1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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
(Address of Principal Executive Offices)
(Zip Code)
Telephone: 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 22,456,968 shares of the Registrant's common stock outstanding at
April 30, 1994.
2
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Index to Form 10-Q
For the Quarterly Period Ended March 31, 1994
Part I. Financial Information: Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations
Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 5
Condensed Statements of Consolidated Cash Flows
Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 13
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
March 31, December 31,
1994 1993*
--------- -----------
ASSETS
------
Current Assets:
Cash and cash equivalents (includes
restricted cash of $26,550 and
$25,420, respectively, as collateral
for letters of credit). . . . . . . . . . . . . . . . . . $ 49,412 36,596
Short-term investments. . . . . . . . . . . . . . . . . . . - 5,952
Receivables, less allowance for
doubtful accounts of $2,419
($2,487 at December 31, 1993). . . . . . . . . . . . . . . 59,487 69,637
Inventories:
Crude oil, refined products and
merchandise . . . . . . . . . . . . . . . . . . . . . . 72,261 71,011
Materials and supplies. . . . . . . . . . . . . . . . . . 3,142 3,175
Prepaid expenses and other. . . . . . . . . . . . . . . . . 9,870 10,136
---------- -------
Total Current Assets. . . . . . . . . . . . . . . . . . . 194,172 196,507
Property, Plant and Equipment, Net of
Accumulated Depreciation, Depletion
and Amortization of $177,188
($172,312 at December 31, 1993) . . . . . . . . . . . . . . 222,418 213,151
Investment in Tesoro Bolivia Petroleum
Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6,823 6,310
Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . 18,696 18,554
---------- -------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 442,109 434,522
========== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* The balance sheet at December 31, 1993 has been taken from the audited
consolidated financial statements at that date and condensed.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1994 1993*
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 45,161 43,192
Accrued liabilities. . . . . . . . . . . . . . . . . . 32,623 24,017
Current portion of long-term debt
and other obligations. . . . . . . . . . . . . . . . 6,094 4,805
--------- ---------
Total Current Liabilities . . . . . . . . . . . . 83,878 72,014
--------- ---------
Other Liabilities. . . . . . . . . . . . . . . . . . . . 35,277 45,272
--------- --------
Long-Term Debt and Other Obligations,
Less Current Portion . . . . . . . . . . . . . . . . . 178,856 180,667
--------- ---------
Commitments and Contingencies (Note 5)
Redeemable Preferred Stock . . . . . . . . . . . . . . . - 78,051
--------- ---------
Common Stock and Other Stockholders'
Equity:
$2.20 Cumulative convertible
preferred stock. . . . . . . . . . . . . . . . . . . 57,500 -
$2.16 Cumulative convertible pre-
ferred stock . . . . . . . . . . . . . . . . . . . . - 1,320
Common Stock . . . . . . . . . . . . . . . . . . . . . 3,743 2,348
Additional paid-in capital . . . . . . . . . . . . . . 114,406 86,985
Retained earnings (deficit) . . . . . . . . . . . . . ( 31,337) ( 31,898)
--------- ---------
144,312 58,755
Less deferred compensation . . . . . . . . . . . . . . 214 237
--------- ---------
144,098 58,518
--------- ---------
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . $ 442,109 434,522
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* The balance sheet at December 31, 1993 has been taken from the audited
consolidated financial statements at that date and condensed.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Condensed Statements of Consolidated Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
---------------------------------
1994 1993
---- ----
Revenues:
Gross operating revenues . . . . . . . . . . $189,087 224,494
Interest income . . . . . . . . . . . . . . . 523 451
Gain on sales of assets . . . . . . . . . . . 2,680 48
Other . . . . . . . . . . . . . . . . . . . . 450 1,488
-------- --------
Total Revenues . . . . . . . . . . . . . . 192,740 226,481
-------- --------
Costs and Expenses:
Costs of sales and operating
expenses . . . . . . . . . . . . . . . . . 167,605 213,737
General and administrative . . . . . . . . . 3,627 3,423
Depreciation, depletion and
amortization . . . . . . . . . . . . . . . 6,677 4,822
Interest expense . . . . . . . . . . . . . . 4,877 5,013
Other . . . . . . . . . . . . . . . . . . . . 1,191 1,663
-------- --------
Total Costs and Expenses . . . . . . . . . 183,977 228,658
-------- --------
Earnings (Loss) Before Income
Taxes and Extraordinary Loss
on Extinguishment of Debt . . . . . . . . . . 8,763 ( 2,177)
Income Tax Provision . . . . . . . . . . . . . 1,561 732
-------- --------
Earnings (Loss) Before Extraor-
dinary Loss on Extinguishment
of Debt . . . . . . . . . . . . . . . . . . . 7,202 ( 2,909)
Extraordinary Loss on Extinguish-
ment of Debt . . . . . . . . . . . . . . . . ( 4,752) -
-------- --------
Net Earnings (Loss) . . . . . . . . . . . . . . $ 2,450 ( 2,909)
======== ========
Net Earnings (Loss) Applicable to
Common Stock . . . . . . . . . . . . . . . . $ 561 ( 5,211)
======== =========
Earnings (Loss) Per Primary and
Fully Diluted* Share:
Earnings (Loss) Before Extra-
ordinary Loss on Extinguish-
ment of Debt . . . . . . . . . . . . . . . $ .27 ( .37)
Extraordinary Loss on
Extinguishment of Debt . . . . . . . . . . ( .24) -
-------- -------
Net Earnings (Loss) . . . . . . . . . . . . . $ .03 ( .37)
======== ========
Weighted Average Common and Common
Equivalent Shares (in thousands) . . . . . . 19,455 14,070
The accompanying notes are an integral part of these condensed consolidated
financial statements.
*Anti-dilutive.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Condensed Statements of Consolidated Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-----------------------------
1994 1993
-------- --------
Cash Flows From (Used In) Operating Activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ 2,450 ( 2,909)
Adjustments to reconcile net earnings
(loss) to net cash from operating
activities:
Loss (gain) on extinguishment of debt . . . . . . . . . . . 4,752 ( 1,422)
Depreciation, depletion and
amortization . . . . . . . . . . . . . . . . . . . . . 6,677 4,822
Gain on sales of assets . . . . . . . . . . . . . . . . . . ( 2,680) ( 48)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 361 662
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . 11,151 3,520
Inventories . . . . . . . . . . . . . . . . . . . . . . . ( 1,217) 13,372
Investment in Tesoro Bolivia
Petroleum Company . . . . . . . . . . . . . . . . . . . ( 513) 377
Other assets . . . . . . . . . . . . . . . . . . . . . . 1,834 1,011
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . . . 8,272 4,563
Obligation payments to State of
Alaska . . . . . . . . . . . . . . . . . . . . . . . . ( 710) (10,797)
Other liabilities and obligations . . . . . . . . . . . . ( 118) 1,262
---------- ---------
Net cash from operating activities . . . . . . . . . . 30,259 14,413
---------- ---------
Cash Flows From (Used In) Investing
Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (18,475) ( 5,084)
Proceeds from sales of assets, net of
expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,014 107
Sales of short-term investments . . . . . . . . . . . . . . . 5,952 20,021
Purchases of short-term investments . . . . . . . . . . . . - ( 8,410)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 ( 206)
---------- ---------
Net cash from (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . (10,158) 6,428
---------- ---------
Cash Flows From (Used In) Financing
Activities:
Payments of long-term debt . . . . . . . . . . . . . . . . . (10,222) ( 211)
Issuance of long-term debt . . . . . . . . . . . . . . . . . 5,000 -
Dividends on preferred stock . . . . . . . . . . . . . . . . ( 103) -
Repurchase of debentures . . . . . . . . . . . . . . . . . . - ( 9,675)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,960) ( 5)
---------- ---------
Net cash used in financing
activities . . . . . . . . . . . . . . . . . . . . . ( 7,285) ( 9,891)
---------- ---------
Increase in Cash and Cash Equivalents . . . . . . . . . . . . 12,816 10,950
Cash and Cash Equivalents at Beginning of
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,596 46,869
---------- ---------
Cash and Cash Equivalents at End of
Period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,412 57,819
========== =========
Supplemental Cash Flow Disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 7,105 8,477
========== =========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . $ 961 755
========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The interim condensed consolidated financial statements are unaudited
but, in the opinion of management, incorporate all adjustments
necessary for a fair presentation of results for such periods. Such
adjustments are of a normal recurring nature. For information
regarding the effects of the Recapitalization (as hereinafter
defined), see Note 2 below. The results of operations for any interim
period are not necessarily indicative of results for the full year.
The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(2) Recapitalization
In February 1994, the Company consummated exchange offers and adopted
amendments to its Restated Certificate of Incorporation pursuant to
which the Company's outstanding debt and preferred stock were
restructured (the "Recapitalization"). The Recapitalization has
significantly improved the Company's capital structure.
Significant components of the Recapitalization, together with the
applicable accounting effects, were as follows:
(i) The Company has exchanged $44.1 million principal amount of new
13% Exchange Notes ("Exchange Notes") due December 1, 2000 for a
like principal amount of 12 3/4% Subordinated Debentures
("Subordinated Debentures") due March 15, 2001. This exchange
satisfied the 1994 sinking fund requirements and, except for $.9
million, will satisfy sinking fund requirements for the
Subordinated Debentures through 1997.
The exchange of the Subordinated Debentures has been accounted for
as an early extinguishment of debt in the first quarter of 1994,
resulting in a charge of $4.8 million as an extraordinary loss on
this transaction, which represented the excess of the estimated
market value of the Exchange Notes over the carrying value of the
Subordinated Debentures. The carrying value of the Subordinated
Debentures exchanged was reduced by applicable unamortized debt
issue costs. No tax benefit was available to offset the
extraordinary loss as the Company has provided a 100% valuation
allowance to the extent of its deferred tax assets.
(ii) The 1,319,563 outstanding shares of the Company's $2.16 Cumulative
Convertible Preferred Stock ("$2.16 Preferred Stock"), which had a
$25 per share liquidation preference, plus accrued and unpaid
dividends aggregating $9.5 million at February 9, 1994, were
reclassified into 6,465,859 shares of Common Stock. The Company
also agreed to issue up to 131,956 shares of Common Stock on
behalf of the holders of $2.16 Preferred Stock to pay certain of
their legal fees and expenses in connection with the settlement of
litigation related to the reclassification. Of such 131,956
shares of Common Stock, 73,913 shares were awarded in April 1994
by the Delaware Chancery Court for legal fees and expenses, with
the remaining shares to be issued to the
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
former holders of $2.16 Preferred Stock upon the court's order
becoming final and nonappealable.
The issuance of the Common Stock in connection with the
reclassification and settlement of litigation that was recorded in
1994 resulted in an increase in Common Stock of approximately $1
million, equal to the aggregate par value of the Common Stock
issued, and an increase in additional paid-in capital of
approximately $9 million.
(iii) The Company and MetLife Security Insurance Company of Louisiana
("MetLife Louisiana"), the holder of all of the Company's
outstanding $2.20 Redeemable Cumulative Convertible Preferred
Stock ("$2.20 Preferred Stock"), entered into an agreement (the
"Amended MetLife Memorandum") with regard to the $2.20 Preferred
Stock pursuant to which MetLife Louisiana agreed to waive all
existing mandatory redemption requirements, to consider all
accrued and unpaid dividends thereon (aggregating $21.2 million at
February 9, 1994) to have been paid, to allow the Company to pay
future dividends on the $2.20 Preferred Stock in Common Stock in
lieu of cash, to waive or refrain from exercising certain other
rights of the $2.20 Preferred Stock and to grant to the Company a
three-year option (the "MetLife Louisiana Option") to purchase all
of MetLife Louisiana's holdings of $2.20 Preferred Stock and
Common Stock for approximately $53 million prior to June 30, 1994
after giving effect to the scheduled dividend payment on May 15,
1994, all in consideration for, among other things, the issuance
by the Company to MetLife Louisiana of 1,900,075 shares of Common
Stock. Such additional shares are subject to the MetLife
Louisiana Option. The unexercised option price will be increased
by 3% on the last day of each calendar quarter until December 31,
1995, and by 3 1/2% on the last day of each quarter thereafter,
and will be reduced by cash dividends paid on the $2.20 Preferred
Stock after February 9, 1994. The Company will be required to pay
dividends (in either cash or Common Stock) when due on the $2.20
Preferred Stock in order for the MetLife Louisiana Option to
remain outstanding. In addition, the MetLife Louisiana Option is
subject to certain minimum exercise requirements to remain
outstanding beyond one year and two years.
These actions have resulted in the reclassification of the $2.20
Preferred Stock into equity capital at its aggregate liquidation
preference of $57.5 million and the recording of an increase in
additional paid-in capital of approximately $21 million in
February 1994.
If the Recapitalization had been completed at the beginning of the
year, the pro forma earnings per share before extraordinary loss
would have decreased from $.27 to $.24 for the three months ended
March 31, 1994 due to the additional shares of Common Stock issued
in the Recapitalization.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(3) Property, Plant and Equipment
In January 1994, the Company sold its terminal facilities in Valdez,
Alaska for cash proceeds of $2.0 million and a note receivable of $3.0
million, which resulted in a pretax gain to the Company of
approximately $2.8 million during the three months ended March 31,
1994.
(4) Credit Arrangements
During April 1994, the Company entered into a new three-year $125
million corporate revolving credit facility ("Revolving Credit
Facility") with a consortium of ten banks. The Revolving Credit
Facility, which is subject to a borrowing base, provides for (i) the
issuance of letters of credit up to the full amount of the borrowing
base as calculated, but not to exceed $125 million, (ii) cash
borrowings up to the amount of the borrowing base attributable to
domestic oil and gas reserves and (iii) a 90-day option to convert up
to $15 million of the commitment under the Revolving Credit Facility
into a four-year term loan for the construction of a vacuum unit at
the Company's Kenai, Alaska refinery (the "Refinery"). Outstanding
obligations under the Revolving Credit Facility are secured by liens
on substantially all of the Company's trade accounts receivable and
product inventory and mortgages on the Refinery and the Company's
South Texas natural gas reserves.
Letters of credit available under the Revolving Credit Facility are
limited to a borrowing base calculation. The borrowing base, which is
comprised of eligible accounts receivable, inventory and domestic oil
and gas reserves, has initially been determined to be approximately
$97 million. As of April 28, 1994, the Company had outstanding
letters of credit under the new facility of $31 million, with a
remaining unused availability of $66 million. Cash borrowings (other
than under the term loan facility for the vacuum unit) are limited to
the amount of the oil and gas reserve component of the borrowing base,
which has initially been determined to be approximately $32 million.
Cash borrowings under the Revolving Credit Facility will reduce the
availability of letters of credit on a dollar-for-dollar basis;
however, letter of credit issuances will not reduce cash borrowing
availability unless the aggregate dollar amount of outstanding letters
of credit exceeds the sum of the accounts receivable and inventory
components of the borrowing base.
Under the terms of the Revolving Credit Facility, the Company is
required to maintain specified levels of working capital, tangible net
worth and cash flow. Among other matters, the Revolving Credit
Facility has certain restrictions with respect to (i) capital
expenditures, (ii) incurrence of additional indebtedness, and (iii)
dividends on its capital stock. The Revolving Credit Facility
contains other covenants customary in credit arrangements of this
kind.
The Revolving Credit Facility replaced certain interim financing
arrangements that the Company had been using since the termination of
its prior letter of credit facility in October 1993. The interim
financing arrangements that were cancelled in conjunction with the
completion of
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
the new Revolving Credit Facility included a $30 million reducing
revolving credit facility and a waiver and substitution of collateral
agreement with the State of Alaska (the "State"). In addition, the
completion of the Revolving Credit Facility provides the Company
significant flexibility in the investment of excess cash balances, as
the Company is no longer required to maintain minimum cash balances or
to cash secure letters of credit.
(5) Commitments and Contingencies
Tennessee Gas Contract. The Company is selling a portion of the gas
from its Bob West Field to Tennessee Gas Pipeline Company ("Tennessee
Gas") under a Gas Purchase and Sales Agreement (the "Tennessee Gas
Contract") which provides that the price of gas shall be the maximum
price as calculated in accordance with Section 102(b)(2) (the
"Contract Price") of the Natural Gas Policy Act of 1978 (the "NGPA").
Tennessee Gas filed suit against the Company alleging that the
Tennessee Gas Contract is not applicable to the Company's properties
and that the gas sales price should be the price calculated under the
provisions of Section 101 of the NGPA rather than the Contract Price.
During March 1994, the Contract Price was $7.84 per Mcf, the Section
101 price was $4.58 per Mcf and the average spot market price was
$2.09 per Mcf. Tennessee Gas also claimed that the contract should be
considered an "output contract" under Section 2.306 of the Texas
Business and Commerce Code and that the increases in volumes tendered
under the contract exceeded those allowable for an output contract.
The Company continues to receive payment from Tennessee Gas based on
the Contract Price for all volumes that are subject to the contract
under the Company's interpretation.
The District Court trial judge returned a verdict in favor of the
Company on all issues. On appeal by Tennessee Gas, the Court of
Appeals affirmed the validity of the Tennessee Gas Contract as to the
Company's properties and held that the price payable by Tennessee Gas
for the gas was the Contract Price. The Court of Appeals remanded the
case to the trial court based on its determination (i) that the
Tennessee Gas Contract was an output contract and (ii) that a fact
issue existed as to whether the increases in the volumes of gas
tendered to Tennessee Gas under the contract were made in bad faith or
were unreasonably disproportionate to prior tenders. The Company is
seeking review of the appellate court ruling on the output contract
issue in the Supreme Court of Texas. Tennessee Gas is seeking review
of the appellate court ruling denying the remaining Tennessee Gas
claims in the Supreme Court of Texas.
Although the outcome of any litigation is uncertain, management, based
upon advice from outside legal counsel, is confident that the decision
of the trial and appellate courts will ultimately be upheld as to the
validity of the Tennessee Gas Contract and the Contract Price.
Therefore, if the Supreme Court of Texas does not grant the Company's
petition for writ of error and affirms the appellate court ruling, the
Company believes that the only issue for trial should be whether the
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
increases in the volumes of gas tendered to Tennessee Gas from the
Company's properties were made in bad faith or were unreasonably
disproportionate. The appellate court decision was the first reported
decision in Texas holding that a take-or-pay contract was an output
contract. As a result, it is not clear what standard the trial court
would be required to apply in determining whether the increases were
in bad faith or unreasonably disproportionate. The appellate court
acknowledged in its opinion that the standards used in evaluating
other kinds of output contracts would not be appropriate in this
context. The Company believes that the appropriate standard would be
whether the development of the field was undertaken in a manner that a
prudent operator would have undertaken in the absence of an
above-market sales price. Under that standard, the Company believes
that, if this issue is tried, the development of its gas properties
and the resulting increases in volumes tendered to Tennessee Gas will
be found to have been reasonable and in good faith. Accordingly, the
Company has recognized revenues, net of production taxes and marketing
charges, for natural gas sales through March 31, 1994, under the
Tennessee Gas Contract based on the Contract Price, which net revenues
aggregated $21.1 million more than the Section 101 prices and $38.9
million in excess of the spot market prices. If Tennessee Gas
ultimately prevails in this litigation, the Company could be required
to return to Tennessee Gas the difference between the spot market
price for gas and the Contract Price, plus interest, if awarded by the
court. An adverse judgment in this case could have a material adverse
effect on the Company. For further information regarding the
Tennessee Gas Contract, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part I, Item 2.
Other. In March 1992, the Company received a Compliance Order and
Notice of Violation from the U. S. Environmental Protection Agency
("EPA") alleging possible violations by the Company of the New Source
Performance Standards under the Clean Air Act at the Refinery. The
Company is continuing in its efforts to resolve these issues with the
EPA; however, no final resolution has been reached. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect upon the Company's business or financial
condition.
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, 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. The Company is currently involved with two waste
disposal sites in Louisiana at which it has been named a potentially
responsible party under the Federal Superfund law. Although this law
might impose joint and several liability upon each party at any site,
the extent of the Company's allocated financial contribution to the
cleanup of these sites is expected to be limited based on the number
of companies and the volumes of waste involved. At each site, a
number of large companies have also been named as potentially
responsible parties and are expected to cooperate in the cleanup. The
Company is also involved in remedial response and has incurred cleanup
expenditures associated with
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
environmental matters at a number of other sites including certain of
its own properties.
At March 31, 1994, the Company had accrued $6.0 million for
environmental costs. Based on currently available information,
including the participation of other parties or former owners in
remediation actions, the Company believes these accruals are adequate.
Conditions which require additional expenditures may exist for various
Company sites, including, but not limited to, the Refinery, service
stations (current and closed locations) and petroleum product
terminals, and for compliance with the Clean Air Act. The amount of
such future expenditures cannot presently be determined by the
Company.
The Company transports its crude oil and a substantial portion of its
refined products utilizing Kenai Pipe Line Company's ("KPL") pipeline
and marine terminal facilities in Kenai, Alaska. In March 1994, KPL
filed a revised tariff with the Federal Energy Regulatory Commission
("FERC") for dock loading services, which would have increased the
Company's annual cost of transporting products through KPL's
facilities from $1.2 million to $11.2 million, or an increase of $10
million per year. Following the FERC's rejection of KPL's tariff and
the commencement of negotiations for the purchase by the Company of
the dock facilities, KPL filed a temporary tariff that would increase
the Company's annual cost by approximately $1.5 million. The
negotiations between the Company and KPL are continuing. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect upon the financial condition or results of
operations of the Company.
-12-
13
Item 2. TESORO PETROLEUM CORPORATION AND
SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1994 COMPARED WITH THE
THREE MONTHS ENDED MARCH 31, 1993
A summary of the Company's consolidated results of operations for the three
months ended March 31, 1994 and 1993 is presented below:
Three Months Ended
March 31,
1994 1993
---- ----
Consolidated Results of Operations Data
(in millions, except per share amounts):
Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $189.1 224.5
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 .5
Gain on Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . 2.7 -
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.5
------- -------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 192.7 226.5
Costs of Sales and Operating Expenses. . . . . . . . . . . . . . . . . 167.6 213.8
General and Administrative . . . . . . . . . . . . . . . . . . . . . . 3.6 3.4
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . 6.6 4.8
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 5.0
Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 1.7
Income Tax Provision . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 .7
------- -------
Earnings (Loss) Before Extraordinary Loss . . . . . . . . . . . . . . 7.2 ( 2.9)
Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . . . . ( 4.8) --
------- --------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.4 ( 2.9)
======= =======
Earnings (Loss) per Primary and Fully Diluted*
Share:
Earnings (Loss) Before Extraordinary Loss . . . . . . . . . . . . . . $ .27 ( .37)
Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . . . . ( .24) --
------- --------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ .03 ( .37)
======= =======
*Anti-dilutive
Net earnings of $2.4 million, or $.03 per share, for the three months ended
March 31, 1994 ("1994 quarter") compare to a net loss of $2.9 million, or $.37
per share, for the three months ended March 31, 1993 ("1993 quarter"). The
comparability between these two periods was impacted by certain transactions.
The 1994 quarter included a noncash extraordinary loss of $4.8 million on the
extinguishment of debt in connection with the Recapitalization. Earnings
before the extraordinary loss were $7.2 million, or $.27 per share, for the
1994 quarter. Also included in the 1994 quarter was a $2.8 million gain on the
sale of the Company's Valdez, Alaska terminal. The 1993 quarter included a
gain of $1.4 million on the repurchase and retirement of $11.25 million
principal amount of Subordinated Debentures at market value. Excluding these
transactions from both periods, the improvement in the 1994 quarter as compared
to the 1993 quarter was primarily attributable to higher natural gas prices on
increased natural gas production from the Bob West Field and improved gross
margins in the refining and marketing operations.
-13-
14
Item 2. TESORO PETROLEUM CORPORATION AND
SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Refining and Marketing
Three Months Ended
March 31,
1994 1993
-------- --------
(Dollars in millions,
except per unit amounts)
Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 150.3 194.6
Costs of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.2 173.1
--------- ---------
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1 21.5
Operating Expenses and Other, Including
Gain on Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . 17.1 17.8
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . 2.6 2.5
--------- ---------
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.4 1.2
========= =========
Refinery Throughput (average daily barrels) . . . . . . . . . . . . . . 45,320 52,911
========= =========
Sales of Refinery Production:
Sales ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . . $ 18.46 20.98
Margin ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 4.24 2.94
Volume (average daily barrels) . . . . . . . . . . . . . . . . . . . 46,236 57,332
Sales of Products Purchased for Resale:
Sales ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . . $ 24.12 26.43
Margin ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 2.62 .88
Volume (average daily barrels) . . . . . . . . . . . . . . . . . . . 19,582 22,643
Sales Volumes (average daily barrels):
Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,570 25,907
Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,678 12,618
Diesel fuel and other distillates . . . . . . . . . . . . . . . . . 16,124 20,584
Residual fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . 16,446 20,866
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,818 79,975
========= =========
Sales Prices ($ per barrel):
Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.92 25.51
Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.43 28.70
Diesel fuel and other distillates . . . . . . . . . . . . . . . . . $ 23.53 26.19
Residual fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.22 11.46
Revenues decreased in the 1994 quarter as compared to the 1993 quarter,
primarily due to an 18% reduction in sales volumes of refined products. The
reduction in volumes resulted from the Company's market-driven operating
strategy implemented in 1993, which more closely aligns Refinery production
with market demand in Alaska while minimizing the output of lower value
residual fuel oil. Costs of sales were lower in the 1994 quarter, due to the
reduced throughput level together with a decrease in crude oil prices.
Included in operating expenses and other above for the 1994 quarter was the
$2.8 million gain from the sale of the Company's Valdez, Alaska terminal. The
overall improvement in gross margin and the gain on sales of assets were
partially offset by a $2.1 million increase in operating expenses which
included higher environmental and transportation costs.
-14-
15
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Exploration and Production
Three Months Ended
March 31,
1994 1993
---- ----
(Dollars in millions,
except per unit amounts)
United States:
Gross operating revenues* . . . . . . . . . . . . . . . . . . . . . $ 17.4 7.7
Lifting cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 1.2
Depreciation, depletion and amortization . . . . . . . . . . . . . . 3.8 2.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 .3
------- ------
Operating Profit - United States . . . . . . . . . . . . . . . . . 11.2 4.2
------- ------
Bolivia:
Gross operating revenues . . . . . . . . . . . . . . . . . . . . . . 2.8 2.8
Lifting cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 .4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.0
------- ------
Operating Profit - Bolivia . . . . . . . . . . . . . . . . . . . . 1.9 1.4
------- ------
Total Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . $ 13.1 5.6
======= ======
Natural Gas - United States:
Production (average daily Mcf) -
Tennessee Gas Contract* . . . . . . . . . . . . . . . . . . . . . . 16,181 6,356
Spot market and other . . . . . . . . . . . . . . . . . . . . . . . 32,817 20,653
------- ------
Total Production . . . . . . . . . . . . . . . . . . . . . . . . 48,998 27,009
======= ======
Average sales price per Mcf -
Tennessee Gas Contract* . . . . . . . . . . . . . . . . . . . . . . $ 7.80 7.36
Spot market . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.01 1.75
Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.92 3.07
Average lifting cost per Mcf . . . . . . . . . . . . . . . . . . . . $ .53 .49
Depletion per Mcf . . . . . . . . . . . . . . . . . . . . . . . . . . $ .85 .82
Natural Gas - Bolivia:
Production (average daily Mcf) . . . . . . . . . . . . . . . . . . . 19,137 17,747
Average sales prices per Mcf . . . . . . . . . . . . . . . . . . . . $ 1.23 1.19
Average lifting cost per net equivalent Mcf . . . . . . . . . . . . . $ .11 .23
- -----------------------
* The Company is involved in litigation with Tennessee Gas relating to a
natural gas sales contract. See "Capital Resources and
Liquidity--Litigation" and Note 5 of Notes to Condensed Consolidated
Financial Statements.
-15-
16
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The number of producing wells in South Texas in which the Company has an
interest increased to 33 at the end of the 1994 quarter compared to 11 at the
end of the 1993 quarter. The resulting increase in the Company's production
levels in South Texas, together with higher average sales prices, contributed
to the higher revenues. Total lifting costs and depreciation, depletion and
amortization also increased in the 1994 quarter due to the higher production
levels.
The 1994 quarter production level, which was higher than the 1993 quarter's,
was lower than the 58 MMcf per day produced during the three months ended
December 31, 1993. In February 1994, the common carrier pipeline facilities
transporting gas from the Bob West Field were at capacity and the Company's
production from the field was curtailed. The curtailment affects only
production subject to spot market prices, and the Company continues to produce
and transport all of its gas in the Bob West Field that is subject to the
Tennessee Gas Contract. Accordingly, the average realized selling price for the
Company's domestic natural gas was $3.92 per Mcf during the 1994 quarter, which
compares to $3.07 per Mcf in the 1993 quarter. A new common carrier pipeline,
which will provide transportation for the increased gas production from the Bob
West Field, is being constructed by Coastal States Gas Transmission Company.
The Company expects that further curtailments will occur until June 1, 1994,
the anticipated completion date of the new pipeline.
Results from the Company's Bolivian operations improved by $.5 million when
comparing the 1994 quarter to the 1993 quarter. Under a sales contract with
Yacimientos Petroliferos Fiscales Bolivianos ("YPFB"), the Company's Bolivian
natural gas production is sold to YPFB, which in turn sells the natural gas to
the Republic of Argentina. The contract between YPFB and the Republic of
Argentina has recently been extended for an additional three-year period ending
March 31, 1997. The contract extension will maintain approximately the same
volumes, but with a small decrease in price. The Company's contract with YPFB,
including the pricing provision, is subject to renegotiation in May 1994 for up
to a three-year period. As a result of the terms of the contract extension
between YPFB and the Republic of Argentina, the Company expects the
renegotiation to result in the same production volume but with a corresponding
small decrease in the contract price.
-16-
17
Item 2. TESORO PETROLEUM CORPORATION AND
SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Oil Field Supply and Distribution
- ---------------------------------
Three Months Ended
March 31,
1994 1993
---- ----
(Dollars in millions)
Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 18.6 19.4
Costs of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 16.6
------- -------
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.8
Operating Expenses and Other . . . . . . . . . . . . . . . . . . . . . 3.8 3.5
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . .1 .1
------- -------
Operating Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 1.2) ( .8)
======= =======
Refined Product Sales (average daily barrels) . . . . . . . . . . . . . 7,424 6,897
======= =======
Operating expenses and other for the 1994 quarter included a charge of
approximately $.9 million for winding up the Company's environmental products
marketing operations. The Company is continuing its wholesale marketing of
fuels and lubricants.
Interest and Other Income
Other income in the 1993 quarter included a $1.4 million gain from the purchase
and retirement of $11.25 million principal amount of Subordinated Debentures in
January 1993. Since this retirement satisfied the sinking fund requirement due
in March 1993, the gain was not reported as an extraordinary item.
Income Taxes
The increase of $.8 million in the income tax provision during the 1994 quarter
as compared to the 1993 quarter was due to federal and state income taxes on
the Company's increased taxable earnings.
CAPITAL RESOURCES AND LIQUIDITY
During the first quarter of 1994, the Company continued to achieve significant
improvement in profitability, resulting primarily from (i) strong gross margins
on the sales of refined products, (ii) the Company's recently implemented
market-driven operating strategy to better align Refinery production with
refined product demand in the Alaskan market and minimize the output of lower
value residual fuel oil and (iii) higher natural gas production resulting from
continuing success in developing the Bob West Field. The Company's liquidity
and capital resources have been significantly enhanced as a result of the
Company's improvement in profitability, together with the completion of the
Recapitalization in February 1994 and the finalization of the Company's
Revolving Credit Facility during April 1994.
Significant components of the Recapitalization were as follows:
(i) Subordinated Debentures in the principal amount of $44.1
million were tendered in exchange for a like principal amount
of new Exchange Notes, which satisfied the 1994 sinking fund
requirements and, except for $.9 million, will satisfy sinking
fund requirements for the Subordinated
-17-
18
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Debentures through 1997. The Exchange Notes bear interest at
13% per annum, are scheduled to mature on December 1, 2000 and
have no sinking fund requirements.
(ii) The 1,319,563 outstanding shares of $2.16 Preferred Stock,
together with accrued and unpaid dividends of $9.5 million at
February 9, 1994, were reclassified into 6,465,859 shares of
Common Stock. The Company also agreed to issue up to 131,956
shares of Common Stock on behalf of the holders of $2.16
Preferred Stock to pay certain of their legal fees and
expenses in connection with the settlement of litigation
related to the reclassification. Of such 131,956 shares of
Common Stock, 73,913 shares were awarded by the court for
legal fees and expenses, with the remaining shares to be
issued to the former holders of $2.16 Preferred Stock upon the
court's order becoming final and nonappealable.
(iii) The Company and MetLife Louisiana, the holder of all the
Company's outstanding $2.20 Preferred Stock, entered into the
Amended MetLife Memorandum, pursuant to which MetLife
Louisiana agreed to waive all existing mandatory redemption
requirements, to consider all accrued and unpaid dividends
thereon through February 9, 1994 (aggregating approximately
$21.2 million) to have been paid, to allow the Company to pay
future dividends in Common Stock in lieu of cash, to waive or
refrain from exercising certain other rights of the $2.20
Preferred Stock and to grant to the Company the MetLife
Louisiana Option (pursuant to which the Company has the option
to purchase, until February 9, 1997, all shares of the $2.20
Preferred Stock and Common Stock held by MetLife Louisiana),
all in consideration for, among other things, the issuance by
the Company to MetLife Louisiana of 1,900,075 shares of Common
Stock. Such additional shares are also subject to the MetLife
Louisiana Option. Until June 30, 1994, the option price is
approximately $53.0 million, after giving effect to a
reduction in the option price for the scheduled cash dividend
payment on the $2.20 Preferred Stock on May 15, 1994. The
unexercised option price will be increased by 3% on the last
day of each calendar quarter until December 31, 1995, and by 3
1/2% on the last day of each quarter thereafter, and will be
reduced by cash dividends paid on the $2.20 Preferred Stock
after February 9, 1994. The Company will be required to pay
dividends (in either cash or Common Stock) when due on the
$2.20 Preferred Stock in order for the MetLife Louisiana
Option to remain outstanding. In addition, the MetLife
Louisiana Option is subject to certain minimum exercise
requirements to remain outstanding beyond one year and two
years.
For further information regarding the Recapitalization, refer to Note 2 of
Notes to Condensed Consolidated Financial Statements.
The Company is currently pursuing a registered public offering of its Common
Stock (the "Offering") for the purpose of raising funds to exercise the MetLife
Louisiana Option. Any net proceeds in excess of the amount required to
exercise the MetLife Louisiana Option in full will be used for general
corporate purposes. If the MetLife Louisiana Option is exercised in full prior
to June 30, 1994, the Company will acquire 2,875,000 shares of $2.20 Preferred
Stock having a liquidation value of $57.5 million and 4,084,160 shares of
Common Stock having an aggregate market value of $47.0 million (based on a
closing price of
-18-
19
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
$11 1/2 per share on May 4, 1994) in consideration for approximately $53.0
million. Upon the exercise in full of the MetLife Louisiana Option, dividend
requirements of $6.3 million per year on the $2.20 Preferred Stock would be
eliminated. Such offering and the exercise in full of the MetLife Louisiana
Option will result in a net increase of only 915,840 outstanding shares of
Common Stock. If the net proceeds from the Offering are less than the full
exercise price, the Metlife Louisiana Option will be exercised in part to the
extent of the net proceeds. The MetLife Louisiana Option provides that any
partial exercise will result in the purchase of a pro rata portion of each of
the shares of Common Stock and the shares of $2.20 Preferred Stock held by
MetLife Louisiana. The Company is currently prohibited under the terms of the
indenture governing the Subordinated Debentures from repurchasing its capital
stock, except from the proceeds of a substantially concurrent sale of other
shares of capital stock. Accordingly, if the proceeds to the Company from the
Offering are not sufficient to exercise the MetLife Louisiana Option in full,
the Company would be able to exercise the MetLife Louisiana Option only to the
extent of the net proceeds of the Offering. There can be no assurance that the
Offering will be consummated.
The Company transports its crude oil and a substantial portion of its refined
products utilizing KPL's pipeline and marine terminal facilities in Kenai,
Alaska. In March 1994, KPL filed a revised tariff with the FERC for dock
loading services, which would have increased the Company's annual cost of
transporting products through KPL's facilities from $1.2 million to $11.2
million, or an increase of $10 million per year. Following the FERC's
rejection of KPL's tariff and the commencement of negotiations for the purchase
by the Company of the dock facilities, KPL filed a temporary tariff that would
increase the Company's annual cost by approximately $1.5 million. The
negotiations between the Company and KPL are continuing. The Company believes
that the ultimate resolution of this matter will not have a material adverse
effect upon the financial condition or results of operations of the Company.
Credit Arrangements
During April 1994, the Company entered into a new three-year $125 million
Revolving Credit Facility with a consortium of ten banks. The Revolving Credit
Facility, which is subject to a borrowing base, provides for (i) the issuance
of letters of credit up to the full amount of the borrowing base as calculated,
but not to exceed $125 million, (ii) cash borrowings up to the amount of the
borrowing base attributable to domestic oil and gas reserves and (iii) a 90-day
option to convert up to $15 million of the commitment under the Revolving
Credit Facility into a four-year term loan for the construction of the vacuum
unit at the Refinery. Outstanding obligations under the Revolving Credit
Facility are secured by liens on substantially all of the Company's trade
accounts receivable and product inventory and mortgages on the Refinery and the
Company's South Texas natural gas reserves.
Letters of credit available under the Revolving Credit Facility are limited to
a borrowing base calculation. The borrowing base, which is comprised of
eligible accounts receivable, inventory and domestic oil and gas reserves, has
initially been determined to be approximately $97 million. As of April 28,
1994, the Company had outstanding letters of credit under the new facility of
$31 million, with a remaining unused availability of $66 million. Cash
-19-
20
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
borrowings (other than under the term loan facility for the vacuum unit) are
limited to the amount of the oil and gas reserve component of the borrowing
base, which has initially been determined to be approximately $32 million.
Cash borrowings under the Revolving Credit Facility will reduce the
availability of letters of credit on a dollar-for-dollar basis; however, letter
of credit issuances will not reduce cash borrowing availability unless the
aggregate dollar amount of outstanding letters of credit exceeds the sum of the
accounts receivable and inventory components of the borrowing base. The terms
of the Revolving Credit Facility include standard and customary restrictions
and covenants. For information concerning such restrictions and covenants, see
Note 4 of Notes to Condensed Consolidated Financial Statements.
The Revolving Credit Facility replaced certain interim financing arrangements
that the Company had been using since the termination of its prior letter of
credit facility in October 1993. The interim financing arrangements that were
cancelled in conjunction with the completion of the new Revolving Credit
Facility included a $30 million reducing revolving credit facility and a waiver
and substitution of collateral agreement with the State. In addition, the
completion of the Revolving Credit Facility provides the Company significant
flexibility in the investment of excess cash balances, as the Company is no
longer required to maintain minimum cash balances or to cash secure letters of
credit.
Debt and Other Obligations
The Company's funded debt obligations as of December 31, 1993 included
approximately $108.8 million principal amount of Subordinated Debentures, which
bear interest at 12 3/4% per annum and require sinking fund payments sufficient
to annually retire $11.25 million principal amount of Subordinated Debentures.
As part of the Recapitalization, $44.1 million principal amount of Subordinated
Debentures was tendered in exchange for a like principal amount of Exchange
Notes. Such exchange satisfied the 1994 sinking fund requirements and, except
for $.9 million, will satisfy sinking fund requirements for the Subordinated
Debentures through 1997. The indenture governing the Subordinated Debentures
contains certain covenants, including a restriction which prevents the current
payment of cash dividends on Common Stock and currently limits the Company's
ability to purchase or redeem any shares of its capital stock. The Exchange
Notes bear interest at 13% per annum, mature on December 1, 2000 and have no
sinking fund requirements. The limitation on dividend payments included in the
indenture governing the Exchange Notes is less restrictive than the limitation
imposed by the Subordinated Debentures. The Subordinated Debentures and
Exchange Notes are redeemable at the option of the Company at 100% of principal
amount, plus accrued interest.
The Company is monitoring the feasibility of a debt offering that would reduce
fixed charges by refinancing all or a substantial portion of such indebtedness
at lower interest rates. The Company is not undertaking such a debt offering
at this time because it considers the current interest rate environment
unattractive; however, if interest rate levels decline, the Company may decide
to proceed with such an offering. There can be no assurance whether or when
such an offering would occur. If the Subordinated Debentures and Exchange
Notes are redeemed prior to their respective maturities, the Company will be
required to recognize a noncash extraordinary charge to earnings equal to the
portion of
-20-
21
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
the original issue discount on the Subordinated Debentures and the debt
issuance costs of both the Subordinated Debentures and the Exchange Notes that
remain unamortized at the date of redemption (aggregating approximately $8.5
million at March 31, 1994).
Capital Expenditures
The Company has under consideration total capital expenditures ranging from
approximately $65 million to $80 million in 1994. Proposed capital
expenditures for 1994 include approximately $29 million for the continued
development of the Bob West Field, which could be increased by $10 million to
$15 million based on additional development drilling proposed by the operators.
In addition, the proposed capital expenditures for 1994 include $32 million for
the refining and marketing operations, of which $24 million is associated with
the installation of a vacuum unit at the Refinery to allow the Company to
further upgrade residual fuel oil production into higher-valued products. The
Revolving Credit Facility, along with other available funds, is expected to
provide sufficient capital to meet the Company's capital expenditure
requirements during 1994.
Cash Flows From Operating, Investing and Financing Activities
During the 1994 quarter, cash and cash equivalents increased by $12.8 million
and short-term investments decreased by $6.0 million. At March 31, 1994, the
Company's cash totaled $49.4 million, which included $26.6 million as
collateral for outstanding letters of credit. Subsequent to March 31, 1994,
these interim cash-backed letter of credit arrangements were replaced by the
Revolving Credit Facility (see Note 4 of Notes to Condensed Consolidated
Financial Statements). Working capital amounted to $110.3 million at March 31,
1994. Net cash from operating activities of $30.3 million during the 1994
quarter, compared to $14.4 million for the 1993 quarter, was primarily due to
net earnings adjusted for certain noncash charges and reduced working capital
requirements. The 1993 quarter included a payment of $10.8 million to the
State in connection with the settlement of a contractual dispute. Net cash
used in investing activities of $10.2 million during the 1994 quarter included
capital expenditures of $18.5 million, partially offset by cash proceeds of
$2.0 million from the sale of the Company's Valdez, Alaska terminal and the
sale of $6.0 million in short-term investments. Capital expenditures for the
1994 quarter included $11.7 million for exploration and production activities
in the Bob West Field, where an additional six natural gas development wells
were completed during this period. The refining and marketing segment's
capital expenditures totaled $6.1 million for the 1994 quarter, primarily for
initial installation costs for the vacuum unit and completion of the
deisobutanizer unit. Net cash used in financing activities of $7.3 million
during the 1994 quarter included the repayment of net borrowings of $5.0
million under the reducing revolving credit facility, which was replaced by the
Revolving Credit Facility (see Note 4 of Notes to Condensed Consolidated
Financial Statements).
Litigation
The Company is subject to certain commitments and contingencies, including a
contingency relating to a natural gas sales contract dispute with Tennessee
Gas.
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Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The Company is selling a portion of the gas from its Bob West Field to
Tennessee Gas under a Gas Purchase and Sales Agreement which provides that the
price of gas shall be the maximum price as calculated in accordance with
Section 102(b)(2) (the "Contract Price") of the NGPA.
Tennessee Gas filed suit against the Company alleging that the gas contract is
not applicable to the Company's properties and that the gas sales price should
be the price calculated under the provisions of Section 101 of the NGPA rather
than the Contract Price. During March 1994, the Contract Price was $7.84 per
Mcf, the Section 101 price was $4.58 per Mcf and the average spot market price
was $2.09 per Mcf. Tennessee Gas also claimed that the contract should be
considered an "output contract" under Section 2.306 of the Texas Business and
Commerce Code and that the increases in volumes tendered under the contract
exceeded those allowable for an output contract. The Company continues to
receive payment from Tennessee Gas based on the Contract Price for all volumes
that are subject to the contract under the Company's interpretation.
The District Court trial judge returned a verdict in favor of the Company on
all issues. On appeal by Tennessee Gas, the Court of Appeals affirmed the
validity of the Tennessee Gas Contract as to the Company's properties and held
that the price payable by Tennessee Gas for the gas was the Contract Price.
The Court of Appeals remanded the case to the trial court based on its
determination (i) that the Tennessee Gas Contract was an output contract and
(ii) that a fact issue existed as to whether the increases in the volumes of
gas tendered to Tennessee Gas under the contract were made in bad faith or were
unreasonably disproportionate to prior tenders. The Company is seeking review
of the appellate court ruling on the output contract issue in the Supreme Court
of Texas. Tennessee Gas is seeking review of the appellate court ruling
denying the remaining Tennessee Gas claims in the Supreme Court of Texas.
Although the outcome of any litigation is uncertain, management, based upon
advice from outside legal counsel, is confident that the decision of the trial
and appellate courts will ultimately be upheld as to the validity of the
Tennessee Gas Contract and the Contract Price. Therefore, if the Supreme Court
of Texas does not grant the Company's petition for writ of error and affirms
the appellate court ruling, the Company believes that the only issue for trial
should be whether the increases in the volumes of gas tendered to Tennessee Gas
from the Company's properties were made in bad faith or were unreasonably
disproportionate. The appellate court decision was the first reported decision
in Texas holding that a take-or-pay contract was an output contract. As a
result, it is not clear what standard the trial court would be required to
apply in determining whether the increases were in bad faith or unreasonably
disproportionate. The appellate court acknowledged in its opinion that the
standards used in evaluating other kinds of output contracts would not be
appropriate in this context. The Company believes that the appropriate
standard would be whether the development of the field was undertaken in a
manner that a prudent operator would have undertaken in the absence of an
above-market sales price. Under that standard, the Company believes that, if
this issue is tried, the development of its gas properties and the resulting
increases in volumes tendered to Tennessee Gas will be found to have been
reasonable and in good faith. Accordingly, the Company has recognized
revenues, net of production taxes and marketing charges, for natural gas sales
through March 31, 1994, under the Tennessee Gas Contract based on the Contract
Price, which net revenues
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Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
aggregated $21.1 million more than the Section 101 prices and $38.9 million in
excess of the spot market prices. If Tennessee Gas ultimately prevails in this
litigation, the Company could be required to return to Tennessee Gas the
difference between the spot market price for gas and the Contract Price, plus
interest, if awarded by the court. In addition, the present value of estimated
future net revenues on a pre-tax basis from the Company's proved domestic
reserves has been calculated based in part on the price being paid by Tennessee
Gas at the date of determination. At March 31, 1994, such present value was
$171.0 million. If calculated using March 31, 1994 spot market prices instead
of the Contract Price, such present value would have been $92.0 million. An
adverse judgment in this case could have a material adverse effect on the
Company.
Environmental
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, 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
clean-up expenditures associated with environmental matters at a number of
sites, including certain of its own properties. Although the level of future
expenditures for environmental purposes, including cleanup obligations, is
impossible to determine with any degree of probability, it is management's
opinion that, based on current knowledge and the extent of such expenditures to
date, the ultimate aggregate cost of environmental remediation will not have a
material adverse effect on the Company's financial condition. At March 31,
1994, the Company's accrual for environmental liabilities was $6.0 million.
Impact of Changing Prices
The Company's operating results and cash flows are sensitive to the volatile
changes in energy prices. Major shifts in the cost of crude oil and the price
of refined products can result in a change in gross margin from the refining
and marketing operations, as prices received for refined products may or may
not keep pace with changes in crude costs. These energy prices, together with
volume levels, also determine the carrying value of crude oil and refined
product inventory.
Likewise, major changes in natural gas prices impact revenues and the present
value of estimated future net revenues from the Company's exploration and
production operations. The carrying value of oil and gas assets may also be
subject to noncash write-downs based on changes in natural gas prices and
other determining factors.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Tennessee Gas Contract. The Company is selling a portion of the gas
from its Bob West Field to Tennessee Gas under a Gas Purchase and Sales
Agreement which provides that the price of gas shall be the Contract Price.
Tennessee Gas filed suit against the Company alleging that the gas
contract is not applicable to the Company's properties and that the gas
sales price should be the price calculated under the provisions of Section
101 of the NGPA rather than the Contract Price. During March 1994, the
Contract Price was $7.84 per Mcf, the Section 101 price was $4.58 per Mcf
and the average spot market price was $2.09 per Mcf. Tennessee Gas also
claimed that the contract should be considered an "output contract" under
Section 2.306 of the Texas Business and Commerce Code and that the
increases in volumes tendered under the contract exceeded those allowable
for an output contract. The Company continues to receive payment from
Tennessee Gas based on the Contract Price for all volumes that are subject
to the contract under the Company's interpretation.
The District Court trial judge returned a verdict in favor of the
Company on all issues. On appeal by Tennessee Gas, the Court of Appeals
affirmed the validity of the Tennessee Gas Contract as to the Company's
properties and held that the price payable by Tennessee Gas for the gas was
the Contract Price. The Court of Appeals remanded the case to the trial
court based on its determination (i) that the Tennessee Gas Contract was an
output contract and (ii) that a fact issue existed as to whether the
increases in the volumes of gas tendered to Tennessee Gas under the
contract were made in bad faith or were unreasonably disproportionate to
prior tenders. The Company is seeking review of the appellate court ruling
on the output contract issue in the Supreme Court of Texas. Tennessee Gas
is seeking review of the appellate court ruling denying the remaining
Tennessee Gas claims in the Supreme Court of Texas.
Although the outcome of any litigation is uncertain, management,
based upon advice from outside legal counsel, is confident that the
decision of the trial and appellate courts will ultimately be upheld as to
the validity of the Tennessee Gas Contract and the Contract Price.
Therefore, if the Supreme Court of Texas does not grant the Company's
petition for writ of error and affirms the appellate court ruling, the
Company believes that the only issue for trial should be whether the
increases in the volumes of gas tendered to Tennessee Gas from the
Company's properties were made in bad faith or were unreasonably
disproportionate. The appellate court decision was the first reported
decision in Texas holding that a take-or-pay contract was an output
contract. As a result, it is not clear what standard the trial court would
be required to apply in determining whether the increases were in bad faith
or unreasonably disproportionate. The appellate court acknowledged in its
opinion that the standards used in evaluating other kinds of output
contracts would not be appropriate in this context. The Company believes
that the appropriate standard would be whether the development of the field
was undertaken in a manner that a prudent operator would have undertaken in
the absence of an above-market sales price. Under that standard, the
Company believes that, if this issue is tried, the development of its gas
properties and the resulting increases in volumes tendered to Tennessee Gas
will be found to have been reasonable and in good faith. Accordingly, the
Company has recognized revenues, net of production taxes and marketing
charges, for natural gas sales through
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March 31, 1994, under the Tennessee Gas Contract based on the Contract
Price, which net revenues aggregated $21.1 million more than the Section
101 prices and $38.9 million in excess of the spot market prices. If
Tennessee Gas ultimately prevails in this litigation, the Company could be
required to return to Tennessee Gas the difference between the spot market
price for gas and the Contract Price, plus interest, if awarded by the
court. In addition, the present value of estimated future net revenues on
a pre-tax basis from the Company's proved domestic reserves has been
calculated based in part on the price being paid by Tennessee Gas at the
date of determination. At March 31, 1994, such present value was $171.0
million. If calculated using March 31, 1994 spot market prices instead of
the Contract Price, such present value would have been $92.0 million. An
adverse judgment in this case could have a material adverse effect on the
Company.
Recapitalization Matters. In October 1993, Croyden Associates, a
holder of shares of the Company's $2.16 Preferred Stock, filed a class
action suit in Delaware Chancery Court on behalf of itself and all other
holders of the $2.16 Preferred Stock. The suit alleged that the Company
and its directors breached their fiduciary duties to the holders of the
$2.16 Preferred Stock in formulating the originally proposed terms of the
Recapitalization, which provided for the reclassification of each share of
$2.16 Preferred Stock into 3.5 shares of Common Stock or, at the holder's
option, 2.75 shares of Common Stock and .25 share of a new issue of
preferred stock. The suit sought, among other things, monetary damages and
to enjoin the Recapitalization. In April 1994, the court approved a
settlement agreement which provided for (i) the exchange of each share of
$2.16 Preferred Stock into 4.9 shares of Common Stock and (ii) the issuance
of up to 131,956 shares of Common Stock and an additional $500,000 in cash
from the Company to pay attorneys' fees awarded by the Delaware Chancery
Court. Of such 131,956 shares of Common Stock, 73,913 shares were awarded by
the court for legal fees and expenses, with the remaining shares to be
issued to the former holders of $2.16 Preferred Stock upon the court's
order becoming final and nonappealable.
Item 2. Changes in Securities
In April 1994, the Company entered into the Revolving Credit Facility,
under which the Company is required to maintain specified levels of
working capital, tangible net worth and cash flow. The Revolving Credit
Facility has certain restrictions with respect to dividends on its capital
stock. For further information on the Revolving Credit Facility, see Note 4
of Notes to Condensed Consolidated Financial Statements in Part I, Item 1.
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Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1993 annual meeting of stockholders of the Company was
held on February 9, 1994.
(b) The names of the directors elected at the meeting and a
tabulation of the number of votes cast for, against or
withheld with respect to each such director is set forth
below:
Votes
Name For Against Withheld
---- --- ------- --------
Charles F. Luce 16,568,999 0 230,695
John J. McKetta, Jr. 16,199,887 0 599,807
Stewart G. Nagler 16,568,768 0 230,926
Arthur Spitzer 16,586,952 0 212,742
The name of each other director whose term of office as a director
continued after the meeting is set forth below:
Robert J. Caverly
Steven H. Grapstein
Raymond K. Mason, Sr.
Murray L. Weidenbaum
Ray C. Adam
Michael D. Burke
Peter M. Detwiler
M. Richard Stewart
Charles Wohlstetter
(c) A brief description of each matter, other than the election of
directors, voted upon at the meeting and the number of votes
cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each matter, is set
forth below:
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Broker
Description For Against Withheld Abstentions Non-Votes
- ---------------------------------------------------------------------------------------------------------------------------
Proposal to amend the
Company's Certificate of
Incorporation to (i)
reclassify the $2.16 Preferred
Stock into Common Stock, (ii)
remove the provisions relating
to the division of directors
into three classes, and (iii)
require, under certain
circumstances, in the absence
of the approval of 66-2/3% of
the stockholders to amend, in
a manner adverse to the
Company, certain agreements
with MetLife Louisiana
All shares entitled to vote 14,661,289 251,743 88,841 0 1,797,821
Holders of $2.16 Preferred
Stock voting separately as
a class 911,114 38,207 11,346 0 234,370
Proposal to amend the
Company's Certificate of
Incorporation to eliminate,
upon the occurrence of certain
conditions, the requirement
for the affirmative vote of
not less than 80% of the
outstanding shares of capital
stock of the Company to
approve certain transactions by
the Company
14,624,055 277,621 98,431 0 1,799,587
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Broker
Description For Against Withheld Abstentions Non-Votes
- ---------------------------------------------------------------------------------------------------------------------------
Proposal to approve the
Company's Executive Long-Term
Incentive Plan 14,028,892 858,746 114,235 0 1,797,821
Proposal to appoint Deloitte &
Touche as independent auditors
for the Company for 1993 16,665,918 66,091 67,685 0 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the Exhibit Index immediately preceding the exhibits filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
Registrant
Date: May 9, 1994 /s/ MICHAEL D. BURKE
Michael D. Burke
President and
Chief Executive Officer
Date: May 9, 1994 /s/ BRUCE A. SMITH
Bruce A. Smith
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number
- -------
10.1 Credit Agreement (the "Credit Agreement") dated as of April 20, 1994
among the Company and Texas Commerce Bank National Association
("TCB"), as Issuing Bank and as Agent, and certain other banks named
therein.
10.2 Guaranty Agreement dated as of April 20, 1994 among various
subsidiaries of the Company and TCB, as Issuing Bank and as Agent,
and certain other banks named therein.
10.3 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of April 20, 1994 from
Tesoro Exploration and Production Company, entered into in
connection with the Credit Agreement.
10.4 Deed of Trust, Security Agreement and Financing Statement dated as
of April 20, 1994 among Tesoro Alaska Petroleum Company, TransAlaska
Title Insurance Agency, Inc., as Trustee, and TCB, as Agent, entered
into in connection with the Credit Agreement.
10.5 Pledge Agreement dated as of April 20, 1994 by the Company in favor
of TCB, entered into in connection with the Credit Agreement.
10.6 Security Agreement (Accounts and Inventory) dated as of April 20,
1994 between the Company and TCB, entered into in connection with
the Credit Agreement.
10.7 Security Agreement (Accounts and Inventory) dated as of April 20,
1994 between Tesoro Alaska Petroleum Company and TCB, entered into
in connection with the Credit Agreement.
10.8 Security Agreement (Accounts) dated as of April 20, 1994 between
Tesoro Petroleum Distributing Company and TCB, entered into in
connection with the Credit Agreement.
10.9 Security Agreement (Accounts and Inventory) dated as of April 20,
1994 between Tesoro Exploration and Production Company and TCB,
entered into in connection with the Credit Agreement.
10.10 Security Agreement (Accounts and Inventory) dated as of April 20,
1994 between Tesoro Refining, Marketing & Supply Company and TCB,
entered into in connection with the Credit Agreement.
11 Information Supporting Earnings (Loss) Per Share Computations.
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