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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .......... TO ..........
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-0862768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218
(Address of principal executive offices) (Zip Code)
210-828-8484
(Registrant's telephone number, including area code)
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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 [ ]
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There were 26,674,910 shares of the registrant's Common Stock outstanding
at April 30, 1998.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- March 31, 1998
and December 31, 1997................................. 3
Condensed Statements of Consolidated
Operations -- Three Months Ended March 31, 1998 and
1997.................................................. 4
Condensed Statements of Consolidated Cash
Flows -- Three Months Ended March 31, 1998 and 1997... 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 19
SIGNATURES.................................................. 20
EXHIBIT INDEX............................................... 21
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3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1998 1997*
--------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2,274 $ 8,352
Receivables, less allowance for doubtful accounts of
$1,292 ($1,373 at December 31, 1997)................... 64,518 76,282
Inventories:
Crude oil and wholesale refined products, at LIFO...... 75,983 68,227
Merchandise and other refined products................. 14,424 13,377
Materials and supplies................................. 7,386 5,755
Prepayments and other..................................... 7,984 9,842
-------- --------
Total Current Assets.............................. 172,569 181,835
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing.................................... 368,183 370,174
Exploration and production (full-cost method of
accounting)............................................ 311,872 291,411
Marine services........................................... 48,201 43,072
Corporate................................................. 13,802 13,689
-------- --------
742,058 718,346
Less accumulated depreciation, depletion and
amortization.......................................... 317,645 304,523
-------- --------
Net Property, Plant and Equipment...................... 424,413 413,823
-------- --------
OTHER ASSETS................................................ 38,447 32,150
-------- --------
Total Assets...................................... $635,429 $627,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 44,275 $ 58,767
Accrued liabilities and current income taxes payable...... 30,253 31,726
Current maturities of long-term debt and other
obligations............................................ 11,428 17,002
-------- --------
Total Current Liabilities......................... 85,956 107,495
-------- --------
DEFERRED INCOME TAXES....................................... 31,003 28,824
-------- --------
OTHER LIABILITIES........................................... 42,821 43,211
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT
MATURITIES................................................ 136,290 115,314
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes D and E)
STOCKHOLDERS' EQUITY
Common stock, par value $0.16 2/3; authorized 50,000,000
shares; 26,515,868 shares issued (26,506,601 in
1997).................................................. 4,419 4,418
Additional paid-in capital................................ 191,000 190,925
Retained earnings......................................... 147,039 140,980
Treasury stock, 200,198 common shares (216,453 in 1997),
at cost................................................ (3,099) (3,359)
-------- --------
Total Stockholders' Equity........................ 339,359 332,964
-------- --------
Total Liabilities and Stockholders' Equity........ $635,429 $627,808
======== ========
- ---------------
* The balance sheet at December 31, 1997 has been taken from the audited
consolidated financial statements at that date and condensed.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
REVENUES
Refining and marketing.................................... $140,213 $174,400
Exploration and production................................ 22,222 23,358
Marine services........................................... 32,818 35,495
Other income.............................................. 786 1,599
-------- --------
Total Revenues.................................... 196,039 234,852
-------- --------
OPERATING COSTS AND EXPENSES
Refining and marketing.................................... 130,720 171,154
Exploration and production................................ 3,925 2,845
Marine services........................................... 30,597 34,216
Depreciation, depletion and amortization.................. 12,944 11,597
-------- --------
Total Operating Costs and Expenses................ 178,186 219,812
-------- --------
OPERATING PROFIT............................................ 17,853 15,040
General and Administrative.................................. (3,372) (3,038)
Interest Expense............................................ (2,665) (1,570)
Interest Income............................................. 108 434
Other Expense, Net.......................................... (1,034) (1,291)
-------- --------
EARNINGS BEFORE INCOME TAXES................................ 10,890 9,575
Income Tax Provision........................................ 4,831 3,444
-------- --------
NET EARNINGS................................................ $ 6,059 $ 6,131
======== ========
NET EARNINGS PER SHARE -- BASIC............................. $ 0.23 $ 0.23
======== ========
NET EARNINGS PER SHARE -- DILUTED........................... $ 0.23 $ 0.23
======== ========
WEIGHTED AVERAGE COMMON SHARES -- BASIC..................... 26,309 26,430
======== ========
WEIGHTED AVERAGE COMMON AND POTENTIALLY DILUTIVE COMMON
SHARES -- DILUTED......................................... 26,789 26,829
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings.............................................. $ 6,059 $ 6,131
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation, depletion and amortization............... 13,154 11,747
Amortization of deferred charges and other............. (54) 51
Changes in operating assets and liabilities:
Receivables.......................................... 11,764 43,533
Inventories.......................................... (10,434) (3,089)
Other assets......................................... 1,691 3,487
Accounts payable and other current liabilities....... (15,980) (40,741)
Obligation payments to State of Alaska............... (1,412) (1,064)
Deferred income taxes................................ 2,179 1,426
Other liabilities and obligations.................... (530) 2,276
-------- --------
Net cash from operating activities................ 6,437 23,757
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures...................................... (23,761) (16,300)
Deposits and other acquisition costs (Note B)............. (5,976) --
Other..................................................... 247 (479)
-------- --------
Net cash used in investing activities............. (29,490) (16,779)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings, net of repayments of $92,100 in 1998 and
$1,000 in 1997, under revolving credit facilities...... 17,689 2,182
Payments of other long-term debt.......................... (732) (764)
Other..................................................... 18 171
-------- --------
Net cash from financing activities................ 16,975 1,589
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (6,078) 8,567
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 8,352 22,796
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,274 $ 31,363
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid............................................. $ 1,706 $ 1,010
======== ========
Income taxes paid......................................... $ 1,379 $ 14,245
======== ========
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)
NOTE A -- BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto
of Tesoro Petroleum Corporation and its subsidiaries (collectively, the
"Company" or "Tesoro") have been prepared by management without audit pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, the accompanying financial statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature.
Certain information and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
The preparation of these condensed consolidated financial statements
required the use of management's best estimates and judgment that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods. Actual results could differ from
these estimates. The results of operations for any interim period are not
necessarily indicative of results for the full year.
Earnings per share have been restated for the prior period to conform with
the requirements of Statement of Financial Accounting Standard No. 128 which
establishes standards for computing and presenting basic and diluted earnings
per share calculations.
NOTE B -- PROPOSED ACQUISITIONS
Hawaii Refinery Acquisition
On March 18, 1998, the Company entered into a stock sale agreement ("Hawaii
Stock Sale Agreement") with BHP Hawaii Inc. and BHP Petroleum Pacific Islands
Inc. (collectively, the "Sellers"), subsidiaries of The Broken Hill Proprietary
Company Limited ("BHP"), whereby Tesoro will purchase (the "Hawaii Acquisition")
all of the outstanding stock of BHP Petroleum Americas Refining Inc. ("BHP
Refining") and BHP Petroleum South Pacific Inc. ("BHP South Pacific"). The
primary assets of BHP Refining and BHP South Pacific include a 95,000-barrel per
day refinery and 32 retail gasoline stations located in Hawaii. In addition,
Tesoro and a BHP affiliate will enter into a two-year crude supply agreement
pursuant to which the BHP affiliate will assist Tesoro in acquiring crude oil
feedstock sourced outside of North America and arrange for the transportation of
such crude oil to the Hawaiian refinery. Under the terms of the Hawaii Stock
Sale Agreement, the Company has deposited $5 million into an escrow account for
the acquisition. The Hawaii Acquisition is scheduled to close on May 29, 1998.
The purchase price to be paid at closing for the Hawaii Acquisition
includes $275 million in cash, less the amount of the escrow deposit. After
closing, the cash purchase price will be increased by an amount that net working
capital acquired exceeds $100 million or reduced by an amount that the net
working capital acquired is less than $100 million. In addition, Tesoro will
issue an unsecured, non-interest bearing, promissory note for the purchase in
the amount of $50 million, payable in five equal annual installments of $10
million each, beginning in 2009. The note will provide for early payment to the
extent of one-half of the amount by which earnings from the acquired assets,
before interest expense, income taxes and depreciation, depletion and
amortization, as specified in the note, exceed $50 million in any calendar year.
The Hawaii Acquisition will be accounted for as a purchase whereby the purchase
price will be allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Washington State Refinery Acquisition
On May 1, 1998, the Company entered into a stock purchase agreement
("Anacortes Stock Purchase Agreement") with Shell Refining Holding Company
("Seller") and Shell Anacortes Refining Company ("SARC"), both subsidiaries of
Shell Oil Company ("Shell"), whereby Tesoro will purchase (the "Washington
Acquisition") all of the outstanding stock of SARC. SARC owns and operates a
108,000-barrel per day refinery in Anacortes, Washington ("Washington
Refinery"). The Washington Acquisition, which is subject to approval by the
Federal Trade Commission and the offices of the attorneys general of the States
of Oregon and Washington as well as other customary conditions, is anticipated
to close in mid to late summer. Under the terms of the Anacortes Stock Purchase
Agreement, the Company paid a $5 million deposit in May 1998 and has agreed to
pay the balance of the purchase price into an escrow by June 30, 1998, if the
stock purchase has not closed by that date.
At closing, the Company will pay the Seller a cash purchase price of $237
million, less the deposit and any escrowed amounts, for the stock of SARC, and
will also pay an additional amount for net working capital of SARC which has
historically averaged approximately $60 million.
See Note C for information related to financings of the proposed Hawaii
Acquisition and Washington Acquisition (collectively, the "Acquisitions") and
Note D for related environmental matters.
NOTE C -- FINANCINGS
The Acquisitions, as discussed in Note B, will be funded using revolving
credit and term loans, which have been fully underwritten by Lehman Brothers,
and a combination of senior subordinated debt, common stock and preferred stock.
In addition to funding the cash consideration of the Acquisitions, the
financings will provide the Company with increased letter of credit capacity,
funds to refinance substantially all of its existing indebtedness and funds for
future working capital needs and general corporate purposes, including the
Company's 1998 capital budget. The Company is currently in the documentation
stage of negotiations for the revolving credit and term loans.
On May 4, 1998, the Company filed a universal shelf registration statement
("Registration Statement") with the SEC for $600 million of debt or equity
securities for acquisitions or general corporate purposes. Tesoro will determine
the specific type and number of securities to be issued in the course of the
financing process. The Registration Statement was declared effective by the SEC
on May 14, 1998.
In connection with filing the Registration Statement, the Company's Board
of Directors approved terminating the repurchase of Tesoro's Common Stock under
a repurchase program that was initiated in May 1997. The repurchase program,
which was scheduled to conclude at the end of 1998, is inconsistent with the
shelf registration and the Company's growth strategies.
NOTE D -- COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved with a waste disposal site near Abbeville,
Louisiana, at which it has been named a potentially responsible party under the
Federal Superfund law. Although this law might impose joint and several
liability upon each party at the site, the extent of the Company's allocated
financial contributions to the cleanup of the site is expected to be limited
based upon the number of companies, volumes of waste involved and an estimated
total cost of approximately $500,000 among all of the parties to close the site.
The Company is currently involved in settlement discussions with the
Environmental Protection Agency and other potentially responsible parties at the
Abbeville, Louisiana site. The Company expects, based on these discussions, that
its liability will not exceed $25,000. The Company is also involved in
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remedial responses and has incurred cleanup expenditures associated with
environmental matters at a number of sites, including certain of its current and
prior-owned properties.
At March 31, 1998, the Company's accruals for environmental expenses
amounted to $8.7 million, which included a noncurrent liability of approximately
$2.5 million for remediation of the Kenai Pipe Line Company's ("KPL") properties
that has been funded by the former owners of KPL through a restricted escrow
deposit. Based on currently available information, including the participation
of other parties or former owners in remediation actions, the Company believes
these accruals are adequate. To comply with environmental laws and regulations,
the Company currently anticipates that it will make capital improvements of
approximately $7 million in 1998 and $2 million in 1999 related to its current
operations. In addition, capital expenditures for alternative secondary
containment systems for existing storage tank facilities are estimated to be $2
million in 1998 and $2 million in 1999 with a remaining $5 million to be spent
by 2002.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refinery, retail
gasoline outlets (current and closed locations) and petroleum product terminals,
and for compliance with the Clean Air Act. The amount of such future
expenditures cannot currently be determined by the Company.
In connection with the Hawaii Acquisition discussed in Note B, certain
subsidiaries of BHP (the "BHP Sellers") and the Company will execute a separate
environmental agreement at closing, whereby the BHP Sellers will indemnify
Tesoro and BHP Refining and BHP South Pacific for environmental costs arising
out of conditions which exist at, or existed prior to, closing subject to a
maximum limit of $9.5 million. Under the environmental agreement, the first $5
million of these liabilities will be the responsibility of the BHP Sellers and
the next $6 million will be shared on the basis of 75% by the BHP Sellers and
25% by Tesoro. The environmental indemnity will survive for a ten-year period.
Certain environmental claims arising out of prior operations will not be subject
to the $9.5 million limit or the ten-year time limit for claims made.
Under the agreement related to the Washington Acquisition, Shell Refining
Holding Company, a subsidiary of Shell, generally has agreed to indemnify the
Company for environmental liabilities at the Washington Refinery arising out of
conditions which existed at or prior to the closing date. However, the Company
is responsible for the first $0.5 million in environmental costs in each year
and 50% of environmental costs over $1 million in each year, subject to a
maximum aggregate liability of $5 million.
NOTE E -- INCENTIVE COMPENSATION STRATEGY
In June 1996, the Company's Board of Directors unanimously approved a
special incentive compensation strategy in order to encourage a longer-term
focus for all employees to perform at an outstanding level. The strategy
provided eligible employees with incentives to achieve a significant increase in
the market price of the Company's Common Stock. Under the strategy, awards would
be earned only if the market price of the Company's Common Stock reaches an
average price per share of $20 or higher over any 20 consecutive trading days
after June 30, 1997 and before December 31, 1998 (the "Performance Target"). In
connection with this strategy, non-executive employees will be able to earn cash
bonuses equal to 25% of their individual payroll amounts for the previous twelve
complete months and certain executives have been granted, from the Company's
Amended and Restated Executive Long-Term Incentive Plan ("Plan"), a total of
340,000 stock options at an exercise price of $11.375 per share, the fair market
value (as defined in the Plan) of a share of the Company's Common Stock on the
date of grant, and 350,000 shares of restricted Common Stock, all of which vest
only upon achieving the Performance Target.
On May 12, 1998, the Performance Target was achieved which will result in a
pretax charge of approximately $23 million ($13 million in cash and $10 million
related to the vesting of restricted stock awards and stock options) in the
second quarter of 1998. On an aftertax basis, the charge will be approximately
$15 million ($0.57 per share), representing 6% of the total aggregate increase
in shareholder value since approval of the special incentive strategy in 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Those statements in the Management's Discussion and Analysis that are not
historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Forward-Looking Statements" on page 18 for discussion
of the factors which could cause actual results to differ materially from those
projected in such statements.
GENERAL
The Company is focused on its long-term strategy to maximize returns and
develop full value of its assets through strategic growth, including
acquisitions and diversifications in all of its operating segments. In this
regard, the Company has entered into two agreements whereby Tesoro's annual
revenues and scope of its refining and marketing operations will be
significantly increased, if the proposed acquisitions are consummated. On May 1,
1998, the Company entered into an agreement to acquire the capital stock of
Shell Anacortes Refining Company, an affiliate of Shell Oil Company (the
"Washington Acquisition"), which owns and operates a 108,000-barrel per day
refinery near Anacortes, Washington. Combined with Tesoro's agreement entered
into on March 18, 1998, to purchase The Broken Hill Proprietary Company
Limited's ("BHP") Hawaii refinery and related operating assets ("Hawaii
Acquisition"), Tesoro will own and operate three West Coast refineries with a
combined throughput capacity of approximately 280,000 barrels per day. Tesoro
expects the cumulative effects of the two acquisitions, if consummated, to be
accretive to 1999 earnings and cash flows. The results may be neutral in 1998
primarily due to the mid-year timing of the proposed acquisitions and a
maintenance turnaround at the Hawaii facility this summer. Annual synergies and
cost savings from integration of the operations are estimated to be $25 million
beginning in 1999. Identified synergies between the Washington, Alaska and
Hawaii refineries include logistical savings, transportation of excess feedstock
or products to areas that are short in supply, further processing of
intermediate products, as well as marketing and operational savings resulting
from having refineries close to retail operations. For further information
regarding the Washington Acquisition and Hawaii Acquisition (collectively, the
"Acquisitions") and related financing, see Notes B and C of Notes to Condensed
Consolidated Financial Statements.
The Company operates in an environment where its results and cash flows are
sensitive to volatile changes in energy prices. Major shifts in the cost of
crude oil used for refinery feedstocks and the price of refined products can
result in a change in margin from the Refining and Marketing operations, as
prices received for refined products may or may not keep pace with changes in
crude oil costs. These energy prices, together with volume levels, also
determine the carrying value of crude oil and refined product inventory. The
Company uses the last-in, first-out ("LIFO") method of accounting for
inventories of crude oil and U.S. wholesale refined products in its Refining and
Marketing segment. This method results in inventory carrying amounts that are
less likely to represent current values and in costs of sales which more closely
represent current costs. Likewise, changes in natural gas, condensate and oil
prices impact revenues and the present value of estimated future net revenues
and cash flows from the Company's Exploration and Production operations. The
Company may increase or decrease its natural gas production in response to
market conditions. The carrying value of oil and gas assets may be subject to
noncash write-downs based on changes in natural gas prices and other determining
factors. Changes in natural gas prices also influence the level of drilling
activity in the Gulf of Mexico. The Company's Marine Services operation, whose
customers include offshore drilling contractors and related industries, could be
impacted by significant fluctuations in natural gas prices. The Company's Marine
Services segment uses the first-in, first-out ("FIFO") method of accounting for
inventories of fuels. Changes in fuel prices can significantly impact inventory
valuations and costs of sales in this segment.
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RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997
SUMMARY
Tesoro's net earnings of $6.1 million, or $0.23 per share, for the three
months ended March 31, 1998 ("1998 Quarter") compare with net earnings of $6.1
million, or $0.23 per share, for the three months ended March 31, 1997 ("1997
Quarter"). Improved refined product margins combined with higher sales volumes
in the Company's Refining and Marketing segment and Marine Services segment
during the 1998 Quarter were offset by lower natural gas prices in the Company's
Exploration and Production segment. A discussion and analysis of the factors
contributing to these results are presented below.
REFINING AND MARKETING
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS
EXCEPT PER BARREL
AMOUNTS)
Gross Operating Revenues:
Refined products.......................................... $ 122.7 $ 155.8
Other, primarily crude oil resales and merchandise........ 17.5 18.6
------- -------
Gross Operating Revenues............................... $ 140.2 $ 174.4
======= =======
Total Operating Profit:
Gross margin:
Refinery(a)............................................ $ 24.0 $ 18.3
Non-refinery(b)(c)..................................... 9.7 6.4
------- -------
Total gross margins............................... 33.7 24.7
Operating expenses........................................ 24.2 21.5
Depreciation and amortization............................. 3.0 3.1
------- -------
Operating Profit....................................... $ 6.5 $ 0.1
======= =======
Capital Expenditures........................................ $ 2.0 $ 2.9
======= =======
Kenai Refinery Throughput:
Barrels per day........................................... 56,148 49,140
% Alaska North Slope ("ANS") crude oil.................... 42% 79%
Refined Products Manufactured (average daily barrels):
Gasoline and gasoline blend stocks........................ 15,211 12,887
Middle distillates, including jet fuel and diesel fuel.... 25,156 20,829
Heavy oils and residual products.......................... 15,128 14,539
Other..................................................... 2,173 2,647
------- -------
Total Refined Products Manufactured............... 57,668 50,902
======= =======
Refinery Product Spread ($/barrel)(c)....................... $ 4.75 $ 4.13
======= =======
Total Segment Product Sales (average daily barrels)(c):
Gasoline.................................................. 14,495 16,738
Middle distillates........................................ 32,875 26,253
Heavy oils and residual products.......................... 18,308 17,890
------- -------
Total Product Sales............................... 65,678 60,881
======= =======
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THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS
EXCEPT PER BARREL
AMOUNTS)
Total Segment Product Sales Prices ($/barrel):
Gasoline.................................................. $ 28.52 $ 33.64
Middle distillates........................................ $ 22.33 $ 32.09
Heavy oils and residual products.......................... $ 11.32 $ 18.19
Total Segment Gross Margins on Product Sales ($/barrel) (e):
Average sales price....................................... $ 20.65 $ 28.43
Average costs of sales.................................... 15.58 24.63
------- -------
Gross Margin........................................... $ 5.07 $ 3.80
======= =======
- ---------------
(a) Represents throughput at the Company's refinery ("Kenai Refinery") times
refinery product spread.
(b) Non-refinery margin includes margins on products purchased and resold,
margins on products sold in markets outside of Alaska, intrasegment
pipeline revenues, retail margins, and adjustments due to selling a volume
and mix of products that is different than actual volumes manufactured.
(c) Amounts reported in the prior period have been reclassified to conform with
current presentation.
(d) Sources of total products sales include products manufactured at the Kenai
Refinery, products drawn from inventory balances and products purchased
from third parties. The Company's purchases of refined products for resale
averaged approximately 11,700 and 11,500 barrels per day for the three
months ended March 31, 1998 and 1997, respectively.
(e) Gross margins on total product sales include margins on sales of purchased
products, together with the effect of changes in inventories.
The Refining and Marketing segment's operating profit of $6.5 million in
the 1998 Quarter increased $6.4 million from operating profit of $0.1 million in
the 1997 Quarter. The improvement in results from Refining and Marketing was due
to a combination of factors, including improved refined product yields, higher
throughput volumes at the refinery and increased sales within the segment's core
Alaska market, all of which contributed to improved refinery margins. The 1998
Quarter benefited from an expansion completed in October 1997 of the Kenai
Refinery's hydrocracker unit, which increased the unit's capacity by
approximately 25% and enables the Company to produce more jet fuel, a product in
short supply in Alaska. The expansion, together with the addition of a new,
high-yield jet fuel hydrocracker catalyst, began to favorably impact this
segment's results in the fourth quarter of 1997.
During the 1998 Quarter, throughput at the Kenai Refinery increased by
7,000 barrels per day, a 14% increase over the 1997 Quarter. Production of
middle distillates increased by 4,300 barrels per day (a 21% increase over the
1997 Quarter) and production of gasoline increased by 2,300 barrels per day (an
18% increase over the 1997 Quarter). Product sales volumes increased by 8% over
the 1997 Quarter, which included a 15% increase within the core Alaska market.
The increase in sales in Alaska was mainly due to a long-term retail capital
spending program, primarily focused in the Anchorage area, which was initiated
in 1997. The improved product slate and marketing efforts contributed to an
increase in the Company's refinery product spread to $4.75 per barrel in 1998,
compared to $4.13 per barrel in 1997, reflecting a 39% decrease in the Company's
per barrel feedstock cost with a 30% decline in per barrel yield value.
Revenues from sales of refined products in the Company's Refining and
Marketing segment decreased during the 1998 Quarter due to a 27% decline in
average sales prices partly offset by the 8% increase in sales volumes. Other
revenues included crude oil resales of $10.5 million in the 1998 Quarter and
$10.7 million in the 1997 Quarter. Costs of sales decreased in the 1998 Quarter
due to lower feedstock prices. Margins from non-refinery activities increased to
$9.7 million in the 1998 Quarter due primarily to a 14% increase in retail
11
12
volumes and improved margins on products sold outside of Alaska. Operating
expenses were higher in the 1998 Quarter due to increased marketing costs.
The Company's initiatives to enhance its product slate and sell more
product within Alaska, as discussed above, have improved the fundamental
earnings potential of this segment. Certain of these initiatives, such as the
hydrocracker expansion, were completed in the fourth quarter of 1997. Future
quarters will continue to benefit from the impact of these initiatives. Future
profitability of this segment, however, will continue to be influenced by market
conditions, particularly as these conditions influence costs of crude oil
relative to prices received for sales of refined products, and other additional
factors that are beyond the control of the Company. As previously discussed, the
revenues and scope of the Refining and Marketing segment will be significantly
increased upon the consummations of the Hawaii Acquisition and Washington
Acquisition (see Note B of Notes to Condensed Consolidated Financial
Statements).
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EXPLORATION AND PRODUCTION
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- -------
(DOLLARS IN MILLIONS
EXCEPT PER UNIT
AMOUNTS)
U.S. (a):
Gross operating revenues.................................. $ 19.1 $ 21.5
Other income.............................................. 0.6 1.6
Production costs.......................................... 2.5 1.7
Administrative support and other operating expenses....... 0.4 0.5
Depreciation, depletion and amortization.................. 8.9 7.9
-------- -------
Operating Profit -- U.S. .............................. 7.9 13.0
-------- -------
BOLIVIA:
Gross operating revenues.................................. 3.1 1.9
Production costs.......................................... 0.3 0.2
Administrative support and other operating expenses....... 0.6 0.5
Depreciation, depletion and amortization.................. 0.5 0.2
-------
Operating Profit -- Bolivia............................ 1.7 1.0
-------- -------
TOTAL OPERATING PROFIT -- EXPLORATION AND
PRODUCTION...................................... $ 9.6 $ 14.0
======== =======
U.S.:
Average Daily Net Production:
Natural gas (thousand cubic feet, "Mcf")............... 99,135 94,103
Oil (barrels).......................................... 173 145
Total (thousand cubic feet equivalent, "Mcfe").... 100,173 94,973
Average Prices:
Natural gas ($/Mcf)(b)................................. $ 2.01 $ 2.34
Oil ($/barrel)......................................... $ 14.13 $ 21.14
Average Operating Expenses ($/Mcfe):
Lease operating expenses............................... $ 0.21 $ 0.16
Severance taxes........................................ 0.06 0.04
-------- -------
Total production costs............................ 0.27 0.20
Administrative support and other....................... 0.05 0.05
-------- -------
Total Operating Expenses.......................... $ 0.32 $ 0.25
======== =======
Depletion ($/Mcfe)........................................ $ 0.97 $ 0.91
======== =======
Capital Expenditures...................................... $ 18.2 $ 7.0
======== =======
BOLIVIA:
Average Daily Net Production:
Natural gas (Mcf)...................................... 22,769 10,999
Condensate (barrels)................................... 816 316
Total (Mcfe)...................................... 27,665 12,895
Average Prices:
Natural gas ($/Mcf).................................... $ 0.97 $ 1.32
Condensate ($/barrel).................................. $ 15.78 $ 19.28
Average Operating Expenses ($/Mcfe):
Production costs....................................... $ 0.11 $ 0.16
Administrative support and other....................... 0.29 0.41
-------- -------
Total Operating Expenses.......................... $ 0.40 $ 0.57
======== =======
Depletion ($/Mcfe)........................................ $ 0.21 $ 0.15
======== =======
Capital Expenditures...................................... $ 2.3 $ 4.0
======== =======
- ---------------
(a) Represents the Company's U.S. oil and gas operations combined with gas
transportation activities.
(b) Includes effects of the Company's natural gas commodity price agreements
which amounted to a loss of $.19 per Mcf for the three months ended March
31, 1997. There were no such agreements during the three months ended March
31, 1998.
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14
EXPLORATION AND PRODUCTION
U.S. Operating profit from the Company's U.S. exploration and production
operations was $7.9 million in the 1998 Quarter compared with $13.0 million in
the 1997 Quarter. While the Company's production increased by 5%, natural gas
prices declined by $0.33 per Mcf, or 14%, to $2.01 per Mcf in the 1998 Quarter
compared to $2.34 per Mcf in the 1997 Quarter. The 1997 Quarter also benefited
from income of $1.6 million for retroactive severance tax refunds for production
in prior years, with no substantial refunds received in the 1998 Quarter.
The Company's production volumes averaged 100.2 million cubic feet
equivalents ("Mmcfe") per day in the 1998 Quarter compared to 95.0 Mmcfe per day
in the 1997 Quarter. This increase in the Company's production consisted of a
30.4 million cubic feet ("Mmcf") per day decline from the Bob West Field offset
by a 35.6 Mmcfe per day production increase from other U.S. fields. The
Company's production outside of the Bob West Field rose to 51% of total
production during the 1998 Quarter, as compared to 17% in the 1997 Quarter.
Gross operating revenues from the Company's U.S. operations decreased by
$2.4 million, primarily due to lower spot market prices for sales of natural
gas. Other income was lower in the 1998 Quarter due to fewer refunds of
severance taxes. Production costs were higher by $0.8 million ($0.07 per Mcfe)
primarily due to higher lease operating expenses. Lease operating costs in the
aggregate for the Bob West Field remained relatively flat, while production
volumes have declined, resulting in an increase in per unit lease operating
expense from $0.13 per Mcf in the 1997 Quarter to $0.22 per Mcf in the 1998
Quarter. Lease operating costs in the aggregate for other fields have doubled,
while production volumes have tripled, resulting in a decrease in per unit lease
operating cost from $0.29 per Mcfe to $0.19 per Mcfe. Depreciation, depletion
and amortization increased by $1.0 million, or 13%, due to a higher depletion
rate and increased volumes.
From time to time, the Company enters into commodity price agreements to
reduce the risk caused by fluctuation in the prices of natural gas in the spot
market. During the 1997 Quarter, the Company used such agreements to set the
price of 34% of the natural gas production that it sold in the spot market and
recognized a loss of $1.6 million ($.19 per Mcf) related to these price
agreements. The Company did not have any such transactions during the 1998
Quarter.
BOLIVIA. Operating profit from the Company's Bolivian operations increased
to $1.7 million in the 1998 Quarter, from $1.0 million operating profit in the
1997 Quarter. Although Bolivian natural gas prices fell to $0.97 per Mcf from
$1.32 per Mcf realized in the 1997 Quarter, net production volumes more than
doubled to 27.7 Mmcfe per day from 12.9 Mmcfe per day in the 1997 Quarter.
Production in the 1997 Quarter was affected by lower contractual purchases made
to balance prior over-production in 1996 and also by constraints from repairs to
a non-Company-owned pipeline that transports gas from Bolivia to Argentina.
Additionally, production in the 1998 Quarter reflects an increase resulting from
the Company's purchase of interests held by its former joint venture participant
in July 1997.
A lack of market access has constrained natural gas production in Bolivia.
The Company believes that the completion of a 1,900-mile pipeline from Bolivia
to Brazil will provide access to larger gas-consuming markets. Upon completion
of this pipeline, the Company will face intense competition from major and
independent natural gas companies operating in Bolivia for a share of the
contractual volumes to be exported to Brazil. It is anticipated that each
producer's share of the contractual volumes will be allocated by a Bolivian
governmental agency according to a number of factors, including the producer's
reserve volumes and production capacity. Although the Company expects gas
deliveries on the pipeline to begin in early 1999, there can be no assurance
that the pipeline will be operational by such date. With the exception of the
volumes currently under contract with the Bolivian government, the Company
cannot be assured of the amount of additional volumes that will be exported to
Brazil upon completion of the pipeline.
14
15
The productive capacity of the Company's wells in Bolivia, including
shut-in wells, is approximately 120 Mmcf per day gross. In addition, two wells
have been spudded during the second quarter of 1998 as part of a five-well
program designed to increase proved reserves.
MARINE SERVICES
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
Gross Operating Revenues:
Fuels..................................................... $25.8 $28.2
Lubricants and other...................................... 4.1 4.3
Services.................................................. 2.9 3.0
----- -----
Gross Operating Revenues............................... 32.8 35.5
Costs of Sales.............................................. 23.6 27.3
----- -----
Gross Profit........................................... 9.2 8.2
Operating Expenses and Other................................ 6.8 6.9
Depreciation and Amortization............................... 0.6 0.4
----- -----
Operating Profit.................................. $ 1.8 $ 0.9
===== =====
Sales Volumes (millions of gallons):
Fuels, primarily diesel................................... 47.9 39.6
Lubricants................................................ 1.7 0.7
Capital Expenditures........................................ $ 1.2 $ 2.2
Gross operating revenues declined by $2.7 million during the 1998 Quarter
due primarily to lower fuel sales prices partly offset by increased volumes.
Cost of sales decreased by $3.7 million, which also reflects the lower fuel
prices. In total, operating profit improved by $0.9 million largely due to
increased margins.
The Marine Services segment's business is largely dependent upon the volume
of oil and gas drilling, workover, construction and seismic activity in the Gulf
of Mexico.
INTEREST EXPENSE
Interest expense of $2.7 million for the 1998 Quarter compares with $1.6
million in the 1997 Quarter. The increase was primarily due to higher borrowings
under the Company's revolving credit facility to fund net working capital
requirements, arising primarily from higher crude oil levels at the Kenai
Refinery, and to fund capital expenditures.
INCOME TAX PROVISION
The income tax provision was $4.8 million in the 1998 Quarter and $3.5
million in the 1997 quarter, representing effective tax rates of 44% and 36%,
respectively. The increase in the effective tax rate was primarily due to
foreign taxes on the Company's increased Bolivian revenues.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its internal cash generation
and external financing. During the 1998 Quarter, the Company made capital
expenditures of $24 million, which were funded through a combination of cash
flows from operations and external borrowings. At March 31, 1998, the Company's
debt-to-capitalization ratio was 29% which will enable the Company to access
capital markets (see Note C of Notes to Condensed Consolidated Financial
Statements).
15
16
The Company operates in an environment where its liquidity and capital
resources are impacted by changes in the supply of and demand for crude oil,
natural gas and refined petroleum products, market uncertainty and a variety of
additional risks that are beyond the control of the Company. These risks
include, among others, the level of consumer product demand, weather conditions,
the proximity of the Company's natural gas reserves to pipelines, the capacities
of such pipelines, fluctuations in seasonal demand, governmental regulations,
the price and availability of alternative fuels and overall market and economic
conditions. The Company's future capital expenditures as well as borrowings
under its credit arrangements and other sources of capital will be affected by
these conditions.
RECENT DEVELOPMENTS
The Acquisitions, as discussed in Note B, will be funded using revolving
credit and term loans, which have been fully underwritten by Lehman Brothers,
and a combination of senior subordinated debt, common stock and preferred stock.
In addition to funding the cash consideration of the Acquisitions, the
financings will provide the Company with increased letter of credit capacity,
funds to refinance substantially all of its existing indebtedness and funds for
future working capital needs and general corporate purposes, including the
Company's 1998 capital budget. The Company is currently in the documentation
stage of negotiations for the revolving credit and term loans.
On May 4, 1998, the Company filed a universal shelf registration statement
("Registration Statement") with the SEC for $600 million of debt or equity
securities for acquisitions or general corporate purposes. Tesoro will determine
the specific type and number of securities to be issued during the course of the
financing process. The Registration Statement was declared effective by the
Securities and Exchange Commission on May 14, 1998.
In connection with filing the Registration Statement, the Company's Board
of Directors approved terminating the repurchase of Tesoro's Common Stock under
a repurchase program that was initiated in May 1997. The repurchase program,
which was scheduled to conclude at the end of 1998, is inconsistent with the
shelf registration and the Company's growth strategies.
On May 12, 1998, employee incentive payments were triggered when the high
and low trading price of the Company's Common Stock averaged $20 per share over
a 20 consecutive trading day period under an incentive strategy approved by the
Company's Board of Directors in June 1996. The triggering of those awards
reflects an aggregate increase of more than $250 million in the market value of
the Company's Common Stock since June 1996. The triggering of the incentive
program will result in a pretax charge of approximately $23 million (of which
approximately $10 million is non-cash) during the second quarter of 1998. On an
aftertax basis, the charge will be approximately $15 million ($0.57 per share)
which represents approximately 6% of the increase in Tesoro's market value since
June 1996. For further information related to the incentive strategy, see Note E
of Notes to Condensed Consolidated Financial Statements.
EXISTING CREDIT ARRANGEMENTS
The Company's amended and restated corporate revolving credit agreement
("Credit Facility"), which expires in April 2000, provides total commitments of
$150 million from a consortium of nine banks. The Company, at its option, has
currently activated $100 million of these commitments. The Credit Facility
provides for the issuance of letters of credit, and for cash borrowings up to
$100 million, with the aggregate subject to a borrowing base (which was
approximately $136 million at March 31, 1998). At March 31, 1998, the Company
had outstanding cash borrowings of $51 million under the Credit Facility. Cash
borrowings under the Credit Facility are generally used on a short-term basis to
finance working capital requirements and capital expenditures. Under the Credit
Facility, at March 31, 1998, the Company had outstanding letters of credit of
$24 million, primarily for royalty crude oil purchases from the State of Alaska.
Unused availability, including unactivated commitments, under the Credit
Facility at March 31, 1998 for additional borrowings and letters of credit
totaled $75 million. The Company is also permitted to utilize unsecured letters
of credit outside of the Credit Facility up to $40 million (none outstanding at
March 31, 1998).
16
17
CAPITAL SPENDING
For the year 1998, the Company has a total capital budget of approximately
$195 million, excluding amounts required to fund the Acquisitions and capital
expenditures for operations related to the Acquisitions. Capital expenditures
for 1998 are expected to be financed through a combination of cash flows from
operations, available cash reserves and additional borrowings under credit
arrangements. Actual capital expenditures may vary from these projections due to
a number of factors, including the timing of drilling projects and the extent to
which properties are acquired. During the 1998 Quarter, the Company's capital
expenditures totaled $24 million which were financed primarily with external
financing and internally-generated cash flows.
The Exploration and Production segment accounts for $139 million, or 71%,
of the budget with $82 million planned for U.S. activities and $57 million for
Bolivia. Planned U.S. expenditures include $25 million for acquisitions, $21
million for development drilling (participation in 30 wells), $17 million for
leasehold, geological and geophysical, and $17 million for exploratory drilling
(participation in 20 wells). In Bolivia, the drilling program is budgeted at $14
million for development drilling (three wells) and $12 million for exploratory
drilling (two wells), with the remainder planned for upgrading a gas processing
plant, laying gathering lines to shut-in wells, workovers and three-dimensional
seismic activity. For the 1998 Quarter, actual U.S. expenditures in the
Exploration and Production segment were $18 million, principally for the
participation in the drilling of three development wells (three completed) and
seven exploratory wells (three completed). In Bolivia, capital spending for the
1998 Quarter totaled $2 million, primarily for exploratory costs.
Capital spending, other than the Acquisitions, for the Refining and
Marketing segment is planned at $39 million, which includes $20 million towards
the retail marketing expansion program in Alaska started in 1997, $8 million for
environmental and $8 million for refinery improvements. The Refining and
Marketing segment spent approximately $2 million towards these projects during
the 1998 Quarter.
The Marine Services capital budget is $9 million, of which $1 million was
spent during the 1998 Quarter. The capital budget is primarily directed towards
equipment and facility upgrades together with potential acquisitions.
CASH FLOWS
Components of the Company's cash flows are set forth below (in millions):
THREE MONTHS
ENDED
MARCH 31,
---------------
1998 1997
------ ------
Cash Flows From (Used In):
Operating Activities...................................... $ 6.4 $ 23.8
Investing Activities...................................... (29.5) (16.8)
Financing Activities...................................... 17.0 1.6
------ ------
Increase (Decrease) in Cash and Cash Equivalents............ $ (6.1) $ 8.6
====== ======
Net cash from operating activities during the 1998 Quarter totaled $6
million, compared to $24 million in the 1997 Quarter. Although the level of
earnings during both quarters was relatively the same, working capital
components were higher during the 1998 quarter. Net cash used in investing
activities of $29 million during the 1998 Quarter included capital expenditures
of $24 million, primarily in the Company's exploration and production segment,
and an escrow deposit of $5 million for the Hawaii Acquisition. Net cash from
financing activities of $17 million during the 1998 Quarter included additional
borrowings of $23 million under the Credit Facility, partially offset by
payments of other long-term debt, including repayment and termination of a
marine services loan. During the 1998 Quarter, gross borrowings under revolving
credit lines were $110 million, with $92 million of repayments. At March 31,
1998, the Company's outstanding borrowings under the
17
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Credit Facility were $51 million and net working capital totaled $87 million,
which included cash and cash equivalents of $2.3 million.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its current and prior-owned properties. At March 31, 1998,
the Company's accruals for environmental expenses amounted to $8.7 million,
which included a noncurrent liability of $2.5 million for remediation of KPL's
properties that has been funded by the former owners of KPL through a restricted
escrow deposit. Based on currently available information, including the
participation of other parties or former owners in remediation actions, the
Company believes these accruals are adequate. To comply with environmental laws
and regulations, the Company anticipates that it will make capital improvements
of approximately $7 million in 1998 and $2 million in 1999. In addition, capital
expenditures for alternative secondary containment systems for existing storage
tank facilities are estimated to be $2 million in 1998 and $2 million in 1999
with a remaining $5 million to be spent by 2002.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Kenai Refinery, retail
gasoline outlets (current and closed locations) and petroleum product terminals,
and for compliance with the Clean Air Act. The amount of such future
expenditures cannot currently be determined by the Company.
For further information on environmental contingencies, including
environmental matters related to the Acquisitions, see Note D of Notes to
Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q, including those contained
in the foregoing discussion and other items herein, concerning the Company which
are (a) projections of revenues, earnings, earnings per share, capital
expenditures or other financial items, (b) statements of plans and objectives
for future operations, including acquisitions, (c) statements of future economic
performance, or (d) statements of assumptions or estimates underlying or
supporting the foregoing are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The ultimate accuracy of forward-looking statements is
subject to a wide range of business risks and changes in circumstances, and
actual results and outcomes often differ from expectations. Any number of
important factors could cause actual results to differ materially from those in
the forward-looking statements herein, including the following: the timing and
extent of changes in commodity prices and underlying demand and availability of
crude oil and other refinery feedstocks, refined products, and natural gas;
actions of customers and competitors; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks and
products; state and federal environmental, economic, safety and other policies
and regulations, any changes therein, and any legal or regulatory delays or
other factors beyond the Company's control; execution of planned capital
projects; weather conditions affecting the Company's operations or the areas in
which the Company's products are marketed; future well performance; the extent
of Tesoro's success in acquiring oil and gas properties and in discovering,
developing and producing reserves; political developments in foreign countries;
the conditions of the capital markets and equity markets during the periods
covered by the forward-looking statements; earthquakes or other natural
disasters affecting operations; adverse rulings, judgments, or settlements in
litigation or other legal matters, including unexpected environmental
remediation costs in excess of any reserves; and adverse changes in the credit
ratings assigned to the Company's trade credit. For more information with
respect to the foregoing, see the Company's Annual Report on Form 10-K. The
Company undertakes no obligation to publicly release the result of any revisions
to any such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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19
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index immediately preceding the exhibits filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 13, 1998, reporting information under
Item 5 related to the Company's proposed acquisition of all of the outstanding
stock of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific
Inc. (collectively, "BHP Hawaii") and filing financial statements of BHP Hawaii
and related pro forma financial information under Item 7. Financial statements
included in the Form 8-K were as follows: (i) Audited Combined Financial
Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South
Pacific Inc. as of May 31, 1997 and 1996; and (ii) Unaudited Combined Financial
Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South
Pacific Inc. as of December 31, 1997 and 1996. Pro Forma Combined Condensed
Financial Statements of the Company, BHP Petroleum Americas Refining Inc. and
BHP Petroleum South Pacific Inc. as of and for the year ended December 31, 1997
were also filed.
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20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: May 15, 1998 /s/ BRUCE A. SMITH
------------------------------------
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive
Officer
Date: May 15, 1998 /s/ DON E. BEERE
------------------------------------
Don E. Beere
Vice President, Controller
(Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER
-------
2.1 Stock Purchase Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining Company
and the Company.
27.1 Financial Data Schedule (March 31, 1998).
27.2 Restated Financial Data Schedule (March 31, 1997).
27.3 Restated Financial Data Schedule (June 30, 1997).
27.4 Restated Financial Data Schedule (September 30, 1997).
27.5 Restated Financial Data Schedule (March 31, 1996).
27.6 Restated Financial Data Schedule (June 30, 1996).
27.7 Restated Financial Data Schedule (September 30, 1996).
21