-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SdgS7+rkWyKqbMDMEdI4b74duwdfiRrSMpPX3UBnGwsppIMR6h31bByQavk+/ohU pOZmS+qJWCISnhRd+VT/ZA== 0000050104-98-000008.txt : 19981118 0000050104-98-000008.hdr.sgml : 19981118 ACCESSION NUMBER: 0000050104-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TESORO PETROLEUM CORP /NEW/ CENTRAL INDEX KEY: 0000050104 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 950862768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03473 FILM NUMBER: 98751953 BUSINESS ADDRESS: STREET 1: 8700 TESORO DR CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 2108288484 10-Q 1 10Q FOR QUARTER ENDED 9/30/98 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 SEPTEMBER 30, 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ----- There were 32,333,116 shares of the registrant's Common Stock outstanding at October 31, 1998. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Statements of Consolidated Operations - Three Months and Nine Months Ended September 30, 1998 and 1997. . . . . . . . 4 Condensed Statements of Consolidated Cash Flows - Nine Months Ended September 30, 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 . . . . . . . . . . . . . . . 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 27 Item 4. Submission of Matters to a Vote of Security Holders . . . 28 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 29 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2 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) September 30, December 31, 1998 1997 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 3,454 $ 8,352 Receivables, less allowance for doubtful accounts of $1,613 ($1,373 at December 31, 1997). . . . . . . . . . . . . . . . . . 167,582 76,282 Inventories: Crude oil and wholesale refined products, at LIFO. . . . . . . . 184,368 68,227 Merchandise and other refined products . . . . . . . . . . . . . 21,832 13,377 Materials and supplies . . . . . . . . . . . . . . . . . . . . . 18,896 5,755 Prepayments and other . . . . . . . . . . . . . . . . . . . . . . 9,193 9,842 ---------- ---------- Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 405,325 181,835 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Refining and marketing. . . . . . . . . . . . . . . . . . . . . . 835,166 370,174 Exploration and production (full-cost method of accounting) . . . 394,538 291,411 Marine services . . . . . . . . . . . . . . . . . . . . . . . . . 49,862 43,072 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,922 13,689 ---------- ---------- 1,297,488 718,346 Less accumulated depreciation, depletion and amortization. . . . 352,345 304,523 ---------- ---------- Net Property, Plant and Equipment. . . . . . . . . . . . . . . . 945,143 413,823 ---------- ---------- OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,233 32,150 ---------- ---------- Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,481,701 $ 627,808 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 156,527 $ 58,767 Accrued liabilities and current income taxes payable. . . . . . . 91,742 31,726 Current maturities of long-term debt and other obligations. . . . 6,386 17,002 ---------- ---------- Total Current Liabilities. . . . . . . . . . . . . . . . . . . . 254,655 107,495 ---------- ---------- DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . 79,388 28,824 ---------- ---------- OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 62,781 43,211 ---------- ---------- LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT MATURITIES . . . . . . . . . . . . . . . . . . . . . . . 483,245 115,314 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes E and F) STOCKHOLDERS' EQUITY Preferred Stock, no par value; authorized 5,000,000 shares: 7.25% Mandatorily Convertible Preferred Stock, 103,500 shares issued and outstanding. . . . . . . . . . . . . . 164,953 - Common stock, par value $0.16-2/3; authorized 100,000,000 shares (50,000,000 in 1997); 32,653,138 shares issued (26,506,601 in 1997) . . . . . . . . . . . . . . . . . . . . . 5,442 4,418 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 278,594 190,925 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 158,052 140,980 Treasury stock, 320,022 common shares (216,453 in 1997), at cost (5,409) (3,359) ---------- ---------- Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . 601,632 332,964 ---------- ---------- Total Liabilities and Stockholders' Equity. . . . . . . . . . . $ 1,481,701 $ 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 Nine Months Ended September 30, September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES Refining and marketing. . . . . . . . . . . . . . . . . . . $ 424,776 $ 198,815 $ 772,495 $ 534,986 Exploration and production. . . . . . . . . . . . . . . . . 19,374 19,821 63,130 61,769 Marine services . . . . . . . . . . . . . . . . . . . . . . 28,392 32,433 90,367 98,266 Other income. . . . . . . . . . . . . . . . . . . . . . . . 192 403 21,610 4,609 -------- -------- -------- -------- Total Revenues . . . . . . . . . . . . . . . . . . . . . . 472,734 251,472 947,602 699,630 -------- -------- -------- -------- OPERATING COSTS AND EXPENSES Refining and marketing. . . . . . . . . . . . . . . . . . . 397,672 188,014 711,119 508,926 Exploration and production. . . . . . . . . . . . . . . . . 3,833 3,054 11,248 8,836 Marine services . . . . . . . . . . . . . . . . . . . . . . 24,821 29,691 82,292 93,406 Depreciation, depletion and amortization. . . . . . . . . . 17,885 11,357 45,683 34,183 -------- -------- -------- -------- Total Segment Operating Costs and Expenses . . . . . . . . 444,211 232,116 850,342 645,351 -------- -------- -------- -------- SEGMENT OPERATING PROFIT . . . . . . . . . . . . . . . . . . 28,523 19,356 97,260 54,279 Other Operating Costs and Expenses . . . . . . . . . . . . . - - (7,934) - General and Administrative . . . . . . . . . . . . . . . . . (4,465) (3,416) (11,689) (9,599) Interest and Financing Costs, Net of Capitalized Interest. . (10,884) (1,893) (20,681) (5,819) Interest Income. . . . . . . . . . . . . . . . . . . . . . . 1,532 135 1,945 1,459 Other Expense, Net . . . . . . . . . . . . . . . . . . . . . (813) (821) (15,079) (2,280) -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . 13,893 13,361 43,822 38,040 Income Tax Provision . . . . . . . . . . . . . . . . . . . . 6,126 5,382 19,119 14,292 -------- -------- -------- -------- EARNINGS BEFORE EXTRAORDINARY ITEM . . . . . . . . . . . . . 7,767 7,979 24,703 23,748 Extraordinary Loss on Extinguishment of Debt, Net of Income Tax Benefit of $2,401 in 1998. . . . . . . . . . . . - - (4,641) - -------- -------- -------- -------- NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . 7,767 7,979 20,062 23,748 Preferred Dividend Requirements. . . . . . . . . . . . . . . 2,990 - 2,990 - -------- -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON. . . . . . . . . . . . . . $ 4,777 $ 7,979 $ 17,072 $ 23,748 ======== ======== ======== ======== NET EARNINGS PER SHARE - BASIC . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90 ======== ======== ======== ======== NET EARNINGS PER SHARE - DILUTED . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES - BASIC . . . . . . . . . . . 32,331 26,439 28,394 26,431 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON AND POTENTIALLY DILUTIVE COMMON SHARES - DILUTED. . . . . . . . . . . . . . 32,876 26,938 28,955 26,857 ======== ======== ======== ======== 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) Nine Months Ended September 30, ------------------------- 1998 1997 ---- ---- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,062 $ 23,748 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation, depletion and amortization. . . . . . . . . . . . . . . . . . 46,355 34,643 Extraordinary loss on extinguishment of debt, net of income tax benefit . . 4,641 - Amortization of goodwill, deferred charges and other. . . . . . . . . . . . 2,718 652 Changes in operating assets and liabilities: Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,725) 45,882 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,090) 358 Accounts payable and other current liabilities . . . . . . . . . . . . . . 70,407 (38,557) Obligation payments to State of Alaska . . . . . . . . . . . . . . . . . . (3,008) (3,406) Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,199 5,401 Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,200 2,350 ---------- ---------- Net cash from operating activities. . . . . . . . . . . . . . . . . . . 98,759 71,071 ---------- ---------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,316) (95,082) Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (527,916) - Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (204) (3,155) ---------- ---------- Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (659,436) (98,237) ---------- ---------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Borrowings under revolving credit facilities, net of repayments. . . . . . . (24,111) 15,828 Borrowings under term loans, net of repayments . . . . . . . . . . . . . . . 150,000 - Proceeds from equity and debt offerings, net . . . . . . . . . . . . . . . . 532,765 - Refinancing and repayments of debt and obligations . . . . . . . . . . . . . (92,185) (3,287) Financing costs and other. . . . . . . . . . . . . . . . . . . . . . . . . . (10,690) (792) ---------- ---------- Net cash from financing activities . . . . . . . . . . . . . . . . . . . . 555,779 11,749 ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . (4,898) (15,417) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 8,352 22,796 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 3,454 $ 7,379 ========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid, net of $56 capitalized in 1998 and $313 capitalized in 1997 . $ 9,779 $ 1,654 ========== ========== Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,490 $ 20,764 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements.
5 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 those 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 prior periods to conform with the requirements of Statement of Financial Accounting Standard ("SFAS") No. 128 which established standards for computing and presenting basic and diluted earnings per share calculations. In addition, certain reclassifications have been made to information previously reported to conform to current presentations. NOTE B - ACQUISITIONS Refining and Marketing On May 29, 1998, the Company completed the acquisition (the "Hawaii Acquisition") of all of the outstanding capital stock of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. (together, "BHP Hawaii") from BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc. ("BHP Sellers"), affiliates of The Broken Hill Proprietary Company Limited ("BHP"). The Hawaii Acquisition included a 95,000-barrel per day refinery (the "Hawaii Refinery") and 32 retail gasoline stations located in Hawaii. In addition, Tesoro and a BHP affiliate entered 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 Hawaii Refinery. Tesoro paid $252.2 million in cash for the Hawaii Acquisition, including $77.2 million for net working capital. In addition, Tesoro issued an unsecured, non-interest bearing, promissory note ("BHP Note") for the purchase in the amount of $50 million, payable in five equal annual installments of $10 million each, beginning in 2009. The BHP Note provides 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 and amortization, as specified in the BHP Note, exceed $50 million in any calendar year. On August 10, 1998, the Company completed the acquisition (the "Washington Acquisition" and together with the Hawaii Acquisition, the "Acquisitions") of all of the outstanding stock of Shell Anacortes Refining Company ("Shell Washington"), an affiliate of Shell Oil Company ("Shell"). The Washington Acquisition included an 108,000-barrel per day refinery (the "Washington Refinery") in Anacortes, Washington and related assets. The total cash purchase price for the Washington Acquisition was $237 million plus $39.6 million for estimated working capital, which is subject to post-closing adjustments. The Acquisitions were accounted for as purchases whereby the purchase prices were allocated to the assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The accompanying financial statements reflect preliminary allocations of the purchase prices, as the purchase price allocations have not been finalized. The Company is awaiting certain financial information regarding assets acquired and liabilities assumed, including final appraisals on property acquired and valuations on certain assumed liabilities. Included in the preliminary allocation of the Hawaii Acquisition was an estimated $14.6 million present value of the BHP Note. 6 The effects of accelerated payments under the BHP Note, if required, would be accounted for as additional costs of the acquired assets and amortized over the remaining life of the assets. Under purchase accounting, financial results of BHP Hawaii and Shell Washington have been included in Tesoro's consolidated financial statements since the date of acquisition. Had these results been included in Tesoro's results since January 1, 1997, and the Refinancing and Offerings completed (as defined in Note C below), Tesoro's consolidated results for the nine months ended September 30, 1998 on a pro forma basis would have reflected revenues of approximately $1.7 billion, earnings before extraordinary item of $26 million ($0.54 per basic and $0.53 per diluted share after preferred dividends) and net earnings of $22 million ($0.40 per basic and $0.39 per diluted share after preferred dividends). Tesoro's consolidated results for the nine months ended September 30, 1997, on a pro forma basis would have reflected revenues of approximately $2.2 billion and net earnings of $28 million ($0.59 per basic and diluted share after preferred dividends). Exploration and Production In August 1998, the Company purchased a 50% working interest in the Stiles Ranch Field, which included 11,400 gross acres (5,750 net) located in Wheeler County in the Texas Panhandle that are adjacent to 9,900 gross acres (3,750 net) acquired earlier in the year. The acquisition price included $8 million in cash plus the conveyance of a 25% working interest in an undeveloped prospect owned by the Company in South Texas. In September 1998, the Company purchased oil and gas assets for $10.4 million, which included a 25% to 50% working interest in eight producing wells and 37,500 gross (11,800 net) undeveloped acres in the Morrow gas play located in Wheeler County in the Texas Panhandle. Also included in the transaction were 14,400 gross (6,200 net) undeveloped acres in prospective areas of the onshore Texas Gulf Coast. Also in 1998, the Company acquired additional interests in 43,300 gross acres (29,400 net) for $4.2 million, located primarily in the onshore Gulf Coast of Texas and in Wheeler County in the Texas Panhandle. NOTE C - LONG-TERM DEBT AND EQUITY Interim Credit Facility and Senior Credit Facility In conjunction with closing the Hawaii Acquisition (see Note B), on May 29, 1998, Tesoro refinanced substantially all of its then-existing indebtedness (the "Refinancing"). The Company recorded an extraordinary loss on early extinguishment of debt of approximately $7.0 million pretax ($4.6 million aftertax, or $0.17 per basic and diluted share) for the Refinancing during the second quarter of 1998. The total amount of funds required by Tesoro to complete the Hawaii Acquisition and the Refinancing, to pay related fees and expenses and for general corporate purposes was approximately $432 million, which was financed through a secured credit facility (the "Interim Credit Facility") provided by Lehman Commercial Paper Inc. ("LCPI"), an affiliate of Lehman Brothers Inc. The Interim Credit Facility replaced the Company's previous corporate revolving credit agreement. In the third quarter of 1998, the Company refinanced all borrowings under the Interim Credit Facility with net proceeds from the Offerings (as defined below) and borrowings under the Senior Credit Facility (as defined below). On July 2, 1998, and in connection with the Notes Offering (defined below) and the Washington Acquisition, the Company entered into a senior credit facility (the "Senior Credit Facility") with a group of lenders led by LCPI in the amount of $500 million. The Senior Credit Facility is comprised of term loan facilities aggregating $200 million (two $100 million tranches, the "Tranche A Term Loans" and the "Tranche B Term Loan") and a $300 million revolving credit facility (the "Revolver"). In addition, the Company may borrow up to $50 million under the Tranche A Term Loans, in up to five draws, for a period of up to six months following July 2, 1998. The Senior Credit Facility is guaranteed by substantially all of the Company's active direct and indirect subsidiaries (the "Guarantors") and is secured by substantially all of the domestic assets of the Company and each of the Guarantors. The Senior Credit Facility requires the Company to maintain specified levels of consolidated leverage and interest coverage and contains other covenants and restrictions customary in credit arrangements of this kind. The terms of the Senior 7 Credit Facility allow for payment of cash dividends on the Company's Common Stock not to exceed an aggregate of $10 million in any year and also allow for payment of required dividends on its 7.25% Mandatorily Convertible Preferred Stock. The Revolver and the Tranche A Term Loans bear interest, at the Company's election, at either the Base Rate (as defined in the Senior Credit Facility) plus a margin ranging from 0.00% to 0.625% or the Eurodollar Rate (as defined in the Senior Credit Facility) plus a margin ranging from 1.125% to 2.125%. The Tranche B Term Loan bears interest, at the Company's election, at either the Base Rate plus a margin ranging from 0.50% to 0.625% or the Eurodollar Rate plus a margin ranging from 2.00% to 2.125%. Provisions of the Senior Credit Facility require prepayments to the Tranche A Term Loans and Tranche B Term Loan, with customary exceptions, in an amount equal to 100% of the net proceeds of certain incurred indebtedness, 100% of the net proceeds received by the Company and its subsidiaries (other than certain net proceeds reinvested in the business of the Company or its subsidiaries) from the disposition of any assets, including proceeds from the sale of stock of any of the Company's subsidiaries and a percentage of excess cash flow, depending on certain credit statistics. In addition to funding the cash consideration of the Acquisitions and Refinancing, the Senior Credit Facility provides the Company with enhanced financial flexibility, such as increased working capital capacity and funds for general corporate purposes. Equity Offerings On May 4, 1998, the Company filed a universal shelf registration statement ("Universal Shelf Registration Statement") with the SEC for $600 million of debt or equity securities for acquisitions or general corporate purposes. The Universal Shelf Registration Statement was declared effective by the SEC on May 14, 1998. The Company offered Premium Income Equity Securities ("PIES") and Common Stock (collectively, the "Equity Offerings") from the Universal Shelf Registration Statement to provide partial funding for the Acquisitions discussed in Note B. On July 1, 1998, the Company issued 9,000,000 PIES, representing fractional interests in the Company's 7.25% Mandatorily Convertible Preferred Stock, with gross proceeds of approximately $143.4 million, and 5,000,000 shares of Common Stock, with gross proceeds of $79.7 million. Upon exercise of the over-allotment options granted to the underwriters of the Equity Offerings, on July 8, 1998, the Company issued 1,350,000 PIES with gross proceeds of $21.5 million and 750,000 shares of Common Stock with gross proceeds of $11.9 million. Holders of PIES are entitled to receive a cash dividend. The PIES will automatically convert into shares of Common Stock on July 1, 2001, at a rate based upon a formula dependent upon the market price of Common Stock. Before July 1, 2001, each PIES is convertible, at the option of the holder thereof, into 0.8455 shares of Common Stock, subject to adjustment in certain events. Notes Offering On July 2, 1998, concurrently with the syndication of the Senior Credit Facility, the Company issued $300 million aggregate principal amount of 9% Senior Subordinated Notes ("Senior Subordinated Notes") due 2008 (the "Notes Offering", and together with the Equity Offerings, the "Offerings") through a private offering eligible for Rule 144A. The Senior Subordinated Notes have a ten-year maturity without sinking fund requirements and are subject to optional redemption by the Company after five years at declining premiums. The indenture (the "Indenture") for the Senior Subordinated Notes contains covenants and restrictions which are customary for notes of this nature. The restrictions under the Indenture are less restrictive than those in the Senior Credit Facility. To the extent the Company's fixed charge coverage ratio, as defined in the Indenture, allows for the incurrence of additional indebtedness, the Company will be allowed to pay cash dividends on Common Stock. On August 7, 1998, a Registration Statement was declared effective by the SEC whereby the Company offered, upon the terms and subject to the conditions set forth in the related Prospectus, to exchange $1,000 principal amount of its registered 9% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes"), for each $1,000 principal amount of its unregistered and outstanding Senior Subordinated Notes due 2008. The terms of the Exchange Notes are identical in all material respects to the terms of the Senior Subordinated Notes, except as described in the Prospectus. The offer to exchange was completed in September 1998. 8 Borrowings under the Senior Credit Facility, together with the net proceeds from the Offerings, were used to fund the cash purchase price of the Washington Acquisition, to refinance the Interim Credit Facility (a portion of which was used to finance the Hawaii Acquisition), to pay certain fees and expenses related to these transactions and for general corporate purposes (including working capital requirements and capital expenditures). Other In connection with filing the Universal Shelf Registration Statement in May 1998, 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. At the 1998 Annual Meeting of Stockholders held on July 29, 1998, the Company's shareholders approved, among other proposals, to (i) amend the Company's Restated Certificate of Incorporation to increase the number of authorized shares of the Company's Common Stock from 50,000,000 to 100,000,000 and (ii) increase the number of shares which can be granted under the Company's Amended and Restated Executive Long-Term Incentive Plan from 2,650,000 to 4,250,000. 9 NOTE D - BUSINESS SEGMENTS The Company has adopted SFAS No. 131 which establishes standards for reporting information about operating segments in annual financial statements and requires that selected information be included in interim financial reports. Segment operating profit includes those revenues and expenses that are directly attributable to management of the respective segment. For the periods presented below, revenues were generated from sales to external customers and there were no intersegment revenues. Segment information for the three months and nine months ended September 30, 1998 and 1997 is as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Refining and Marketing: Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $ 424.7 $ 198.8 $ 772.5 $ 535.0 Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 397.7 188.0 711.7 509.0 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 7.9 3.4 15.2 9.7 ----- ----- ----- ----- Total Refining and Marketing Segment Operating Profit. . . . . . . . 19.1 7.4 45.6 16.3 ----- ----- ----- ----- Exploration and Production: Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 19.3 19.7 63.1 61.7 Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . - - 21.8 4.1 Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 3.6 2.9 11.0 8.7 Depreciation, depletion and amortization. . . . . . . . . . . . . . . 9.3 7.5 28.7 23.2 ----- ----- ----- ----- Total Exploration and Production Segment Operating Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 9.3 45.2 33.9 ----- ----- ----- ----- Marine Services: Operating revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 28.5 32.5 90.4 98.3 Operating costs and other . . . . . . . . . . . . . . . . . . . . . . 24.7 29.4 82.1 93.0 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 0.7 0.4 1.8 1.2 ----- ----- ----- ----- Total Marine Services Segment Operating Profit. . . . . . . . 3.1 2.7 6.5 4.1 ----- ----- ----- ----- Total Segment Operating Profit . . . . . . . . . . . . . . . . . . . . $ 28.6 $ 19.4 $ 97.3 $ 54.3 ===== ===== ===== =====
Total assets for each operating segment are as follows (in millions): September 30, December 31, 1998 1997 ------------- ------------ Refining and Marketing . . . . . . . . . . . . . . . . . . . . . . . $ 1,087.5 $ 337.4 Exploration and Production . . . . . . . . . . . . . . . . . . . . . 284.0 209.0 Marine Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 61.3 59.3 ------- ------- Total Segment Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 1,432.8 $ 605.7 ======= ======
NOTE E - COMMITMENTS AND CONTINGENCIES 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 with a waste disposal site near Abbeville, Louisiana and the Casmalia Disposal Site in Santa Barbara County, California. The Company has been named a potentially responsible party ("PRP") under Federal Superfund law at both sites. Although this law might impose joint and several liability upon each party at the sites, the extent of the Company's allocated financial contributions for cleanup is expected to be de minimis based upon the number of companies, volumes of waste involved and total estimated costs to close each site. The Company is currently involved in settlement discussions with the Environmental Protection Agency ("EPA") and other PRPs 10 pertaining to the Abbeville Site. The Company believes, based on these discussions, that its liability will not exceed $25,000. The Company believes that its liability at the Casmalia Site is de minimus based on the EPA's October 14, 1998 notification. The Company is also 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 September 30, 1998, the Company's accruals for environmental expenses totaled $11.4 million. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals to be adequate. In connection with the Hawaii Acquisition discussed in Note B, the BHP Sellers and the Company have executed a separate environmental agreement, whereby the BHP Sellers have indemnified the Company for environmental costs arising out of conditions which existed at or prior to closing. This indemnification is subject to a maximum limit of $9.5 million and expires after a period of ten years. Under the environmental agreement, the first $5.0 million of these liabilities will be the responsibility of the BHP Sellers and the next $6.0 million will be shared on the basis of 75% by the BHP Sellers and 25% by the Company. Certain environmental claims arising out of prior operations will not be subject to the $9.5 million limit or the ten-year time limit. Under the agreement related to the Washington Acquisition discussed in Note B, Shell Refining Holding Company, a subsidiary of Shell (the "Shell Seller"), 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 and identified by the Company prior to August 1, 2001. The Company is responsible for environmental costs up to the first $0.5 million each year, after which the Shell Seller will be responsible for annual environmental costs up to $1.0 million. Annual costs greater than $1.0 million will be shared on a 50%/50% basis between the Company and the Shell Seller, subject to an aggregate maximum of $5.0 million and a ten-year term. In addition to environmental expenses, the Company anticipates it will make capital improvements totaling approximately $10 million in 1998 and $7 million in 1999 to comply with environmental laws and regulations affecting its Alaska, Hawaii, Pacific Northwest and Gulf Coast operations. In addition, capital expenditures for alternate secondary containment systems for existing storage tank facilities in Alaska are estimated to be $2 million in 1998 and $2 million in 1999, with a remaining $ 5 million to be spent by the end of year 2002. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refineries, retail stations (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 regarding environmental matters, see Legal Proceedings in Part II, Item 1, included herein. Other The Company's results for the nine months ended September 30, 1998 included receipt totaling approximately $21 million pretax ($14 million aftertax) from an operator in the Bob West Field, representing funds that are no longer needed as a contingency reserve for litigation. On October 1, 1998, the Attorney General for the State of Hawaii filed a lawsuit in the U.S. District Court for the District of Hawaii against thirteen oil companies, including Tesoro Petroleum Corporation and Tesoro Hawaii Corporation, alleging anti-competitive marketing practices in violation of Federal and State anti-trust laws. The complaint seeks injunctive relief and compensatory and treble damages and civil penalties against all defendants in an amount in excess of $500 million. The Company believes that it has not engaged in any anti-competitive activities and that this proceeding is subject to the indemnity provision of the Stock Sale Agreement between the BHP Sellers and the Company which provides for indemnification in excess of $2 million and not to exceed $65 million. The Company will defend this litigation vigorously. 11 NOTE F - LONG-TERM INCENTIVE COMPENSATION 1996 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 were earned when the market price of the Company's Common Stock reached an average price per share of $20 or higher over 20 consecutive trading days after June 30, 1997 and before December 31, 1998 (the "Performance Target"). In connection with this strategy, non-executive employees earned cash bonuses equal to 25% of their individual payroll amounts for the previous twelve complete months and certain executives were granted, from the Company's Amended and Restated Executive Long-Term Incentive Plan ("Incentive 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 Incentive 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 vested upon achieving the Performance Target. On May 12, 1998, the Performance Target was achieved which resulted in a pretax charge of approximately $20 million ($10 million related to the vesting of restricted stock awards and stock options and $10 million in cash) in the second quarter of 1998. The pretax charge included approximately $8 million in other operating costs and expenses and approximately $12 million in other expense. On an after tax basis, the charge was approximately $13 million, representing approximately 5% of the total aggregate increase in shareholder value since approval of the special incentive strategy in 1996. 1998 Performance Incentive Compensation Plan In October 1998, the Company's Board of Directors unanimously approved the 1998 Performance Incentive Compensation Plan (the "Performance Plan"), which is intended to advance the best interests of the Company and its stockholders by directly targeting Company performance to align with the ninetieth percentile historical stock-price growth rate for the Company's peer group. In addition, the Performance Plan will provide the Company's employees with additional compensation, contingent upon achievement of the targeted objectives, thereby encouraging them to continue in the employ of the Company. Under the Performance Plan, targeted objectives are comprised of the fair market value of the Company's Common Stock equaling or exceeding an average of $35 per share (the "First Performance Target") and $45 per share (the "Second Performance Target") on any 20 consecutive trading days during a period commencing on October 1, 1998 and ending on the earlier of September 30, 2002, or the date on which the Second Performance Target is achieved (the "Performance Period"). The Performance Plan has several tiers of awards, with the award generally determined by job level. Most eligible employees have contingent cash bonus opportunities of 25% of their annual "basic compensation" (as defined in the Performance Plan) and three executive officers have contingent awards of phantom stock. Upon achievement of the First Performance Target, one-fourth of the contingent awards will be earned, with payout deferred until the end of the Performance Period. The remaining 75% will be earned only upon achievement of the Second Performance Target, with payout occurring 30 days thereafter. Employees will need to have at least one year of regular, full-time service at the time the Performance Period ends in order to be eligible for a payment. The Company estimates that it will incur aftertax costs of approximately 1% of the total aggregate increase in shareholder value if the First Performance Target is reached and will incur an additional 2% aftertax charge if the Second Performance Target is reached. NOTE G - EARNINGS PER SHARE Earnings per share have been calculated in accordance with SFAS No. 128. Basic earnings per share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares outstanding during the period. The Company's calculation of diluted earnings per share takes into account the effect of potentially dilutive stock options outstanding during the period. The assumed conversion of preferred stock to common stock for the three months and nine months ended September 30, 1998 (approximately 8,750,000 and 2,917,000 shares, respectively) produced an anti-dilutive result and, in accordance with SFAS No. 128, was not included in the dilutive calculation. Earnings per share calculations for the three months and nine months ended September 30, 1998 and 1997 are presented below (in millions except per share amounts): 12
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic: Numerator: Earnings Before Extraordinary Item . . . . . . . . . . . . $ 7.8 $ 8.0 $ 24.7 $ 23.8 Extraordinary Loss on Extinguishments of Debt, Aftertax. . - - (4.6) - ------ ------ ------ ------ Net Earnings . . . . . . . . . . . . . . . . . . . . . . . 7.8 8.0 20.1 23.8 Less Preferred Dividends . . . . . . . . . . . . . . . . . 3.0 - 3.0 - ------ ------ ------ ------ Net Earnings Applicable To Common. . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8 ====== ====== ====== ====== Denominator: Weighted Average Common Shares Outstanding . . . . . . . . 32.3 26.4 28.4 26.4 ====== ====== ====== ====== Basic Earnings Per Share: Before extraordinary item. . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.77 $ 0.90 Extraordinary loss, aftertax . . . . . . . . . . . . . . . - - (0.17) - ------ ------ ------ ------ Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90 ====== ====== ====== ====== Diluted: Numerator: Net Earnings Applicable to Common. . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8 Plus Income Impact of Assumed Conversions of Preferred Stock (only if dilutive) . . . . . . . . . - - - - ------ ------ ------ ------ Net Earnings . . . . . . . . . . . . . . . . . . . . . . . $ 4.8 $ 8.0 $ 17.1 $ 23.8 ====== ====== ====== ====== Denominator: Weighted Average Common Shares Outstanding . . . . . . . . 32.3 26.4 28.4 26.4 Add Potential Dilutive Securities: Incremental dilutive shares from assumed conversion of stock options and other. . . . . . . . . . . . . . . 0.6 0.5 0.6 0.5 Incremental dilutive shares from assumed conversion of preferred stock . . . . . . . . . . . . . . . . - - - - ------ ------ ------ ------ Total Diluted Shares . . . . . . . . . . . . . . . . . . . 32.9 26.9 29.0 26.9 ====== ====== ====== ====== Diluted Earnings Per Share : Before extraordinary item . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.76 $ 0.88 Extraordinary loss, aftertax. . . . . . . . . . . . . . . - - (0.17) - ------ ------ ------ ------ Net . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88 ====== ====== ====== ====== Anti-dilutive impact of assumed conversion of preferred stock into common stock is not considered in the calculation.
13 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 26 for discussion of the factors which could cause actual results to differ materially from those projected in such statements. GENERAL The Company's strategy is to (i) maximize return on capital employed and increase the competitiveness of each of its business units by reducing costs, increasing operating efficiencies and optimizing existing assets and (ii) expand its overall market presence through a combination of internal growth initiatives and selective acquisitions which are both accretive to earnings and provide significant operational synergies. The Company plans to further improve profitability in the Refining and Marketing segment by enhancing processing capabilities, strengthening marketing channels and improving supply and transportation functions. In the Exploration and Production segment, the strategy includes evaluating ways in which the Company can continue to diversify its oil and gas reserve base through both acquisitions and the drill bit and enhanced technical capabilities. The Company has made significant progress in diversifying its U.S. operations to areas other than the Bob West Field and has taken steps to begin serving emerging markets in South America. Improved profitability has positioned the Marine Services segment to participate in the consolidation of the industry by pursuing opportunities for expansion, as well as optimizing existing operations. Tesoro acquired the refining and marketing assets of two subsidiaries of BHP in May 1998 and acquired a refinery and related assets from a subsidiary of Shell in August 1998. The Acquisitions are expected to triple Tesoro's historical annual revenues and significantly increase the scope of its refining and marketing operations. Tesoro expects that the results of the Acquisitions will be accretive to earnings and cash flows beginning in 1999. The impact of the Acquisitions on earnings and cash flows may be neutral in 1998 primarily due to the mid-year timing of the Acquisitions and a planned maintenance turnaround at the Hawaii Refinery in the summer of 1998. The Company believes that there are significant cost saving and revenue enhancement opportunities available by integrating the Hawaii Refinery and Washington Refinery with its Alaskan operations and has currently identified $25 million of potential annual cost saving and revenue enhancing synergies. Management expects to begin to realize such synergies in the fourth quarter of 1998 with the full annual impact to be achieved in the fiscal year ending December 31, 1999. The Company will continue to pursue other opportunities that are operationally and geographically complementary with its asset base. 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. Similarly, 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 crude oil and 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 crude oil and 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. 14 RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 SUMMARY Tesoro's net earnings of $7.8 million for the three months ended September 30, 1998 ("1998 Quarter") compare with net earnings of $8.0 million for the three months ended September 30, 1997 ("1997 Quarter"). Net earnings per share for the 1998 Quarter were $0.15 (basic and diluted), after preferred dividends, compared to $0.30 (basic and diluted) in the 1997 Quarter. The Company's net earnings remained relatively unchanged from quarter to quarter. Higher downstream profits from the Company's refining and marketing and marine services operations, together with increased production in its Exploration and Production segment, were substantially offset by the impact of lower Bolivian natural gas prices and increased interest and financing costs. On a per share basis, the Company's net earnings were reduced by dividends on preferred stock and the impact of issuing additional shares of Common Stock during the quarter. For the year-to-date period, net earnings of $20.1 million ($0.60 per basic share, $0.59 per diluted share) for the nine months ended September 30, 1998 ("1998 Period") compare with net earnings of $23.8 million ($0.90 per basic share, $0.88 per diluted share) for the nine months ended September 30, 1997 ("1997 Period"). Significant items which affect the comparability between results for 1998 and 1997 are highlighted in the table below (in millions except per share amounts):
Three Months Ended Nine Months September 30, September 30, ------------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Earnings as Reported . . . . . . . . . . . . . . . . . . . . $ 7.8 $ 8.0 $ 20.1 $ 23.8 Extraordinary Loss on Debt Extinguishments, Net of Income Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 4.6 - ------ ------ ------ ------ Earnings Before Extraordinary Item . . . . . . . . . . . . . . . 7.8 8.0 24.7 23.8 ------ ------ ------ ------ Significant Items Affecting Comparability, Pretax: Income from receipt of contingency funds from an operator . . . - - 21.3 - Charge for special incentive compensation strategy. . . . . . . - - (19.9) - Income from retroactive severance tax refunds . . . . . . . . . - - - 1.8 Income from collection of Bolivian receivable . . . . . . . . . - - - 2.2 ------ ------ ------ ------ Total Significant Items, Pretax. . . . . . . . . . . . . . . . - - 1.4 4.0 Income Tax Effect. . . . . . . . . . . . . . . . . . . . . . . - - 0.5 1.2 ------ ------ ------ ------ Total Significant Items, Aftertax. . . . . . . . . . . . . . . - - 0.9 2.8 ------ ------ ------ ------ Net Earnings Excluding Significant Items and Extraordinary Item. 7.8 8.0 23.8 21.0 Preferred Dividend Requirements. . . . . . . . . . . . . . . . . 3.0 - 3.0 - ------ ------ ------ ------ Net Earnings Applicable to Common Stock, Excluding Significant Items and Extraordinary Items . . . . . . . . . . . $ 4.8 $ 8.0 $ 20.8 $ 21.0 ====== ====== ====== ====== Earnings Per Share - Basic: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.60 $ 0.90 Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - - (0.17) - Effect of other significant items . . . . . . . . . . . . . . . - - 0.04 0.11 ------ ------ ------ ------ Excluding significant items and extraordinary item. . . . . . . $ 0.15 $ 0.30 $ 0.73 $ 0.79 ====== ====== ====== ====== Earnings Per Share - Diluted: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.30 $ 0.59 $ 0.88 Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - - (0.17) - Effect of other significant items . . . . . . . . . . . . . . . - - 0.04 0.10 ------ ------ ------ ------ Excluding significant items and extraordinary item. . . . . . . $ 0.15 $ 0.30 $ 0.72 $ 0.78 ====== ====== ====== ======
For the year-to-date periods, excluding significant items, net earnings would have been $20.8 million ($0.73 per basic share, $0.72 per diluted share) for the 1998 Period compared to $21.0 million ($0.79 per basic share, $0.78 per diluted share) for the 1997 Period. The decrease in net earnings in the 1998 Period was primarily due to higher interest and financing costs and income taxes, which were substantially offset by increased refining and marketing results. A discussion and analysis of the factors contributing to the Company's results of operations are presented below. 15
REFINING AND MARKETING Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in millions except per barrel amounts) Gross Operating Revenues: Refined products. . . . . . . . . . . . . . . . . . . . . . . . $ 406.2 $ 177.5 $ 713.8 $ 486.9 Other, primarily crude oil resales and merchandise. . . . . . . 18.5 21.3 58.7 48.1 ----- ----- ----- ----- Gross Operating Revenues . . . . . . . . . . . . . . . . . . . $ 424.7 $ 198.8 $ 772.5 $ 535.0 ===== ===== ===== ===== Total Operating Profit: Gross margin: Refinery . . . . . . . . . . . . . . . . . . . . . . . $ 99.3 $ 30.4 $ 182.4 $ 85.3 Non-refinery . . . . . . . . . . . . . . . . . . . . . . . 4.3 3.8 15.0 9.5 ----- ----- ----- ----- Total gross margins . . . . . . . . . . . . . . . . . . . . . 103.6 34.2 197.4 94.8 Operating expenses and other. . . . . . . . . . . . . . . . . . 76.6 23.4 136.6 68.8 Depreciation and amortization . . . . . . . . . . . . . . . . . 7.9 3.4 15.2 9.7 ----- ----- ----- ----- Segment Operating Profit . . . . . . . . . . . . . . . . . . . $ 19.1 $ 7.4 $ 45.6 $ 16.3 ===== ===== ===== ===== Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . $ 13.7 $ 11.8 $ 20.9 $ 30.6 ===== ===== ===== ===== Refinery Throughput (thousands of barrels/day): Alaska. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.6 43.2 58.2 48.2 Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . 80.7 - 76.8 - Washington . . . . . . . . . . . . . . . . . . . . . . . . 106.6 - 106.6 - ----- ----- ----- ----- Total Refinery Throughput 245.9 43.2 241.6 48.2 ===== ===== ===== ===== Refined Products Manufactured (thousands of barrels per day) : Gasoline and gasoline blendstocks . . . . . . . . . . . . . . . 72.4 11.3 36.3 12.5 Jet fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.4 11.9 33.6 14.6 Diesel fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 29.9 6.1 14.6 5.8 Heavy oils and residual products. . . . . . . . . . . . . . . . 48.3 12.6 29.1 14.1 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 1.9 6.6 2.5 ----- ----- ----- ----- Total Refined Products Manufactured. . . . . . . . . . . . . . 217.4 43.8 120.2 49.5 ===== ===== ===== ===== Refinery Product Spread ($/barrel) . . . . . . . . . . . . . . . $ 5.14 $ 7.65 $ 5.74 $ 6.48 ===== ===== ===== ===== Segment Product Sales (thousands of barrels per day) : Gasoline and gasoline blendstocks . . . . . . . . . . . . . . . 76.0 18.6 40.0 18.2 Middle distillates. . . . . . . . . . . . . . . . . . . . . . . 100.9 37.8 60.3 30.1 Heavy oils, residual products and other . . . . . . . . . . . . 50.1 13.8 31.8 17.7 ----- ----- ----- ----- Total Product Sales. . . . . . . . . . . . . . . . . . . . . . 227.0 70.2 132.1 66.0 ===== ===== ===== ===== Total Segment Gross Margins on Product Sales ($/barrel) : Average sales price . . . . . . . . . . . . . . . . . . . . . . $ 19.45 $ 27.49 $ 19.79 $ 27.03 Average costs of sales. . . . . . . . . . . . . . . . . . . . . 14.82 22.88 14.72 22.36 ----- ----- ----- ----- Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.63 $ 4.61 $ 5.07 $ 4.67 ===== ===== ===== ===== Represents throughput at the Company's refineries times refinery product spread. Amounts reported for 1997 have been reclassified to conform with current presentation, primarily to reclassify retail margins and intrasegment transportation revenues from non-refinery to refinery product spread. Non-refinery margin includes merchandise margins, margins on products purchased and resold, and adjustments due to selling a volume and mix of products that is different than actual volumes manufactured. Sales and manufactured volumes for 1998 include amounts from the acquired Hawaii and Washington operations since the date of acquisitions, averaged over the periods presented. Throughput volumes for the Hawaii and Washington refineries are since the date of acquisitions, averaged over the periods owned only. Sources of total products sales include products manufactured at the refineries, products drawn from inventory balances and products purchased from third parties. Gross margins on total product sales include margins on sales of purchased products, together with the effect of changes in inventories. Amounts reported for 1997 have been reclassified to conform with current presentation.
16 REFINING AND MARKETING THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit for the Company's Refining and Marketing operations was $19.1 million in the 1998 Quarter, an increase of $11.7 million from segment operating profit of $7.4 million in the 1997 Quarter. The improvement in results from Refining and Marketing was primarily due to higher throughput volumes, primarily stemming from its recently acquired operations (see Note B of Notes to Condensed Consolidated Financial Statements), and improved refined product yields in Alaska. Higher sales within the segment's Alaska, Hawaii and Northwest markets also contributed to the improved profitability. The 1998 Quarter benefited from an expansion completed in October 1997 of the Company's hydrocracker unit at its Alaska refinery, 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 began to favorably impact this segment's results in the fourth quarter of 1997. Financial results for the acquired operations have been included since the dates of acquisition. The Hawaii Acquisition was completed on May 29, 1998 and the Washington Acquisition on August 10, 1998. The acquired operations contributed positively to the segment's results for the 1998 Quarter, but are expected, after interest and financing costs, to have a neutral impact for the year. During the 1998 Quarter, throughput at the Alaska refinery increased by 15,400 barrels per day, a 36% increase over the 1997 Quarter, which included a 30-day maintenance turnaround. Throughput averaged 80,700 barrels per day at the Hawaii Refinery and 106,600 barrels per day at the Washington Refinery during the 1998 Quarter. The improved Alaska product slate, together with results from the acquired operations, contributed to a total refined product gross margin of $4.63 per barrel in the 1998 Quarter compared to $4.61 per barrel in the 1997 Quarter. Total product sales volumes tripled to 227,000 barrels per day due to the Acquisitions and higher throughput volumes. Revenues from sales of refined products increased during the 1998 Quarter primarily due to the higher sales and throughput volumes, partially offset by a reduction in average sales prices. Merchandise revenues increased in the 1998 Quarter due to the Hawaii Acquisition, which included 32 retail stations. Other revenues included crude oil resales of $6.1 million in the 1998 Quarter compared with $12.3 million in the 1997 Quarter. The increase in costs of sales also reflected the higher volumes associated with the Acquisitions and marketing efforts in Alaska, partly offset by lower feedstock prices. Margins from non-refinery activities increased to $4.3 million in the 1998 Quarter due primarily to higher merchandise sales. Operating expenses and other increased during the 1998 Quarter primarily due to the Acquisitions. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit from the Refining and Marketing operations totaled $45.6 million in the 1998 Period compared to $16.3 million in the 1997 Period. As discussed above, this increase was due to a number of factors, including higher throughput volumes from the Acquisitions and improved refined product yields in Alaska. During the 1998 Period, throughput at the Alaska refinery increased by 10,000 barrels per day, a 21% increase over the 1997 Period. Production of jet fuel at this refinery increased by approximately 35% over the 1997 Period due to the hydrocracker expansion completed in October 1997 together with the higher throughput levels and an improved feedstock slate. The improved refined product yield, together with results from the acquired operations, contributed to sales volumes of 132,100 barrels per day and a refined product gross margin of $5.07 per barrel in the 1998 Period. Refined product gross margin was $4.67 per barrel in the 1997 Period. Revenues from sales of refined products in the Company's Refining and Marketing segment increased during the 1998 Period due to the Acquisitions partially offset by lower sales prices. Other revenues included $29.9 million and $23.0 million in crude oil resales in the 1998 Period and 1997 Period, respectively. The increase in cost of sales was primarily due to higher volumes associated with the Acquisitions partly offset by lower feedstock costs. Margins on non-refinery activities increased to $15.0 million in the 1998 Period as compared to $9.5 million in the 1997 Period due primarily to higher merchandise sales. Operating expenses and other were higher in the 1998 Period due primarily to the Acquisitions. The Company's initiatives to enhance its product slate and sell more product within core markets have improved the fundamental earnings potential of this segment. Certain of these initiatives, such as the Alaska hydrocracker expansion and improved feedstock slate, were completed in the fourth quarter of 1997. Management expects that future quarters will continue to benefit from the impact of these initiatives. In addition, Tesoro expects that the results of the Acquisitions will be accretive to earnings and cash flows beginning in 1999. The revenues and scope of the Refining and Marketing segment have been significantly increased with the Acquisitions (see Note B of Notes to Condensed Consolidated Financial Statements). 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. 17
EXPLORATION AND PRODUCTION Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in millions except per unit amounts) U.S. : Gross operating revenues. . . . . . . . . . . . . . . . . . . $ 16.5 $ 15.9 $ 54.3 $ 53.3 Other income. . . . . . . . . . . . . . . . . . . . . . . . . - - 22.3 1.9 Production costs . . . . . . . . . . . . . . . . . . . . . . 2.3 1.5 6.8 5.0 Administrative support and other operating expenses . . . . . 0.4 0.6 1.4 1.7 Depreciation, depletion and amortization. . . . . . . . . . . 8.5 7.0 26.7 22.2 --------- -------- -------- --------- Segment Operating Profit - U.S.. . . . . . . . . . . . . . . 5.3 6.8 41.7 26.3 --------- -------- -------- --------- BOLIVIA: Gross operating revenues. . . . . . . . . . . . . . . . . . . 2.8 3.8 8.8 8.4 Other income (expense). . . . . . . . . . . . . . . . . . . . - - (0.5) 2.2 Production costs. . . . . . . . . . . . . . . . . . . . . . . 0.3 0.3 0.8 0.7 Administrative support and other operating expenses . . . . . 0.6 0.5 2.0 1.3 Depreciation, depletion and amortization. . . . . . . . . . . 0.8 0.5 2.0 1.0 --------- -------- -------- --------- Segment Operating Profit - Bolivia . . . . . . . . . . . . . 1.1 2.5 3.5 7.6 --------- -------- -------- --------- Total Segment Operating Profit - Exploration and Production. . $ 6.4 $ 9.3 $ 45.2 $ 33.9 ========= ======== ======== ========= U.S.: Average Daily Net Production: Natural gas (thousand cubic feet, "Mcf") . . . . . . . . . . 83,563 79,683 91,871 86,317 Oil (barrels). . . . . . . . . . . . . . . . . . . . . . . . 239 93 223 119 Total (thousand cubic feet equivalent, "Mcfe"). . . . . . . 84,997 80,241 93,209 87,031 Average Prices: Natural gas ($/Mcf) . . . . . . . . . . . . . . . . . . $ 2.02 $ 2.01 $ 2.03 $ 2.08 Oil ($/barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 11.07 $ 18.23 $ 12.46 $ 19.44 Average Operating Expenses ($/Mcfe): Lease operating expenses . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.21 $ 0.23 $ 0.18 Severance taxes. . . . . . . . . . . . . . . . . . . . . . . 0.03 - 0.04 0.03 --------- -------- -------- --------- Total production costs. . . . . . . . . . . . . . . . . . . 0.30 0.21 0.27 0.21 Administrative support and other . . . . . . . . . . . . . . 0.06 0.09 0.05 0.07 --------- -------- -------- --------- Total Operating Expenses. . . . . . . . . . . . . . . . . . $ 0.36 $ 0.30 $ 0.32 $ 0.28 ========= ======== ======== ========= Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . . . $ 1.07 $ 0.93 $ 1.03 $ 0.92 ========= ======== ======== ========= Capital Expenditures. . . . . . . . . . . . . . . . . . . . . $ 38.0 $ 16.3 $ 76.5 $ 32.5 ========= ======== ======== ========= BOLIVIA: Average Daily Net Production: Natural gas (Mcf). . . . . . . . . . . . . . . . . . . . . . 31,921 26,856 27,083 18,452 Condensate (barrels) . . . . . . . . . . . . . . . . . . . . 640 760 726 529 Total (Mcfe). . . . . . . . . . . . . . . . . . . . . . . . 35,761 31,416 31,439 21,626 Average Prices: Natural gas ($/Mcf). . . . . . . . . . . . . . . . . . . . . $ 0.76 $ 1.13 $ 0.84 $ 1.20 Condensate ($/barrel). . . . . . . . . . . . . . . . . . . . $ 11.47 $ 15.00 $ 12.83 $ 16.23 Average Operating Expenses ($/Mcfe): Production costs . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.10 $ 0.09 $ 0.11 Administrative support and other . . . . . . . . . . . . . . 0.22 0.20 0.25 0.25 --------- -------- -------- --------- Total Operating Expenses. . . . . . . . . . . . . . . . . . $ 0.29 $ 0.30 $ 0.34 $ 0.36 ========= ======== ======== ========= Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.19 $ 0.22 $ 0.18 ========= ======== ======== ========= Capital Expenditures. . . . . . . . . . . . . . . . . . . . . $ 15.2 $ 20.0 $ 26.7 $ 26.0 ========= ======== ======== ========= Represents the Company's U.S. oil and gas operations combined with gas transportation activities. Includes effects of the Company's natural gas commodity price agreements which amounted to gains of $0.09 per Mcf and $0.03 per Mcf for the three months and nine months ended September 30, 1998, respectively, and a loss of $0.06 per Mcf for the nine months ended September 30, 1997. There were no such gains or losses during the three months ended September 30, 1997.
18 EXPLORATION AND PRODUCTION U.S. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit from the Company's U.S. exploration and production operations was $5.3 million in the 1998 Quarter compared with $6.8 million in the 1997 Quarter. The decline in operating profit was primarily due to higher depletion expenses associated with exploration activities and higher production volumes. The Company's U.S. production volumes increased 6% to 85.0 million cubic feet equivalents ("Mmcfe") per day in the 1998 Quarter compared to 80.2 Mmcfe per day in the 1997 Quarter. The Company's U.S. production outside of the Bob West Field rose to 54% of total U.S. production during the 1998 Quarter, as compared to 23% in the 1997 Quarter. This increase was mainly attributable to the development of fields discovered in the Val Verde Basin, the Upper Wilcox Trend and the Frio/Vicksburg Trend. During the 1998 Quarter, the Company acquired interests in the Texas Panhandle that are expected to increase the Company's net production in the 1998 fourth quarter by approximately 7 Mmcfe per day. Gross operating revenues from the Company's U.S. operations increased by $0.6 million due to the higher production, while natural gas prices remained flat. Production costs per Mcfe increased from $0.21 to $0.30, primarily due to lease operating expenses. In the Bob West Field, aggregate lease operating expenses remained relatively flat, while field production declined by 22 Mmcfe per day, resulting in an increase in per unit lease operating expenses from $0.19 to $0.26 per Mcfe. Lease operating expenses at other fields remained flat at $0.27 per Mcfe, while production increased by 27 Mmcfe per day. Depreciation, depletion and amortization increased by $1.5 million, or 21%, due to a higher depletion rate and increased volumes. The higher depletion rate was the result of the Company's emphasis on exploration. Exploration costs represented more than half of total 1998 drilling costs. 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 1998 Quarter, the Company used such agreements to set the price of approximately 20% of the natural gas production that it sold in the spot market and recognized a gain of $0.7 million ($0.09 per Mcf) related to these price agreements. The Company did not have any such transactions during the 1997 Quarter. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit of $41.7 million from the Company's U.S. exploration and production operations in the 1998 Period compares to $26.3 million in the 1997 Period. Comparability between these periods was impacted by certain significant items. The 1997 Period included retroactive severance tax refunds of $1.8 million, while the 1998 Period included income from receipt of approximately $21.3 million from an operator in the Bob West Field, representing funds that were no longer needed as a contingency reserve for litigation. Excluding these significant items, segment operating profit decreased by approximately $4.1 million primarily due to lower natural gas prices and higher depreciation, depletion and amortization and operating expenses. Gross operating revenues from the Company's U.S. operations increased by $1.0 million as higher production volumes were generally offset by lower prices. The Company's U.S. production averaged 93.2 Mmcfe per day in the 1998 Period, an increase of 6.2 Mmcfe per day over the 1997 Period. Prices realized by the Company on its spot natural gas production declined to $2.03 per Mcf in the 1998 Period from $2.08 per Mcf in the 1997 Period. Lease operating expenses, which increased from $4.4 million to $5.9 million, remained relatively flat in the Bob West Field but were higher in other fields by $1.7 million. Production in the Bob West Field declined by 26 Mmcfe per day resulting in an increase in per unit lease operating expenses from $0.15 to $0.23 per Mcfe. Production at other fields increased by 32 Mmcfe per day resulting in a decrease in per unit lease operating expenses from $0.32 to $0.24 per Mcfe. Depreciation, depletion and amortization increased by $4.5 million, or 20%, due to a higher depletion rate and increased volumes. The higher depletion rate was the result of increased exploration activities. During the 1998 and 1997 Periods, the Company used commodity price agreements to set the price of approximately 12% and 11%, respectively, of the natural gas production that it sold in the spot market. During the 1998 and 1997 Periods, the Company realized a gain of $1.0 million ($0.03 per Mcf) and a loss of $1.6 million ($0.06 per Mcf), respectively, from these price agreements. 19 BOLIVIA THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit from the Company's Bolivian operations decreased $1.4 million from $2.5 million in the 1997 Quarter to $1.1 million in the 1998 Quarter. This decrease in segment operating profit was primarily due to lower natural gas and oil prices. Bolivian natural gas prices, which are contractually tied to posted New York fuel oil prices, fell 33% from $1.13 per Mcf in the 1997 Quarter to $0.76 per Mcf in the 1998 Quarter. However, production volumes increased from 31.4 Mmcfe per day to 35.8 Mmcfe per day . NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997. Segment operating profit from the Company's Bolivian operations decreased $4.1 million from $7.6 million in the 1997 Period to $3.5 million in the 1998 Period. The 1997 Period included other income of $2.2 million related to the collection of the receivable discussed above. Excluding this other income, segment operating profit for the 1998 Period decreased by $1.9 million from the 1997 Period primarily due to the decline in natural gas prices together with a charge for prior period taxes. Bolivian natural gas prices fell 30% from $1.20 per Mcf in the 1997 Period to $0.84 per Mcf in the 1998 Period and condensate prices fell from $16.23 to $12.83 per barrel. However, production volumes increased from 21.6 Mmcfe per day to 31.4 Mmcfe per day resulting in an overall revenue increase of $0.4 million. The Company's share of net production increased in the 1998 Period as a result of the July 1997 buyout of interests held by its former joint venture participant, and the remaining production difference resulted in part from production constraints in the 1997 Period arising from repairs to a non-Company-owned pipeline that transports gas from Bolivia to Argentina. The increase in depreciation, depletion and amortization was due to the higher production volumes and a higher depletion rate. 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 YPFB 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 1999, there can be no assurance that the pipeline will be operational next year. 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. The productive capacity of the Company's wells in Bolivia, including shut-in wells, is approximately 120 Mmcf per day gross. At September 30, 1998, the Company had four wells in progress as part of a five-well program designed to increase proved reserves. In addition, an affiliate of Total, S.A. has spud the first well pursuant to a farmout agreement covering the Company's acreage located in the Andes mountains. 20
MARINE SERVICES Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions) Gross Operating Revenues: Fuels . . . . . . . . . . . . . . . . . $ 21.4 $ 25.2 $ 69.7 $ 77.6 Lubricants and other. . . . . . . . . . 4.0 4.2 11.9 12.3 Services. . . . . . . . . . . . . . . . 3.1 3.1 8.8 8.4 ----- ----- ----- ----- Gross Operating Revenues . . . . . . . 28.5 32.5 90.4 98.3 Costs of Sales . . . . . . . . . . . . . 17.8 22.9 60.8 72.6 ----- ----- ----- ----- Gross Profit . . . . . . . . . . . . . 10.7 9.6 29.6 25.7 Operating Expenses and Other . . . . . . 6.9 6.5 21.3 20.4 Depreciation and Amortization. . . . . . 0.7 0.4 1.8 1.2 ----- ----- ----- ----- Segment Operating Profit . . . . . . $ 3.1 $ 2.7 $ 6.5 $ 4.1 ===== ===== ===== ===== Sales Volumes (millions of gallons): Fuels, primarily diesel . . . . . . . . 43.8 39.1 135.3 116.2 Lubricants. . . . . . . . . . . . . . . 0.5 0.7 1.7 2.0 Capital Expenditures . . . . . . . . . . $ 0.4 $ 2.0 $ 3.0 $ 5.3
Gross operating revenues in the Marine Services segment declined by $4.0 million and $7.9 million during the 1998 Quarter and 1998 Period, respectively, primarily due to lower fuel sales prices, partially offset by increased fuel volumes. The decreases in costs of sales also reflected the lower fuel prices. Despite lower rig activity in the Gulf of Mexico, total segment operating profit improved by $0.4 million and $2.4 million in the 1998 Quarter and 1998 Period, respectively, largely due to the higher fuel volumes and 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. GENERAL AND ADMINISTRATIVE General and administrative expenses increased by $1.1 million and $2.1 million during the 1998 Quarter and 1998 Period, respectively. These increases included higher employee costs and professional fees due in part to the installation and implementation of an integrated software system. INTEREST AND FINANCING COSTS Interest and financing costs increased by $9.0 million and $14.9 million during the 1998 Quarter and 1998 Period, respectively. These increases were primarily due to higher borrowings under the Company's credit arrangements, including the Senior Credit Facility and Senior Subordinated Notes, to fund the Acquisitions and the Refinancing (see Notes B and C of Notes to Condensed Consolidated Financial Statements) and to fund net working capital requirements and capital expenditures. OTHER OPERATING COSTS AND OTHER EXPENSES Other operating costs and other expense in the 1998 Period included a charge of $19.9 million for the special incentive compensation strategy, of which $7.9 million related to operating segment employees (see Note F of Notes to Condensed Consolidated Financial Statements). INCOME TAX PROVISION The income tax provision increased by $0.7 million and $4.8 million in the 1998 Quarter and 1998 Period, respectively. The effective tax rate rose to 44% in the 1998 Period from 38% in the 1997 Period primarily due to higher Bolivian taxes and higher consolidated taxable earnings which reduced available state net operating loss carryforwards. 21 CAPITAL RESOURCES AND LIQUIDITY OVERVIEW The Company's primary sources of liquidity are its cash and cash equivalents, internal cash generation and external financing. 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. CREDIT ARRANGEMENTS AND CAPITALIZATION Refinancing and Offerings In conjunction with closing the Hawaii Acquisition, on May 29, 1998, Tesoro completed a Refinancing of all of its then-existing indebtedness. The total amount of funds required by Tesoro on that date to complete the Hawaii Acquisition and the Refinancing, to pay related fees and expenses and for general corporate purposes was approximately $432 million, which was financed through the Interim Credit Facility. In July 1998, the Company refinanced all borrowings under the Interim Credit Facility with net proceeds from the Offerings and borrowings under the Senior Credit Facility. On July 2, 1998, and in connection with the Notes Offering and the Washington Acquisition, the Company entered into the Senior Credit Facility in the amount of $500 million. In addition to funding the cash consideration of the Acquisitions and Refinancing, the Senior Credit Facility provides the Company with enhanced financial flexibility, such as increased working capital capacity and funds for general corporate purposes, including the projected capital expenditures for 1998. On May 4, 1998, the Company filed a Universal Shelf Registration Statement with the SEC for $600 million of debt or equity securities for acquisitions or general corporate purposes. The Universal Shelf Registration Statement was declared effective by the SEC on May 14, 1998. The Company offered PIES and Common Stock from the Universal Shelf Registration Statement to provide partial funding for the Acquisitions. On July 1, 1998, the Company issued 9,000,000 PIES, representing fractional interests in the Company's 7.25% Mandatorily Convertible Preferred Stock, with gross proceeds of approximately $143.4 million, and 5,000,000 shares of Common Stock, with gross proceeds of $79.7 million. Upon exercise of the over-allotment options granted to the underwriters of the Equity Offerings, on July 8, 1998, the Company issued 1,350,000 PIES with gross proceeds of $21.5 million and 750,000 shares of Common Stock with gross proceeds of $11.9 million. Holders of PIES are entitled to receive a cash dividend. The PIES will automatically convert into shares of Common Stock on July 1, 2001, at a rate based upon a formula dependent upon the market price of Common Stock. Before July 1, 2001, each PIES is convertible, at the option of the holder thereof, into 0.8455 shares of Common Stock, subject to adjustment in certain events. On July 2, 1998, concurrently with the syndication of the Senior Credit Facility, the Company issued $300 million aggregate principal amount of Senior Subordinated Notes through a private offering eligible for Rule 144A. The Senior Subordinated Notes have a ten-year maturity without sinking fund requirements and are subject to optional redemption by the Company after five years at declining premiums. On August 7, 1998, a Registration Statement was declared effective by the SEC whereby the Company offered, upon the terms and subject to the conditions set forth in the related Prospectus, to exchange $1,000 principal amount of Exchange Notes for each $1,000 principal amount of its Senior Subordinated Notes. The terms of the Exchange Notes are identical in all material respects to the terms of the Senior Subordinated Notes, except as described in the Prospectus. The offer to exchange was completed in September 1998. Capitalization After issuance of the Senior Subordinated Notes, Common Stock and PIES, entering into the Senior Credit Facility and the application of the net proceeds therefrom, the Company's indebtedness as of September 30, 1998 was approximately $490 million (excluding an additional $322 million available under the Senior Credit Facility) with a debt-to-capitalization ratio of 45%. 22 The Company's primary capital requirements are expected to include capital expenditures, working capital and debt service. The primary sources of capital are expected to be cash flow from operations and borrowings under the Senior Credit Facility which incurs interest at variable rates. Based upon current and anticipated needs, the Company believes that available capital resources will be adequate to meet anticipated future capital requirements. The Senior Credit Facility, the Senior Subordinated Notes and PIES, as described in Note C of Notes to Condensed Consolidated Financial Statements impose various restrictions and covenants on the Company that could potentially limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital or to take advantage of business opportunities. CAPITAL SPENDING (EXCLUDING AMOUNTS TO FUND ACQUISITIONS) During the first nine months of 1998, the Company's capital expenditures totaled $131 million which were financed with internally-generated cash flows from operations and external financing. Although capital expenditures for the year had been projected to exceed $220 million, actual capital spending will be less due to a number of factors, including the timing of refining and marketing and other capital projects. Capital expenditures for the remainder of the year, currently estimated at $45 million to $55 million, are expected to be funded by cash flows from operations and external borrowings under the Company's credit arrangements. The Exploration and Production segment accounts for $139 million of the projected capital spending with $88 million planned for U.S. activities and $51 million for Bolivia. Planned U.S. expenditures include $20 million for acquisitions, $32 million for development drilling (participation in 27 wells), $14 million for leasehold, geological and geophysical, and $22 million for exploratory drilling (participation in 22 wells). In Bolivia, the drilling program is projected at $10 million for development drilling (two wells) and $22 million for exploratory drilling (three wells), with the remainder planned for gathering lines to shut-in wells, workovers and three-dimensional seismic activity. For the 1998 Period, actual U.S. expenditures in the Exploration and Production segment were $76 million, principally for the participation in the drilling of 16 development wells (15 completed), 18 exploratory wells (eleven completed) and purchases of interests in oil and gas properties. In Bolivia, capital spending for the 1998 Period totaled $27 million, primarily for drilling four wells in progress. Capital spending for the downstream operations, the Refining and Marketing and Marine Services segments, are projected to range from $30 million to $40 million for the year 1998, which includes retail marketing projects, improvements to the refineries, environmental projects and equipment and facility upgrades. The downstream operations spent approximately $24 million towards these projects during the 1998 Period. Capital expenditures for corporate projects are primarily directed towards the installation and implementation of an integrated software system, which totaled $4 million during the 1998 Period. Another $2 million is expected to be spent in this area during the remainder of 1998, with $12 million to be expended during 1999. CASH FLOWS Components of the Company's cash flows are set forth below (in millions):
Nine Months Ended September 30, ----------------- 1998 1997 ---- ---- Cash Flows From (Used In): Operating Activities . . . . . . . . . . . . . . . $ 98.7 $ 71.1 Investing Activities . . . . . . . . . . . . . . . (659.4) (98.2) Financing Activities . . . . . . . . . . . . . . . 555.8 11.7 ------- ------- Decrease in Cash and Cash Equivalents. . . . . . . . $ (4.9) $ (15.4) ======= =======
Net cash from operating activities of $99 million during the 1998 Period, compares to $71 million during the 1997 Period. Higher levels of earnings plus depreciation, depletion and amortization, primarily from the Acquisitions, together with favorable changes in working capital components contributed to the increase in cash flows from operations during the 1998 period. Net cash used in investing activities of $659 million during the 1998 Period included approximately $528 million for the Acquisitions and capital expenditures of $131 million. Net cash from financing activities of $556 million included net proceeds from the Offerings of $533 million, gross borrowings under revolving credit lines and term loans of $901 million with $775 million of repayments, and refinancing and payment of other debt of $92 million. At September 30, 1998, the Company's net working capital totaled $151 million, which included cash and cash equivalents of $3 million. 23 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 September 30, 1998, the Company's accruals for environmental expenses totaled $11.4 million. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. In addition to environmental expenses, the Company anticipates it will make capital improvements totaling approximately $10 million in 1998 and $7 million in 1999 to comply with environmental laws and regulations affecting its Alaska, Hawaii, Pacific Northwest and Gulf Coast operations. In addition, capital expenditures for alternate secondary containment systems for existing storage tank facilities in Alaska are estimated to be $2 million in 1998 and $2 million in 1999, with a remaining $ 5 million to be spent by the end of year 2002. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refineries, retail stations (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 and other contingencies, including environmental matters related to the Acquisitions, see Note E of Notes to Condensed Consolidated Financial Statements in Part I, Item 1, and Legal Proceedings in Part II, Item 1, included herein OTHER The Company's results for the 1998 Period reflected receipt of approximately $21 million pretax ($14 million aftertax) from an operator in the Bob West Field, representing funds that are no longer needed as a contingency reserve for litigation. These proceeds were used to reduce debt levels. In October 1998, the Company's Board of Directors unanimously approved the 1998 Performance Incentive Compensation Plan (the "Performance Plan"), which is intended to advance the best interests of the Company and its stockholders by directly targeting Company performance to align with the ninetieth percentile historical stock-price growth rate for the Company's peer group. In addition, the Performance Plan will provide the Company's employees with additional compensation, contingent upon achievement of the targeted objectives, thereby encouraging them to continue in the employ of the Company. Under the Performance Plan, targeted objectives are comprised of the fair market value of the Company's Common Stock equaling or exceeding an average of $35 per share (the "First Performance Target") and $45 per share (the "Second Performance Target") on any 20 consecutive trading days during a period commencing on October 1, 1998 and ending on the earlier of September 30, 2002, or the date on which the Second Performance Target is achieved (the "Performance Period"). The Performance Plan has several tiers of awards, with the award generally determined by job level. Most eligible employees have contingent cash bonus opportunities of 25% of their annual "basic compensation" (as defined in the Performance Plan) and three executive officers have contingent awards of phantom stock. Upon achievement of the First Performance Target, one-fourth of the contingent awards will be earned, with payout deferred until the end of the Performance Period. The remaining 75% will be earned only upon achievement of the Second Performance Target, with payout occurring 30 days thereafter. Employees will need to have at least one year of regular, full-time service at the time the Performance Period ends in order to be eligible for a payment. The Company estimates that it will incur aftertax costs of approximately 1% of the total aggregate increase in shareholder value if the First Performance Target is reached and will incur an additional 2% aftertax charge if the Second Performance Target is reached. YEAR 2000 READINESS DISCLOSURE The efficient operation of the Company's business is dependent on its computer hardware, operating systems and software programs (collectively, "Systems and Programs"). These Systems and Programs are used in several key areas of the Company's business, including production and distribution, information management services and financial reporting, as well as in various administrative functions. The Company has been evaluating its Systems and Programs to identify potential year 2000 compliance problems, as well as manual processes, external interfaces with customers and services supplied by vendors to coordinate year 2000 compliance and conversion. The Company has 24 identified and is replacing a number of Systems and Programs which are not year 2000 compliant. The year 2000 problem refers to the limitations of certain existing hardware and software programs to recognize date sensitive information for the year 2000 and beyond. Unless replaced or modified prior to the year 2000, such hardware and systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. Based on current information, the Company expects to attain year 2000 compliance and institute appropriate testing of its modifications and replacements in a timely fashion and in advance of the year 2000 date change. Modification or replacement of the Company's Systems and Programs is being performed in-house by company personnel as well as external consultants. The Company believes that, with hardware replacement and modifications to existing software or conversions to new software, the year 2000 date change will not pose a significant operational problem for the Company. However, because most computer systems are, by their very nature, interdependent, it is possible that non-compliant third party computer systems or programs may not interface properly with the Company's computer systems. The Company has requested assurance from third parties that their computers, systems or programs be year 2000 compliant. The Company could, however, be adversely affected by the year 2000 problem if it or unrelated parties fail to successfully address this issue. Management of the Company expects that expenses and capital expenditures associated with the year 2000 compliance project will not have a material effect on its business, financial condition or results of operations. The Company estimates that it will spend approximately $1 million in 1998 and $4 million in 1999 to become year 2000 compliant. The costs of year 2000 compliance and the expected completion dates are the best estimates of Company management and are believed to be reasonably accurate. In the event the Company's plan to address the year 2000 problem is not successfully or timely implemented, the Company may need to devote more resources to the process and additional costs may be incurred. Problems encountered by the Company's vendors, customers and other third parties may also have an adverse effect on the Company's operations. Purchased hardware and software will continue to be capitalized in accordance with accounting policy. Personnel and other costs will also be accounted for as appropriate under accounting policy. The foregoing statements in the above paragraphs under "Year 2000 Readiness Disclosure" herein are intended to be and are hereby designated "Year 2000 Readiness Disclosure" statements within the meaning of the Year 2000 Information and Readiness Disclosure Act. NEW ACCOUNTING STANDARDS In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosures related to pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain disclosures previously required. SFAS No. 132 becomes effective for the Company in 1998 and contains provisions for restatement of prior period information. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 1999 and should not be applied retroactively to financial statements of prior periods. The Company is evaluating the effects that these new statements will have on its financial condition, results of operations and financial reporting and disclosures. 25 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, among other things, discussions of anticipated revenue enhancements and cost savings following the Acquisitions, the Company's business strategy and expectations concerning the Company's market position, future operations, margins, profitability, liquidity and capital resources, expenditures for capital projects and attempts to reduce costs. Although the Company believes that the assumptions upon which the forward-looking statements contained in this Form 10-Q are based are reasonable, any of the assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect. All phases of the operations of the Company involve risks and uncertainties, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company's operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to, 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; changes in the cost or availability of third-party vessels, pipelines and other means of transporting feedstocks and products; execution of planned capital projects; adverse changes in the credit ratings assigned to the Company's trade credit; future well performance; the extent of the Company's success in acquiring oil and gas properties and in discovering, developing and producing reserves; 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; adverse rulings, judgments, or settlements in litigation or other legal matters, including unexpected environmental remediation costs in excess of any reserves; actions of customers and competitors; weather conditions affecting the Company's operations or the areas in which the Company's products are marketed; earthquakes or other natural disasters affecting operations; political developments in foreign countries; and the conditions of the capital markets and equity markets during the periods covered by the forward-looking statements. Future results will also be dependent upon the ability of the Company to integrate the Acquisitions with the Company's other operations. Many of the factors are described in greater detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and other of the Company's filings with the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing. 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. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Environmental. On August 26, 1998, the United States Coast Guard issued a Notice of Federal Interest For An Oil Pollution Incident to Tesoro Hawaii Corporation ("Tesoro Hawaii"), a subsidiary of the Company, in connection with an oil spill which occurred on August 24, 1998, at Tesoro Hawaii's single point mooring at Barbers Point, Oahu, Hawaii. Tesoro Hawaii, the Coast Guard and the Hawaii Department of Health ("HDOH") responded to the spill immediately and clean-up efforts have been completed. Under the Federal Water Pollution Control Act and the Oil Pollution Act of 1990, the responsible party is liable for removal costs and damages, including damages from injury to natural resources and may be assessed administrative or civil penalties. The Company carries insurance to provide protection against pollution damages. The Company does not believe that the resolution of this oil spill will have a material adverse effect on the Company. On October 2, 1998, the Alaska Department of Environmental Conservation ("ADEC") issued a Notice of Violation ("NOV") against the Company's refinery in Alaska related to non-compliance with the facility air quality permit. This NOV alleges that an air emission treatment unit at the refinery groundwater treatment system did not maintain the air contaminant removal efficiency rate required in the facility air quality permit. The Company has initiated discussions with the ADEC on this matter and does not believe that the resolution thereof will have a material adverse effect on the Company. On October 19, 1998, the Company received notice from the EPA that it has been identified as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") at the Casmalia Disposal Site in Santa Barbara County, California. The site is being remediated by the EPA pursuant to CERCLA Superfund law and the Resource Conservation and Recovery Act ("RCRA"). Although CERCLA imposes joint and several liability on PRPs, the extent of the Company's allocated financial contribution for cleanup is expected to be de minimis based on the volume of waste disposed of at the site by the Company as identified in the EPA's notice. The Company believes that the aggregate amount of its liability at this site will not have a material adverse effect on the Company. On October 16, 1998, the HDOH issued a Notice of Apparent Violation of Hawaii state law to Tesoro Hawaii in connection with a spill on September 23, 1998. During the loading of a time-chartered barge, diesel fuel was spilled into the state waters at Barbers Point Harbor, Oahu, Hawaii. It was immediately cleaned up by the charterer of the barge. Hawaii law requires that appropriate action to correct an apparent violation must be taken and further provides for civil penalties. The Company has taken corrective action and does not believe that the resolution of the diesel fuel spill will have a material adverse effect on the Company. Other. On October 1, 1998, the Attorney General for the State of Hawaii filed a lawsuit in the U.S. District Court for the District of Hawaii against thirteen oil companies, including Tesoro Petroleum Corporation and Tesoro Hawaii Corporation, alleging anti-competitive marketing practices in violation of Federal and State anti-trust laws. The complaint seeks injunctive relief and compensatory and treble damages and civil penalties against all defendants in an amount in excess of $500 million. The Company believes that it has not engaged in any anti-competitive activities and that this proceeding is subject to the indemnity provision of the Stock Sale Agreement between the BHP Sellers and the Company which provides for indemnification in excess of $2 million and not to exceed $65 million. The Company will defend this litigation vigorously. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The 1998 Annual Meeting of Stockholders of the Company was held on July 29, 1998. (b) The following directors were elected at the 1998 Annual Meeting of Stockholders to hold office until the 1999 Annual Meeting of Stockholders or until their successors are elected and qualified. A tabulation of the number of votes cast for or withheld with respect to each such director are set forth below: Votes Votes Name For Withheld -------------------- ---------- -------- Steven H. Grapstein 23,654,195 863,309 William J. Johnson 23,661,055 856,449 Alan J. Kaufman 23,658,977 858,527 Raymond K. Mason, Sr. 23,658,371 859,133 Bruce A. Smith 23,664,172 853,332 Patrick J. Ward 23,662,835 854,669 Murray L. Weidenbaum 23,658,204 859,300 (c)(i) With respect to the resolution amending the Company's Restated Certificate of Incorporation to increase the number of authorized shares of the Company's Common Stock from 50 million to 100 million, there were 22,934,397 votes for; 1,530,088 votes against; 53,019 abstentions; and no broker non-votes. (ii) With respect to the resolution increasing the number of shares which can be granted under the Amended and Restated Executive Long-Term Incentive Plan and increasing the limit on the number of shares of restricted stock which can be granted under such plan, there were 15,439,159 votes for; 3,247,935 votes against; 79,572 abstentions; and 5,750,838 broker non-votes. (iii) With respect to the ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for fiscal year 1998, there were 23,902,948 votes for; 40,152 votes against; 574,404 abstentions; and no broker non-votes. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Amendment, dated as of August 3, 1998, to Certificate of Incorporation of the Company, amending Article IV, increasing the number of authorized shares of Common Stock from 50,000,000 to 100,000,000. 10.1 Copy of the Company's 1998 Performance Incentive Compensation Plan. 10.2 Copy of the Company's Amended and Restated Executive Long-Term Incentive Plan, as amended through July 29, 1998. 27.1 Financial Data Schedule (September 30, 1998). (b) Reports on Form 8-K. A Current Report on Form 8-K, dated June 25, 1998, was filed on July 1, 1998, reporting under Item 5, Other Events, that the Company had issued 9,000,000 Premium Income Equity Securities and 5,000,000 shares of Common Stock. Exhibits were also filed under Item 7. A Current Report on Form 8-K, dated August 10, 1998, was filed on August 12, 1998, reporting under Item 2, Acquisition or Disposition of Assets, that the Company completed the acquisition of all of the outstanding capital stock of Shell Anacortes Refining Company, an affiliate of Shell Oil Company. The Audited Financial Statements of Shell Anacortes Refining Company as of December 31, 1996 and 1997, and Unaudited Financial Statements of Shell Anacortes Refining Company as of March 31, 1998, were previously filed in the Registrant's Current Report on Form 8-K dated May 29, 1998 and filed on June 5, 1998. Included under Item 7 of the Form 8-K, dated August 10, 1998 and filed on August 12, 1998, were unaudited pro forma combined condensed financial statements of the Company, BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. and Shell Anacortes Refining Company as of March 31, 1998 and for the year ended December 31, 1997 and three months ended March 31, 1998. 29 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: November 16, 1998 /s/ BRUCE A. SMITH Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer Date: November 16, 1998 /s/ DON M. HEEP Don M. Heep Vice President, Controller (Chief Accounting Officer) 30 EXHIBIT INDEX EXHIBIT NUMBER 3.1 Certificate of Amendment, dated as of August 3, 1998, to Certificate of Incorporation of the Company, amending Article IV, increasing the number of authorized shares of Common Stock from 50,000,000 to 100,000,000. 10.1 Copy of the Company's 1998 Performance Incentive Compensation Plan. 10.2 Copy of the Company's Amended and Restated Executive Long-Term Incentive Plan, as amended through July 29, 1998. 27.1 Financial Data Schedule (September 30, 1998). 31 EX-3.1 2 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF TESORO PETROLEUM CORPORATION The undersigned, Tesoro Petroleum Corporation, a Delaware corporation (the "Corporation"), for the purpose of amending the Certificate of Incorporation of the Corporation, in accordance with the General Corporation Law of the State of Delaware, does hereby make and execute this Certificate of Amendment of Certificate of Incorporation and does hereby certify that: FIRST: The following resolution proposed by the Board of Directors and adopted by the stockholders of the Corporation set forth the amendment adopted: RESOLVED, that to effect the Common Stock Increase, the Board of Directors hereby approves and authorizes an amendment to the first paragraph of Article IV and subsection (A) of Article IV of the Company's Amended and Restated Certificate of Incorporation (the "Common Stock Amendment") by deleting all of the present first paragraph of Article IV and subsection (A) of Article IV and inserting in lieu thereof the following first paragraph of Article IV and subsection (A) of Article IV: "ARTICLE IV The total number of shares of all classes of stock which the Corporation shall have authority to issue is One Hundred Five Million (105,000,000) shares consisting of One Hundred Million (100,000,000) shares of the par value $.16 2/3 per share; and Five Million (5,000,000) shares with no par value. (A) Designation of Each Class of Shares. (1) The One Hundred Million (100,000,000) authorized shares of a par value of $.16 2/3 shall be designated Common Stock; and (2) The Five Million (5,000,000) authorized shares with no par value shall be designated Preferred Stock." SECOND: Such amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware, as amended. IN WITNESS WHEREOF, this Certificate of Amendment has been executed on behalf of the Corporation by its Executive Vice President, General Counsel and Secretary on this 3rd day of August 1998. TESORO PETROLEUM CORPORATION By: /s/ James C. Reed, Jr. James C. Reed, Jr. Executive Vice President, General Counsel and Secretary EX-10.1 3 1998 PERFORMANCE INCENTIVE COMPENSATION PLAN TESORO PETROLEUM CORPORATION 1998 PERFORMANCE INCENTIVE COMPENSATION PLAN TESORO PETROLEUM CORPORATION 1998 PERFORMANCE INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS Section ARTICLE I - PLAN PURPOSE AND TERM Purpose. . . . . . . . . . . . . . . . . . . . . . .1.1 Term of Plan . . . . . . . . . . . . . . . . . . . .1.2 ARTICLE II - DEFINITIONS Affiliate. . . . . . . . . . . . . . . . . . . . . .2.1 Applicable Percentage. . . . . . . . . . . . . . . .2.2 Basic Compensation . . . . . . . . . . . . . . . . .2.3 Board. . . . . . . . . . . . . . . . . . . . . . . .2.4 Change of Control. . . . . . . . . . . . . . . . . .2.5 Code . . . . . . . . . . . . . . . . . . . . . . . .2.6 Committee. . . . . . . . . . . . . . . . . . . . . .2.7 Company. . . . . . . . . . . . . . . . . . . . . . .2.8 Contingent Award . . . . . . . . . . . . . . . . . .2.9 Disability . . . . . . . . . . . . . . . . . . . . 2.10 Employee . . . . . . . . . . . . . . . . . . . . . 2.11 Exchange Act . . . . . . . . . . . . . . . . . . . 2.12 Fair Market Value. . . . . . . . . . . . . . . . . 2.13 First Performance Target . . . . . . . . . . . . . 2.14 Grantee. . . . . . . . . . . . . . . . . . . . . . 2.15 Payout Date. . . . . . . . . . . . . . . . . . . . 2.16 Performance Period . . . . . . . . . . . . . . . . 2.17 Phantom Stock. . . . . . . . . . . . . . . . . . . 2.18 Plan . . . . . . . . . . . . . . . . . . . . . . . 2.19 Pro Rata Share . . . . . . . . . . . . . . . . . . 2.20 Retirement . . . . . . . . . . . . . . . . . . . . 2.21 Second Performance Target. . . . . . . . . . . . . 2.22 Stock. . . . . . . . . . . . . . . . . . . . . . . 2.23 Voting Stock . . . . . . . . . . . . . . . . . . . 2.24 ARTICLE III - CONTINGENT AWARDS Grants of Contingent Awards. . . . . . . . . . . . .3.1 Attainment of Performance Targets. . . . . . . . . .3.2 Payment of Contingent Awards . . . . . . . . . . . .3.3 Payment of Contingent Awards of Phantom Stock. . . .3.4 No Rights as Stockholder . . . . . . . . . . . . . .3.5 -i- Non-Transferability. . . . . . . . . . . . . . . . .3.6 Recapitalization or Reorganization of the Company. .3.7 ARTICLE IV - ADMINISTRATION ARTICLE V - AMENDMENT OR TERMINATION OF PLAN ARTICLE VI - MISCELLANEOUS Unfunded Arrangement . . . . . . . . . . . . . . . .6.1 No Employment Obligation . . . . . . . . . . . . . .6.2 Tax Withholding. . . . . . . . . . . . . . . . . . .6.3 Indemnification of the Committee . . . . . . . . . .6.4 Gender and Number. . . . . . . . . . . . . . . . . .6.5 Headings . . . . . . . . . . . . . . . . . . . . . .6.6 Other Compensation Plans . . . . . . . . . . . . . .6.7 Governing Law. . . . . . . . . . . . . . . . . . . .6.8 APPENDIX A - CONTINGENT AWARD LEVELS UNDER THE PLAN -ii- ARTICLE I PLAN PURPOSE AND TERM 1.1 PURPOSE. The Plan is intended to advance the best interests of the Company and its stockholders by directly targeting Company performance to align with the ninetieth percentile historical stock-price growth rate for the Company's peer group. In addition, the Plan will provide the Company's employees with additional compensation, contingent upon achievement of the targeted objectives, thereby encouraging them to continue in the employ of the Company or any of its Affiliates. 1.2 TERM OF PLAN. The Plan is effective October 1, 1998. The Plan shall remain in effect until all Contingent Awards under the Plan have been satisfied or have expired. I-1 ARTICLE II DEFINITIONS The words and phrases defined in this Article shall have the meaning set out in these definitions throughout the Plan, unless the context in which any such word or phrase appears reasonably requires a broader, narrower, or different meaning. 2.1 "AFFILIATE" means any parent corporation, any subsidiary corporation and any partnership the majority of which is owned by the Company or a parent corporation or subsidiary corporation. The term "parent corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the action or transaction, each of the corporations other than the Company owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. The term "subsidiary corporation" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the action or transaction, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2.2 "APPLICABLE PERCENTAGE" means the percentage of Basic Compensation taken into account under a Contingent Award as specified in Section 3.1 or Appendix A. 2.3 "BASIC COMPENSATION" means annualized wages within the meaning of section 3401(a) of the Code (for purposes of income tax withholding at the source) paid to the Employee by the Company and any Affiliate plus the Employee's pre-tax elective contributions under any cafeteria plan governed by section 125 of the Code and any plan qualified under section 401(k) of the Code that is maintained by the Company or an Affiliate, excluding all of the following items paid by the Company or an Affiliate (even if includible in gross income): bonuses and other incentive compensation, pension or retirement benefits, reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation (including amounts paid under the Plan and amounts includible in gross income upon the vesting of restricted stock and upon the exercise of a stock option or stock appreciation right), and welfare benefits (such as severance pay). For purposes of determining the Basic Compensation of an Employee who is nonexempt under the Fair Labor Standards Act of 1938, Basic Compensation shall be defined as set forth above except that the definition of Basic Compensation shall include incentive bonus payments under the Company's incentive compensation plans, as they may be determined from time to time. Except as provided in the previous sentence, it is intended that Basic Compensation include only regular hourly wages or regular monthly, semi-monthly or bi-weekly salary and not other forms of compensation. II-1 To determine Basic Compensation for the calculation of payments to a nonexempt Employee, Basic Compensation shall be the sum of the amounts specified above paid to the Employee for the months that he was employed by the Company or its Affiliates during the Performance Period, multiplied by a fraction, the numerator of which is 365 and the denominator of which is the number of days that he was employed by the Company or its Affiliates during the Performance Period. 2.4 "BOARD" means the board of directors of the Company. 2.5 "CHANGE OF CONTROL" means the occurrence of any of the following after the date on which the applicable Contingent Award is granted: (i) there shall be consummated (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company where a majority of the Board of Directors of the surviving corporation are, and for a two-year period after the merger continue to be, persons who were directors of the Company immediately prior to the merger or were elected as directors, or nominated for election as directors, by a vote of at least two-thirds of the directors then still in office who were directors of the Company immediately prior to the merger, or (B) any sale, lease, exchange, or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (ii) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; or (iii) (A) any "person", as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of two years thereafter, individuals who immediately prior to the beginning of such period constituted the Board of Directors of the Company shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination by the Board of Directors for election by the Company's shareholders of each new director during such period was approved by a vote of at least two- II-2 thirds of the directors then still in office who were directors at the beginning of such period. 2.6 "CODE" means the Internal Revenue Code of 1986, as amended. 2.7 "COMMITTEE" means members of the Compensation Committee of the Board. 2.8 "COMPANY" means Tesoro Petroleum Corporation (a Delaware corporation) and any successor. 2.9 "CONTINGENT AWARD" means cash remuneration granted under the Plan the payment of which is contingent upon the attainment of the First Performance Target or the Second Performance Target. 2.10 "DISABILITY" means a medically determinable mental or physical impairment that, in the opinion of a physician selected by the Committee, shall prevent the Grantee from engaging in any substantial gainful activity and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months and that: (a) was not contracted, suffered or incurred while the Grantee was engaged in, or did not result from having engaged in, a felonious criminal enterprise; (b) did not result from an injury incurred while a member of the Armed Forces of the United States for which the Grantee receives a military pension; and (c) did not result from an inte ntionally self-inflicted injury. 2.11 "EMPLOYEE" means a person employed on a regular full-time basis by the Company or any Affiliate, excluding any such person represented by a collective bargaining agreement. 2.12 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.13 "FAIR MARKET VALUE" of the Stock as of any date means (a) the average of the high and low sale prices of the Stock on that date (or, if there was no sale on such date, the first preceding date on which there was such a sale) on the principal securities exchange on which the Stock is listed; or (b) if the Stock is not listed on a securities exchange, an amount as determined by the Committee in its sole discretion. 2.14 "FIRST PERFORMANCE TARGET" means $35.00 per share of Stock. 2.15 "GRANTEE" means an Employee who has been granted a Contingent Award under the Plan. II-3 2.16 "PAYOUT DATE" means 30 days after the end of the Performance Period in the event the First Performance Target or Second Performance Target is achieved. 2.17 "PERFORMANCE PERIOD" means the period of time during which the First Performance Target and the Second Performance Target must be achieved, commencing on October 1, 1998, and ending on the earlier of September 30, 2002, or the date on which the Second Performance Target is achieved. 2.18 "PHANTOM STOCK" means the cash equivalent of a share of Stock, determined without regard to cash dividends paid or payable with respect to a share of Stock. 2.19 "PLAN" means the Tesoro Petroleum Corporation 1998 Performance Incentive Compensation Plan, as set forth in this document and as it may be amended from time to time. 2.20 "PRO RATA SHARE" means a fraction, the numerator of which is the number of days that the Grantee has been or was an Employee during the Performance Period and the denominator of which is the total number of days in the Performance Period. 2.21 "RETIREMENT" means the severance of the employment relationship between the Employee and the Company and all Affiliates after his attaining the age of 55, with five years of service for vesting purposes under a retirement plan maintained by the Company or an Affiliate that is intended to qualify under Section 401(a) of the Code. 2.22 "SECOND PERFORMANCE TARGET" means $45.00 per share of Stock. 2.23 "STOCK" means the common stock of the Company, $.16 par value or, in the event that the outstanding shares of common stock are later changed into or exchanged for a different class of stock or securities of the Company or another corporation, that other stock or security. 2.24 "VOTING STOCK" means shares of capital stock of the Company the holders of which are entitled to vote for the election of directors, but excluding shares entitled to so vote only upon the occurrence of a contingency unless that contingency shall have occurred. II-4 ARTICLE III GENERAL PROVISIONS RELATING TO CONTINGENT AWARDS 3.1 GRANTS OF CONTINGENT AWARDS. Effective October 1, 1998, Contingent Awards have been granted to Employees in amounts specified by the Board, consistent with the levels set forth on Appendix A. In addition, the Board has granted to three executive officers of the Company Contingent Awards of Phantom Stock as specified by the Board. Any Employee who has not been granted a Contingent Award by the Board but is an Employee on October 1, 1998, is hereby granted a Contingent Award of 25 percent of his Basic Compensation. If a person becomes an Employee after October 1, 1998, he will be granted a Contingent Award on the date that he becomes an Employee. The size of the Contingent Award will be commensurate with such Employee's employment classification as specified in Appendix A. The Chief Executive Officer of the Company has the authority to determine Contingent Awards of less than 100 percent of Basic Compensation for newly hired employees and promotions. Contingent Awards equal to or in excess of 100 percent of Basic Compensation must be approved by the Committee or the Board. 3.2 ATTAINMENT OF PERFORMANCE TARGETS. The First Performance Target or Second Performance Target will be treated as having been attained for purposes of the Plan and Contingent Awards thereunder only if the average of the Fair Market Values of the Stock for any 20 consecutive trading day period during the Performance Period equals or exceeds the First Performance Target or Second Performance Target, as applicable. 3.3 PAYMENT OF CONTINGENT AWARDS. (a) Grantee Who is Still Employed at the End of the Performance Period. If a Grantee of a Contingent Award is an Employee at the end of the Performance Period and if he has been an Employee for at least 365 days on such date, the Company will pay or cause to be paid to him on the Payout Date an amount equal to the Applicable Percentage of his Basic Compensation as of the date the Second Performance Target is achieved, or 25 percent of that amount if the First Performance Target is achieved but the Second Performance Target is not achieved. However, in either case, the amount payable to a Grantee who is hired by the Company or an Affiliate after October 1, 1998, will be reduced so that he receives a Pro Rata Share of the applicable amount specified in the preceding sentence. (b) Grantee Who is Not Employed at the End of the Performance Period. If a Grantee of a Contingent Award has been an Employee for at least 365 days, but he is not an Employee at the end of the Performance Period because of his death, Retirement, or Disability that occurred during the Performance Period, the Company III-1 will pay or cause to be paid to him or his estate on the Payout Date an amount equal to the Pro Rata Share of the amount that he would have received under the Contingent Award on such date (as specified in paragraph (a) above) if he had continued working until the end of the Performance Period and been paid through that date his same Basic Compensation that was in effect upon his termination of employment, provided that for purposes of determining his Pro Rata Share, the Grantee shall not be given credit for the time from the date of his termination of employment to the end of the Performance Period. If a Grantee is terminated without cause during the Performance Period, the Grantee shall be entitled to an amount equal to the Pro Rata Share of the amount that he would have received under the Contingent Award on the Pay-Out Date if he continued working until the end of the Performance Period and been paid through that date his same Basic Compensation that was in effect upon his termination of employment, provided that for purposes of determining his Pro Rata Share, the Grantee shall not be given credit for the time from the date of his termination of employment to the end of the Performance Period. For purposes of this Section 3.3(b), "termination without cause" shall mean termination of Grantee's employment by the Company other than a termination based on the Grantee's failure to perform the duties required of the Grantee, the Grantee's acting in a manner adverse to or inconsistent with the interest of the Company, or the Grantee's taking any action or being involved in any activity that adversely affects the interest of the Company or the ability of the Grantee to perform the duties required of him. If a Grantee of a Contingent Award is not an Employee at the end of the Performance Period for any reason other than his death, Disability, Retirement, or termination without cause, no amount will be paid under his Contingent Award on the Payout Date. (c) Special Rule For Certain Grantees of Contingent Awards in the Event of a Change of Control. Notwithstanding any other provision of the Plan, if the Grantee of a Contingent Award whose Applicable Percentage is 400 or more has been an Employee for at least 365 days on the day before a Change of Control that occurs during the Performance Period, the Company shall pay or cause to be paid to the Grantee on the earlier of the Payout Date or 30 days after termination of employment by the Company, other than a termination "with cause", or 30 days after a termination of employment by the Employee for "good reason", an amount equal to the Applicable Percentage of the greater of his Basic Compensation determined either as of the day before the Change of Control or the date of termination of employment, irrespective of whether either of the First Performance Target or the Second Performance Target has been attained. For purposes of determining the amount of any payment upon a Change of Control, the payment shall be subject to reduction pursuant to Section 3.3(a) in the event the Grantee was hired after October 1, 1998, but shall not be reduced pursuant to Section 3.3(b) so that for all purposes of determining the payment, it will be assumed that the Grantee remained an employee of the Company or an Affiliate to the end of the Performance Period for purposes hereof; provided, however, the calculation of a Pro Rata Share for a Grantee who was hired after October 1, 1998, shall use in the denominator the number of days from October 1, 1998, to the date of termination of employment in lieu of the number of days in the III-2 Performance Period. "With cause" shall mean a termination of employment by the Company solely on account of the conviction of, or plea of nolo contendre by, the Grantee to the charge of a felony that, through lapse of time or otherwise, is not subject to appeal, or on account of a material breach of fiduciary duty to the Company through the misappropriation of Company funds or property. Termination by the Grantee for "good reason" shall exist if any of the following occurs: (i) without Grantee's express written consent, the assignment to Grantee of any duties inconsistent with the employment of Grantee immediately prior to the Change of Control, or a significant diminution of Employee's position, duties, responsibilities or status with the Company from those immediately prior to a Change of Control or a diminution in Grantee's titles or offices as in effect immediately prior to a Change of Control, or any removal of Grantee from, or any failure to reelect Grantee to, any of such positions; (ii) a reduction by the Company in Grantee's Basic Compensation in effect immediately prior to a Change of Control; (iii) the failure by the Company to continue in effect any thrift, stock ownership, pension, life insurance, health, dental, and accident or disability plan in which Employee is participating or is eligible to participate at the time of the Change of Control (or plans providing Employee with substantially similar benefits), except as otherwise required by the terms of such plans as in effect at the time of any Change of Control or the taking of any action by the Company that would adversely affect Grantee's participation in or materially reduce Grantee's benefits under any of such plans or deprive Grantee of any material fringe benefits enjoyed by Grantee at the time of the Change of Control or the failure by the Company to provide Grantee with the number of paid vacation days to which Employee is entitled in accordance with the vacation policies of the Company in effect at the time of a Change of Control; (iv) the failure by the Company to continue in effect any incentive plan or arrangement in which Grantee is participating at the time of a Change of Control (or to substitute and continue other plans or arrangements providing the Grantee with substantially similar benefits), except as otherwise required by the terms of such plans as in effect at the time of any Change of Control; (v) the failure by the Company to continue in effect any plan or arrangement with respect to securities of the Company (including, without limitation, any plan or arrangement to receive and exercise stock options, stock appreciation rights, restricted stock or grants thereof or to acquire stock or other securities of the Company) in which Grantee is participating III-3 at the time of a Change of Control (or to substitute and continue plans or arrangements providing the Grantee with substantially similar benefits), except as otherwise required by the terms of such plans as in effect at the time of any Change of Control or the taking of any action by the Company that would adversely affect Grantee's participation in or materially reduce Grantee's benefits under any such plan; (vi) the relocation of the Company's principal executive offices to a location outside the San Antonio, Texas, area, or the Company's requiring Grantee to be based anywhere other than at the location of the Grantee's principal place of business immediately prior to the Change of Control, except for required travel on the Company's business to an extent substantially consistent with Grantee's business travel obligations prior to the Change of Control, or, in the event Grantee consents to any such relocation, the failure by the Company to pay (or reimburse Grantee for) all reasonable moving expenses incurred by Grantee relating to a change of Grantee's principal residence in connection with such relocation and to indemnify Grantee against any loss (defined as the difference between the actual sale price of such residence and the fair market value thereof as determined by the highest of three appraisals from Member Appraisal Institute-approved real estate appraisers reasonably satisfactory to both Employee and the Company at the time Grantee's principal residence is offered for sale in connection with any such change of residence); (vii) any purported termination of Grantee's employment by the Company other than termination with cause as defined in this Section 3.3(c). 3.4 PAYMENT OF CONTINGENT AWARDS OF PHANTOM STOCK. On the Payout Date the Company shall pay or cause to be paid to a Grantee of a Contingent Award of Phantom Stock an amount equal to the number of shares of Phantom Stock granted to him under his Contingent Award multiplied by the Fair Market Value of a share of Stock on the last day of the Performance Period if the Second Performance Target is attained and the Grantee is still an Employee on the date the Second Performance Target is achieved. If the First Performance Target is attained but the Second Performance Target is not attained and the Grantee is still an Employee at the end of the Performance Period, the Company shall pay or cause to be paid to the Grantee on the Payout Date one-fourth of the amount specified in the preceding sentence. If during the term of his employment agreement with the Company or an Affiliate and during the Performance Period the Grantee's employment with the Company or an Affiliate is terminated by the Grantee for "good reason" or by the Company or an Affiliate "without cause" as such phrases are defined in the Grantee's employment agreement with the Company or an Affiliate (including as such terms are redefined in the event of a Change of Control as defined in such employment agreement), the Grantee shall be entitled to receive within 30 days of such termination an amount equal to his Contingent Award of Phantom Stock multiplied by the average of the Fair Market Values of a share of Stock for the 20 consecutive trading III-4 days ending on the trading day immediately preceding such termination; provided that if a Change of Control shall have occurred prior to such termination, the amount shall equal the greatest of his Contingent Award of Phantom Stock multiplied by the highest of the Fair Market Value of a share of Stock on the trading day immediately preceding the Change of Control, or the Fair Market Value of a share of Stock on the trading day immediately preceding the date on which the stock ceases to be publicly traded, if such is the case, or the average of the Fair Market Values of a share of Stock for the 20 consecutive trading days ending on the trading day immediately preceding such termination. If a Change of Control shall occur and in connection therewith or at any time thereafter, the Stock is exchanged for and converted into anything other than a publicly traded common stock (excluding cash paid in lieu of fractional shares), the Grantee shall be entitled to receive, within 30 days of such exchange or conversion, an amount equal to the greater of the Contingent Award of Phantom Stock multiplied by the higher of the Fair Market Value of the Stock on the trading day immediately preceding the Change of Control, or the Fair Market Value of the Stock on the trading day immediately preceding such exchange or conversion, in lieu of any other payment or award with respect to such Contingent Award. If a Grantee of a Phantom Stock Contingent Award is not an Employee at the end of the Performance Period because of his death, Retirement, or Disability that occurs prior to the end of the Performance Period, the Company will pay or cause to be paid to him or his estate on the Payout Date an amount equal to the Pro Rata Share of the amount that he would have received under the Contingent Award on that date if he had continued working until the end of the Performance Period, provided that for purposes of determining his Pro Rata Share, the Grantee shall not be given credit for the time from the date of his termination of employment to the end of the Performance Period. However, if a Change of Control has occurred, the amount of the payment shall be determined based on a Pro-Rata Share of an amount equal to the greater of his Contingent Award of Phantom Stock multiplied by the higher of the Fair Market Value of the Stock on the trading day immediately preceding the Change of Control, or the Fair Market Value of the Stock on the last day of the Performance Period, and provided, if the Stock is converted or exchanged for anything other than a publicly traded common stock (excluding cash paid in lieu of fractional shares), the Grantee shall be paid within 30 days of such exchange or conversion in an amount based on the higher of the Fair Market Value of the Stock on the trading day immediately preceding the Change of Control, or the Fair Market Value of the Stock on the trading day immediately preceding such exchange or conversion. If a Grantee of a Phantom Stock Contingent Award is not an Employee at the end of the Performance Period for any reason other than his death, Disability, Retirement, termination of employment by the Grantee for "good reason" (as defined in his employment agreement with the Company or an Affiliate), or termination of employment by the Company or an Affiliate "without cause" (as defined in his employment agreement with the Company or an Affiliate), no amount will be paid under his Contingent Award on the Payout Date. 3.5 NO RIGHTS AS STOCKHOLDER. No Grantee shall have any rights as a stockholder as a result of his Contingent Award. III-5 3.6 NON-TRANSFERABILITY. Except as may be specified in a "qualified domestic relations order," an unvested Contingent Award shall not be transferable by the Employee otherwise than by will or under the laws of descent and distribution. In the discretion of the Committee, any attempt to transfer an unvested Contingent Award other than under the terms of the Plan may terminate the Contingent Award. 3.7 RECAPITALIZATION OR REORGANIZATION OF THE COMPANY. (a) No Limitations on Company's Rights to Effect Changes. The existence of outstanding Contingent Awards shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, or preferred or prior preference stock ahead of or affecting the Stock or its rights, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) Increase or Reduction of Outstanding Shares. If a stock split, reverse stock split, stock dividend, combination, recapitalization, or reclassification of the Stock, or any other increase or decrease in the number of shares of the Stock outstanding, is effected without receipt of consideration by the Company, then the First and Second Performance Targets and Contingent Awards of Phantom Stock under the Plan shall be appropriately adjusted by the Committee. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration by the Company." Such adjustment shall be made by the Committee, whose determination in that respe ct shall be final, binding and conclusive. (c) Merger of the Company. In the event the Company is merged or consolidated with another entity (whether or not the Company is the surviving entity) and the Stock is converted into another publicly traded equity security, then the First and Second Performance Targets and the Contingent Awards of Phantom Stock under the Plan shall be adjusted, in good faith, by the Committee based on the terms of conversion of the Stock into such equity security to provide substantially the same economic opportunity and benefits as provided by the Plan prior to such merger or consolidation. In the event the Company is merged or consolidated with another entity, and the Stock is converted into cash, property, debt, or some other consideration that is not an equity security, each Grantee shall be entitled to a payment, adjusted as set forth in the next sentences, at the time of such merger or consolidation as though he continued to work until the end of the Performance Period and based on his Basic Compensation that is in effect at the time of the merger or consolidation. A portion of such payment would be based on attainment toward meeting the First Performance Target and would equal the amount of the payment that otherwise would have been made if the First Performance Target had been met multiplied by a fraction the numerator of which shall be the Fair Market Value of the Stock on the last trading day prior to such merger or combination minus $12.8125 (the "Adjusted III-6 Merger Value") and the denominator of which shall be $22.1875; provided the fraction shall not exceed one. The remaining portion of such payment would be based on attainment toward meeting the Second Performance Target and would be equal to three-fourths of the amount of the payment that otherwise would have been made if the Second Performance Target had been met multiplied by a fraction the numerator of which shall be the Adjusted Merger Value and the denominator of which shall be $32.1875; provided the fraction shall not exceed one. To the extent of any conflict between this Subsection (c) and Section 3.3(c) and 3.4, Sections 3.3(c) and 3.4 shall control. (d) Spin-off of Business Segment. In the event the Company disposes of any business segment or one or more of its refineries as an entity by a spin-off dividend of the capital stock of the subsidiary owning such business segment or refinery, the First Performance Target and the Second Performance Target shall be adjusted for the remainder of the Performance Period by multiplying the First Performance Target and the Second Performance Target by a fraction with a numerator equal to the Fair Market Value of the stock at the close of business on the first day on which the Stock traded separately from the stock of the spin-off company (the "Post Spin-off Price") and the denominator of which is the Fair Market Value of the Stock at the close of business on the immediately preceding trading day (the "Pre-Spin-Off Price"). In addition, the Company shall cause the company to be spun-off to adopt a plan substantially identical to this Plan provided that the First Performance Target and the Second Performance Target for such Plan shall be determined by multiplying the First Performance Target and the Second Performance Target hereunder by a fraction the numerator of which shall be the Pre-Spin-off Price minus the Post Spin-off Price and the denominator shall be the Pre-Spin-off Price. Notwithstanding the foregoing, the Committee, by an action prior to the date of the spin-off referred to in the previous two sentences, may elect not to adjust the First and Second Performance Targets and may provide that the determination of the attainment of the First and Second Performance Targets shall be based on a combination of the Fair Market Value of the Stock and the Fair Market Value of the common stock of the spun-off company. Such election by the Committee shall be evidenced by an amendment to the Plan identifying the common stock of the spun-off company and containing such other provisions deemed necessary or appropriate by the Committee, acting in good faith, to carry out the intent hereof. (e) Certain Sales of Assets. In the event the Company sells a business segment or one or more of its refineries as an entity, no adjustment shall be made to this Plan with respect to Grantees remaining with the Company or an Affiliate. However, with respect to Grantees who are employed by the entity acquiring such assets and who do not resign from or terminate such employment and are not terminated from such employment for cause for a period of one year, the Company shall either continue such Grantees under this Plan or cause the acquiring entity to assume the obligation hereunder so that the transferred Grantee shall receive a Contingent Award hereunder that a Grantee would have received if a Grantee remained an employee of the Company to the end of the Performance Period but such Contingent Award shall be based solely upon the time the III-7 Grantee was an employee of the Company or an Affiliate and not upon any time after the sale of such assets. III-8 ARTICLE IV ADMINISTRATION The Plan shall be administered by the Committee. All questions of interpretation and application of the Plan and Contingent Awards shall be subject to the determination of the Committee. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be as effective as if it had been made by a majority vote at a meeting properly called and held. In carrying out its authority under the Plan, the Committee shall have full and final authority and discretion, including but not limited to the following rights, powers and authorities, to: (a) prescribe, amend, and rescind rules and regulations relating to administration of the Plan, and (b) make all other determinations and take all other actions deemed necessary, appropriate, or advisable for the proper administration of the Plan. The actions of the Committee in exercising all of the rights, powers, and authorities under the Plan, when performed in good faith and in its sole judgment, shall be final, conclusive, and binding on all parties. IV-1 ARTICLE V AMENDMENT OR TERMINATION OF PLAN The Board may amend, terminate, or suspend the Plan at any time, in its sole and absolute discretion. However, no amendment or termination of the Plan may, without the consent of a Grantee, reduce, terminate, or suspend the Grantee's benefits under the Plan as in effect prior to the amendment or termination. V-1 ARTICLE VI MISCELLANEOUS 6.1 UNFUNDED ARRANGEMENT. No property shall be set aside nor shall a trust fund of any kind be established to secure the rights of any Grantee under the Plan. All Grantees shall at all times rely solely upon the general credit of the Company for the payment of any benefit that becomes payable under the Plan. 6.2 NO EMPLOYMENT OBLIGATION. The granting of any Contingent Award shall not constitute an employment contract, express or implied, nor impose upon the Company or any Affiliate any obligation to employ or continue to employ the Grantee. The right of the Company or any Affiliate to terminate the employment of any person shall not be diminished or affected by reason of the fact that a Contingent Award has been granted to him. 6.3 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to deduct from the Contingent Award or other compensation payable to each Grantee any sums required by federal, state, or local tax law to be withheld with respect to payments under a Contingent Award. 6.4 INDEMNIFICATION OF THE COMMITTEE. The Company shall indemnify each present and future member of the Committee against, and each member of the Committee shall be entitled without further act on his part to indemnity from the Company for, all expenses (including attorney's fees, the amount of judgments, and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his being or having been a member of the Committee, whether or not he continues to be a member of the Committee at the time of incurring the expenses -- including, without limitation, matters as to which he shall be finally adjudged in any action, suit, or proceeding to have been found to have been negligent in the performance of his duty as a member of the Committee. However, this indemnity shall not include any expenses incurred by any member of the Committee in respect of matters as to which he shall be finally adjudged in any action, suit, or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as a member of the Committee. In addition, no right of indemnification under the Plan shall be available to or enforceable by any member of the Committee unless, within 60 days after institution of any action, suit, or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at its own expense. This right of indemnification shall inure to the benefit of the heirs, executors, or administrators of each member of the Committee and shall be in addition to all other rights to which a member of the Committee may be entitled as a matter of law, contract, or otherwise. VI-1 6.5 GENDER AND NUMBER. If the context requires, words of one gender when used in the Plan shall include the other, and words used in the singular or plural shall include the other. 6.6 HEADINGS. Headings of Articles and Sections are included for convenience of reference only and do not constitute part of the Plan and shall not be used in construing the terms of the Plan. 6.7 ACKNOWLEDGMENT AND WAIVER. The Committee or the Board may require, as a condition to participating in the Plan, that an employee enter into an Acknowledgment and Waiver in the form deemed appropriate by the Committee or the Board to establish that any employment agreement, management stability agreement or other agreement or arrangement applicable to the employee will not accelerate, enhance or otherwise change the benefits intended to be granted hereunder. 6.8 OTHER COMPENSATION PLANS. Except as provided in Section 6.7, the adoption of the Plan shall not affect any other stock option, incentive, or other compensation or benefit plans in effect for the Company or any Affiliate, nor shall the Plan preclude the Company from establishing any other forms of incentive or other compensation for employees of the Company or any Affiliate. 6.9 GOVERNING LAW. The provisions of the Plan shall be construed, administered, and governed under the laws of the State of Texas. VI-2 APPENDIX A CONTINGENT AWARD LEVELS UNDER THE PLAN EMPLOYMENT CLASSIFICATION APPLICABLE PERCENTAGE OF BASIC COMPENSATION FOR PURPOSES OF CONTINGENT AWARD Business Unit Head Executive Vice President Senior Vice President, Corporate Resources 400-500 Vice President, Retail Certain Other Corporate or Business-Unit Vice 100-200 Presidents Designated Key Corporate or Business-Unit 50-75 Contributors (as determined by the Chief Executive Officer of the Company at the Employee's date of hire or date of promotion) All Other Employees 25 A-1 EX-10.2 4 AMENDED AND RESTATED EXECUTIVE LONG-TERM INCENTIVE PLAN TESORO PETROLEUM CORPORATION AMENDED AND RESTATED EXECUTIVE LONG-TERM INCENTIVE PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Tesoro Petroleum Corporation, a Delaware corporation (hereinafter referred to as the "Company"), established an incentive compensation plan to be known as the "Tesoro Petroleum Corporation Executive Long-Term Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, and Performance Shares. The Plan became effective as of September 15, 1993 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. Effective May 4, 1995, the Plan was amended to limit the number of Shares that can be granted in the form of an Option to any Participant during any fiscal year of the Company to 500,000. Effective June 6, 1996, the Plan was amended to (i) increase the total number of Shares available for grant under the Plan and (ii) limit the total amount of Restricted Stock that can be awarded under the Plan. Effective July 29, 1998, the Plan was amended to (i) increase the total number of Shares available for grant under the Plan and (ii) increase the total amount of Restricted Stock that can be awarded under the Plan. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of Company shareholders, and by providing Participants with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants upon whose judgment, interest, and special effort the successful conduct of its operation largely is dependent. 1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award be granted under the Plan on or after September 15, 2003. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: 1 (a) "Affiliated SAR" means a SAR that is granted in connection with a related Option, and which will be deemed to automatically be exercised simultaneous with the exercise of the related Option. (b) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares. (c) "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (d) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (e) "Board" or "Board of Directors" means the Board of Directors of the Company. (f) "Cause" means: (i) willful misconduct on the part of a Participant that is materially detrimental to the Company; or (ii) the commission by a Participant of one or more acts which constitute an indictable crime under United States Federal, state, or local law. "Cause" under either (i) or (ii) shall be determined in good faith by the Committee. (g) "Change in Control" of the Company shall be deemed to have occurred if: (i) Any Person other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock or the Company is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) A majority of the Board at any time shall cease to be made up of Qualified Directors. For purposes hereof a Qualified Director is a director who meets any of the following criteria: (1) Was a director immediately after the effective date of the Reclassification (as defined in the Company's Registration Statement on S-4, relating to the 1993 Annual Meeting of Stockholders), including the three new directors elected in connection therewith; (2) Was a director immediately after the Company's 1994 Annual Meeting of Stockholders; (3) Any director nominated for election as a director or elected to the Board by the directors to fill a vacancy by a vote of directors, and at the time of such nomination or election at least a majority of the directors were Qualified Directors; or (iii) The shareholders of the Company approve a merger or consolidation of the Company, with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior 2 thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. However, in no event shall a "Change in Control" be deemed to have occurred with respect to a Participant, if the Participant is part of a purchasing group which consummates the Change in Control transaction. A Participant shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Participant is an equity participant in the purchasing company or group (except for (i) passive ownership of less than three percent (3%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change in Control by a majority of the nonemployee continuing Directors). (h) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (i) "Committee" means the committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. (j) "Company" means Tesoro Petroleum Corporation, a Delaware corporation, or any successor thereto as provided in Article 17 herein. (k) "Director" means any individual who is a member of the Board of Directors of the Company. (l) "Disability" means a permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in good faith, upon receipt of sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice. (m) "Employee" means any full-time, nonunion employee of the Company or of the Company's Subsidiaries. Directors who are not otherwise employed by the Company shall not be considered Employees under this Plan. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (o) "Fair Market Value" shall mean the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the weighted average of the means between the highest and lowest quoted selling prices on the nearest day before and the nearest day after the relevant date, as determined by the Committee. 3 (p) "Freestanding SAR" means a SAR that is granted independently of any Options. (q) "Incentive Stock Option" or "ISO" means an option to purchase Shares, granted under Article 6 herein, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (r) "Insider" shall mean an Employee who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as defined under Section 16 of the Exchange Act. (s) "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 6 herein, which is not intended to be an Incentive Stock Option. (t) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. (u) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (v) "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. (w) "Performance Unit" means an Award granted to an Employee, as described in Article 9 herein. (x) "Performance Share" means an Award granted to an Employee, as described in Article 9 herein. (y) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein. (z) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (aa) "Restricted Stock" means an Award granted to a Participant pursuant to Article 8 herein. (ab) "Retirement" shall have the meaning ascribed to it in the tax-qualified pension plan of the Company. (ac) "Shares" means the shares of common stock of the Company. 4 (ad) "Subsidiary" means any corporation in which the Company owns directly, or indirectly through subsidiaries, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns at least fifty percent (50%) of the combined equity thereof. (ae) "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as a SAR, pursuant to the terms of Article 7 herein. (af) "Tandem SAR" means a SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled). (ag) "Window Period" means the period beginning on the third business day following the date of public release of the Company's quarterly sales and earnings information, and ending on the twelfth business day following such date. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Compensation Committee of the Board, or by any other Committee appointed by the Board consisting of all Directors who are not Employees (the "Committee"). The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. The Committee shall be comprised solely of Directors who are eligible to administer the Plan pursuant to Rule 16b-3(c)(2) under the Exchange Act. However, if for any reason the Committee does not qualify to administer the Plan, as contemplated by Rule 16b-3(c)(2) of the Exchange Act, the Board of Directors may appoint a new Committee so as to comply with Rule 16b-3(c)(2). 3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power except as limited by law or by the Articles of Incorporation or Bylaws of the Company, and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14 herein) to amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors 5 shall be final, conclusive, and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 herein, the total number of Shares available for grant under the Plan may not exceed 4,250,000. These Shares may be either authorized but unissued or reacquired Shares. The following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan: (a) While an Award is outstanding, it shall be counted against the authorized pool of Shares, regardless of its vested status. (b) The grant of an Option or Restricted Stock shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. (c) The grant of a Tandem SAR shall reduce the number of Shares available for grant by the number of Shares subject to the related Option (i.e., there is no double counting of Options and their related Tandem SARs). (d) The grant of an Affiliated SAR shall reduce the number of Shares available for grant by the number of Shares subject to the SAR, in addition to the number of Shares subject to the related Option. (e) The grant of a Freestanding SAR shall reduce the number of Shares available for grant by the number of Freestanding SARs granted. (f) The Committee shall in each case determine the appropriate number of Shares to deduct from the authorized pool in connection with the grant of Performance Units and/or Performance Shares. 4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason (with the exception of the termination of a Tandem SAR upon exercise of the related Option or the termination of a related Option upon exercise of the corresponding Tandem SAR), any Shares subject to such Award again shall be available for the grant of an Award under the Plan. However, in the event that prior to the Award's cancellation, termination, expiration, or lapse, the holder of the Award at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Securities and Exchange Commission, pursuant to any rule or interpretation promulgated under Section 16 of the Exchange Act), the Shares subject to such Award shall not be made available for regrant under the Plan. 6 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of Shares subject to any Award shall always be a whole number. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all full-time, active Employees of the Company and its Subsidiaries, as determined by the Committee, including Employees who are members of the Board, but excluding Directors who are not Employees. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time as shall be determined by the Committee. The Committee shall have discretion in determining the number of Shares subject to Options granted to each Participant, but in no event shall the Committee be permitted to grant Options to any Participant in excess of 500,000 Shares during any fiscal year of the Company. The Committee may grant ISOs, NQSOs, or a combination thereof. 6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Option Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Section 422 of the Code, or a NQSO whose grant is intended not to fall under the Code provisions of Section 422. 6.3 OPTION PRICE. The Option Price for each grant of an Option shall be determined by the Committee; provided that the Option Price shall not be less than the Fair Market Value of a Share on the date the Option is granted unless such Option is granted in connection with a deferral election pursuant to Article XI herein. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 7 6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. However, in no event may any Option granted under this Plan become exercisable prior to six (6) months following the date of its grant. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Committee also may allow cashless exercise as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. (a) TERMINATION BY DEATH. In the event the employment of a Participant is terminated by reason of death, all outstanding Options which are exercisable as of the date of death shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is shorter, by such person or persons as shall have been named as the Participant's beneficiary, or by such persons that have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. Options which are not exercisable as of the date of death shall be forfeited and returned to the Company; provided, however, that the Committee may, at its sole 8 discretion, provide for accelerated vesting of unvested Options upon such terms as the Committee deems advisable. (b) TERMINATION BY DISABILITY. In the event the employment of a Participant is terminated by reason of Disability, all outstanding Options which are exercisable as of the date the Committee determines the definition of Disability to have been satisfied shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is shorter. Options which are not exercisable as of the date the Committee determines the definition of Disability to have been satisfied shall be forfeited and returned to the Company; provided, however, that the Committee may, at its sole discretion, provide for accelerated vesting of unvested Options upon such terms as the Committee deems advisable. (c) TERMINATION BY RETIREMENT. In the event the employment of a Participant is terminated by reason of Retirement, all outstanding Options which are exercisable as of the date of Retirement shall remain exercisable at any time prior to their expiration date, or for three (3) years after the effective date of Retirement, whichever period is shorter. Options which are not exercisable as of the date of Retirement shall be forfeited and return to the Company; provided, however, that the Committee may, at its sole discretion, provide for accelerated vesting of unvested Options upon such terms as the Committee deems advisable. (d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a Participant's employment terminates by reason of Disability or Retirement, and within the exercise period following such termination the Participant dies, then the remaining exercise period under outstanding vested Options shall equal the longer of (i) one (1) year following death; or (ii) the remaining portion of the exercise period which was triggered by the employment termination. Such Options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (e) EXERCISE LIMITATIONS ON ISOS. In the case of ISOs, the tax treatment prescribed under Section 422 of the Internal Revenue Code of 1986, as amended, may not be available if the Options are not exercised within the Section 422 prescribed time periods after each of the various types of employment termination. 6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than the reasons set forth in Section 6.8 (and other than for Cause), all Options held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited to the Company (and shall once again become available for grant under the Plan). However, the Committee, in its 9 sole discretion, shall have the right to immediately vest all or any portion of such Options, subject to such terms as the Committee, in its sole discretion, deems appropriate. Options which are vested as of the effective date of employment termination may be exercised by the Participant within the period beginning on the effective date of employment termination, and ending three (3) months after such date. If the employment of a Participant shall be terminated by the Company for Cause, all outstanding Options held by the Participant immediately shall be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. 6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, a SAR may be granted to an Employee at any time and from time to time as shall be determined by the Committee. The Committee may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination of these forms of SARs. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. However, the grant price of a Freestanding SAR shall be at least equal to the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem SARs and Affiliated SARs shall equal the Option Price of the related Option. In no event shall any SAR granted hereunder become exercisable within the first six (6) months of its grant. 7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. 10 7.3 EXERCISE OF AFFILIATED SARS. Affiliated SARs shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of Affiliated SARs shall not necessitate a reduction in the number of related options. 7.4 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them. 7.5 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine. 7.6 TERM OF SARS. The term of a SAR granted under the Plan shall be determined by the Committee, in its sole discretion; provided, however, that such term shall not exceed ten (10) years. 7.7 PAYMENT OF SAR AMOUNT. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the grant price; by (b) The number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. 7.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on exercise of a SAR (including, without limitation, the right of the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Section 16 (or any successor rule) of the Exchange Act. For example, if the Participant is an Insider, the ability of the Participant to exercise SARs for cash will be limited to Window Periods. However, if the Committee determines that the Participant is not an Insider, or if the securities laws change to permit greater freedom of exercise of SARs, then the Committee may permit exercise at any point in time, to the extent the SARs are otherwise exercisable under the Plan. 7.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. (a) TERMINATION BY DEATH. In the event the employment of a Participant is terminated by reason of death, all outstanding SARs which are exercisable as of the date of death shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is shorter, by such person or persons as shall have been named as the Participant's beneficiary, or by such 11 persons that have acquired the Participant's rights under the SAR by will or by the laws of descent and distribution. SARs which are not exercisable as of the date of death shall be forfeited and returned to the Company; provided, however, that the Committee may, at its sole discretion, provide for accelerated vesting of unvested SARs upon such terms as the Committee deems advisable. (b) TERMINATION BY DISABILITY. In the event the employment of a Participant is terminated by reason of Disability, all outstanding SARs which are exercisable as of the date the Committee determines the definition of Disability to have been satisfied shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is shorter. SARs which are not exercisable as of the date the Committee determines the definition of Disability to have been satisfied shall be forfeited and returned to the Company; provided, however, that the Committee may, at its sole discretion, provide for accelerated vesting of unvested SARs upon such terms as the Committee deems advisable. (c) TERMINATION BY RETIREMENT. In the event the employment of a Participant is terminated by reason of Retirement, all outstanding SARs which are exercisable as of the date of Retirement shall remain exercisable at any time prior to their expiration date, or for three (3) years after the effective date of Retirement, whichever period is shorter. SARs which are not exercisable as of the date of Retirement shall be forfeited and returned to the Company; provided, however, that the Committee may, at its sole discretion, provide for accelerated vesting of unvested SARs upon such terms as the Committee deems advisable. (d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a Participant's employment terminates by reason of Disability or Retirement, and within the exercise period following such termination the Participant dies, then the remaining exercise period under outstanding vested SARs shall equal the longer of: (i) one (1) year following death; or (ii) the remaining portion of the exercise period which was triggered by the employment termination. Such SARs shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or by such persons who have acquired the Participant's rights under the SAR by will or by the laws of descent and distribution. 7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than the reasons set forth in Section 7.9 (and other than for Cause), all SARs held by the Participant which are not vested as of the effective 12 date of employment termination immediately shall be forfeited to the Company (and shall once again become available for grant under the Plan). However, the Committee, in its sole discretion, shall have the right to immediately vest all or any portion of such SARs, subject to such terms as the Committee, in its sole discretion, deems appropriate. SARs which are vested as of the effective date of employment termination may be exercised by the Participant within the period beginning on the effective date of employment termination, and ending three (3) months after such date. If the employment of a Participant shall be terminated by the Company for Cause, all outstanding SARs held by the Participant immediately shall be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the SARs. 7.11 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. ARTICLE 8. RESTRICTED STOCK 8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts as the Committee shall determine, but in no event shall the total number of Shares of Restricted Stock available for grant by the Committee exceed 750,000 Shares. 8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock Agreement that shall specify the Period of Restriction, or Periods, the number of Restricted Stock Shares granted, and such other provisions as the Committee shall determine. 8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Restricted Stock Agreement. However, in no event may any Restricted Stock granted under the Plan become vested in a Participant prior to six (6) months following the date of its grant. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant. 8.4 OTHER RESTRICTIONS. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase 13 price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Companywide, divisional, and/or individual), and/or restrictions under applicable Federal or state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan may bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Tesoro Petroleum Corporation Executive Long-Term Incentive Plan, and in a Restricted Stock Agreement. A copy of the Plan and such Restricted Stock Agreement may be obtained from Tesoro Petroleum Corporation." The Company shall have the right to retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. 8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his or her share certificate. 8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be subject to a vesting period equal to the longer of: (i) the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend is paid; or (ii) six months. The Committee shall establish procedures for the application of this provision. 8.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of a Participant is terminated by reason of death, Disability, or Retirement, 14 all unvested Shares of Restricted Stock shall immediately be forfeited by the Participant; provided, however, that the Committee, in its sole discretion, shall have the right to provide for accelerated vesting of some or all unvested Shares of Restricted Stock, upon such terms as the Committee deems advisable. The holder of the certificates of Restricted Stock shall be entitled to have any nontransferability legends required under Sections 8.4 and 8.5 of this Plan removed from the Share certificates. 8.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than those specifically set forth in Section 8.9 herein, all Shares of Restricted Stock held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited (and, subject to Section 4.2 herein, shall once again become available for grant under the Plan). With the exception of a termination of employment for Cause, the Committee, in its sole discretion, shall have the right to provide for lapsing of the restrictions on Restricted Stock following employment termination, upon such terms and provisions as it deems appropriate. ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan, Performance Units and Performance Shares may be granted to eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant. 9.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." Performance Periods shall, in all cases, exceed six (6) months in length. 9.3 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive payout on the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. 9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Payment of each Performance Units/Shares shall be made in a single lump sum, within forty-five (45) calendar days following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Shares in the form of cash or in 15 Shares (or in a combination thereof), which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period. Prior to the beginning of each Performance Period, Participants may elect to defer the receipt of Performance Unit/Share payout upon such terms as the Committee deems appropriate. 9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT, OR INVOLUNTARY TERMINATION (WITHOUT CAUSE). In the event the employment of a Participant is terminated by reason of death, Disability, Retirement, or involuntary termination without Cause during a Performance Period, the Participant shall receive a prorated payout of the Performance Units/Shares. The prorated payout shall be determined by the Committee, in its sole discretion, and shall be based upon the length of time that the Participant held the Performance Units/Shares during the Performance Period, and shall further be adjusted based on the achievement of the preestablished performance goals. Payment of earned Performance Units/Shares shall be made at the same time payments are made to Participants who did not terminate employment during the applicable Performance Period. However, the Committee, in its sole discretion, shall have the right to accelerate the timing of this payout, upon such terms and provisions as it deems appropriate. 9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant's employment terminates for any reason other than those reasons set forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited by the Participant to the Company, and shall once again be available for grant under the Plan. However, the Committee, in its sole discretion, may provide a payout on any or all Performance Units/Shares, upon such times and provisions as it deems appropriate. 9.7 NONTRANSFERABILITY. Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. ARTICLE 10. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 16 ARTICLE 11. DEFERRALS The Committee may permit a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or goals with respect to Performance Units/Shares. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 12. RIGHTS OF EMPLOYEES 12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) shall not be deemed a termination of employment. 12.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or having been so selected, to be selected to receive a future Award. ARTICLE 13. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of Section 18 herein: (a) Any and all Options and SARs granted hereunder shall become immediately exercisable; (b) Any restriction periods and restrictions imposed on Restricted Shares shall lapse, and within ten (10) business days after the occurrence of a Change in Control, the stock certificates representing Shares of Restricted Stock, without any restrictions or legend thereon, shall be delivered to the applicable Participants; (c) The target payout opportunity attainable under all outstanding Performance Units and Performance Shares shall be deemed to have been earned for the portion of the Performance Period(s) that passed as of the effective date of the Change in Control. This pro rata value shall be paid out in cash to Participants within thirty (30) days following the effective date of the Change in Control. However, regardless of the above, Performance Units or Performance Shares that were granted less than six (6) months prior to the effective date of the Change in Control shall be forfeited in their entirety, and receive no accelerated payout. 17 (d) Subject to Article 14 herein, the Committee shall have the authority to make any modifications to the Awards as determined by the Committee to be appropriate before the effective date of the Change in Control. (e) In the event that following the Change in Control the Shares are no longer traded over a national public securities exchange, Participants holding Options shall have the right to require the Company to make a cash payment to them in exchange for their Options. Such cash payment shall be contingent upon the Option holder surrendering his or her Option. The amount of the cash payment shall be determined by adding the total "spread" on all outstanding Options. For this purpose, the total "spread" shall equal the sum of the differences between: (i) the Fair Market Value of a Share on the date the Option is surrendered by the Participant; and (ii) the Option Price applicable to each Share held under Option. ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION 14.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time to time, the Board may terminate, amend, or modify the Plan. However, without the approval of the stockholders of the Company (as may be required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Shares are then listed or reported, or by a regulatory body having jurisdiction with respect hereto), no such termination, amendment, or modification may: (a) Materially increase the total number of Shares which may be issued under this Plan, except as provided in Section 4.3 herein; or (b) Materially modify the eligibility requirements; or (c) Materially increase the benefits accruing under the Plan. 14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. ARTICLE 15. WITHHOLDING 15.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising or as a result of this Plan. 15.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold 18 Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, signed by the Participant, and elections by Insiders shall additionally comply with the applicable requirement set forth in (a) or (b) of this Section 15.2. (a) AWARDS HAVING EXERCISE TIMING WITHIN PARTICIPANTS' DISCRETION. The Insider must either: (i) Deliver written notice of the stock withholding election to the Committee at least six (6) months prior to the date specified by the Insider on which the exercise of the Award is to occur, or (ii) Make the stock withholding election in connection with an exercise of an Award which occurs during a Window Period. (b) AWARDS HAVING A FIXED EXERCISE/PAYOUT SCHEDULE WHICH IS OUTSIDE INSIDER'S CONTROL. The Insider must either. (i) Deliver written notice of the stock withholding election to the Committee at least six (6) months prior to the date on which the taxable event (e.g., exercise or payout) relating to the Award is scheduled to occur; or (ii) Make the stock withholding election during a Window Period which occurs prior to the scheduled taxable event relating to the Award (for this purpose, an election may be made prior to such a Window Period, provided that it becomes effective during a Window Period occurring prior to the applicable taxable event). ARTICLE 16. INDEMNIFICATION Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, 19 as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 17. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18. LEGAL CONSTRUCTION 18.1 GENDER AND NUMBER. Except where otherwise indicated by the context any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 18.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision set forth in the Plan, if required by the then-current Section 16 of the Exchange Act, any "derivative security" or "equity security" offered pursuant to the Plan to any Insider may not be sold or transferred for at least six (6) months after the date of grant of such Award. The terms "equity security" and "derivative security" shall have the meanings ascribed to them in the then-current Rule 16(a) under the Exchange Act. 18.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 18.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Texas. 20 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 3,454 0 169,195 1,613 225,096 405,325 1,297,488 352,345 1,481,701 254,655 483,245 5,442 0 164,953 431,237 1,481,701 925,992 947,602 804,659 804,659 46,355 0 20,681 43,822 19,119 24,703 0 (4,641) 0 20,062 0.60 0.59 Earnings per share is after an extraordinary loss of $4.6 million ($0.17 loss per basic and diluted share) on extinguishment of debt.
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