- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO CURRENT REPORT ON
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): MAY 17, 2002
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-3473 95-0862768
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
300 CONCORD PLAZA DRIVE 78216-6999
SAN ANTONIO, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 828-8484
- --------------------------------------------------------------------------------
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 17, 2002, Tesoro Petroleum Corporation ("Tesoro" or the
"Company") completed the acquisition of the 168,000 barrels per day Golden Eagle
refinery located in Martinez, California in the San Francisco Bay area along
with 70 associated retail sites throughout northern California (collectively,
the "Golden Eagle Assets") from Ultramar Inc., a subsidiary of Valero Energy
Corporation. The acquisition was completed pursuant to a Sale and Purchase
Agreement, dated February 4, 2002, by and among Ultramar Inc. and Tesoro
Refining and Marketing Company, as amended on February 20, 2002 and May 3, 2002,
which was previously filed as Exhibit 2.1 to this Current Report on Form 8-K and
is incorporated herein by reference. The Company intends to utilize the Golden
Eagle Assets in a similar manner as the seller.
The purchase price for the Golden Eagle Assets, as amended, was $945
million, plus $130 million for feedstock and refined product inventories,
subject to post-closing adjustments. The Company issued to the seller two
ten-year junior subordinated notes with face amounts aggregating $150 million as
part of the $945 million purchase price. The notes consist of: (i) a $100
million junior subordinated note, due July 2012, which is non-interest bearing
for the first five years and carries a 7.5% interest rate for the remaining
five-year period, and (ii) a $50 million junior subordinated note, due July
2012, which has no interest payment in year one and bears a 7.47% effective
interest rate for the second through the fifth years and a 7.5% interest rate
for years six through ten. Copies of the $100 million and $50 million junior
subordinated notes were previously filed as Exhibits 10.1 and 10.2 to this
Current Report on Form 8-K and are incorporated herein by reference. The Company
further funded the acquisition of the Golden Eagle Assets with borrowings under
its amended and restated Senior Secured Credit Facility (described in Item 5 of
this Current Report on Form 8-K, File No. 1-3473, filed May 24, 2002), proceeds
of a recent common stock offering and the proceeds of a March 2002 senior
subordinated notes offering. The Company also assumed certain liabilities and
obligations (including costs associated with transferred employees and
environmental matters, among others) subject to certain levels of
indemnification.
In connection with the acquisition of the Golden Eagle Assets, the
Company entered into a letter agreement, dated May 5, 2002, with the State of
California Department of Justice, Office of the Attorney General, which was
previously filed as Exhibit 10.3 to this Current Report on Form 8-K and is
incorporated herein by reference.
The foregoing is qualified by reference to the previously filed
Exhibits 2.1, 10.1, 10.2 and 10.3 to this Current Report on Form 8-K,
which are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of businesses acquired.
The audited financial statements of Golden Eagle Refining and
Marketing Assets Business as of December 31, 2001 and 2000 and for the
year ended December 31, 2001 and the four months ended December 31,
2000 were filed on Form 8-K under Item 7 on February 22, 2002.
The following financial statements are included in Appendix A
hereto and incorporated herein by reference.
<Table>
UNAUDITED FINANCIAL STATEMENTS OF GOLDEN EAGLE REFINING AND
MARKETING ASSETS BUSINESS
Balance Sheets as of March 31, 2002 and December 31, 2001......... A-2
Statements of Income for the Three Months Ended March 31, 2002
and March 31, 2001................................................ A-3
Statements of Cash Flows for the Three Months Ended March 31,
2002 and March 31, 2001........................................... A-4
Notes to Financial Statements..................................... A-5
</Table>
(b) Pro forma financial information.
The pro forma financial statements required pursuant to
Article 11 of Regulation S-X will be filed by amendment to this Current
Report on Form 8-K no later than sixty days after the date on which
this Current Report on Form 8-K was originally required to be filed.
(c) Exhibits.
2.1 Sale and Purchase Agreement for Golden Eagle Refining
and Marketing Assets, dated February 4, 2002, by and
among Ultramar Inc. and Tesoro Refining and Marketing
Company, including First Amendment dated February 20,
2002 and related Purchaser Parent Guaranty dated
February 4, 2002 (incorporated by reference to
Exhibit 2.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, File No.
1-3473) and Second Amendment dated May 3, 2002
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed May 9,
2002, File No. 1-3473).
10.1 $100 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc.
(incorporated by reference to the Exhibit 10.1 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002).
10.2 $50 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc.
(incorporated by reference to the Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002).
10.3* Letter dated May 5, 2002 from the Company to the
State of California Department of Justice, Office of
the Attorney General (incorporated by reference to
the Exhibit 10.3 to the Company's Current Report on
Form 8-K, File No. 1-3473, filed on May 24, 2002).
10.4 $1,275,000,000 Amended and Restated Credit Agreement,
dated as of May 17, 2002, among the Company and
Lehman Brothers Inc. (arranger), Lehman Commercial
Paper Inc. (the syndication agent), Bank One, NA (the
administrative agent) and a syndicate of banks,
financial institutions and other entities
(incorporated by reference to the Exhibit 10.4 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002). Certain schedules
and exhibits to this Amended and Restated Credit
Agreement have not been filed with this exhibit. The
Company agrees to furnish supplementally any omitted
schedule or exhibit to the SEC upon request.
* Portions have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: July 16, 2002
TESORO PETROLEUM CORPORATION
By: /s/ Gregory A. Wright
--------------------------------------
Gregory A. Wright
Senior Vice President
and Chief Financial Officer
APPENDIX A
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
BALANCE SHEETS
(unaudited, in thousands)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 108 $ 189
Inventories .................................................. 116,726 162,982
Current deferred income tax asset ............................ 2,211 2,804
Other current assets, net .................................... 4,269 8,154
------------- -------------
TOTAL CURRENT ASSETS ...................................... 123,314 174,129
------------- -------------
Property, plant and equipment ................................... 909,801 827,443
Less accumulated depreciation and amortization .................. (68,285) (58,575)
------------- -------------
Property, plant and equipment, net ........................... 841,516 768,868
Goodwill ........................................................ 199,446 199,446
Other assets, net ............................................... 88,752 58,562
------------- -------------
TOTAL ASSETS ................................................ $ 1,253,028 $ 1,201,005
============= =============
LIABILITIES AND NET PARENT INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ..................... $ 107,661 $ 90,212
Taxes other than income taxes ................................ 15,640 20,405
Lease termination obligation ................................. 36,088 36,088
------------- -------------
TOTAL CURRENT LIABILITIES ................................. 159,389 146,705
Deferred income tax liabilities ................................. 73,310 85,872
Employee benefit obligations .................................... 31,341 29,930
Other long-term liabilities ..................................... 3,954 3,954
------------- -------------
TOTAL LIABILITIES .......................................... 267,994 266,461
Net parent investment ........................................... 985,034 934,544
------------- -------------
TOTAL LIABILITIES AND NET PARENT INVESTMENT ................ $ 1,253,028 $ 1,201,005
============= =============
</Table>
See accompanying notes to the financial statements.
A-2
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
STATEMENTS OF INCOME
(unaudited, in thousands)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------- -------------
SALES AND OTHER REVENUES: ............................. $ 430,569 $ 505,866
------------- -------------
COSTS AND EXPENSES:
Cost of products sold .............................. 348,291 328,210
Operating expenses ................................. 62,835 74,257
General and administrative expenses ................ 2,675 2,619
Taxes other than income taxes ...................... 33,379 37,543
Depreciation and amortization ...................... 12,748 9,198
Loss on sale of property, plant and equipment ...... 16 7
------------- -------------
TOTAL COSTS AND EXPENSES ........................ 459,944 451,834
------------- -------------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT) EXPENSE ..... (29,375) 54,032
Income tax (benefit) expense ........................ (11,969) 22,055
------------- -------------
NET INCOME (LOSS) ..................................... $ (17,406) $ 31,977
============= =============
</Table>
See accompanying notes to the financial statements.
A-3
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (17,406) $ 31,977
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ..................................... 12,748 9,198
Loss on sale of property, plant and equipment ..................... 16 7
Deferred income tax (benefit) expense ............................. (11,969) 16,236
Changes in operating assets and liabilities:
Decrease in receivables ......................................... -- 3,014
Decrease in inventories ......................................... 46,256 7,212
Decrease (increase) in other current assets ..................... 3,885 (86)
Increase (decrease) in accounts payable and
accrued liabilities .......................................... 17,449 (4,272)
Decrease in taxes other than income taxes ....................... (4,765) (183)
Increase in employee benefit obligations .......................... 1,411 1,266
Increase in other long-term assets ................................ (316) --
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................... 47,309 64,369
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (82,448) (4,857)
Deferred refinery turnaround costs ................................... (32,898) --
Advances to employees under notes receivable ......................... -- (476)
Repayments of employee notes receivable .............................. 60 --
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ....................... (115,286) (5,333)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash advances from (repayments to) parent ........................ 67,896 (59,056)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... 67,896 (59,056)
------------- -------------
NET DECREASE IN CASH ................................................. (81) (20)
CASH AT BEGINNING OF PERIOD .......................................... 189 171
------------- -------------
CASH AT END OF PERIOD ................................................ $ 108 $ 151
============= =============
</Table>
See accompanying notes to the financial statements.
A-4
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
THE BUSINESS
In conjunction with Valero Energy Corporation's (Valero) acquisition of Ultramar
Diamond Shamrock Corporation (UDS) on December 31, 2001, the U.S. Federal Trade
Commission (FTC) approved a consent decree requiring divestiture of certain UDS
assets. Pursuant to the consent decree, the assets to be divested were required
to be put into a trust, with the future operations of those assets controlled by
an independent trustee selected by the FTC. These assets and their related
operations are referred to as the Golden Eagle Refining and Marketing Assets
Business (the Business) and include:
o the 168,000 barrel-per-day Golden Eagle Refinery located in the San
Francisco Bay area and all tangible assets used in the operation of the
refinery including docks, tanks and pipelines. In addition to the main
refinery processing units, the refinery complex includes three wharves,
water treatment systems, pipelines and a chemical production facility.
The refinery has approximately 140 tanks with combined capacity of
7,700,000 barrels for crude oil and other feedstocks and refined
products;
o the wholesale marketing business, which includes primarily sales to
unbranded customers located in the northern half of California, Fresno
and north, and Reno, Nevada; and
o 70 Beacon- and Ultramar-branded convenience stores located in Northern
California, including land, buildings, pump equipment, underground
storage tanks and various store equipment. The convenience stores sell
various grades of gasoline and diesel, and merchandise products such as
cigarettes, beverages, groceries, and health and beauty aids.
Under the terms of the consent decree, the Business was assigned 6 term sales
contracts (wholesale customers) and 9 refined product exchange contracts. The
exchange contracts provide for the delivery of refined products to unaffiliated
companies at third party terminals in exchange for delivery of a similar
quantity of refined products to the Business by these unaffiliated companies at
specified locations. In addition, Valero has the option to purchase refined
products from the Business at market prices to supply branded convenience stores
located in Northern California, which are being retained by Valero.
Ultramar, Inc. (Ultramar), now a subsidiary of Valero, owned and operated the
Business discussed above as well as other refining and marketing assets and
operations in California.
SALE AND PURCHASE AGREEMENT WITH TESORO
On February 4, 2002, Ultramar entered into a sale and purchase agreement, which
was subsequently amended on February 20, 2002 and May 3, 2002, (as amended, the
Sale and Purchase Agreement) with Tesoro Refining and Marketing Company (Tesoro)
whereby Tesoro would acquire the Business. On May 17, 2002, Valero closed on the
sale of the Business to Tesoro, with the final sales price of $1,075,000,000
being paid to Valero in the form of $925,000,000 of cash and two notes totaling
$150,000,000. The sale included refinery feedstock and refined product
inventories. In addition, the Sale and Purchase Agreement required Tesoro to
assume various employee benefit obligations, lease obligations and environmental
liabilities but excluded certain liabilities of the Business, including accounts
payable, certain accrued liabilities and income tax obligations.
FINANCIAL STATEMENT PRESENTATION
These unaudited financial statements have been prepared in accordance with
United States generally accepted accounting principles for interim financial
information and with the Securities and Exchange Commission (SEC) instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete
A-5
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain previously reported amounts have been reclassified to
conform to the 2002 presentation. Operating results for the three-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The balance sheet as of December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by United States generally accepted accounting principles for
complete financial statements. For further information, refer to the audited
financial statements of the Business included in Tesoro Petroleum Corporation's
Form 8-K filed with the SEC in February 2002.
The financial statements represent a carve-out financial statement presentation
of the operations of the Business and are based on UDS' historical cost related
to the Business prior to Valero's acquisition of UDS. These financial statements
do not include any adjustments that might result from a sale of the Business.
The financial statements include allocations and estimates of direct and
indirect Valero/UDS general and administrative costs attributable to the
operations of the Business. In addition, it was assumed that the majority of
refined product sales from the refinery were made to the wholesale marketing
business and the wholesale marketing business then sold those refined products
to third parties, to Valero's/UDS' branded jobbers and to the 70 convenience
stores being sold. The sales between the refinery and the wholesale marketing
business and between the wholesale marketing business and the 70 convenience
stores being sold have been eliminated in these financial statements. Management
believes that the assumptions, estimates and allocations used to prepare these
financial statements are reasonable. However, the allocations may not
necessarily be indicative of the costs and expenses that would have resulted if
the Business had been operated as a separate entity.
The Business' results of operations may be affected by seasonal factors, such as
the demand for petroleum products, which vary during the year, or industry
factors that may be specific to a particular period, such as industry supply
capacity and refinery turnarounds.
EXCISE AND INCOME TAXES
Federal excise and state motor fuel taxes collected on the sale of products and
remitted to governmental agencies are included in sales and other revenues and
in taxes other than income taxes. For the three months ended March 31, 2002 and
2001, excise taxes were $30,902,000 and $35,668,000, respectively.
The Business' results will be included in the consolidated federal and state
income tax returns filed by its parent for each respective period. The income
tax (benefit) expense in the statement of income represents the current and
deferred income taxes that would have resulted if the Business were a
stand-alone taxable entity filing its own income tax returns. The tax benefit
resulting from the loss for the three months ended March 31, 2002 has been
recorded as a long-term deferred tax asset based on the assumption that such
benefit would be carried forward.
NOTE 2: ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO. 142
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." Statement No. 142 addresses how intangible assets
A-6
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. The statement
provides that goodwill and other intangible assets that have indefinite useful
lives will not be amortized but instead will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but such lives will not be limited to 40
years, as was required under previous guidance. Impairment losses that arise due
to the initial application of Statement No. 142 are to be reported as resulting
from a change in accounting principle. The provisions of Statement No. 142 were
implemented on January 1, 2002 resulting in the cessation of goodwill
amortization, which amortization was $418,000 for the three months ended March
31, 2001. Excluding the impact of goodwill amortization, net of the related tax
effect of $171,000, results in pro forma net income of $32,224,000 for the three
months ended March 31, 2001. In addition, management believes that future
reported net income may be more volatile because impairment losses related to
goodwill are likely to occur irregularly and in varying amounts.
FASB STATEMENT NO. 144
Effective January 1, 2002, the Business adopted Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Statement No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. This statement supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," but retains Statement No. 121's
fundamental provisions for recognition and measurement of impairment of
long-lived assets to be held and used and measurement of long-lived assets to be
disposed of by sale. This statement also supersedes APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. Statement
No. 144 does not apply to goodwill or other intangible assets, the accounting
and reporting of which is addressed in newly issued Statement No. 142, "Goodwill
and Other Intangible Assets." There was no impact to the Business' financial
position or results of operations as a result of the adoption of this statement.
FASB STATEMENT NO. 145
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement:
o rescinds Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt";
o rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements";
o rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers"; and
o amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of Statement No. 145 related to the
rescission of Statement No. 4 shall be applied in fiscal years beginning after
May 15, 2002 and the provisions of this statement related to the Statement No.
13 sale-leaseback inconsistency shall be effective for transactions occurring
after May 15, 2002, with early application encouraged. All other provisions of
this statement shall be effective for financial statements issued on or
A-7
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
after May 15, 2002, with earlier application encouraged. The Business does not
expect that the adoption of this statement will have a material impact on its
financial position or results of operations.
NOTE 3: INVENTORIES
Inventories consisted of the following:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
(in thousands)
Crude oil and other feedstocks..................................... $ 61,866 $ 67,855
Refined products and other finished products
and convenience store items ..................................... 42,404 85,434
Materials and supplies ............................................ 7,850 8,283
Refined products due under exchange contracts ..................... 4,606 1,410
------------- -------------
Total inventories.............................................. $ 116,726 $ 162,982
============= =============
</Table>
As of December 31, 2001, the Business recorded a $55,930,000 reduction in the
carrying value of crude oil and refined product inventories to reduce such
inventories to market value which was lower than LIFO cost.
In the first quarter of 2002, the Business experienced a LIFO inventory
liquidation which was treated as a temporary decrement.
NOTE 4: NET PARENT INVESTMENT AND RELATED-PARTY TRANSACTIONS
The net parent investment represents a net balance as the result of various
transactions between the Business and Valero/UDS. The balance is the result of
the Business' participation in Valero's/UDS' centralized cash management program
under which all of the Business' cash receipts were remitted to and all cash
disbursements were funded by Valero/UDS. There are no terms of settlement or
interest charges associated with the net parent investment balance.
Transactions between the Business and Valero/UDS included the allocation of
salary and employee benefit costs, insurance costs and administrative fees from
Valero/UDS to the Business.
During the three months ended March 31, 2002 and 2001, Valero/UDS provided the
Business with certain general and administrative services, including the
centralized corporate functions of legal, accounting, treasury, engineering,
information technology, human resources and other corporate services. Charges
for these services were allocated based on various factors, including
investments in property, personnel headcount, and refinery capacity. Management
believes that the amount of general and administrative expenses allocated to the
Business is a reasonable approximation of the costs related to the Golden Eagle
Refinery and northern California retail operations. For purposes of these
financial statements, payables and receivables related to transactions between
the Business and Valero/UDS are included as a component of the net parent
investment.
A-8
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes transactions with Valero/UDS:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------- --------------
(in thousands)
Operating expenses ............................ $ 22,398 $ 19,568
General and administrative expenses ........... 2,675 2,619
</Table>
Employees who work in the Business are included in the various employee benefit
plans of Valero/UDS. These plans include qualified, non-contributory defined
benefit retirement plans, defined contribution 401(k) plans, employee and
retiree medical, dental and life insurance plans, long-term incentive plans and
other such benefits. For the purposes of these carve-out financial statements,
the Business is considered to be participating in multi-employer benefit plans
of Valero/UDS.
The Business' allocated share of Valero/UDS employee benefit plan expenses were
$4,573,000 and $4,032,000 for the three months ended March 31, 2002 and 2001,
respectively. These employee benefit plan expenses are included in operating
expenses with the related payroll costs.
Historically, the Business' results have been included in the consolidated
federal and state income tax returns filed by Valero/UDS. The income tax
(benefit) expense in the statements of income represents the current and
deferred income taxes that would have resulted if the Business were a
stand-alone taxable entity filing its own income tax returns. Accordingly, the
calculations of income tax (benefit) expense and net deferred income tax
liabilities necessarily require certain assumptions, allocations and estimates
which management believes are reasonable to reflect the tax reporting for the
Business as a stand-alone taxpayer.
NOTE 5: CONTINGENCIES AND COMMITMENTS
San Francisco Baykeeper's Citizen Suit
On February 16, 2001, an environmental group, San Francisco Baykeeper
(Baykeeper), filed a complaint against Ultramar alleging violations of the Clean
Water Act, the California Water Code, and a storm water pollution prevention
plan pertaining to a petroleum coke loading terminal in Pittsburg, California
owned by Ultramar. In January 2002, Ultramar and Baykeeper entered into a
settlement agreement that has been approved by the court. The settlement will
require Ultramar to reimburse Baykeeper's legal costs, evaluate the use of the
coke terminal and either discontinue its use of the terminal or implement best
available technology. The owner of the terminal will have up to four years to
implement this settlement agreement. Pursuant to the Sale and Purchase
Agreement, Tesoro will assume the obligations for implementation of this
settlement agreement.
Communities For A Better Environment
On March 31, 2001, two environmental groups, Communities for a Better
Environment and San Francisco Baykeeper (collectively Plaintiffs), filed a
lawsuit challenging certain orders by the California State Water Resources
Control Board and the San Francisco Regional Water Quality Control Board
(collectively the Boards) that grant the Golden Eagle Refinery a water discharge
permit, also known as a National Pollutant Discharge Elimination System (NPDES)
permit. The lawsuit was brought in the form of a petition for writ of mandamus
against the Boards. Ultramar is named as the real party in interest.
The NPDES permit sets an interim limit and proposals for establishing a final
limit on certain discharges from the refinery. The interim limit could extend
until 2010. The Plaintiffs make three claims, namely that (a) the permit lacks
any "Water Quality Based Effluent Limitation," in violation of the Clean Water
Act, because the interim limit is performance-based, not water quality based,
(b) the new permit violates the Clean Water Act's anti-backsliding requirement,
because the interim limit is less stringent than the
A-9
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
facility's prior NPDES permit, and (c) the schedule for interim and final limits
violates legal limitations in the Clean Water Act and state law, in part because
the period for interim limitations is allegedly too long.
The court tentatively ruled that the refinery's permit fails to include a
numeric water quality-based effluent limitation as mandated by the Clean Water
Act and federal law, and that by eliminating a water quality-based effluent
limitation for dioxins as required by federal law and regulations, the orders of
the Regional and State Boards are in violation of the law. The court ordered the
orders of the Regional and State Boards to be remanded for further proceedings
consistent with the court's ruling. The court's ruling will not be final until
the judge enters the order. Currently, negotiations are underway regarding the
extent of the order and the Board's procedural options with respect to the
court's tentative decision. If the refinery's permit is subject to more
stringent limits, the Business could incur significant capital expenditures to
comply with those limits. Pursuant to the Sale and Purchase Agreement with
Tesoro, Tesoro will assume the defense and obligations associated with this
litigation.
Union Oil Company of California Litigation
On January 22, 2002, Union Oil Company of California (Unocal) filed a patent
infringement lawsuit against Valero in California federal court. The complaint
seeks a 5.75 cent per gallon royalty on all reformulated gasoline infringing on
Unocal's '393 and '126 patents. These patents cover certain compositions of
cleaner-burning gasoline. The complaint seeks treble damages for Valero's
alleged willful infringement of Unocal's patents and Valero's alleged conduct to
induce others to infringe the patents. In a previous lawsuit, Unocal prevailed
against five other major refiners involving its '393 patent.
In August 2001, the FTC announced that it was commencing an antitrust
investigation concerning Unocal's conduct with a joint industry research group
during the time that Unocal was prosecuting its patents at the U.S. Patent and
Trademark Office (PTO). An injunction against Unocal's enforcement of its
patents is a potential outcome of the FTC investigation. In 2001, the PTO
commenced a reexamination of Unocal's '393 patent, and in January 2002, the PTO
issued a notice of rejection of all claims of the '393 patent. Unocal has
responded to the PTO's action, but the PTO has not issued a final decision. In
January 2002, the PTO reversed an earlier denial and commenced reexamination of
Unocal's '126 patent. Both reexaminations could affect the scope and validity of
the patents.
Valero moved to stay the patent lawsuit pending the outcome of the reexamination
proceedings, and the court has agreed to stay the lawsuit until July 8, 2002.
Notwithstanding the judgment against the other refiners in the previous
litigation, management believes that it has several strong defenses to Unocal's
lawsuit, including those arising from Unocal's misconduct, and management
believes it will prevail in the lawsuit. However, due to the inherent
uncertainty of litigation, there can be no assurance that Valero will prevail,
and an adverse result could have a material adverse effect on the results of
operations and financial position of the Business. Pursuant to the Sale and
Purchase Agreement with Tesoro, Ultramar and its predecessors will retain
liability for any infringement of Unocal's patents at the Golden Eagle Refinery
prior to its sale to Tesoro.
General
There are various other legal proceedings and claims pending against the
Business which arise in the ordinary course of business. It is management's
opinion, based upon advice of counsel, that these matters, individually or in
the aggregate, will not have a material adverse effect on the results of
operations or financial position of the Business.
NOTE 6: ENVIRONMENTAL MATTERS
The operations of the Business are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although management believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in petroleum refining and retail
marketing operations,
A-10
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
and there can be no assurance that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws and regulations and enforcement policies
thereunder, and claims for damages to property or persons resulting from the
operations, could result in substantial costs and liabilities. Accordingly, the
Business has adopted policies, practices and procedures in the areas of
pollution control, product safety, occupational health and the production,
handling, storage, use and disposal of hazardous materials to prevent material
environmental or other damage, and to limit the financial liability which could
result from those events. However, some risk of environmental or other damage is
inherent in the Business, as it is with other companies engaged in similar
businesses.
In conjunction with UDS' acquisition of the Golden Eagle Refinery from Tosco
Corporation (Tosco) on August 31, 2000, Tosco agreed to indemnify UDS for up to
$50,000,000 of environmental liabilities that are discovered subsequent to the
acquisition. Excluded from this indemnification are liabilities that result from
a change in environmental law after August 31, 2000.
The balances of and changes in accruals for environmental matters, which are not
covered by the Tosco indemnity, are primarily related to retail operations and
are principally included in other long-term liabilities, consisted of the
following:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------- -------------
(in thousands)
Balance at beginning of period ...... $ 2,863 $ 3,446
Payments .......................... (212) (110)
------------- -------------
Balance at end of period ............ $ 2,651 $ 3,336
============= =============
</Table>
The accruals noted above represent the Business' best estimate of the costs
which will be incurred over an extended period for restoration and environmental
remediation at various sites. However, environmental exposures are difficult to
assess and estimate due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination of the
Business' liability in proportion to other parties, improvements in cleanup
technologies and the extent to which environmental laws and regulations may
change in the future. The liabilities reflected above have not been reduced by
possible recoveries from third parties and projected cash expenditures have not
been discounted.
NOTE 7: BUSINESS SEGMENTS
The Business has two reportable segments, refining and retail. The refining
segment includes the Golden Eagle Refinery and related wholesale marketing
operations. The retail segment includes the operations of the 70
company-operated convenience stores in Northern California. Operations that are
not included in the two reportable segments are included in the Corporate
category and consist primarily of general and administrative expenditures. The
Business' operations are located in the State of California.
The reportable segments are strategic business units that offer different
products and services. They have been historically managed separately as each
business requires different technology and marketing strategies. The calculation
of EBITDA below is not based on United States generally accepted accounting
principles and should not be considered as an alternative to net income or cash
flows from operating activities (which are determined in accordance with U.S.
GAAP). Intersegment sales are generally derived from transactions made at
prevailing market rates.
A-11
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
REFINING RETAIL CORPORATE TOTAL
------------ ------------ ------------ ------------
(in thousands)
THREE MONTHS ENDED MARCH 31, 2002:
Sales and other revenues from
external customers ................ $ 371,864 $ 58,705 $ -- $ 430,569
Intersegment sales ................... 30,652 -- -- 30,652
Earnings before interest, income
taxes and depreciation and
amortization (EBITDA) ............. (10,924) (3,028) (2,675) (16,627)
Operating loss ....................... (23,074) (3,626) (2,675) (29,375)
THREE MONTHS ENDED MARCH 31, 2001:
Sales and other revenues from
external customers ................ 437,988 67,878 -- 505,866
Intersegment sales ................... 39,764 -- -- 39,764
EBITDA ............................... 65,568 281 (2,619) 63,230
Operating income (loss) .............. 56,887 (236) (2,619) 54,032
</Table>
NOTE 8: FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(in thousands)
Cash ................................. $ 108 $ 189
Employee notes receivable ............ 3,269 3,329
Commodity price swap contracts:
Derivative assets, net ........... -- 1,226
Derivative liabilities ........... 1,791 2,967
</Table>
As of March 31, 2002 and December 31, 2001, the carrying value of the commodity
price swaps approximated fair value and the Business had no commodity futures
contracts outstanding.
The Business is subject to the market risk associated with changes in the market
price of the crude oil and refined products underlying the derivative
instruments; however, the effect of these changes in values is generally
mitigated by changes in the sales price of the Business' refined products.
A-12
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Sale and Purchase Agreement for Golden Eagle Refining
and Marketing Assets, dated February 4, 2002, by and
among Ultramar Inc. and Tesoro Refining and Marketing
Company, including First Amendment dated February 20,
2002 and related Purchaser Parent Guaranty dated
February 4, 2002 (incorporated by reference to
Exhibit 2.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, File No.
1-3473) and Second Amendment dated May 3, 2002
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed May 9,
2002, File No. 1-3473).
10.1 $100 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc.
(incorporated by reference to the Exhibit 10.1 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002).
10.2 $50 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc.
(incorporated by reference to the Exhibit 10.2 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002).
10.3* Letter dated May 5, 2002 from the Company to the
State of California Department of Justice, Office of
the Attorney General (incorporated by reference to
the Exhibit 10.3 to the Company's Current Report on
Form 8-K, File No. 1-3473, filed on May 24, 2002).
10.4 $1,275,000,000 Amended and Restated Credit Agreement,
dated as of May 17, 2002, among the Company and
Lehman Brothers Inc. (arranger), Lehman Commercial
Paper Inc. (the syndication agent), Bank One, NA (the
administrative agent) and a syndicate of banks,
financial institutions and other entities
(incorporated by reference to the Exhibit 10.4 to the
Company's Current Report on Form 8-K, File No.
1-3473, filed on May 24, 2002). Certain schedules
and exhibits to this Amended and Restated Credit
Agreement have not been filed with this exhibit. The
Company agrees to furnish supplementally any omitted
schedule or exhibit to the SEC upon request.
</Table>
* Portions have been omitted pursuant to a request for
confidential treatment.