- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): FEBRUARY 22, 2002
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 1-3473 95-0862768
(State or other jurisdiction (Commission File Number) (IRS Employer Identification No.)
of incorporation)
300 CONCORD PLAZA DRIVE 78216-6999
SAN ANTONIO, TEXAS (Zip Code)
(Address of principal executive offices)
</Table>
Registrant's telephone number, including area code: (210) 828-8484
- --------------------------------------------------------------------------------
ITEM 5. OTHER EVENTS
Tesoro Petroleum Corporation ("Tesoro" or the "Company") through its
subsidiary, Tesoro Refining and Marketing Company, entered into a sale and
purchase agreement with Ultramar Inc., a subsidiary of Valero Energy
Corporation, on February 4, 2002, which was amended on February 20, 2002. Tesoro
agreed to acquire the 168,000 barrel-per-day Golden Eagle refinery located in
Martinez, California near the San Francisco Bay Area along with 70 associated
retail sites throughout northern California. The transaction, which is subject
to approval by the Federal Trade Commission and the offices of the Attorneys
General of the States of California and Oregon as well as other customary
conditions, is anticipated to close in April 2002. Under the terms of the sale
and purchase agreement, Tesoro paid a $53.75 million earnest money deposit in
February 2002. At closing, Tesoro will pay the seller a cash purchase price of
$995 million, less the deposit, plus the value of inventory at closing assumed
to be $130 million. The Company intends to finance the acquisition with a
combination of debt (including an amendment to its senior secured credit
facility) and public or private equity. The sale and purchase agreement,
including the First Amendment thereto, was filed as Exhibit 2.12 to Tesoro's
Annual Report on Form 10-K (SEC File No. 1-3473) for the year ended December 31,
2001 and is incorporated herein by reference.
The foregoing is qualified in its entirety by reference to Exhibit
2.12 to Tesoro's Annual Report on Form 10-K (SEC File No. 1-3473) for the
year ended December 31, 2001.
On February 22, 2002, Tesoro issued a press release (the "Press
Release") announcing that Tesoro intends to offer 20,000,000 newly issued shares
of its common stock. The foregoing is qualified by reference to the press
release, which is filed as Exhibit 99.1 to this Current Report on Form 8-K and
is incorporated herein by reference.
The information included in this Current Report on Form 8-K may contain
forward-looking statements and certain assumptions upon which such
forward-looking statements are in part based. Numerous important factors,
including those factors identified as Risk Factors and Investment Considerations
in Tesoro's Annual Report on Form 10-K and other of the Company's filings with
the Securities and Exchange Commission, and the fact that the assumptions set
forth in the presentation data could prove incorrect, could cause actual results
to differ materially from those contained in such forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of businesses acquired.
The following financial statements are included in Appendix A
hereto and incorporated herein by reference:
FINANCIAL STATEMENTS OF GOLDEN EAGLE REFINING AND MARKETING
ASSETS BUSINESS
Report of Independent Public Accountants.................. A-2
Balance Sheets - December 31, 2001 and 2000............... A-3
Statements of Income - Year Ended December 31, 2001
and Four Months Ended December 31, 2000................... A-4
Statements of Cash Flows - Year Ended December 31, 2001
and Four Months Ended December 31, 2000................... A-5
Statements of Changes in Net Parent Investment - Year
Ended December 31, 2001 and Four Months Ended
December 31, 2000......................................... A-6
Notes to Financial Statements............................. A-7
(b) Pro forma financial information.
The following pro forma financial information is included in
Appendix B hereto and incorporated herein by reference:
PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Balance
Sheet as of December 31, 2001............................. B-4
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 2001........... B-6
(c) Exhibits.
23.1 Consent of Arthur Andersen LLP.
99.1 Press Release issued on February 22, 2002 by Tesoro
Petroleum Corporation.
2
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 hereunto duly authorized.
Date: February 22, 2002
TESORO PETROLEUM CORPORATION
By: /s/ Gregory A. Wright
------------------------------
Gregory A. Wright
Senior Vice President,
and Chief Financial Officer
3
APPENDIX A
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
A-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Valero Energy Corporation:
We have audited the accompanying balance sheets of the Golden Eagle
Refining and Marketing Assets Business as of December 31, 2001 and 2000, and the
related statements of income, cash flows and changes in net parent investment
for the year ended December 31, 2001 and the four months ended December 31, 2000
(included herein on pages A-3 through A-21). These financial statements are the
responsibility of Valero Energy Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Golden Eagle Refining
and Marketing Assets Business as of December 31, 2001 and 2000, and the results
of its operations and its cash flows for the year ended December 31, 2001 and
the four months ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 2002, except Note 16
to the financial statements for which
the date is February 20, 2002
A-2
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
---------- --------
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 189 $ 171
Receivable from Tosco Corporation......................... -- 3,014
Inventories............................................... 162,982 169,436
Current deferred income tax asset......................... 2,804 --
Other current assets, net................................. 4,870 5,313
---------- --------
TOTAL CURRENT ASSETS................................... 170,845 177,934
---------- --------
Property, plant and equipment............................... 830,727 712,963
Less accumulated depreciation and amortization.............. (58,575) (21,531)
---------- --------
Property, plant and equipment, net........................ 772,152 691,432
Other assets, net........................................... 258,008 35,742
---------- --------
TOTAL ASSETS........................................... $1,201,005 $905,108
========== ========
LIABILITIES AND NET PARENT INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 90,212 $ 96,482
Taxes other than income taxes............................. 20,405 20,057
Current deferred income tax liabilities................... -- 13,680
Lease termination obligation.............................. 36,088 --
---------- --------
TOTAL CURRENT LIABILITIES.............................. 146,705 130,219
Deferred income tax liabilities............................. 85,872 27,492
Employee benefit obligations................................ 29,930 24,501
Other long-term liabilities................................. 3,954 2,297
---------- --------
TOTAL LIABILITIES...................................... 266,461 184,509
Net parent investment....................................... 934,544 720,599
---------- --------
TOTAL LIABILITIES AND NET PARENT INVESTMENT............ $1,201,005 $905,108
========== ========
</Table>
See accompanying notes to the financial statements.
A-3
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
STATEMENTS OF INCOME
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
SALES AND OTHER REVENUES.................................... $2,020,596 $841,761
---------- --------
COSTS AND EXPENSES:
Cost of products sold..................................... 1,281,347 612,759
Write-down of inventories to market value................. 55,930 --
Operating expenses........................................ 309,673 91,825
General and administrative expenses....................... 15,378 5,794
Taxes other than income taxes............................. 167,447 45,261
Depreciation and amortization............................. 43,969 12,229
(Gain) loss on sale of property, plant and equipment...... (247) 184
---------- --------
TOTAL COSTS AND EXPENSES............................... 1,873,497 768,052
---------- --------
INCOME BEFORE INCOME TAX EXPENSE............................ 147,099 73,709
Income tax expense........................................ 60,097 30,121
---------- --------
NET INCOME.................................................. $ 87,002 $ 43,588
========== ========
</Table>
See accompanying notes to the financial statements.
A-4
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 87,002 $ 43,588
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 43,969 12,229
(Gain) loss on sale of property, plant and equipment...... (247) 184
Deferred income taxes..................................... 41,896 24,336
Write-down of inventories to market value................. 55,930 --
Changes in operating assets and liabilities:
Decrease (increase) in receivables..................... 4,825 (3,014)
Increase in inventories................................ (21,785) (6,307)
Decrease (increase) in other current assets............ 443 (3,727)
(Decrease) increase in accounts payable and accrued
liabilities.......................................... (17,559) 93,539
Increase in taxes other than income taxes.............. 348 4,248
Increase in employee benefit obligations.................. 5,429 1,792
(Decrease) increase in other long-term liabilities........ (143) 548
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 200,108 167,416
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (120,693) (21,509)
Earn-out payment, net of working capital settlement, in
connection with the Golden Eagle Refinery acquisition..... (148,219) (905)
Catalyst costs.............................................. (1,362) --
Deferred refinery turnaround costs.......................... (56,519) --
Advances to employees under notes receivable................ (501) (2,842)
Repayments of employee notes receivable..................... 14 --
Proceeds from sale of assets................................ 247 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (327,033) (25,256)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash advances from (repayments to) parent............... 126,943 (142,141)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 126,943 (142,141)
--------- ---------
NET INCREASE IN CASH........................................ 18 19
CASH AT BEGINNING OF PERIOD................................. 171 152
--------- ---------
CASH AT END OF PERIOD....................................... $ 189 $ 171
========= =========
NON-CASH ACTIVITIES:
Increase in receivable from Tosco Corporation............... $ (1,811) $ --
Increase in inventories..................................... (27,691) --
Decrease in property, plant and equipment................... 4,000 4,001
Increase in accounts payable and accrued liabilities........ 47,377 --
Increase in other long-term liabilities..................... 1,800 --
Decrease in employee benefit obligations.................... -- (80)
Increase in goodwill........................................ (23,675) (3,921)
</Table>
See accompanying notes to the financial statements.
A-5
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
STATEMENTS OF CHANGES IN NET PARENT INVESTMENT
(IN THOUSANDS)
<Table>
BALANCE AS OF AUGUST 31, 2000 (UNAUDITED)................... $ 819,152
Net income................................................ 43,588
Net cash repayments to parent............................. (142,141)
---------
BALANCE AS OF DECEMBER 31, 2000............................. 720,599
Net income................................................ 87,002
Net cash advances from parent............................. 126,943
---------
BALANCE AS OF DECEMBER 31, 2001............................. $ 934,544
=========
</Table>
See accompanying notes to the financial statements.
A-6
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1: BUSINESS DESCRIPTION
During the period covered by these financial statements, Ultramar Diamond
Shamrock Corporation (UDS), an independent refining and marketing company, owned
and operated 7 refineries and marketed its products through over 4,500
company-operated and dealer-operated convenience stores. Ultramar Inc.
(Ultramar), a subsidiary of UDS, owned and operated two refineries (the Golden
Eagle refinery and the Wilmington refinery) and marketed its products through
over 200 company-operated and dealer-operated convenience stores.
In conjunction with Valero Energy Corporation's (Valero) acquisition of UDS
on December 31, 2001, the U.S. Federal Trade Commission (FTC) approved a consent
decree requiring divestiture of certain UDS assets. Pursuant to the consent
decree, the assets to be divested were required to be put into a trust, with the
future operations of those assets controlled by an independent trustee selected
by the FTC. These assets and their related operations are referred to as the
Golden Eagle Refining and Marketing Assets Business (the Business) and include:
- the 168,000-barrel per day Golden Eagle Refinery located in the San
Francisco Bay area and all tangible assets used in the operation of the
refinery including docks, tanks and pipelines;
- the wholesale marketing business, which includes primarily sales to
unbranded customers located in the northern half of California, Fresno
and north, and Reno, Nevada; and
- 70 Beacon- and Ultramar-branded convenience stores located in Northern
California, including land, buildings, pump equipment, underground
storage tanks and various store equipment.
The Golden Eagle Refinery, which UDS acquired on August 31, 2000, is
located on 2,300 acres in Contra Costa County, California near San Francisco.
The refinery relies primarily on a blend of California and foreign crude oil to
produce conventional gasolines and diesel and California Air Resource Board
(CARB) specification reformulated gasoline and diesel. In addition to the main
refinery processing units, the refinery complex includes three wharves, water
treatment systems, pipelines, and a chemical production facility. The refinery
has approximately 140 tanks with combined capacity of 7,700,000 barrels for
crude oil and other feedstocks and refined products.
The 70 convenience stores sell various grades of gasoline and diesel, and
merchandise products such as cigarettes, beverages, groceries, and health and
beauty aids.
Under the terms of the consent decree, the Business was assigned 6 term
sales contracts (wholesale customers) and 9 refined product exchange contracts.
The exchange contracts provide for the delivery of refined products to
unaffiliated companies at third party terminals in exchange for delivery of a
similar quantity of refined products to the Business by these unaffiliated
companies at specified locations. In addition, Ultramar has the option to
purchase refined products from the Business at market prices to supply branded
convenience stores located in Northern California, which are being retained by
Ultramar.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: These audited financial statements have been
prepared in accordance with United States generally accepted accounting
principles. The financial statements represent a carve-out financial statement
presentation of the operations of the Business and reflect UDS' historical cost
basis as of and for the year ended December 31, 2001 and as of and for the four
months ended December 31, 2000. These financial statements do not include any
adjustments that might result from a sale of the Business.
The financial statements include allocations and estimates of direct and
indirect UDS general and administrative costs attributable to the operations of
the Business. In addition, it was assumed that the majority of refined product
sales from the refinery were made to the wholesale marketing business and the
wholesale
A-7
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
marketing business then sold those refined products to third parties, to UDS'
branded jobbers and to the 70 convenience stores being sold. The sales between
the refinery and the wholesale marketing business and between the wholesale
marketing business and the 70 convenience stores being sold have been eliminated
in these financial statements. Management believes that the assumptions,
estimates and allocations used to prepare these financial statements are
reasonable. However, the allocations may not necessarily be indicative of the
costs and expenses that would have resulted if the Business had been operated as
a separate entity.
The Business' results of operations may be affected by seasonal factors,
such as the demand for petroleum products, which vary during the year, or
industry factors that may be specific to a particular period, such as industry
supply capacity and refinery turnarounds.
Use of Estimates: The preparation of financial statements in accordance
with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. On an ongoing basis, management reviews their estimates based
on currently available information. Changes in facts and circumstances may
result in revised estimates.
Inventories: Crude oil and refined product inventories are valued at the
lower of cost or market (net realizable value). Cost is determined primarily on
the last-in, first-out (LIFO) basis. Materials, supplies and convenience store
merchandise are valued at average cost, but not in excess of market value.
Property, Plant and Equipment: Additions to property, plant and equipment,
including capitalized interest, are recorded at cost. Depreciation is provided
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
related asset.
Goodwill: The excess of UDS' purchase price over the fair value of net
assets of the Golden Eagle refinery (goodwill) was amortized using the
straight-line method over 20 years. For a discussion of goodwill, see the
discussion of FASB Statement No. 142 below.
Impairment: Long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The evaluation of recoverability is
performed using undiscounted estimated net cash flows generated by the related
assets. The amount of impairment is determined as the amount by which the net
carrying value exceeds discounted estimated net cash flows.
Refinery Turnaround Costs: Refinery turnaround costs are deferred when
incurred and amortized over the period of time estimated to lapse until the next
turnaround occurs which is typically three to four years. These costs include,
among other things, the cost to repair, restore, refurbish or replace refinery
equipment such as vessels, tanks, reactors, piping, valves, fittings, rotating
equipment, instrumentation, electrical equipment, heat exchangers, and fired
heaters.
Environmental Remediation Costs: Environmental remediation costs are
expensed and the related accrual established when site restoration and
environmental remediation and cleanup obligations are either known or considered
probable and can be reasonably estimated. Accrued liabilities are not discounted
to present value and are not reduced by possible recoveries from third parties.
Environmental costs include initial site surveys, costs for remediation and
restoration, including direct internal costs, and ongoing monitoring costs, as
well as fines, damages and other costs, when estimable. Adjustments to initial
estimates are recorded, from time to time, to reflect changing circumstances and
estimates based upon additional information developed in subsequent periods. See
Note 12 regarding environmental liabilities retained by Tosco Corporation, which
has been subsequently acquired by Phillips Petroleum Company.
A-8
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Parent Investment: The net parent investment represents a net balance
as the result of various transactions between the Business and UDS. The balance
is the result of the Business' participation in UDS' central cash management
program under which all of the Business' cash receipts were remitted to and all
cash disbursements were funded by UDS. Other transactions affecting the net
parent investment include intercompany sales to UDS and administrative and
support expenses incurred by UDS that were allocated to the Business. There are
no terms of settlement or interest charges associated with the net parent
investment balance.
Revenue Recognition: Sales and other revenues are recognized when the
related goods are shipped and all significant obligations have been satisfied.
Shipping and Handling Fees and Costs: Shipping and handling fees and costs
are classified in cost of products sold. Such fees and costs relate to the
transportation (via ship, train, truck or pipeline) of crude oil and other
feedstocks to the refinery and refined products from the refinery to wholesale
markets and company-operated and dealer-operated convenience stores.
Excise Taxes: Federal excise and state motor fuel taxes collected on the
sale of products and remitted to governmental agencies are included in sales and
other revenues and in taxes other than income taxes. For the year ended December
31, 2001 and the four months ended December 31, 2000, excise taxes were
$156,803,000 and $42,247,000, respectively.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred amounts are measured using enacted tax
rates expected to apply to taxable income in the year those temporary
differences are expected to be recovered or settled.
Historically, the Business' results have been included in the consolidated
federal and state income tax returns filed by UDS. The income tax provisions in
the statements of income represent the current and deferred income taxes that
would have resulted if the Business were a stand-alone taxable entity filing its
own income tax returns. Accordingly, the calculations of income tax provisions
and deferred taxes necessarily require certain assumptions, allocations and
estimates which management believes are reasonable to reflect the tax reporting
for the Business as a stand-alone taxpayer.
Comprehensive Income: The Business has reported no comprehensive income
due to the absence of items of other comprehensive income in all periods
presented.
Derivative Instruments and Hedging Activities: Effective January 1, 2001,
the Business adopted Financial Accounting Standards Board (FASB) Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
This statement established accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all derivative
instruments be recognized as either assets or liabilities in the balance sheet
and be measured at their fair value. The statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met.
The adoption of Statement No. 133, as amended, could increase volatility in
the Business' net income and other comprehensive income based on the level of
derivative instruments utilized and the extent of hedging activities, which are
subject to change from time to time based on management's decision as to the
appropriate strategies and overall risk exposure levels. There was no impact of
adopting Statement No. 133, as amended, on January 1, 2001 as no derivative
assets or liabilities were held.
The Business enters into contracts that provide for the purchase of crude
oil and other feedstocks and for the sale of refined products. Certain of these
contracts meet the definition of a derivative instrument in
A-9
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accordance with Statement No. 133, as amended. The Business believes that these
contracts qualify for the normal purchases and normal sales exception under
Statement No. 133, as amended, because they will be delivered in quantities
expected to be used or sold over a reasonable period of time in the normal
course of business. Accordingly, these contracts are designated as normal
purchases and normal sales contracts and are not required to be recorded as
derivative instruments under Statement No. 133, as amended.
In addition, the Business uses commodity futures contracts to procure a
large portion of its crude oil requirements and to hedge its exposure to crude
oil, refined product and natural gas price volatility. Under Statement No. 133,
as amended, these commodity futures contracts are not designated as hedging
instruments and therefore are marked to market each period. The Business uses
commodity price swaps to manage its exposure to price volatility related to
forecasted purchases of crude oil, other feedstocks and natural gas and sales of
refined products. Under Statement No. 133, as amended, commodity price swaps are
not designated as hedges and are therefore adjusted to market each period.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Statement No. 141
In June 2001, the FASB issued Statement No. 141, "Business Combinations."
Statement No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations within the scope of Statement No. 141
are to be accounted for using the purchase method. The provisions of Statement
No. 141 apply to all business combinations initiated after June 30, 2001 and to
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. The Business has not entered into
a business combination subsequent to July 1, 2001.
FASB Statement No. 142
Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. The statement
provides that goodwill and other intangible assets that have indefinite useful
lives will not be amortized but instead will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but such lives will not be limited to 40
years. Goodwill amortization for the year ended December 31, 2001 and the four
months ended December 31, 2000 was $5,348,000 and $558,000, respectively.
Impairment losses that arise due to the initial application of Statement No. 142
are to be reported as resulting from a change in accounting principle. As a
result of this statement, management believes that future reported net income
may be more volatile because impairment losses related to goodwill are likely to
occur irregularly and in varying amounts.
FASB Statement No. 143
In June 2001, the FASB also issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
an obligation associated with the retirement of a
A-10
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tangible long-lived asset. An asset retirement obligation should be recognized
in the financial statements in the period in which it meets the definition of a
liability as defined in FASB Concepts Statement No. 6, "Elements of Financial
Statements." The amount of the liability would initially be measured at fair
value. Subsequent to initial measurement, an entity would recognize changes in
the amount of the liability resulting from (a) the passage of time and (b)
revisions to either the timing or amount of estimated cash flows. Statement No.
143 also establishes standards for accounting for the cost associated with an
asset retirement obligation. It requires that, upon initial recognition of a
liability for an asset retirement obligation, an entity capitalize that cost by
recognizing an increase in the carrying amount of the related long-lived asset.
The capitalized asset retirement cost would then be allocated to expense using a
systematic and rational method. Statement No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Business is currently evaluating the impact
of adopting this new statement.
FASB Statement No. 144
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," but retains Statement No. 121's
fundamental provisions for recognition and measurement of impairment of
long-lived assets to be held and used and measurement of long-lived assets to be
disposed of by sale. This statement also supersedes APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. Statement
No. 144 does not apply to goodwill or other intangible assets, the accounting
and reporting of which is addressed in newly issued Statement No. 142, "Goodwill
and Other Intangible Assets." The provisions of Statement No. 144 are effective
for financial statements for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Business is currently evaluating the impact of adopting this new statement.
NOTE 3: ACQUISITION OF THE GOLDEN EAGLE REFINERY BY UDS
On August 31, 2000, Ultramar acquired Tosco Corporation's 168,000 barrel
per day Avon Refinery (renamed the Golden Eagle Refinery) located in the San
Francisco bay area of California. The initial purchase price of $806,812,000
included the crude oil, other feedstock and refined product inventories and the
assumption of certain liabilities. The purchase was funded by UDS through a
combination of proceeds from a bridge loan, sales of accounts receivable under
an existing securitization facility and borrowings under a commercial paper
program. The terms of the purchase and sale agreement also provided for
additional consideration of up to $150,000,000 over an eight-year period if
average annual West Coast refinery margins exceeded historical averages.
The acquisition was accounted for using the purchase method. The purchase
price was allocated based on the estimated fair values of the individual assets
and liabilities at the date of acquisition. During the subsequent year,
September 1, 2000 through August 31, 2001, it was determined that the estimated
fair values of inventories, accrued liabilities, other long-term liabilities and
the lease termination obligation were understated and property, plant and
equipment was overstated. In addition, West Coast refinery margins exceeded
historical averages resulting in the full $150,000,000 of contingent
consideration becoming due to Tosco Corporation. In accordance with the purchase
and sale agreement, the $150,000,000 was paid to Tosco
A-11
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Corporation in November 2001. The following table summarizes the revisions to
the initial allocation of purchase price.
<Table>
<Caption>
ALLOCATION ALLOCATION ALLOCATION
AUGUST 31, DECEMBER 31, AUGUST 31,
2001 2000 2000
---------- ------------ ----------
(IN THOUSANDS)
Inventories and other current assets............... $179,794 $150,292 $150,292
Property, plant and equipment...................... 641,999 645,999 650,000
Goodwill........................................... 205,351 33,458 28,632
Accrued liabilities................................ (11,289) -- --
Employee benefit liabilities....................... (22,032) (22,032) (22,112)
Lease termination obligation....................... (36,088) -- --
Other long-term liabilities........................ (1,800) -- --
-------- -------- --------
Total purchase price..................... $955,935 $807,717 $806,812
======== ======== ========
</Table>
NOTE 4: INVENTORIES
Inventories consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Crude oil and other feedstocks.............................. $ 67,855 $ 75,992
Refined products and other finished products and convenience
store items............................................... 85,434 75,681
Materials and supplies...................................... 8,283 --
Refined products due under exchange contracts............... 1,410 17,763
-------- --------
Total inventories................................. $162,982 $169,436
======== ========
</Table>
As of December 31, 2001, the Business recorded a $55,930,000 non-cash
reduction in the carrying value of crude oil and refined product inventories to
reduce such inventories to market value which was lower than LIFO cost.
NOTE 5: OTHER CURRENT ASSETS
Other current assets consisted of the following:
<Table>
<Caption>
DECEMBER 31,
---------------
2001 2000
------ ------
(IN THOUSANDS)
Prepaid expenses (primarily ad valorem taxes)............... $3,644 $5,313
Derivative asset, net of $923 deemed uncollectible.......... 1,226 --
------ ------
Other current assets, net......................... $4,870 $5,313
====== ======
</Table>
A-12
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<Table>
<Caption>
DECEMBER 31,
ESTIMATED -------------------
USEFUL LIVES 2001 2000
------------- -------- --------
(IN THOUSANDS)
Refining facilities.............................. 15 - 30 years $711,408 $645,999
Retail facilities................................ 5 - 30 years 48,053 46,201
Construction in progress......................... 71,266 20,763
-------- --------
Total.................................. 830,727 712,963
Accumulated depreciation and amortization........ (58,575) (21,531)
-------- --------
Property, plant and equipment, net............. $772,152 $691,432
======== ========
</Table>
NOTE 7: OTHER ASSETS
Other assets consisted of the following:
<Table>
<Caption>
DECEMBER 31,
------------------
2001 2000
-------- -------
(IN THOUSANDS)
Goodwill, net of accumulated amortization of $5,906 in 2001
and $558 in 2000.......................................... $199,446 $32,900
Refinery turnaround costs, net of accumulated amortization
of $1,286 in 2001......................................... 55,233 --
Employee notes receivable................................... 3,329 2,842
-------- -------
Other assets, net......................................... $258,008 $35,742
======== =======
</Table>
NOTE 8: INCOME TAXES
The amounts presented below relate only to the Business and were calculated
as if the Business filed separate federal and state income tax returns.
A-13
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consisted of the following:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
(IN THOUSANDS)
Current:
Federal.............................................. $12,474 $ 4,333
State................................................ 5,727 1,452
------- -------
Total current................................ 18,201 5,785
------- -------
Deferred:
Federal.............................................. 37,144 21,032
State................................................ 4,752 3,304
------- -------
Total deferred............................... 41,896 24,336
------- -------
Provision for income taxes............................. $60,097 $30,121
======= =======
</Table>
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the Business'
financial statements. The components of the Business' net deferred income tax
liabilities consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Deferred income tax assets:
LIFO inventory............................................ $ 1,020 $ --
Goodwill.................................................. -- 191
Accrued liabilities....................................... 1,783 537
Other long-term liabilities............................... 1,167 1,404
Net operating loss carryforwards.......................... -- 795
Alternative minimum tax credit............................ 6,536 4,332
------- -------
Total deferred income tax assets.................. 10,506 7,259
------- -------
Deferred income tax liabilities:
LIFO inventory............................................ -- 14,217
Property, plant and equipment............................. 60,851 24,945
Refinery turnaround costs................................. 31,795 9,269
Goodwill.................................................. 928 --
------- -------
Total deferred income tax liabilities............. 93,574 48,431
------- -------
Net deferred income tax liabilities............... $83,068 $41,172
======= =======
</Table>
A-14
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the Business' effective income tax rate and the
U.S. federal statutory rate is reconciled as follows:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
U. S. federal statutory rate........................... 35.0% 35.0%
State income taxes (net of federal tax benefit)........ 5.8 5.8
Other.................................................. 0.1 0.1
---- ----
Effective income tax rate............................ 40.9% 40.9%
==== ====
</Table>
NOTE 9: RELATED-PARTY TRANSACTIONS
Transactions between the Business and UDS included sales of refined
products from the Business to UDS and the allocation of salary and employee
benefit costs, insurance costs, and administrative fees from UDS to the
Business.
The Business participated in UDS' centralized cash management program under
which cash receipts and cash disbursements were processed through UDS' cash
accounts with a corresponding credit or charge to an intercompany account. This
intercompany account is included in the net parent investment balance.
During the year ended December 31, 2001 and the four months ended December
31, 2000, UDS provided the Business with certain general and administrative
services, including the centralized corporate functions of legal, accounting,
treasury, engineering, information technology, human resources and other
corporate services. Charges for these services were allocated based on various
factors, including investments in property, personnel headcount, and refinery
capacity. Management believes that the amount of general and administrative
expenses allocated to the Business is a reasonable approximation of the costs
related to the Golden Eagle Refinery and northern California retail operations.
For purposes of these financial statements, payables and receivables related to
transactions between the Business and UDS are included as a component of the net
parent investment.
The following table summarizes transactions with UDS:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
(IN THOUSANDS)
Sales and other revenues............................... $42,738 $ --
Operating expenses..................................... 77,046 23,750
General and administrative expenses.................... 15,378 5,794
</Table>
NOTE 10: EMPLOYEE BENEFIT PLANS
Employees who work in the Business are included in the various employee
benefit plans of UDS. These plans include qualified, non-contributory defined
benefit retirement plans, defined contribution 401(k) plans, employee and
retiree medical, dental and life insurance plans, long-term incentive plans
(i.e., stock options and bonuses) and other such benefits. For the purposes of
these carve-out financial statements, the Business is considered to be
participating in multi-employer benefit plans of UDS.
The Business' allocated share of UDS employee benefit plan expenses were
$16,996,000 and $4,908,000 for the year ended December 31, 2001 and the four
months ended December 31, 2000, respectively. These employee benefit plan
expenses are included in operating expenses with the related payroll costs.
A-15
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition of the Golden Eagle Refinery on August
31, 2000, UDS assumed $22,032,000 related to employee pension and other
post-retirement benefit obligations. The amount accrued by the Business for
pension and other post-retirement benefit obligations as of December 31, 2001
and 2000 is reflected in the employee benefit obligations in the related balance
sheets. The weighted-average assumptions used in computing the actuarial present
value of such benefit obligations were as follows:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
-------------- -----------------
Discount rate........................................ 7.00% 7.75%
Expected long-term rate of return on plan assets..... 8.75% 9.50%
Rate of compensation increases....................... 5.00% 4.50%
Health care cost trend rate.......................... 10.00% 7.70%
decreasing to decreasing to
ultimate trend ultimate trend
rate of 5.50% rate of 5.60%
in 2006 in 2006
</Table>
NOTE 11: CONTINGENCIES AND COMMITMENTS
Leases and Contracts
The Business leases a wide variety of facilities and equipment under
operating leases, including the MTBE facility discussed below, office equipment
and transportation equipment. Rent expense approximated $10,970,000 (including
$5,720,000 for the MTBE facility lease) and $2,822,000 for the year ended
December 31, 2001 and the four months ended December 31, 2000, respectively.
Future minimum rental payments applicable to non-cancelable operating
leases as of December 31, 2001, excluding the MTBE facility lease payments
subsequent to 2002, are as follows (in thousands):
<Table>
2002........................................................ $ 6,789
2003........................................................ 812
2004........................................................ 612
2005........................................................ 529
2006........................................................ 474
Thereafter.................................................. 3,532
-------
Future minimum lease payments............................. $12,748
=======
</Table>
UDS previously entered into a long-term operating lease arrangement, which
expires in July 2003, with Jamestown Funding, L.P. for several of its
convenience stores. Included in the Jamestown lease arrangement is one of the
Business' retail convenience stores. After the non-cancelable lease term, the
Jamestown lease may be extended by agreement of the parties, or the Business may
purchase or arrange for the sale of the convenience store. The amount necessary
to purchase the convenience store as of December 31, 2001 would have been
$1,578,000.
In conjunction with the acquisition of the Golden Eagle Refinery, UDS
assumed a long-term contract for the supply of hydrogen, which expires in 2009.
The hydrogen contract has take-or-pay provisions requiring a monthly payment
totaling approximately $1,000,000, which is adjusted periodically based on
certain market indices. Also in conjunction with the acquisition of the Golden
Eagle Refinery, UDS assumed an operating lease for the MTBE facility located at
the refinery, which expires in 2010. At the time of the acquisition,
A-16
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
governmental regulations required that the use of MTBE blended gasolines be
phased out by 2004. The Golden Eagle Refinery is completing various capital
projects, which will allow it to phase out MTBE effective December 31, 2002.
Accordingly, a lease termination obligation for the MTBE facility lease of
$36,088,000 was accrued as part of the allocation of the purchase price.
San Francisco Baykeeper's Citizen Suit
On February 16, 2001, an environmental group named San Francisco Baykeeper
(Baykeeper) filed a complaint against Ultramar alleging violations of the Clean
Water Act, the California Water Code, and a storm water pollution prevention
plan pertaining to a petroleum coke loading terminal in Pittsburg, California
owned by Ultramar. In January 2002, Ultramar and Baykeeper entered into a
settlement agreement that is presently awaiting court approval. The settlement
will require Ultramar to reimburse Baykeeper's legal costs, evaluate the use of
the coke terminal and either discontinue its use of the terminal or implement
best available technology. The owner of the terminal will have up to four years
to implement this settlement agreement. Pursuant to the pending sale and
purchase agreement related to the Business between Ultramar and Tesoro Refining
and Marketing Company (Tesoro) dated as of February 4, 2002, as amended (Sale
and Purchase Agreement), which is discussed in Note 16: Sale and Purchase
Agreement with Tesoro below, Tesoro will assume the obligations for
implementation of this settlement agreement.
Communities For A Better Environment
On March 31, 2001, two environmental groups, Communities for a Better
Environment and San Francisco Baykeeper (collectively Plaintiffs), filed a
lawsuit challenging certain orders by the California State Water Resources
Control Board and the San Francisco Regional Water Quality Control Board
(collectively the Boards) that grant the Golden Eagle Refinery a water discharge
permit, also known as a National Pollutant Discharge Elimination System (NPDES)
permit. The lawsuit was brought in the form of a petition for writ of mandamus
against the Boards. Ultramar is named as the real party in interest.
The NPDES permit sets an interim limit and proposals for establishing a
final limit on certain discharges from the refinery. The interim limit could
extend until 2010. The Plaintiffs make three claims, namely that (a) the permit
lacks any "Water Quality Based Effluent Limitation," in violation of the Clean
Water Act, because the interim limit is performance-based, not water quality
based, (b) the new permit violates the Clean Water Act's anti-backsliding
requirement, because the interim limit is less stringent than the facility's
prior NPDES permit, and (c) the schedule for interim and final limits violates
legal limitations in the Clean Water Act and state law, in part because the
period for interim limitations is allegedly too long.
If the Plaintiffs prevail, then the refinery's ultimate permit limits could
be reduced to the prior limits, to an alternative final limit, or to some other
stringent limit. If the refinery is required to meet one of these more stringent
limits, the Business could incur significant capital expenditures to comply with
that limit. Pursuant to the pending Sale and Purchase Agreement with Tesoro,
Tesoro will assume the defense and obligations associated with this litigation.
General
There are various other legal proceedings and claims pending against the
Business which arise in the ordinary course of business. It is management's
opinion, based upon advice of counsel, that these matters, individually or in
the aggregate, will not have a material adverse effect on the results of
operations or financial position of the Business.
A-17
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: ENVIRONMENTAL MATTERS
The operations of the Business are subject to environmental laws and
regulations adopted by various federal, state and local governmental authorities
in the jurisdictions in which it operates. Although management believes its
operations are in general compliance with applicable environmental regulations,
risks of additional costs and liabilities are inherent in petroleum refining and
retail marketing operations, and there can be no assurance that significant
costs and liabilities will not be incurred. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws and regulations
and enforcement policies thereunder, and claims for damages to property or
persons resulting from the operations, could result in substantial costs and
liabilities. Accordingly, the Business has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the production, handling, storage, use and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability which could result from those events. However, some risk of
environmental or other damage is inherent in the Business, as it is with other
companies engaged in similar businesses.
In conjunction with the acquisition of the Golden Eagle Refinery from Tosco
Corporation on August 31, 2000, Tosco Corporation agreed to indemnify UDS for up
to $50,000,000 of environmental liabilities that are discovered subsequent to
the acquisition. Excluded from this indemnification are liabilities that result
from a change in environmental law after August 31, 2000.
The balances of and changes in accruals for environmental matters, which
are primarily related to retail operations and are principally included in other
long-term liabilities, consisted of the following:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------------
(IN THOUSANDS)
Balance at beginning of period......................... $3,446 $2,898
Additions to accrual................................. 223 548
Payments............................................. (806) --
------ ------
Balance at end of period............................... $2,863 $3,446
====== ======
</Table>
The accruals noted above represent the Business' best estimate of the costs
which will be incurred over an extended period for restoration and environmental
remediation at various sites. However, environmental exposures are difficult to
assess and estimate due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination of the
Business' liability in proportion to other parties, improvements in cleanup
technologies and the extent to which environmental laws and regulations may
change in the future. The liabilities reflected above have not been reduced by
possible recoveries from third parties and projected cash expenditures have not
been discounted.
NOTE 13: BUSINESS SEGMENTS
The Business has two reportable segments, refining and retail. The refining
segment includes the Golden Eagle Refinery, and related wholesale marketing
operations. The retail segment includes the operations of the 70
company-operated convenience stores in Northern California. Operations that are
not included in the two reportable segments are included in the Corporate
category and consist primarily of general and administrative expenditures. The
Business' operations are located in the State of California.
The reportable segments are strategic business units that offer different
products and services. They have been historically managed separately as each
business requires different technology and marketing strategies. The accounting
policies for the segments are the same as those described in the summary of
significant
A-18
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accounting policies. The Business evaluates performance based on earnings before
interest, taxes and depreciation and amortization (EBITDA). The calculation of
EBITDA is not based on United States generally accepted accounting principles
and should not be considered as an alternative to net income or cash flows from
operating activities (which are determined in accordance with US GAAP). This
measure may not be comparable to similarly titled measures used by other
entities as other entities may not calculate EBITDA in the same manner as the
Business. Intersegment sales are generally derived from transactions made at
prevailing market rates. Total expenditures include capital expenditures,
acquisition costs, catalysts, and deferred refinery turnaround costs.
<Table>
<Caption>
REFINING RETAIL CORPORATE TOTAL
---------- -------- --------- ----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001:
Sales and other revenues from external
customers.......................... $1,730,154 $290,442 $ -- $2,020,596
Intersegment sales.................... 152,482 -- -- 152,482
EBITDA................................ 190,237 16,209 (15,378) 191,068
Depreciation and amortization......... 41,855 2,114 -- 43,969
Operating income (loss)............... 148,382 14,095 (15,378) 147,099
Total assets.......................... 1,160,257 40,748 -- 1,201,005
Total expenditures.................... 326,732 61 -- 326,793
FOUR MONTHS ENDED DECEMBER 31, 2000:
Sales and other revenues from external
customers.......................... 737,312 104,449 -- 841,761
Intersegment sales.................... 60,994 -- -- 60,994
EBITDA................................ 88,266 3,466 (5,794) 85,938
Depreciation and amortization......... 11,575 654 -- 12,229
Operating income (loss)............... 76,691 2,812 (5,794) 73,709
Total assets.......................... 864,673 40,435 -- 905,108
Total expenditures.................... 20,964 1,450 -- 22,414
</Table>
Sales and other revenues from external customers for the Business'
principal products were as follows:
<Table>
<Caption>
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------------
(IN THOUSANDS)
REFINING:
Gasoline and blendstocks............................. $1,171,950 $491,623
Distillates (diesel and jet fuel).................... 463,940 211,788
Other................................................ 94,264 33,901
RETAIL:
Fuel sales (gasoline and diesel)..................... 242,989 89,848
Merchandise sales.................................... 47,453 14,601
---------- --------
Total sales and other revenues from external
customers....................................... $2,020,596 $841,761
========== ========
</Table>
A-19
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
<Table>
<Caption>
DECEMBER 31,
---------------
2001 2000
------ ------
(IN THOUSANDS)
Cash........................................................ $ 189 $ 171
Employee notes receivable................................... 3,329 2,842
Commodity price swap contracts:
Derivative assets, net.................................... 1,226 --
Derivative liabilities.................................... 2,967 --
</Table>
As of December 31, 2001, the carrying value of the commodity price swaps
approximated fair value and the Business had no commodity futures contracts
outstanding. As of December 31, 2000, the Business had no commodity price swaps
or futures contracts outstanding.
The Business is subject to the market risk associated with changes in the
market price of the crude oil and refined products underlying the derivative
instruments; however, the effect of these changes in values is generally
mitigated by changes in the sales price of the Business' refined products.
NOTE 15: SUBSEQUENT EVENT
Union Oil Company of California Litigation
On January 22, 2002, Union Oil Company of California (Unocal) filed a
patent infringement lawsuit against Valero in California federal court. The
complaint seeks a 5.75 cent per gallon royalty on all reformulated gasoline
infringing on Unocal's '393 and '126 patents. These patents cover certain
compositions of cleaner-burning gasoline. The complaint seeks treble damages for
Valero's alleged willful infringement of Unocal's patents. In a previous
lawsuit, Unocal prevailed against five other major refiners involving its '393
patent.
In August 2001, the FTC announced that it was commencing an antitrust
investigation concerning Unocal's conduct with a joint industry research group
while Unocal was prosecuting its patents at the U.S. Patent and Trademark Office
(PTO). An injunction against Unocal's enforcement of its patents is a potential
outcome of the FTC investigation. In 2001, the PTO commenced a reexamination of
Unocal's '393 patent, and in January 2002, the PTO issued a nonfinal rejection
of all claims of the '393 patent. Unocal has the opportunity to respond. In
January 2002, the PTO reversed an earlier denial and commenced reexamination of
Unocal's '126 patent. Both reexaminations could affect the scope and validity of
the patents.
Notwithstanding the judgment against the other refiners in the previous
litigation, management believes that it has several strong defenses to Unocal's
lawsuit, including those arising from Unocal's misconduct, and management
believes it will prevail in the lawsuit. However, an adverse result could have a
materially adverse effect on the results of operations and financial position of
the Business. Pursuant to the terms of the pending Sale and Purchase Agreement
with Tesoro, Ultramar and its predecessors will retain liability for any
infringement of Unocal's patents at the Golden Eagle Refinery prior to its sale
to Tesoro.
NOTE 16: SALE AND PURCHASE AGREEMENT WITH TESORO
In February 2002, Ultramar entered into the Sale and Purchase Agreement (as
amended February 20, 2002) dated February 4, 2002, with Tesoro whereby Tesoro
will acquire the Golden Eagle Refinery and associated wholesale marketing
operation in Northern California and the network of 70 convenience stores
located in the northern half of California. The total purchase price of
$1,125,000,000 also includes an
A-20
GOLDEN EAGLE REFINING AND MARKETING ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimated amount for crude oil and refined product inventories and the
assumption of various employee benefit and lease obligations, but excludes
certain liabilities of the Business, including accounts payable, certain accrued
liabilities, and income tax obligations.
A-21
APPENDIX B
PRO FORMA FINANCIAL INFORMATION
B-1
PRO FORMA FINANCIAL STATEMENTS
When used in these Pro Forma Financial Statements, the terms "Tesoro",
"we", "our" and "us" except as otherwise indicated or as the context otherwise
indicates, refer to Tesoro Petroleum Corporation and its subsidiaries.
We entered into a sale and purchase agreement with Ultramar Inc., a
subsidiary of Valero Energy Corporation, on February 4, 2002, which was amended
on February 20, 2002. We agreed to acquire the 168,000 barrels per day ("bpd")
Golden Eagle refinery located in Martinez, California near the San Francisco Bay
Area along with 70 associated retail sites throughout northern California
(collectively, the "Golden Eagle Assets").
On September 6, 2001, we acquired two refineries in North Dakota and Utah
and related storage, distribution and retail assets from certain affiliates of
BP p.l.c. ("BP"). The acquired assets include a 60,000 bpd refinery in Mandan,
North Dakota and a 55,000 bpd refinery in Salt Lake City, Utah. In connection
with the acquisition of the North Dakota refinery, we purchased a North
Dakota-based, common-carrier crude oil pipeline and gathering system ("Pipeline
System") from certain affiliates of BP on November 1, 2001. The Pipeline System
is the primary crude supply carrier for our Mandan, North Dakota refinery. The
purchase of the Pipeline System and the acquisition of the North Dakota and Utah
refineries and related storage, distribution and retail assets are collectively
referred to as the "Mid-Continent Acquisition".
The following unaudited pro forma combined condensed balance sheet gives
effect to the following events as if each had occurred on December 31, 2001:
- the pending acquisition of the Golden Eagle Assets;
- a planned offering of 20,000,000 shares of Tesoro common stock; and
- borrowings under our senior secured credit facility and other debt
financings, as necessary to consummate the pending acquisition of the
Golden Eagle Assets.
The Mid-Continent Acquisition and the related financings closed during the
course of 2001 and are included in Tesoro's historical balance sheet as of
December 31, 2001 as reported in our Annual Report on Form 10-K for the year
ended December 31, 2001.
The following unaudited pro forma combined condensed statements of
operations give effect to the following events as if each had occurred on
January 1, 2001:
MID-CONTINENT ACQUISITION:
- consummation of the Mid-Continent Acquisition;
- the related borrowings under our existing senior secured credit facility;
and
- the offering of our 9 5/8% Senior Subordinated Notes due 2008.
PENDING ACQUISITION OF THE GOLDEN EAGLE ASSETS:
- the pending acquisition of the Golden Eagle Assets;
- a planned offering of 20,000,000 shares of Tesoro common stock; and
- borrowings under our senior secured credit facility and other debt
financings, as necessary to consummate the pending acquisition of the
Golden Eagle Assets.
OTHER ADJUSTMENT:
- the July 1, 2001 conversion of our Premium Income Equity Securities
("PIES(SM)") into shares of our common stock.
B-2
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
As reported in our Annual Report on Form 10-K for the year ended December
31, 2001, Tesoro's historical results of operations for the year ended December
31, 2001 included results of the Mid-Continent Acquisition (excluding the
Pipeline System) and related interest and financing costs for the period
September 6, 2001 (the closing date for those assets) through December 31, 2001
and results of the Pipeline System and related interest and financing costs for
the period November 1, 2001 (the closing date for the Pipeline System) through
December 31, 2001.
The pending acquisition of the Golden Eagle Assets will be accounted for
using the purchase method of accounting. The estimates of the fair value of the
Golden Eagle Assets and related liabilities are based on preliminary valuations.
These valuations will be updated with respect to inventories, property, plant
and equipment, intangible assets and certain assumed liabilities, and will
change from the amounts shown.
The unaudited pro forma combined condensed financial statements are based
on assumptions that we believe are reasonable under the circumstances and are
intended for informational purposes only. They are not necessarily indicative of
the future financial position or future results of the combined companies or of
the financial position or the results of operations that would have actually
occurred had the pending acquisition of the Golden Eagle Assets and the
Mid-Continent Acquisition taken place as of the date or for the periods
presented. The unaudited pro forma combined condensed statement of operations
does not reflect any benefits from potential cost savings or revenue
enhancements resulting from the integration of the operations of the Golden
Eagle Assets and the Mid-Continent Acquisition. The unaudited pro forma combined
condensed statement of operations contains allocations of corporate overhead
totaling $23.3 million related to the historical Mid-Continent Acquisition and
Golden Eagle Assets financial statements. We believe the actual incremental
corporate overhead that we will incur will be less than the allocated amounts.
These unaudited pro forma combined condensed statements should be read in
conjunction with the historical Consolidated Financial Statements of Tesoro
Petroleum Corporation included in the Company's Annual Report on Form 10-K for
the year December 31, 2001, the Financial Statements of The North Dakota and
Utah Refining and Marketing Business of BP Corporation North America Inc.
included in Amendment No. 1 to our Current Report on Form 8-K filed on October
24, 2001, and the Financial Statements of Golden Eagle Refining and Marketing
Assets Business (the "Golden Eagle Business") in Appendix A to this Current
Report on Form 8-K.
B-3
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 2001
<Table>
<Caption>
HISTORICAL PRO FORMA
-------------------- --------------------------
GOLDEN
EAGLE
TESORO BUSINESS ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Current Assets:
Cash and cash equivalents................... $ 51.9 $ 0.2 $ (0.2)(a) $ 51.9
Receivables................................. 384.9 -- -- 384.9
Inventories................................. 431.8 163.0 (25.0)(b) 569.8
Prepayments and other....................... 9.4 7.7 (7.7)(a) 9.4
-------- -------- ------- --------
Total Current Assets................ 878.0 170.9 (32.9) 1,016.0
-------- -------- ------- --------
Property, Plant and Equipment................. 1,852.7 830.7 (0.7)(b) 2,682.7
Less accumulated depreciation and
amortization............................. (330.4) (58.6) 58.6(b) (330.4)
-------- -------- ------- --------
Net Property, Plant and Equipment........... 1,522.3 772.1 57.9 2,352.3
-------- -------- ------- --------
Goodwill...................................... 95.2 199.4 (177.4)(b) 117.2
Other Assets.................................. 166.8 58.6 146.4(b) 407.8
36.0(c)
-------- -------- ------- --------
Total Assets........................ $2,662.3 $1,201.0 $ 30.0 $3,893.3
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.... $ 504.1 $ 110.6 $(105.8)(b) $ 508.9
Lease termination obligation................ -- 36.1 (36.1)(b) --
Current maturities of debt and other
obligations.............................. 34.4 -- --(c) 34.4
-------- -------- ------- --------
Total Current Liabilities........... 538.5 146.7 (141.9) 543.3
Deferred Income Taxes......................... 136.9 85.9 (85.9)(a) 136.9
Other Liabilities............................. 117.4 33.9 21.3(b) 172.6
Debt and Other Obligations.................... 1,112.5 -- 915.5(c) 2,028.0
Net Parent Investment......................... -- 934.5 (934.5)(d) --
Stockholders' Equity:
Common stock................................ 7.2 -- 3.3(e) 10.5
Additional paid-in capital.................. 448.4 -- 252.2(e) 700.6
Retained earnings........................... 321.9 -- -- 321.9
Treasury stock.............................. (20.5) -- -- (20.5)
-------- -------- ------- --------
Total Stockholders' Equity.......... 757.0 -- 255.5 1,012.5
-------- -------- ------- --------
Total Liabilities and
Stockholders' Equity......... $2,662.3 $1,201.0 $ 30.0 $3,893.3
======== ======== ======= ========
</Table>
B-4
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 2001
(a) Represents an adjustment to exclude assets and liabilities of the Golden
Eagle Business we are not acquiring.
(b) The following is a preliminary estimate of the purchase price for the Golden
Eagle Assets (in millions):
<Table>
Purchase price under the sale and purchase agreement........ $ 995.0
Assumed purchased value of feedstock and refined product
inventories............................................... 130.0
Estimated direct costs of acquisition....................... 10.0
--------
Total purchase price................................... $1,135.0
========
</Table>
There will be a post-closing adjustment if the actual value of the feedstock
and refined products inventories differs from the assumed value. We assume
that the feedstock and refined product inventories required for the Golden
Eagle Assets are approximately $130 million.
For purposes of this pro forma analysis, the above estimated purchase price
has been allocated based on a preliminary assessment of the fair value of
the assets to be acquired and liabilities to be assumed as follows (in
millions):
<Table>
Property, plant and equipment............................... $ 830.0
Inventories:
Feedstocks and refined products........................... 130.0
Materials and supplies.................................... 8.0
Other assets, including intangible and turnaround assets.... 205.0
Goodwill.................................................... 22.0
Environmental and employee benefit liabilities.............. (60.0)
--------
Total purchase price................................... $1,135.0
========
</Table>
Preliminarily, we are not recording a liability related to a lease
termination obligation recorded on the seller's historical balance sheet.
This liability was recorded to reflect the remaining lease payments on a
MTBE facility which the seller had planned to stop operating at the end of
2002. However, our present plans are to reconfigure the facility at an
estimated cost of less than $5 million and to operate the facility
throughout the lease term.
(c) Represents an adjustment to aggregate borrowings of $915.5 million to
finance the pending acquisition of the Golden Eagle Assets and to pay an
estimated $36 million in related fees, expenses and debt issuance costs. All
borrowings have been reflected as non-current for the purposes of this pro
forma analysis; however, based on the ultimate terms of our financing, some
of this amount could be classified as current maturities.
(d) Represents the elimination of historical equity related to the Golden Eagle
Business.
(e) Represents $270 million in estimated gross proceeds from the equity offering
used to finance a portion of the pending acquisition of the Golden Eagle
Assets, less expected issuance costs of $14.5 million. If we are unable to
complete the equity offering or if the proceeds from the equity offering are
materially different from the estimated amount, we would be required to
increase our borrowings necessary to finance the pending acquisition of the
Golden Eagle Assets or we may be unable to finance the pending acquisition
at all. In addition, the interest rates assumed on debt could increase
substantially if we are unable to complete the equity offering or if the
proceeds from the equity offering are materially different from the
estimated amount.
B-5
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------------------- ------------------------- ------------ ------------------------
MID-CONTINENT GOLDEN EAGLE
MID-CONTINENT(1) AND OTHER ADJUSTED GOLDEN EAGLE BUSINESS
TESORO ACQUISITION ADJUSTMENTS TESORO BUSINESS ADJUSTMENTS COMBINED
-------- ---------------- ------------- -------- ------------ ------------ --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................ $5,217.8 $972.3(2) $ -- $6,190.1 $2,020.6 $ (98.1)(g) $8,112.6
Costs and Expenses:
Costs of sales and
operating
expenses............ 4,857.5 835.0 (5.5)(a) 5,687.0 1,758.2 (98.1)(g) 7,348.3
1.2(h)
Writedown of
inventories to
market value........ -- -- -- -- 55.9(4) -- 55.9
Selling, general and
administrative
expenses............ 104.2 19.1(3) -- 123.3 15.4(3) -- 138.7
Depreciation and
amortization........ 57.4 15.2 (1.2)(b) 75.3 44.0 (5.4)(i) 113.3
3.9(c) (6.9)(j)
7.5(k)
(1.2)(h)
-------- ------ ------ -------- -------- ------- --------
Operating Income........ 198.7 103.0 2.8 304.5 147.1 4.8 456.4
Interest and Financing
Costs, Net of
Capitalized
Interest.............. (52.8) -- (37.2)(d) (90.0) -- (85.5)(l) (175.5)
Interest Income......... 1.0 -- -- 1.0 -- -- 1.0
-------- ------ ------ -------- -------- ------- --------
Earnings Before Income
Taxes................. 146.9 103.0 (34.4) 215.5 147.1 (80.7) 281.9
Income Tax Provision.... 58.9 41.2 (13.1)(e) 87.0 60.1 (30.7)(m) 116.4
-------- ------ ------ -------- -------- ------- --------
Net Earnings............ 88.0 61.8(2) (21.3) 128.5 87.0 (50.0) 165.5
Preferred Dividend
Requirements.......... 6.0 -- (6.0)(f) -- -- -- --
-------- ------ ------ -------- -------- ------- --------
Net Earnings Applicable
to Common Stock....... $ 82.0 $ 61.8 $(15.3) $ 128.5 $ 87.0 $ (50.0) $ 165.5
======== ====== ====== ======== ======== ======= ========
Weighted Average Common
Shares:
Basic............... 36.2 5.2(f) 20.0(n) 61.4
======== ====== ======= ========
Diluted............. 41.9 20.0(n) 61.9
======== ======= ========
Net Earnings Per Share:
Basic............... $ 2.26 $ 2.70
======== ========
Diluted............. $ 2.10 $ 2.67
======== ========
</Table>
B-6
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
INFORMATIONAL NOTES
(1) Includes the Mid-Continent Acquisition (excluding the Pipeline System) for
the period from January 1, 2001 through September 5, 2001, and the Pipeline
System for the period from January 1, 2001 through October 31, 2001. The
results of operations of the Mid-Continent Acquisition (excluding the
Pipeline System) are included in Tesoro's historical results from the date
of acquisition, September 6, 2001 through December 31, 2001. The results of
operations of the Pipeline System are included in Tesoro's historical
results from the date of acquisition, November 1, 2001 through December 31,
2001.
(2) In connection with the Mid-Continent Acquisition, we entered into certain
offtake agreements with BP to provide us with a distribution channel for a
portion of our refined products produced at these refineries. The offtake
agreements commit approximately 37,220 bpd of refined products for a period
ranging from two to five years. Historically, BP sold these volumes through
its distribution network, which included retail stations and jobbers. The
product sales prices that we will receive under the offtake agreements may
be less than BP historically realized. A decrease in product sales price of
1 cent per gallon would have resulted in a decrease in revenues of $5.7
million and a decrease in net earnings of $3.4 million for the year ended
December 31, 2001.
(3) Historical Mid-Continent Acquisition results include $7.9 million, or $0.08
per pro forma diluted share, of allocated corporate overhead. Historical
Golden Eagle Business results include $15.4 million, or $0.15 per pro forma
diluted share, of allocated corporate overhead.
(4) Represents a year-end, non-cash $55.9 million, or $0.56 per pro forma
diluted share, writedown of inventories to current market values. Excluding
the impact of this writedown, pro forma diluted net earnings would have
been $3.23 per share.
MID-CONTINENT ADJUSTMENTS
(a) Represents an adjustment to conform the accounting policy for refinery
maintenance turnaround costs to our policy.
(b) Represents an adjustment in depreciation expense due to the change in
property, plant and equipment from book value to fair value. Pro forma
depreciation is calculated on the straight-line method over estimated
useful lives of 28 years for refinery and pipeline assets and 16 years for
terminals and retail assets.
(c) Represents the amortization of acquired intangible assets over their
estimated useful lives (weighted average life of 19 years). Intangible
assets include jobber agreements, customer contracts, refinery permits and
plans and refinery technology.
(d) Represents additional interest expense and amortization of debt issuance
costs under our senior secured credit facility and senior subordinated
notes, offset by a decrease in interest expense and amortization of debt
issuance costs related to our prior credit facility.
(e) Represents the income tax effect of the adjustments above at a combined
statutory tax rate of 38%.
OTHER ADJUSTMENT
(f) Represents the elimination of the preferred dividend requirements upon
conversion of our PIES(SM) into shares of our common stock on July 1, 2001.
B-7
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
GOLDEN EAGLE ADJUSTMENTS
(g) Represents an adjustment to eliminate excise taxes on wholesale sales
collected on behalf of governmental agencies associated with the seller's
operations from both revenues and costs of sales and operating expenses to
conform to our accounting policy.
(h) Represents an adjustment to conform the accounting policy for classifying
amortization of refinery maintenance turnaround costs to our policy.
(i) Represents an adjustment to eliminate the seller's historical goodwill
amortization of $5.4 million. As we will account for our purchase under
SFAS No. 141 and No. 142, we will not amortize goodwill resulting from the
pending acquisition of the Golden Eagle Assets.
(j) Represents an adjustment to record depreciation expense based on our
preliminary allocation of fair values to property, plant and equipment
based on a weighted-average estimated useful life of 22 years and
estimated salvage value of 10%.
(k) Represents an adjustment to record amortization of acquired intangible
assets assuming a weighted average life of 20 years.
(l) Represents an adjustment to record interest expense (and amortization of
deferred financing costs) on borrowings required to finance the pending
acquisition of the Golden Eagle Assets and to pay related fees, expenses
and debt issuance costs at a weighted average annual interest rate of 8%.
A 1/8% change in the interest rate associated with these borrowings would
have a $1.1 million effect on annual interest expense. A $10 million
change in the amount of borrowings necessary to finance the pending
acquisition of the Golden Eagle Assets would have a $0.8 million effect on
annual interest expense.
(m) Represents the income tax effect of the adjustments above at a combined
statutory tax rate of 38%.
(n) Represents an adjustment for an offering of 20 million shares of common
stock at a price of $13.50 per share to yield gross proceeds of $270
million. A $1 decrease in the offering price of our common stock would
reduce our net proceeds by $19 million, thereby increasing borrowings
necessary to finance the pending acquisition of the Golden Eagle Assets and
increasing annual interest expense by $1.5 million.
B-8
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Arthur Andersen LLP.
99.1 Press Release issued on February 22, 2002 by Tesoro Petroleum
Corporation.
</Table>
4