . . . . . . . . . . $ 0.76 $ 1.13 $ 0.84 $ 1.20
Condensate ($/barrel). . . . . . . . . . . . . . . . . . . . $ 11.47 $ 15.00 $ 12.83 $ 16.23
Average Operating Expenses ($/Mcfe):
Production costs . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.10 $ 0.09 $ 0.11
Administrative support and other . . . . . . . . . . . . . . 0.22 0.20 0.25 0.25
--------- -------- -------- ---------
Total Operating Expenses. . . . . . . . . . . . . . . . . . $ 0.29 $ 0.30 $ 0.34 $ 0.36
========= ======== ======== =========
Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.19 $ 0.22 $ 0.18
========= ======== ======== =========
Capital Expenditures. . . . . . . . . . . . . . . . . . . . . $ 15.2 $ 20.0 $ 26.7 $ 26.0
========= ======== ======== =========
<FN>
<F1> Represents the Company's U.S. oil and gas operations combined with gas transportation activities.
<F2> Includes effects of the Company's natural gas commodity price agreements which amounted to gains of $0.09 per
Mcf and $0.03 per Mcf for the three months and nine months ended September 30, 1998, respectively, and a loss
of $0.06 per Mcf for the nine months ended September 30, 1997. There were no such gains or losses during the
three months ended September 30, 1997.
18
EXPLORATION AND PRODUCTION
U.S.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit from the Company's U.S. exploration and
production operations was $5.3 million in the 1998 Quarter compared with $6.8
million in the 1997 Quarter. The decline in operating profit was primarily due
to higher depletion expenses associated with exploration activities and higher
production volumes. The Company's U.S. production volumes increased 6% to 85.0
million cubic feet equivalents ("Mmcfe") per day in the 1998 Quarter compared to
80.2 Mmcfe per day in the 1997 Quarter. The Company's U.S. production outside
of the Bob West Field rose to 54% of total U.S. production during the 1998
Quarter, as compared to 23% in the 1997 Quarter. This increase was mainly
attributable to the development of fields discovered in the Val Verde Basin, the
Upper Wilcox Trend and the Frio/Vicksburg Trend. During the 1998 Quarter, the
Company acquired interests in the Texas Panhandle that are expected to increase
the Company's net production in the 1998 fourth quarter by approximately 7 Mmcfe
per day.
Gross operating revenues from the Company's U.S. operations increased by $0.6
million due to the higher production, while natural gas prices remained flat.
Production costs per Mcfe increased from $0.21 to $0.30, primarily due to lease
operating expenses. In the Bob West Field, aggregate lease operating expenses
remained relatively flat, while field production declined by 22 Mmcfe per day,
resulting in an increase in per unit lease operating expenses from $0.19 to
$0.26 per Mcfe. Lease operating expenses at other fields remained flat at $0.27
per Mcfe, while production increased by 27 Mmcfe per day. Depreciation,
depletion and amortization increased by $1.5 million, or 21%, due to a higher
depletion rate and increased volumes. The higher depletion rate was the result
of the Company's emphasis on exploration. Exploration costs represented more
than half of total 1998 drilling costs.
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.
During the 1998 Quarter, the Company used such agreements to set the price of
approximately 20% of the natural gas production that it sold in the spot market
and recognized a gain of $0.7 million ($0.09 per Mcf) related to these price
agreements. The Company did not have any such transactions during the 1997
Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit of $41.7 million from the Company's U.S.
exploration and production operations in the 1998 Period compares to $26.3
million in the 1997 Period. Comparability between these periods was impacted by
certain significant items. The 1997 Period included retroactive severance tax
refunds of $1.8 million, while the 1998 Period included income from receipt of
approximately $21.3 million from an operator in the Bob West Field, representing
funds that were no longer needed as a contingency reserve for litigation.
Excluding these significant items, segment operating profit decreased by
approximately $4.1 million primarily due to lower natural gas prices and higher
depreciation, depletion and amortization and operating expenses.
Gross operating revenues from the Company's U.S. operations increased by $1.0
million as higher production volumes were generally offset by lower prices. The
Company's U.S. production averaged 93.2 Mmcfe per day in the 1998 Period, an
increase of 6.2 Mmcfe per day over the 1997 Period. Prices realized by the
Company on its spot natural gas production declined to $2.03 per Mcf in the 1998
Period from $2.08 per Mcf in the 1997 Period. Lease operating expenses, which
increased from $4.4 million to $5.9 million, remained relatively flat in the Bob
West Field but were higher in other fields by $1.7 million. Production in the
Bob West Field declined by 26 Mmcfe per day resulting in an increase in per unit
lease operating expenses from $0.15 to $0.23 per Mcfe. Production at other
fields increased by 32 Mmcfe per day resulting in a decrease in per unit lease
operating expenses from $0.32 to $0.24 per Mcfe. Depreciation, depletion and
amortization increased by $4.5 million, or 20%, due to a higher depletion rate
and increased volumes. The higher depletion rate was the result of increased
exploration activities.
During the 1998 and 1997 Periods, the Company used commodity price agreements to
set the price of approximately 12% and 11%, respectively, of the natural gas
production that it sold in the spot market. During the 1998 and 1997 Periods,
the Company realized a gain of $1.0 million ($0.03 per Mcf) and a loss of $1.6
million ($0.06 per Mcf), respectively, from these price agreements.
19
BOLIVIA
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit from the Company's Bolivian operations
decreased $1.4 million from $2.5 million in the 1997 Quarter to $1.1 million in
the 1998 Quarter. This decrease in segment operating profit was primarily due
to lower natural gas and oil prices. Bolivian natural gas prices, which are
contractually tied to posted New York fuel oil prices, fell 33% from $1.13 per
Mcf in the 1997 Quarter to $0.76 per Mcf in the 1998 Quarter. However,
production volumes increased from 31.4 Mmcfe per day to 35.8 Mmcfe per day .
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997. Segment operating profit from the Company's Bolivian operations
decreased $4.1 million from $7.6 million in the 1997 Period to $3.5 million in
the 1998 Period. The 1997 Period included other income of $2.2 million related
to the collection of the receivable discussed above. Excluding this other
income, segment operating profit for the 1998 Period decreased by $1.9 million
from the 1997 Period primarily due to the decline in natural gas prices together
with a charge for prior period taxes. Bolivian natural gas prices fell 30% from
$1.20 per Mcf in the 1997 Period to $0.84 per Mcf in the 1998 Period and
condensate prices fell from $16.23 to $12.83 per barrel. However, production
volumes increased from 21.6 Mmcfe per day to 31.4 Mmcfe per day resulting in an
overall revenue increase of $0.4 million. The Company's share of net production
increased in the 1998 Period as a result of the July 1997 buyout of interests
held by its former joint venture participant, and the remaining production
difference resulted in part from production constraints in the 1997 Period
arising from repairs to a non-Company-owned pipeline that transports gas from
Bolivia to Argentina. The increase in depreciation, depletion and amortization
was due to the higher production volumes and a higher depletion rate.
A lack of market access has constrained natural gas production in Bolivia. The
Company believes that the completion of a 1,900-mile pipeline from Bolivia to
Brazil will provide access to larger gas-consuming markets. Upon completion of
this pipeline, the Company will face intense competition from major and
independent natural gas companies operating in Bolivia for a share of the
contractual volumes to be exported to Brazil. It is anticipated that each
producer's share of the contractual volumes will be allocated by YPFB according
to a number of factors, including the producer's reserve volumes and production
capacity. Although the Company expects gas deliveries on the pipeline to begin
in 1999, there can be no assurance that the pipeline will be operational next
year. With the exception of the volumes currently under contract with the
Bolivian government, the Company cannot be assured of the amount of additional
volumes that will be exported to Brazil upon completion of the pipeline.
The productive capacity of the Company's wells in Bolivia, including shut-in
wells, is approximately 120 Mmcf per day gross. At September 30, 1998, the
Company had four wells in progress as part of a five-well program designed to
increase proved reserves. In addition, an affiliate of Total, S.A. has spud the
first well pursuant to a farmout agreement covering the Company's acreage
located in the Andes mountains.
20
MARINE SERVICES
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Millions)
Gross Operating Revenues:
Fuels . . . . . . . . . . . . . . . . . $ 21.4 $ 25.2 $ 69.7 $ 77.6
Lubricants and other. . . . . . . . . . 4.0 4.2 11.9 12.3
Services. . . . . . . . . . . . . . . . 3.1 3.1 8.8 8.4
----- ----- ----- -----
Gross Operating Revenues . . . . . . . 28.5 32.5 90.4 98.3
Costs of Sales . . . . . . . . . . . . . 17.8 22.9 60.8 72.6
----- ----- ----- -----
Gross Profit . . . . . . . . . . . . . 10.7 9.6 29.6 25.7
Operating Expenses and Other . . . . . . 6.9 6.5 21.3 20.4
Depreciation and Amortization. . . . . . 0.7 0.4 1.8 1.2
----- ----- ----- -----
Segment Operating Profit . . . . . . $ 3.1 $ 2.7 $ 6.5 $ 4.1
===== ===== ===== =====
Sales Volumes (millions of gallons):
Fuels, primarily diesel . . . . . . . . 43.8 39.1 135.3 116.2
Lubricants. . . . . . . . . . . . . . . 0.5 0.7 1.7 2.0
Capital Expenditures . . . . . . . . . . $ 0.4 $ 2.0 $ 3.0 $ 5.3
Gross operating revenues in the Marine Services segment declined by $4.0 million
and $7.9 million during the 1998 Quarter and 1998 Period, respectively,
primarily due to lower fuel sales prices, partially offset by increased fuel
volumes. The decreases in costs of sales also reflected the lower fuel prices.
Despite lower rig activity in the Gulf of Mexico, total segment operating profit
improved by $0.4 million and $2.4 million in the 1998 Quarter and 1998 Period,
respectively, largely due to the higher fuel volumes and margins.
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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $1.1 million and $2.1 million
during the 1998 Quarter and 1998 Period, respectively. These increases included
higher employee costs and professional fees due in part to the installation and
implementation of an integrated software system.
INTEREST AND FINANCING COSTS
Interest and financing costs increased by $9.0 million and $14.9 million during
the 1998 Quarter and 1998 Period, respectively. These increases were primarily
due to higher borrowings under the Company's credit arrangements, including the
Senior Credit Facility and Senior Subordinated Notes, to fund the Acquisitions
and the Refinancing (see Notes B and C of Notes to Condensed Consolidated
Financial Statements) and to fund net working capital requirements and capital
expenditures.
OTHER OPERATING COSTS AND OTHER EXPENSES
Other operating costs and other expense in the 1998 Period included a charge of
$19.9 million for the special incentive compensation strategy, of which $7.9
million related to operating segment employees (see Note F of Notes to Condensed
Consolidated Financial Statements).
INCOME TAX PROVISION
The income tax provision increased by $0.7 million and $4.8 million in the 1998
Quarter and 1998 Period, respectively. The effective tax rate rose to 44% in
the 1998 Period from 38% in the 1997 Period primarily due to higher Bolivian
taxes and higher consolidated taxable earnings which reduced available state net
operating loss carryforwards.
21
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash and cash equivalents,
internal cash generation and external financing. 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 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
arrangements and other sources of capital will be affected by these conditions.
CREDIT ARRANGEMENTS AND CAPITALIZATION
Refinancing and Offerings
In conjunction with closing the Hawaii Acquisition, on May 29, 1998, Tesoro
completed a Refinancing of all of its then-existing indebtedness. The total
amount of funds required by Tesoro on that date to complete the Hawaii
Acquisition and the Refinancing, to pay related fees and expenses and for
general corporate purposes was approximately $432 million, which was financed
through the Interim Credit Facility. In July 1998, the Company refinanced all
borrowings under the Interim Credit Facility with net proceeds from the
Offerings and borrowings under the Senior Credit Facility.
On July 2, 1998, and in connection with the Notes Offering and the Washington
Acquisition, the Company entered into the Senior Credit Facility in the amount
of $500 million. In addition to funding the cash consideration of the
Acquisitions and Refinancing, the Senior Credit Facility provides the Company
with enhanced financial flexibility, such as increased working capital capacity
and funds for general corporate purposes, including the projected capital
expenditures for 1998.
On May 4, 1998, the Company filed a Universal Shelf Registration Statement with
the SEC for $600 million of debt or equity securities for acquisitions or
general corporate purposes. The Universal Shelf Registration Statement was
declared effective by the SEC on May 14, 1998. The Company offered PIES and
Common Stock from the Universal Shelf Registration Statement to provide partial
funding for the Acquisitions. On July 1, 1998, the Company issued 9,000,000
PIES, representing fractional interests in the Company's 7.25% Mandatorily
Convertible Preferred Stock, with gross proceeds of approximately $143.4
million, and 5,000,000 shares of Common Stock, with gross proceeds of $79.7
million. Upon exercise of the over-allotment options granted to the underwriters
of the Equity Offerings, on July 8, 1998, the Company issued 1,350,000 PIES with
gross proceeds of $21.5 million and 750,000 shares of Common Stock with gross
proceeds of $11.9 million. Holders of PIES are entitled to receive a cash
dividend. The PIES will automatically convert into shares of Common Stock on
July 1, 2001, at a rate based upon a formula dependent upon the market price of
Common Stock. Before July 1, 2001, each PIES is convertible, at the option of
the holder thereof, into 0.8455 shares of Common Stock, subject to adjustment in
certain events.
On July 2, 1998, concurrently with the syndication of the Senior Credit
Facility, the Company issued $300 million aggregate principal amount of Senior
Subordinated Notes through a private offering eligible for Rule 144A. The Senior
Subordinated Notes have a ten-year maturity without sinking fund requirements
and are subject to optional redemption by the Company after five years at
declining premiums. On August 7, 1998, a Registration Statement was declared
effective by the SEC whereby the Company offered, upon the terms and subject to
the conditions set forth in the related Prospectus, to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal amount of its Senior
Subordinated Notes. The terms of the Exchange Notes are identical in all
material respects to the terms of the Senior Subordinated Notes, except as
described in the Prospectus. The offer to exchange was completed in September
1998.
Capitalization
After issuance of the Senior Subordinated Notes, Common Stock and PIES, entering
into the Senior Credit Facility and the application of the net proceeds
therefrom, the Company's indebtedness as of September 30, 1998 was approximately
$490 million (excluding an additional $322 million available under the Senior
Credit Facility) with a debt-to-capitalization ratio of 45%.
22
The Company's primary capital requirements are expected to include capital
expenditures, working capital and debt service. The primary sources of capital
are expected to be cash flow from operations and borrowings under the Senior
Credit Facility which incurs interest at variable rates. Based upon current and
anticipated needs, the Company believes that available capital resources will be
adequate to meet anticipated future capital requirements.
The Senior Credit Facility, the Senior Subordinated Notes and PIES, as described
in Note C of Notes to Condensed Consolidated Financial Statements impose various
restrictions and covenants on the Company that could potentially limit the
Company's ability to respond to market conditions, to provide for unanticipated
capital investments, to raise additional debt or equity capital or to take
advantage of business opportunities.
CAPITAL SPENDING (EXCLUDING AMOUNTS TO FUND ACQUISITIONS)
During the first nine months of 1998, the Company's capital expenditures totaled
$131 million which were financed with internally-generated cash flows from
operations and external financing. Although capital expenditures for the year
had been projected to exceed $220 million, actual capital spending will be less
due to a number of factors, including the timing of refining and marketing and
other capital projects. Capital expenditures for the remainder of the year,
currently estimated at $45 million to $55 million, are expected to be funded by
cash flows from operations and external borrowings under the Company's credit
arrangements.
The Exploration and Production segment accounts for $139 million of the
projected capital spending with $88 million planned for U.S. activities and $51
million for Bolivia. Planned U.S. expenditures include $20 million for
acquisitions, $32 million for development drilling (participation in 27 wells),
$14 million for leasehold, geological and geophysical, and $22 million for
exploratory drilling (participation in 22 wells). In Bolivia, the drilling
program is projected at $10 million for development drilling (two wells) and $22
million for exploratory drilling (three wells), with the remainder planned for
gathering lines to shut-in wells, workovers and three-dimensional seismic
activity. For the 1998 Period, actual U.S. expenditures in the Exploration and
Production segment were $76 million, principally for the participation in the
drilling of 16 development wells (15 completed), 18 exploratory wells (eleven
completed) and purchases of interests in oil and gas properties. In Bolivia,
capital spending for the 1998 Period totaled $27 million, primarily for drilling
four wells in progress.
Capital spending for the downstream operations, the Refining and Marketing and
Marine Services segments, are projected to range from $30 million to $40 million
for the year 1998, which includes retail marketing projects, improvements to the
refineries, environmental projects and equipment and facility upgrades. The
downstream operations spent approximately $24 million towards these projects
during the 1998 Period.
Capital expenditures for corporate projects are primarily directed towards the
installation and implementation of an integrated software system, which totaled
$4 million during the 1998 Period. Another $2 million is expected to be spent
in this area during the remainder of 1998, with $12 million to be expended
during 1999.
CASH FLOWS
Components of the Company's cash flows are set forth below (in millions):
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
Cash Flows From (Used In):
Operating Activities . . . . . . . . . . . . . . . $ 98.7 $ 71.1
Investing Activities . . . . . . . . . . . . . . . (659.4) (98.2)
Financing Activities . . . . . . . . . . . . . . . 555.8 11.7
------- -------
Decrease in Cash and Cash Equivalents. . . . . . . . $ (4.9) $ (15.4)
======= =======
Net cash from operating activities of $99 million during the 1998 Period,
compares to $71 million during the 1997 Period. Higher levels of earnings plus
depreciation, depletion and amortization, primarily from the Acquisitions,
together with favorable changes in working capital components contributed to the
increase in cash flows from operations during the 1998 period. Net cash used in
investing activities of $659 million during the 1998 Period included
approximately $528 million for the Acquisitions and capital expenditures of $131
million. Net cash from financing activities of $556 million included net
proceeds from the Offerings of $533 million, gross borrowings under revolving
credit lines and term loans of $901 million with $775 million of repayments, and
refinancing and payment of other debt of $92 million. At September 30, 1998,
the Company's net working capital totaled $151 million, which included cash and
cash equivalents of $3 million.
23
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 current and prior-owned properties. At September 30, 1998, the Company's
accruals for environmental expenses totaled $11.4 million. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
In addition to environmental expenses, the Company anticipates it will make
capital improvements totaling approximately $10 million in 1998 and $7 million
in 1999 to comply with environmental laws and regulations affecting its Alaska,
Hawaii, Pacific Northwest and Gulf Coast operations. In addition, capital
expenditures for alternate secondary containment systems for existing storage
tank facilities in Alaska are estimated to be $2 million in 1998 and $2 million
in 1999, with a remaining $ 5 million to be spent by the end of year 2002.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refineries, retail stations
(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 and other contingencies, including
environmental matters related to the Acquisitions, see Note E of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1, and Legal
Proceedings in Part II, Item 1, included herein
OTHER
The Company's results for the 1998 Period reflected receipt of approximately $21
million pretax ($14 million aftertax) from an operator in the Bob West Field,
representing funds that are no longer needed as a contingency reserve for
litigation. These proceeds were used to reduce debt levels.
In October 1998, the Company's Board of Directors unanimously approved the 1998
Performance Incentive Compensation Plan (the "Performance Plan"), which is
intended to advance the best interests of the Company and its stockholders by
directly targeting Company performance to align with the ninetieth percentile
historical stock-price growth rate for the Company's peer group. In addition,
the Performance Plan will provide the Company's employees with additional
compensation, contingent upon achievement of the targeted objectives, thereby
encouraging them to continue in the employ of the Company. Under the
Performance Plan, targeted objectives are comprised of the fair market value of
the Company's Common Stock equaling or exceeding an average of $35 per share
(the "First Performance Target") and $45 per share (the "Second Performance
Target") on any 20 consecutive trading days during a period commencing on
October 1, 1998 and ending on the earlier of September 30, 2002, or the date on
which the Second Performance Target is achieved (the "Performance Period"). The
Performance Plan has several tiers of awards, with the award generally
determined by job level. Most eligible employees have contingent cash bonus
opportunities of 25% of their annual "basic compensation" (as defined in the
Performance Plan) and three executive officers have contingent awards of phantom
stock. Upon achievement of the First Performance Target, one-fourth of the
contingent awards will be earned, with payout deferred until the end of the
Performance Period. The remaining 75% will be earned only upon achievement of
the Second Performance Target, with payout occurring 30 days thereafter.
Employees will need to have at least one year of regular, full-time service at
the time the Performance Period ends in order to be eligible for a payment. The
Company estimates that it will incur aftertax costs of approximately 1% of the
total aggregate increase in shareholder value if the First Performance Target is
reached and will incur an additional 2% aftertax charge if the Second
Performance Target is reached.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of the Company's business is dependent on its computer
hardware, operating systems and software programs (collectively, "Systems and
Programs"). These Systems and Programs are used in several key areas of the
Company's business, including production and distribution, information
management services and financial reporting, as well as in various
administrative functions. The Company has been evaluating its Systems and
Programs to identify potential year 2000 compliance problems, as well as manual
processes, external interfaces with customers and services supplied by vendors
to coordinate year 2000 compliance and conversion. The Company has
24
identified and is replacing a number of Systems and Programs which are not year
2000 compliant. The year 2000 problem refers to the limitations of certain
existing hardware and software programs to recognize date sensitive information
for the year 2000 and beyond. Unless replaced or modified prior to the year
2000, such hardware and systems may not properly recognize such information and
could generate erroneous data or cause a system to fail to operate properly.
Based on current information, the Company expects to attain year 2000 compliance
and institute appropriate testing of its modifications and replacements in a
timely fashion and in advance of the year 2000 date change. Modification or
replacement of the Company's Systems and Programs is being performed in-house by
company personnel as well as external consultants.
The Company believes that, with hardware replacement and modifications to
existing software or conversions to new software, the year 2000 date change will
not pose a significant operational problem for the Company. However, because
most computer systems are, by their very nature, interdependent, it is possible
that non-compliant third party computer systems or programs may not interface
properly with the Company's computer systems. The Company has requested
assurance from third parties that their computers, systems or programs be year
2000 compliant. The Company could, however, be adversely affected by the year
2000 problem if it or unrelated parties fail to successfully address this issue.
Management of the Company expects that expenses and capital expenditures
associated with the year 2000 compliance project will not have a material effect
on its business, financial condition or results of operations. The Company
estimates that it will spend approximately $1 million in 1998 and $4 million in
1999 to become year 2000 compliant. The costs of year 2000 compliance and the
expected completion dates are the best estimates of Company management and are
believed to be reasonably accurate. In the event the Company's plan to address
the year 2000 problem is not successfully or timely implemented, the Company may
need to devote more resources to the process and additional costs may be
incurred. Problems encountered by the Company's vendors, customers and other
third parties may also have an adverse effect on the Company's operations.
Purchased hardware and software will continue to be capitalized in accordance
with accounting policy. Personnel and other costs will also be accounted for as
appropriate under accounting policy.
The foregoing statements in the above paragraphs under "Year 2000 Readiness
Disclosure" herein are intended to be and are hereby designated "Year 2000
Readiness Disclosure" statements within the meaning of the Year 2000 Information
and Readiness Disclosure Act.
NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which standardizes the disclosures related to pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
and eliminates certain disclosures previously required. SFAS No. 132 becomes
effective for the Company in 1998 and contains provisions for restatement of
prior period information. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
quarters of fiscal years beginning after June 15, 1999 and should not be applied
retroactively to financial statements of prior periods. The Company is
evaluating the effects that these new statements will have on its financial
condition, results of operations and financial reporting and disclosures.
25
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements include, among other things, discussions of anticipated revenue
enhancements and cost savings following the Acquisitions, the Company's business
strategy and expectations concerning the Company's market position, future
operations, margins, profitability, liquidity and capital resources,
expenditures for capital projects and attempts to reduce costs. Although the
Company believes that the assumptions upon which the forward-looking statements
contained in this Form 10-Q are based are reasonable, any of the assumptions
could prove to be inaccurate and, as a result, the forward-looking statements
based on those assumptions also could be incorrect. All phases of the
operations of the Company involve risks and uncertainties, many of which are
outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether the forward-looking statements ultimately prove to be correct. Actual
results and trends in the future may differ materially depending on a variety of
factors including, but not limited to, the timing and extent of changes in
commodity prices and underlying demand and availability of crude oil and other
refinery feedstocks, refined products, and natural gas; changes in the cost or
availability of third-party vessels, pipelines and other means of transporting
feedstocks and products; execution of planned capital projects; adverse changes
in the credit ratings assigned to the Company's trade credit; future well
performance; the extent of the Company's success in acquiring oil and gas
properties and in discovering, developing and producing reserves; state and
federal environmental, economic, safety and other policies and regulations, any
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; adverse rulings, judgments, or settlements in litigation or
other legal matters, including unexpected environmental remediation costs in
excess of any reserves; actions of customers and competitors; weather conditions
affecting the Company's operations or the areas in which the Company's products
are marketed; earthquakes or other natural disasters affecting operations;
political developments in foreign countries; and the conditions of the capital
markets and equity markets during the periods covered by the forward-looking
statements. Future results will also be dependent upon the ability of the
Company to integrate the Acquisitions with the Company's other operations. Many
of the factors are described in greater detail in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and other of the Company's
filings with the SEC. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the foregoing. The Company undertakes
no obligation to publicly release the result of any revisions to any such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Environmental. On August 26, 1998, the United States Coast Guard issued a
Notice of Federal Interest For An Oil Pollution Incident to Tesoro Hawaii
Corporation ("Tesoro Hawaii"), a subsidiary of the Company, in connection
with an oil spill which occurred on August 24, 1998, at Tesoro Hawaii's
single point mooring at Barbers Point, Oahu, Hawaii. Tesoro Hawaii, the
Coast Guard and the Hawaii Department of Health ("HDOH") responded to the
spill immediately and clean-up efforts have been completed. Under the
Federal Water Pollution Control Act and the Oil Pollution Act of 1990, the
responsible party is liable for removal costs and damages, including
damages from injury to natural resources and may be assessed administrative
or civil penalties. The Company carries insurance to provide protection
against pollution damages. The Company does not believe that the
resolution of this oil spill will have a material adverse effect on the
Company.
On October 2, 1998, the Alaska Department of Environmental Conservation
("ADEC") issued a Notice of Violation ("NOV") against the Company's
refinery in Alaska related to non-compliance with the facility air quality
permit. This NOV alleges that an air emission treatment unit at the
refinery groundwater treatment system did not maintain the air contaminant
removal efficiency rate required in the facility air quality permit. The
Company has initiated discussions with the ADEC on this matter and does not
believe that the resolution thereof will have a material adverse effect on
the Company.
On October 19, 1998, the Company received notice from the EPA that it has
been identified as a PRP under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") at the Casmalia Disposal Site in
Santa Barbara County, California. The site is being remediated by the EPA
pursuant to CERCLA Superfund law and the Resource Conservation and Recovery
Act ("RCRA"). Although CERCLA imposes joint and several liability on PRPs,
the extent of the Company's allocated financial contribution for cleanup is
expected to be de minimis based on the volume of waste disposed of at the
site by the Company as identified in the EPA's notice. The Company
believes that the aggregate amount of its liability at this site will not
have a material adverse effect on the Company.
On October 16, 1998, the HDOH issued a Notice of Apparent Violation of
Hawaii state law to Tesoro Hawaii in connection with a spill on September
23, 1998. During the loading of a time-chartered barge, diesel fuel was
spilled into the state waters at Barbers Point Harbor, Oahu, Hawaii. It
was immediately cleaned up by the charterer of the barge. Hawaii law
requires that appropriate action to correct an apparent violation must be
taken and further provides for civil penalties. The Company has taken
corrective action and does not believe that the resolution of the diesel
fuel spill will have a material adverse effect on the Company.
Other. On October 1, 1998, the Attorney General for the State of Hawaii
filed a lawsuit in the U.S. District Court for the District of Hawaii
against thirteen oil companies, including Tesoro Petroleum Corporation and
Tesoro Hawaii Corporation, alleging anti-competitive marketing practices in
violation of Federal and State anti-trust laws. The complaint seeks
injunctive relief and compensatory and treble damages and civil penalties
against all defendants in an amount in excess of $500 million. The Company
believes that it has not engaged in any anti-competitive activities and
that this proceeding is subject to the indemnity provision of the Stock
Sale Agreement between the BHP Sellers and the Company which provides for
indemnification in excess of $2 million and not to exceed $65 million. The
Company will defend this litigation vigorously.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 Annual Meeting of Stockholders of the Company was held on
July 29, 1998.
(b) The following directors were elected at the 1998 Annual Meeting of
Stockholders to hold office until the 1999 Annual Meeting of
Stockholders or until their successors are elected and qualified. A
tabulation of the number of votes cast for or withheld with respect
to each such director are set forth below:
Votes Votes
Name For Withheld
-------------------- ---------- --------
Steven H. Grapstein 23,654,195 863,309
William J. Johnson 23,661,055 856,449
Alan J. Kaufman 23,658,977 858,527
Raymond K. Mason, Sr. 23,658,371 859,133
Bruce A. Smith 23,664,172 853,332
Patrick J. Ward 23,662,835 854,669
Murray L. Weidenbaum 23,658,204 859,300
(c)(i) With respect to the resolution amending the Company's Restated
Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 50 million to 100 million,
there were 22,934,397 votes for; 1,530,088 votes against; 53,019
abstentions; and no broker non-votes.
(ii) With respect to the resolution increasing the number of shares which
can be granted under the Amended and Restated Executive Long-Term
Incentive Plan and increasing the limit on the number of shares of
restricted stock which can be granted under such plan, there were
15,439,159 votes for; 3,247,935 votes against; 79,572 abstentions;
and 5,750,838 broker non-votes.
(iii) With respect to the ratification of the appointment of Deloitte &
Touche LLP as the Company's independent auditors for fiscal year
1998, there were 23,902,948 votes for; 40,152 votes against; 574,404
abstentions; and no broker non-votes.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending Article
IV, increasing the number of authorized shares of Common Stock
from 50,000,000 to 100,000,000.
10.1 Copy of the Company's 1998 Performance Incentive Compensation
Plan.
10.2 Copy of the Company's Amended and Restated Executive Long-Term
Incentive Plan, as amended through July 29, 1998.
27.1 Financial Data Schedule (September 30, 1998).
(b) Reports on Form 8-K.
A Current Report on Form 8-K, dated June 25, 1998, was filed on July
1, 1998, reporting under Item 5, Other Events, that the Company had
issued 9,000,000 Premium Income Equity Securities and 5,000,000 shares
of Common Stock. Exhibits were also filed under Item 7.
A Current Report on Form 8-K, dated August 10, 1998, was filed on
August 12, 1998, reporting under Item 2, Acquisition or Disposition of
Assets, that the Company completed the acquisition of all of the
outstanding capital stock of Shell Anacortes Refining Company, an
affiliate of Shell Oil Company. The Audited Financial Statements of
Shell Anacortes Refining Company as of December 31, 1996 and 1997, and
Unaudited Financial Statements of Shell Anacortes Refining Company as
of March 31, 1998, were previously filed in the Registrant's Current
Report on Form 8-K dated May 29, 1998 and filed on June 5, 1998.
Included under Item 7 of the Form 8-K, dated August 10, 1998 and filed
on August 12, 1998, were unaudited pro forma combined condensed
financial statements of the Company, BHP Petroleum Americas Refining
Inc. and BHP Petroleum South Pacific Inc. and Shell Anacortes Refining
Company as of March 31, 1998 and for the year ended December 31, 1997
and three months ended March 31, 1998.
29
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: November 16, 1998 /s/ BRUCE A. SMITH
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: November 16, 1998 /s/ DON M. HEEP
Don M. Heep
Vice President, Controller
(Chief Accounting Officer)
30
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Certificate of Amendment, dated as of August 3, 1998, to Certificate of
Incorporation of the Company, amending Article IV, increasing the
number of authorized shares of Common Stock from 50,000,000 to
100,000,000.
10.1 Copy of the Company's 1998 Performance Incentive Compensation Plan.
10.2 Copy of the Company's Amended and Restated Executive Long-Term
Incentive Plan, as amended through July 29, 1998.
27.1 Financial Data Schedule (September 30, 1998).
31