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EXHIBIT 99.2
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
(UNAUDITED)
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(Amounts in 000s)
ASSETS As of December 31,
---------------------------
1997 1996
---------- ----------
CURRENT ASSETS
Cash $ 2,704 $ 3,978
Accounts receivable, net 45,044 59,865
Due from affiliates - trade 7,096 7,742
Due from affiliates - other 4,513 42,333
Inventories 84,331 63,682
Other current assets 3,539 3,700
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Total current assets 147,227 181,300
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 331,247 382,101
---------- ----------
NON-CURRENT ASSETS
Goodwill, net of accumulated amortization (Note 4) -- 31,426
Other 3,350 7,570
---------- ----------
Total non-current assets 3,350 38,996
---------- ----------
Total Assets $ 481,824 $ 602,397
========== ==========
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(Amounts in 000s)
LIABILITIES AND STOCKHOLDERS' EQUITY As of December 31,
---------------------------
1997 1996
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CURRENT LIABILITIES:
Cash overdraft $ 4,842 $ 8,485
Accounts payable 10,545 18,610
Due to affiliates - trade 20,485 29,799
Capital lease obligations, current portion 1,007 685
Accrued liabilities 12,667 12,842
---------- ----------
Total current liabilities 49,546 70,421
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NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000
CAPITAL LEASE OBLIGATIONS, net of current portion 8,751 5,496
DEFERRED INCOME TAXES 36,086 62,839
OTHER LIABILITIES 31,032 32,891
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,500 shares
authorized, issued and outstanding 8,208 8,208
Additional paid-in capital 52,362 52,362
Retained earnings:
BHP Petroleum Americas Refining Inc. 140,517 216,490
BHP Petroleum South Pacific Inc. 10,322 8,690
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Total stockholders' equity 211,409 285,750
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Total Liabilities and Stockholders' Equity $ 481,824 $ 602,397
========== ==========
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in 000s)
Seven Months Ended December 31,
-------------------------------
1997 1996
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REVENUES
Sales and other revenue - trade $ 456,817 $ 520,483
Sales and other revenue - affiliates 74,684 61,929
Other income 3 3
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Total Revenue 531,504 582,415
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OPERATING COSTS AND EXPENSES
Cost of sales 460,310 504,913
Operating and selling 25,543 24,190
Depreciation and amortization (Note 4) -- 16,834
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Total Operating Costs and Expenses 485,853 545,937
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OPERATING INCOME 45,651 36,478
General and administrative (10,648) (10,325)
Interest (5,802) (5,934)
Capitalized interest 1,097 749
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INCOME BEFORE INCOME TAXES 30,298 20,968
Income tax provision (11,876) (8,783)
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NET INCOME $ 18,422 $ 12,185
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The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000s)
Seven Months Ended December 31,
-------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,422 $ 12,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization -- 16,834
Deferred income taxes 5,427 (3,175)
Changes in:
Accounts receivable, net 2,631 (15,952)
Due from affiliates, trade and other 20,412 (16,964)
Inventories (467) (11,328)
Other assets 2,133 2,095
Accounts payable and accrued liabilities (11,855) 12,499
Due to affiliates, trade (9,448) 25,212
Other liabilities 2,492 1,145
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Net cash provided by operating activities 29,747 22,551
CASH FLOWS FROM INVESTING ACTIVITIES --
Additions to property plant and equipment (27,805) (19,195)
CASH FLOWS FROM FINANCING ACTIVITIES --
Repayment of principal on capital leases (658) (421)
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Net increase in cash 1,284 2,935
Cash, beginning of period 1,420 1,043
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Cash, end of period $ 2,704 $ 3,978
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The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in 000s)
1. ORGANIZATION
BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP
Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively
referred to as "the Company," are affiliated companies and wholly-owned indirect
subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian
company. All capital and financing requirements of the Company are provided for
by BHP, except for capital and operating leases.
BHPPAR operates an oil refinery, product storage and distribution facilities,
and retail gasoline stations in the state of Hawaii. Crude oil is purchased
through other BHP affiliates and shipped to Hawaii by tanker. Refined product
exports usually are sold through other BHP affiliates. BHPPSP is a petroleum
products marketer in American Samoa, and operates the government-owned product
storage and distribution facilities. BHPPSP purchases most of its refined
products from BHPPAR.
The Companies were part of a consolidated group, Pacific Resources, Inc. and
Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was
allocated to assets and liabilities based on fair values at the acquisition
date. The purchase price in excess of fair values was reported as goodwill until
May 1997 when the refinery assets were written down to estimated fair value and
the unamortized goodwill was written off.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company's interim combined financial statements and notes thereto have been
prepared by management without audit. Accordingly, the accompanying financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of results for the periods presented. Such
adjustments are of a normal recurring nature. Certain information and notes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. However,
management believes that the disclosures presented herein are adequate to make
the information not misleading.
Combined Financial Statements - The combined financial statements include the
accounts of BHPPAR and BHPPSP. These companies are combined to present the
financial position and results of operations of BHP's downstream petroleum
refining and marketing business. The combined financial statements have been
prepared using the historical costs and results of operations of the affiliated
entities. There were no significant differences in accounting methods or their
application among the combining entities. All significant intercompany balances
and transactions between the combined entities are eliminated.
Use of Estimates and Presentation - Preparation of the combined financial
statements, in conformity with generally accepted accounting principles,
requires management to make
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estimates and assumptions which affect the amounts of assets and liabilities,
and disclosure of contingencies at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
Financial Instruments - The carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable, and certain other current
liabilities, approximate fair value because of the short maturity of these
instruments. The carrying amounts of the Company's long-term notes payable and
other obligations approximate the Company's estimate of fair values of such
items.
Hedging Activities - The Company periodically enters into hedging arrangements
through BHP affiliates to manage petroleum price risks and not for speculative
purposes. Gains and losses from hedging are recognized in income when the hedged
transaction occurs. Historically, gains and losses from hedging transactions
have not been material.
Inventories - Crude oil and refined products are valued at the lower of cost or
market (net realizable value). Cost is determined primarily on the last-in,
first-out (LIFO) basis. Other inventories held for sale, materials and supplies
are stated at the lower of average cost, not in excess of market.
Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Major replacements, renewals and improvements are capitalized. Maintenance,
repairs and replacements, which do not improve or extend the lives of assets,
are charged to expense. In accordance with provisions of Statement of Financial
Accounting Standards No. 121, no depreciation or amortization has been recorded
since May 1997. In previous years, depreciation and amortization, including
amortization of assets under capital leases, were computed using the
straight-line method over estimated useful lives or lease terms, if shorter.
Estimated useful lives range up to 20 years for buildings and up to 25 years for
plant and equipment.
Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and
maintenance turnaround costs are included in other assets and amortized over the
estimated period of benefit, generally one to three years, depending on the
process unit.
Goodwill - Goodwill represents BHP's purchase price in excess of the fair values
of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred
tax liabilities on the difference between the assets' fair values and their
income tax basis. Goodwill was amortized on a straight-line, 20 year rate until
the goodwill was determined to be without further value and was written off in
May 1997.
Income Taxes - Deferred tax assets and liabilities are recognized for future
income tax effects of temporary differences between financial statement carrying
amounts and the related income tax bases of assets and liabilities. Deferred
income tax assets and liabilities measurements are based on enacted tax rates
expected to apply when the temporary differences are expected to be settled. The
effect of tax rate changes on deferred tax assets and liabilities is recognized
when rate changes are enacted.
Income taxes are computed and recorded as if each company were filing separate
tax returns, although BHPPAR and BHPPSP are included in different federal and
state consolidated income tax returns which include other BHP companies in the
affiliated groups. Current income tax liabilities or refunds are settled with
BHP through intercompany accounts.
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Environmental Expenditures - Environmental expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures are capitalized if
they extend the useful lives of assets, increase capacity, or mitigate or
prevent environmental contamination. Expenditures are expensed if they are for
existing conditions caused by past operations, and if the expenditures will not
contribute to future revenue generation. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable and when costs
can be estimated reasonably. Such amounts are based on the estimated timing and
extent of remedial actions required by regulatory agencies, experience gained
from other sites where assessments and remediation have been completed, and the
amount of the Company's estimated liability, considering proportional liability
and financial abilities of other responsible parties. Adjustments to accrued
liabilities are made as changes in conditions and estimated costs become known.
Pension Plans and Other Post-Employment Benefits - Pension costs are accounted
for in conformity with Statements of Financial Accounting Standards No. 87 and
88. Funding is based on required contributions under the Employee Retirement
Income Security Act of 1974. Other post-employment benefits, primarily medical
insurance, are accounted for in conformity with Statement of Financial
Accounting Standards No. 106.
3. INVENTORIES
Inventories at December 31 consisted of:
1997 1996
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Crude oil and refined products $ 75,366 $ 53,977
Merchandise and packaged petroleum products 1,189 868
Materials and supplies 7,776 8,837
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Total inventories $ 84,331 $ 63,682
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At December 31, 1997 and 1996, crude oil and product inventories at LIFO cost
were below current cost by approximately $7.8 million and $16.3 million,
respectively.
4. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, RELATED WRITE-DOWNS, AND CHANGE IN
DEPRECIATION METHOD
In 1997 BHP developed a plan to sell the Company, engaged an investment advisor,
completed an appraisal of assets, and began discussions with potential buyers.
Management determined that net book value of refinery assets had been impaired
based in part on the appraisal. The refinery property, plant and equipment were
written down to estimated fair value in May 1997, based on an evaluation of
these assets, related operating results, and in accordance with provisions of
Statement of Financial Accounting Standards (SFAS) No. 121. The write-down, net
of accumulated depreciation, amounted to $88.8 million ($54.2 million after a
$34.6 million reduction in deferred income taxes). In accordance with SFAS No.
121, no depreciation and amortization expense has been included in the financial
statements since May 1997. BHP reached an agreement in March 1998 to sell the
Company, and as a result of the sale, the Company anticipates recognizing an
estimated loss of approximately $120-125 million, in addition to the loss
recognized in May 1997 (see Note 8). Substantially all of the loss is expected
to be allocated to a further reduction in the fair value of the property, plant
and equipment.
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In connection with management's determination that the carrying amount of
refinery assets had become impaired, it was also determined that goodwill had no
continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net
of accumulated amortization of $21,285) was also written off in May 1997.
Goodwill amortization expense included in statements of operations was $1,505
for the seven months ended December 31, 1996.
5. INCOME TAXES
The income tax provisions were 39% and 42% of income before income taxes for the
seven months ended December 31, 1997 and 1996, respectively. The effective
income tax rates differed from the normal 35% Federal income tax rate because of
state income taxes and the effects of permanent differences between book and tax
income, primarily the amortization of goodwill in 1996.
6. RELATED PARTY BALANCES AND TRANSACTIONS
The Company enters into transactions with BHP-affiliated companies primarily for
petroleum operations and general financing activities. Crude oil is purchased
through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil
transportation costs are either included in the purchase price or paid to an
affiliated BHP Transport company. Export products are sold through BHP Petroleum
affiliates.
Sales of refined products to BHP affiliates are negotiated with reference to
current published market prices. Sales include export cargoes marketed primarily
in Asia. Also, naphtha and LPG were sold to a Hawaii gas utility affiliate (the
Gas Company) under term contracts. BHP sold the Gas Company to an unrelated
company effective October 31, 1997, and continues to sell products to the Gas
Company.
Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum
affiliate at their cost, net of their price hedging transactions. BHPPAR also
imports crude oil, primarily from Australia and Asia, under term agreements with
BHP Petroleum affiliates, and purchase prices are determined by a formula using
current published market prices.
7. COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims in the normal course of business.
The outcome of individual matters is not predictable. However, management
believes that the ultimate resolution of all of these matters, after considering
insurance coverages, is not likely to have a material adverse effect on the
Company's combined financial statements.
Environmental
The Company's operations are subject to various Federal and state environmental
laws and regulations. The Company has received notices of violation or potential
liability from the U.S. Environmental Protection Agency (EPA), the State of
Hawaii Department of Health (HDOH) and private parties relating to various
environmental matters associated with the Company's ownership and/or operations
of its assets. There have been no significant changes in environmental matters
disclosed in the audited financial statements for the fiscal year ended May 31,
1997.
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8. SUBSEQUENT EVENT
On March 18, 1998, the Company's stockholders entered into a stock sale
agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will
purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is
expected to close by the end of May 1998, subject to regulatory review and other
customary conditions. The price to be paid at closing amounts to $275 million in
cash (including a $5 million escrow deposit). After closing, the cash price will
be increased by the amount that net working capital sold exceeds $100 million,
or reduced by the amount that net working capital is less than $100 million. In
addition, Tesoro will issue an unsecured, non-interest bearing, promissory note
for $50 million payable in five equal annual installments of $10 million each,
beginning in 2009. The note will provide for earlier payment, depending on
earnings performance of the acquired assets.
The parties will execute a separate environmental agreement at closing, whereby
the selling stockholders will indemnify Tesoro and the Company for environmental
costs arising out of conditions which exist at, or existed prior to, closing
subject to a maximum limit of $9.5 million. The environmental indemnity will
survive for a ten-year period. Certain environmental liabilities of the
Companies will be retained by BHP and are not subject to the $9.5 million
indemnity.
As a result of the sale, the Company anticipates recognizing an estimated loss
of approximately $120-125 million. This estimated loss will increase or decrease
based on results of operations and changes in noncurrent assets and liabilities
through the closing date. Substantially all of the loss is expected to be
allocated to a further reduction in the fair value of the property, plant and
equipment.
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