-----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, HWG1uwaBP2P7p+MFJ+99MKmXSXooUdyO4Ds9VUwTxqyjOKJrjNKeU+EjmbbuQwfz nVqvJ0RdjOYBXV1v4ozzOw== 0000950129-98-002067.txt : 19980514 0000950129-98-002067.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950129-98-002067 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980513 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980513 SROS: NYSE SROS: PCX 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: 8-K SEC ACT: SEC FILE NUMBER: 001-03473 FILM NUMBER: 98618691 BUSINESS ADDRESS: STREET 1: 8700 TESORO DR CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 2108288484 8-K 1 FORM 8-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 13, 1998 TESORO PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 1-3473 95-0862768 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation) File Number) Identification No.)
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 210-828-8484 ================================================================================ 2 ITEM 5. OTHER EVENTS As previously reported, on March 18, 1998, Tesoro Petroleum Corporation ("Tesoro", the "Company" or the "Registrant") entered into a stock sale agreement ("Hawaii Stock Sale Agreement") to purchase (the "Hawaii Acquisition") all of the outstanding stock of two subsidiaries of The Broken Hill Proprietary Company Limited ("BHP") (together, "BHP Hawaii"). BHP Hawaii owns and operates a 95,000-barrel per day refinery in Kapolei, Hawaii, on the island of Oahu, approximately 20 miles west of Honolulu, and 32 retail gasoline stations on the islands of Oahu, Maui and Hawaii. The cash purchase price for the Hawaii Acquisition is currently estimated to be approximately $275 million. The cash purchase price will be adjusted after closing for the amount by which the working capital of BHP Hawaii differs from $100 million at the closing date. In addition, Tesoro will issue an unsecured, non-interest bearing promissory note (the "BHP Note") in the amount of $50 million, payable in five equal annual installments of $10 million each, beginning on the eleventh anniversary date of the closing. The BHP Note provides for earlier payment based on the financial performance of BHP Hawaii. The Hawaii Acquisition is scheduled to close on May 29, 1998. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Included as Exhibit 99.1 to this Form 8-K are the audited combined balance sheets of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996 and the related combined statements of operations, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1997. Included as Exhibit 99.2 to this Form 8-K are the unaudited combined balance sheets of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of December 31, 1997 and 1996 and the related combined statements of operations and cash flows for the seven months then ended. (b) PRO FORMA FINANCIAL INFORMATION. Included as Exhibit 99.3 of this Form 8-K is the unaudited pro forma combined condensed financial statements of the Company and BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of and for the year ended December 31, 1997. (c) EXHIBITS *2.1 Stock Sale Agreement, dated March 18, 1998, among the Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc. +23.1 Consent of Arthur Andersen LLP. +99.1 Audited Combined Financial Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996. +99.2 Unaudited Combined Financial Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of December 31, 1997 and 1996. +99.3 Pro Forma Combined Condensed Financial Statements of the Company and BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of and for the year ended December 31, 1997. - --------------------------- * Previously filed. + Filed herewith. 2 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TESORO PETROLEUM CORPORATION REGISTRANT Date: May 13, 1998 By: /s/ BRUCE A. SMITH ----------------------------------- Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer 3 4 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- *2.1 Stock Sale Agreement, dated March 18, 1998, among the Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc. +23.1 Consent of Arthur Andersen LLP. +99.1 Audited Combined Financial Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996. +99.2 Unaudited Combined Financial Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of December 31, 1997 and 1996. +99.3 Pro Forma Combined Condensed Financial Statements of the Company and BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of and for the year ended December 31, 1997. - --------------------------- * Previously filed. + Filed herewith. 4 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation of our report dated March 31, 1998 covering the audited combined financial statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. included in this Form 8-K of Tesoro Petroleum Corporation, into the Company's previously filed Registration Statement File No. 333-51789. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Honolulu, Hawaii May 12, 1998 EX-99.1 3 COMBINED FINANCIAL STATEMENTS - 5/31/97, 5/31/96 1 EXHIBIT 99.1 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED FINANCIAL STATEMENTS AS OF MAY 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc.: We have audited the accompanying combined balance sheets of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. (the Company) as of May 31, 1997 and 1996, and the related combined statements of operations, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996, and the combined results of their operations and their cash flows for each of the three years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Honolulu, Hawaii March 31, 1998 3 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED BALANCE SHEETS (Amounts in 000s)
ASSETS As of May 31, ------------------------------- 1997 1996 ------------ ------------ CURRENT ASSETS Cash $ 1,420 $ 1,043 Accounts receivable, net 47,675 43,913 Due from affiliates - trade 9,906 10,742 Due from affiliates - other 22,115 22,369 Inventories 83,864 52,354 Other current assets 4,802 5,712 ------------ ------------ Total current assets 169,782 136,133 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization (Note 5) 303,442 378,235 ------------ ------------ NON-CURRENT ASSETS Goodwill, net of accumulated amortization (Note 5) -- 32,931 Other 4,220 7,653 ------------ ------------ Total non-current assets 4,220 40,584 ------------ ------------ Total Assets $ 477,444 $ 554,952 ============ ============
The accompanying notes are an integral part of these combined financial statements. 4 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED BALANCE SHEETS (Amounts in 000s)
LIABILITIES AND STOCKHOLDERS' EQUITY As of May 31, ------------------------------- 1997 1996 ------------ ------------ CURRENT LIABILITIES: Cash overdraft $ 6,840 $ 6,668 Accounts payable 12,287 7,557 Due to affiliates - trade 29,933 4,587 Capital lease obligations, current portion 1,055 685 Accrued liabilities 20,782 13,213 ------------ ------------ Total current liabilities 70,897 32,710 ------------ ------------ NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000 CAPITAL LEASE OBLIGATIONS, net of current portion 9,361 5,917 DEFERRED INCOME TAXES 30,659 66,014 OTHER LIABILITIES 28,540 31,746 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS' EQUITY Common stock, no par value, 1,000,500 shares authorized, issued and outstanding 8,208 8,208 Additional paid-in capital 52,362 52,362 Retained earnings: BHP Petroleum Americas Refining Inc. 122,378 204,205 BHP Petroleum South Pacific Inc. 10,039 8,790 ------------ ------------ Total stockholders' equity 192,987 273,565 ------------ ------------ Total Liabilities and Stockholders' Equity $ 477,444 $ 554,952 ============ ============
The accompanying notes are an integral part of these combined financial statements. 5 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED STATEMENTS OF OPERATIONS (Amounts in 000s)
Years Ended May 31, ---------------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ REVENUES Sales and other revenue - trade $ 886,380 $ 741,631 $ 752,044 Sales and other revenue - affiliates 111,258 72,992 79,908 Other income 211 905 750 ------------ ------------ ------------ Total Revenue 997,849 815,528 832,702 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Cost of sales 881,991 711,131 720,597 Operating and selling 43,363 43,661 42,148 Depreciation and amortization 30,596 29,507 27,745 Refinery assets write-down to fair value (Note 5) 88,813 -- -- Goodwill write-off (Notes 2 and 5) 30,351 -- -- ------------ ------------ ------------ Total Operating Costs and Expenses 1,075,114 784,299 790,490 ------------ ------------ ------------ OPERATING INCOME (LOSS) (77,265) 31,229 42,212 General and administrative (24,731) (21,238) (22,319) Interest (9,976) (9,887) (11,274) Capitalized interest 1,269 765 857 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (110,703) 869 9,476 Income tax benefit (provision) 30,125 (1,474) (4,673) ------------ ------------ ------------ NET INCOME (LOSS) $ (80,578) $ (605) $ 4,803 ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. 6 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY ($ Amounts in 000s)
Common Stock Additional Total ------------------------------ Paid-in Retained Stockholders' Shares Amount Capital Earnings Equity --------------- -------------- ---------------- ---------------- ----------------- Balance May 31,1994 BHP Petroleum Americas Refining Inc. 500 $ 8,008 $ 42,000 $ 200,219 $ 250,227 BHP Petroleum South Pacific Inc. 1,000,000 200 10,362 8,578 19,140 --------- ------- -------- --------- --------- Total 1,000,500 8,208 52,362 208,797 269,367 Net income - - - 4,803 4,803 --------- ------- -------- --------- --------- Balance May 31,1995 1,000,500 8,208 52,362 213,600 274,170 Net loss - - - (605) (605) --------- ------- -------- --------- --------- Balance May 31,1996 1,000,500 8,208 52,362 212,995 273,565 Net loss - - - (80,578) (80,578) --------- ------- -------- --------- --------- Balance, May 31, 1997 1,000,500 $ 8,208 $ 52,362 $ 132,417 $ 192,987 ========= ======= ======== ========= =========
The accompanying notes are an integral part of these combined financial statements. 7 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED STATEMENTS OF CASH FLOWS (Amounts in 000s)
Years Ended May 31, ------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (80,578) $ (605) $ 4,803 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Refinery assets write-down to fair value 88,813 -- -- Goodwill write-off 30,351 -- -- Depreciation and amortization 30,596 29,507 27,745 Deferred income taxes (35,355) 285 (6,067) Changes in: Accounts receivable, net (3,762) 7,767 (44,397) Due from affiliates, trade and other 1,090 (786) 29,368 Inventories (31,510) 18,916 (6,803) Other assets 4,343 (8,903) 2,569 Accounts payable and accrued liabilities 12,471 (4,343) 13,644 Due to affiliates, trade 25,346 (15,106) (1,274) Other liabilities (3,206) 4,008 4,499 ----------- ----------- ----------- Net cash provided by operating activities 38,599 30,740 24,087 CASH FLOWS FROM INVESTING ACTIVITIES -- Additions to property plant and equipment (37,467) (29,568) (23,461) CASH FLOWS FROM FINANCING ACTIVITIES -- Repayment of principal on capital leases (755) (654) (527) ----------- ----------- ----------- Net increase in cash 377 518 99 Cash, beginning of period 1,043 525 426 ----------- ----------- ----------- Cash, end of period $ 1,420 $ 1,043 $ 525 =========== =========== =========== Supplemental disclosures: Acquisition of equipment under capital lease $ 4,569 $ 1,900 $ -- Fixed assets from parent company, at book value $ -- $ 7,540 $ --
The accompanying notes are an integral part of these combined financial statements. 8 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in 000s) 1. ORGANIZATION BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively referred to as "the Company," are affiliated companies and wholly-owned indirect subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian company. All capital and financing requirements of the Company are provided for by BHP, except for capital and operating leases. BHPPAR operates an oil refinery, product storage and distribution facilities, and retail gasoline stations in the state of Hawaii. Crude oil is purchased through other BHP affiliates and shipped to Hawaii by tanker. Refined product exports usually are sold through other BHP affiliates. BHPPSP is a petroleum products marketer in American Samoa, and operates the government-owned product storage and distribution facilities. BHPPSP purchases most of its refined products from BHPPAR. The Companies were part of a consolidated group, Pacific Resources, Inc. and Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was allocated to assets and liabilities based on fair values at the acquisition date. The purchase price in excess of fair values was reported as goodwill until May 1997 when the refinery assets were written down to estimated fair value and the unamortized goodwill was written off (see Note 5). There have been changes in the former PRI group since 1989: certain subsidiaries were liquidated, others were merged or became subsidiaries of other BHP affiliates. In 1995 two affiliates, BHP Petroleum Americas Terminals Inc. (Terminals), and BHP Petroleum Americas Gas Express Inc. (Gas Express), were merged into BHPPAR. In connection with this reorganization, all employees of Terminals, Gas Express and parent company, BHP Hawaii Inc., became employees of BHPPAR. The 1995 financial statements reflect the results of operations of these combined entities, consistent with the presentation in 1996 and 1997. 2. SIGNIFICANT ACCOUNTING POLICIES Combined Financial Statements - The combined financial statements include the accounts of BHPPAR and BHPPSP. These companies are combined to present the financial position and results of operations of BHP's downstream petroleum refining and marketing business. The combined financial statements have been prepared using the historical costs and results of operations of the affiliated entities. There were no significant differences in accounting methods or their application among the combining entities. All significant intercompany balances and transactions between the combined entities are eliminated. Use of Estimates and Presentation - Preparation of the combined financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions which affect the amounts of assets and liabilities, and disclosure of 6 9 contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Financial Instruments - The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and certain other current liabilities, approximate fair value because of the short maturity of these instruments. The carrying amounts of the Company's long-term notes payable and other obligations approximate the Company's estimate of fair values of such items. Hedging Activities - The Company periodically enters into hedging arrangements through BHP affiliates to manage petroleum price risks and not for speculative purposes. Gains and losses from hedging are recognized in income when the hedged transaction occurs. Historically, gains and losses from hedging transactions have not been material. Inventories - Crude oil and refined products are valued at the lower of cost or market (net realizable value). Cost is determined primarily on the last-in, first-out (LIFO) basis. Other inventories held for sale, materials and supplies are stated at the lower of average cost, not in excess of market. Property, Plant and Equipment - Property, plant and equipment is stated at cost. Major replacements, renewals and improvements are capitalized. Maintenance, repairs and replacements, which do not improve or extend the lives of assets, are charged to expense. Depreciation and amortization, including amortization of assets under capital leases, are computed using the straight-line method over estimated useful lives or lease terms, if shorter. Estimated useful lives range up to 20 years for buildings and up to 25 years for plant and equipment. Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and maintenance turnaround costs are included in other assets and amortized over the estimated period of benefit, generally one to three years, depending on the process unit. Goodwill - Goodwill represents BHP's purchase price in excess of the fair values of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred tax liabilities on the difference between the assets' fair values and their income tax basis. Goodwill was amortized on a straight-line, 20 year rate until the goodwill was determined to be without further value and was written off in May 1997 (see Note 5). Income Taxes - Deferred tax assets and liabilities are recognized for future income tax effects of temporary differences between financial statement carrying amounts and the related income tax bases of assets and liabilities. Deferred income tax assets and liabilities measurements are based on enacted tax rates expected to apply when the temporary differences are expected to be settled. The effect of tax rate changes on deferred tax assets and liabilities is recognized when rate changes are enacted. Income taxes are computed and recorded as if each company were filing separate tax returns, although BHPPAR and BHPPSP are included in different federal and state consolidated income tax returns which include other BHP companies in the affiliated groups. Current income tax liabilities or refunds are settled with BHP through intercompany accounts. Environmental Expenditures - Environmental expenditures for current operations are expensed or capitalized, as appropriate. Expenditures are capitalized if they extend the useful lives of 7 10 assets, increase capacity, or mitigate or prevent environmental contamination. Expenditures are expensed if they are for existing conditions caused by past operations, and if the expenditures will not contribute to future revenue generation. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and when costs can be estimated reasonably. Such amounts are based on the estimated timing and extent of remedial actions required by regulatory agencies, experience gained from other sites where assessments and remediation have been completed, and the amount of the Company's estimated liability, considering proportional liability and financial abilities of other responsible parties. Adjustments to accrued liabilities are made as changes in conditions and estimated costs become known. Pension Plans and Other Post-Employment Benefits - Pension costs are accounted for in conformity with Statements of Financial Accounting Standards No. 87 and 88. Funding is based on required contributions under the Employee Retirement Income Security Act of 1974. Other post-employment benefits, primarily medical insurance, are accounted for in conformity with Statement of Financial Accounting Standards No. 106. 3. RECEIVABLES The Company operates in a single industry, marketing refined petroleum products in a limited geographic area, primarily Hawaii and American Samoa. The markets are subject to economic and industry changes, including changes in market prices and sources of supply. Concentration of credit risk in trade receivables is limited by the numbers and variety of customers. In October 1997, BHP sold a Hawaii gas services subsidiary (the Gas Company) to an unrelated company. The Gas Company continues to purchase naphtha and propane (LPG) from the refinery. Receivables from the Gas Company amounted to $3,886 and $3,243 at May 31, 1997 and 1996, respectively. BHPPSP operates the government-owned fuel storage facilities and markets to a wide range of customers in American Samoa. The facilities management contract expired in 1997 and was awarded to a competitor. BHPPSP has contested the award, but there is no assurance that the company will be able to continue as the facilities operator and/or as a marketer in American Samoa. Transfer of operations to a competitor could increase the collection risk of receivables in that market. BHPPSP's receivables, net of allowance for doubtful accounts, amounted to $4,273 and $3,331 at May 31, 1997 and 1996, respectively. The company performs on-going credit evaluations of its customers financial condition, and in some circumstances requires prepayment or letters of credit. The allowance for doubtful accounts is included in the combined balance sheets as a reduction of receivables. The allowance for doubtful accounts as of May 31, 1997, 1996 and 1995, was $698, $734 and $1,561, respectively. 4. INVENTORIES Inventories at May 31 consisted of:
1997 1996 -------- -------- Crude oil and refined products $ 73,601 $ 42,107 Merchandise and packaged petroleum products 1,243 896 Materials and supplies 9,020 9,351 -------- -------- Total inventories $ 83,864 $ 52,354 ======== ========
8 11 At May 31, 1997 and 1996, crude oil and product inventories at LIFO cost amounting to $71.5 million and $41.0 million, respectively, were below current cost by approximately $7.0 million and $10.7 million, respectively. 5. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, AND RELATED WRITE-DOWNS Principal assets include the oil refinery, its buildings and its property site on the island of Oahu. The Company owns pipelines connecting the refinery to an off-shore, single-point mooring, to a barge harbor near the refinery, and to Honolulu International Airport and Honolulu Harbor. Marketing facilities include product storage and distribution terminals on the islands of Maui and Hawaii, as well as retail gas stations. In 1997 BHP developed a plan to sell the Company, engaged an investment advisor, completed an appraisal of assets, and began discussions with potential buyers. Management determined that net book value of refinery assets had been impaired based in part on the appraisal. The refinery property, plant and equipment were written down to estimated fair value in May 1997, based on an evaluation of these assets, related operating results, and in accordance with provisions of Statement of Financial Accounting Standards No. 121. The write-down, net of accumulated depreciation, amounted to $88.8 million ($54.2 million after a $34.6 million reduction in deferred income taxes), as summarized below. BHP reached an agreement in March 1998 to sell the Company, and as a result of the sale, the Company anticipates recognizing an estimated loss of approximately $120-125 million, in addition to the loss recognized in May 1997 (see Note 15). Substantially all of the loss is expected to be allocated to a further reduction in the fair value of the property, plant and equipment.
1997 1996 --------- --------- Land and buildings $ 70,451 $ 67,708 Plant and equipment, including capital leases 582,076 548,067 --------- --------- Total before revaluation write-down 652,527 615,775 Accumulated depreciation and amortization (260,272) (237,540) --------- --------- Property, plant and equipment, net before write-down 392,255 378,235 --------- --------- Less write-down to estimated fair value: Land and buildings (23,451) -- Plant and equipment (325,634) -- Accumulated depreciation and amortization 260,272 -- --------- --------- Net write-down to estimated fair value (88,813) -- --------- --------- Property, plant and equipment, net $ 303,442 $ 378,235 ========= =========
In connection with management's determination that the carrying amount of refinery assets had become impaired, it was also determined that goodwill had no continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net of accumulated amortization of $21,285) was also written off in May 1997. Annual goodwill amortization expense included in statements of operations was $2,580 for each of the three years ended May 31, 1997. 9 12 6. LEASES The company leases equipment and some properties under various lease agreements covering periods through 2024. Properties include the pipeline corridor from the refinery to Honolulu International Airport and Honolulu Harbor, as well as land underlying terminal facilities and most of the gas stations. The Company also uses product terminals owned by others, including deliveries at Honolulu Harbor, Honolulu International Airport, and all sales in American Samoa. Rent, through-put fees, and storage fees are paid for use of these facilities. Certain operating leases contain provisions for renegotiation or escalation of rents based on operating costs or usage. Rent expense for operating leases, including leases with terms of a month or less, was $13,330 in 1997, $13,125 in 1996 and $13,696 in 1995. Capital leases are for tugs and barges used in transportation of petroleum products within Hawaii. Cost and accumulated amortization of capitalized leased assets at May 31 amounted to:
1997 1996 ---------- ---------- Capitalized leases - cost $ 15,023 $ 12,204 Accumulated amortization (5,123) (5,965) ---------- ---------- Capitalized leases included in property - net $ 9,900 $ 6,239 ========== ==========
Minimum lease commitments under non-cancelable leases (excluding leases with terms of one year or less) at May 31, 1997 are summarized below:
Fiscal Operating Capital Year Leases Leases ----- ------ ------ 1998 $ 12,186 $ 2,005 1999 10,763 1,884 2000 9,394 1,677 2001 9,441 1,634 2002 8,221 1,468 Thereafter 96,027 6,659 --------- -------- Total minimum lease payments $ 146,032 15,327 ========= Less amount representing interest (4,911) -------- Present value of net minimum lease payments 10,416 Less current portion (1,055) -------- Noncurrent portion $ 9,361 ========
7. ACCRUED LIABILITIES Accrued current liabilities at May 31 included the following:
1997 1996 ------- ------- Environmental costs $ 3,950 $ 3,190 Accrued employee compensation 10,768 5,502 Taxes, other than income taxes 5,908 4,239 Other accrued liabilities 156 282 ------- ------- Total accrued liabilities, current $20,782 $13,213 ======= =======
10 13 8. NOTES PAYABLE TO AFFILIATE Noncurrent debt consists of two unsecured promissory notes totaling $145 million, payable to BHPPAR's parent company, BHP Hawaii Inc. The notes are payable 395 days from demand, and interest is payable at the monthly average short-term Applicable Federal Rate, as determined under Internal Revenue Code Sec. 1274(d). Interest rates ranged from 5.63% to 6.23% in 1997, 5.05% to 6.37% in 1996, and 5.56% to 7.43% in 1995. The rates for May 1997 and 1996 were 6.23% and 5.76%, respectively. Interest is paid as accrued through settlement of inter-company accounts. Interest expense on the notes was $8,734 in 1997, $8,364 in 1996, and $9,415 in 1995. 9. INCOME TAXES The income tax provision (benefit) for the three years ended May 31, 1997, included:
1997 1996 1995 ---------- ---------- ---------- Current income tax provision $ 5,285 $ 1,990 $ 10,738 Deferred tax benefit (35,410) (516) (6,065) ---------- ---------- ---------- Total income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673 ========== ========== ==========
The deferred income tax benefit in 1997 includes the deferred tax effect of the fair value write-down of refinery property, plant and equipment. The following table reconciles taxes on income at the normal 35% Federal income tax rate with the effective tax rate:
1997 1996 1995 ---------- ---------- ---------- Earnings (loss) before income taxes $ (110,703) $ 869 $ 9,476 ---------- ---------- ---------- Tax provision (benefit) at U.S. corporate tax rate $ (38,746) $ 304 $ 3,317 Effect of: Write-off / amortization of goodwill 11,526 903 900 State income taxes, net of Federal tax effects (3,027) 149 470 Other 122 118 (14) ---------- ---------- ---------- Income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673 ========== ========== ========== Effective combined income tax rate 27.2% 169.6% 49.3% ---------- ---------- ----------
The effective tax rates are significantly different than "normal" because of the amortization and write-off of goodwill related to BHP's 1989 acquisition of BHPPAR. 11 14 Deferred income tax liabilities and assets, resulting from timing differences, as of May 31, 1997 and 1996:
1997 1996 ---------- ---------- Deferred Federal tax assets: Accrued vacation pay, incentive compensation $ 692 $ 1,824 Accrued retirement benefits 4,417 4,376 Environmental provisions 7,236 7,862 Other 995 895 ---------- ---------- Total deferred tax assets 13,340 14,957 ---------- ---------- Deferred Federal tax liabilities: Accelerated depreciation and other property items 39,410 71,844 Refinery turn-around costs 976 2,011 Other 525 525 ---------- ---------- Total deferred tax liabilities 40,911 74,380 ---------- ---------- Net Federal deferred tax liability 27,571 59,423 Net State deferred tax liability 3,088 6,591 ---------- ---------- Deferred income tax liability - net $ 30,659 $ 66,014 ========== ==========
10. RETIREMENT PLANS Employees are covered by a qualified noncontributory defined benefit pension plan. BHPPAR and BHPPSP participate with many other BHP affiliates in the BHP (USA) Pension Plan, and the plan's actuary allocates assets and liabilities to the participating entities, as well as determining annual costs and recommended contributions. The plan's benefit formula is a final-pay formula. The plan funding policy is to fund a contribution of at least the minimum funding requirement, but no more than the maximum tax-deductible contribution. The following plan information covers all the employees of the Company, as well as certain employees and retirees of affiliates which were merged into BHPPAR or disposed of during the three years ended May 31, 1997. Plan assets exceeded projected benefit obligations, with respect to BHPPAR and BHPPSP, at May 31, 1997 and 1996. The following tables present pension expense, funded status and major actuarial assumptions used to determine amounts.
Net Periodic Pension Cost 1997 1996 1995 - ------------------------- --------- --------- --------- Service cost $ 1,550 $ 1,530 $ 1,330 Interest cost 1,660 1,470 1,420 Actual return on plan assets (4,920) (3,000) (2,600) Net amortization and deferral 3,061 1,521 1,381 --------- --------- --------- Net periodic pension cost $ 1,351 $ 1,521 $ 1,531 ========= ========= =========
12 15
Funded Status of Pension Plans as of May 31 1997 1996 - ------------------------------------------- ---------- ---------- Actuarial present value of accumulated benefit obligation: Vested $ 14,380 $ 13,670 ---------- ---------- Total $ 17,610 $ 16,490 ---------- ---------- Projected benefit obligation $ 24,420 $ 22,060 Plan assets at fair value 27,120 22,540 ---------- ---------- Plan assets in excess of projected benefit obligation 2,700 480 Unrecognized net gain (4,800) (2,590) Unrecognized prior service cost 1,002 1,093 ---------- ---------- Accrued net pension liability $ (1,098) $ (1,017) ========== ==========
The accrued net pension liability is included in other liabilities (noncurrent) in the accompanying balance sheets.
Actuarial Assumptions 1997 1996 1995 - --------------------- ---- ---- ---- Discount rate 7.75% 7.75% 8.00% Rate of increase in future compensation levels 5.00 5.00 5.00 Expected long-term rate of return on plan assets 8.50 8.50 8.50
In addition to the defined benefit plan, the Company is a participating sponsor in a defined contribution plan. The BHP Retirement Savings Plan (RSP) is a deferred compensation plan which covers employees of the Company and other BHP entities in the U.S. The Company matches and contributes an amount equal to each employee's contribution up to 6 percent of the employee's salary and incentive compensation. Plan contributions charged to expense amounted to $1,421, $1,222 and $1,071 in 1997, 1996 and 1995, respectively. Liabilities also are accrued for supplemental retirement benefits for executives. The unfunded liabilities and expense are actuarially determined. Payments are made for vested benefits after retirement. 11. OTHER RETIREMENT BENEFITS Certain medical and life insurance benefits are provided for qualified retirees and their qualified dependents. Employees who retire at ages 55-61 with at least 15 years of continuous service, or who retire at age 62, or later, with at least 10 years of continuous service, become eligible for these benefits. The health care plan is contributory with retiree contributions adjusted periodically. The life insurance plan is noncontributory. Plan expense and liabilities are accrued as actuarially determined and funded on a pay-as-you-go basis. The following tables present the composition of post-retirement benefit expense and the accumulated post-retirement benefit obligation. 13 16
Components of Net Periodic Post-Retirement Benefit Cost 1997 1996 1995 - ------------------------------------------------------- ----- ----- ----- Service cost $ 83 $ 100 $ 108 Interest cost on accumulated benefit obligation 424 528 601 Amortization of unrecognized net transition asset (48) (48) (48) Amortization of unrecognized (gain) loss (78) - 8 ----- ----- ----- Net periodic post-retirement benefit cost $ 381 $ 580 $ 669 ===== ===== =====
Accrued Post-Retirement Benefit Obligation as of May 31 1997 1996 - ------------------------------------------------------- ------- ------- Retirees and beneficiaries $ 4,553 $ 4,742 Active participants eligible to retire 282 264 Other active participants 873 733 ------- ------- Total post-retirement benefit obligation 5,708 5,739 Unrecognized transition asset 728 776 Unrecognized gain 1,441 1,614 ------- ------- Accrued post-retirement benefit obligation $ 7,877 $ 8,129 ======= =======
The accrued obligation is included in other liabilities (noncurrent) in the accompanying balance sheets. Amounts to be paid during the next twelve months are included in current liabilities. The weighted average rate of increase in the per capita cost of covered health care benefits was assumed to be 8% for 1997, decreasing by 1/2% per year to 5.5% in 2002 and thereafter. A 1% increase in the health care cost trend rate would increase the accumulated post-retirement benefit obligation by $149 at May 31, 1997, and the net periodic service and interest cost by $13 for the year. Actuarial assumptions used to measure the accrued post-retirement obligation at May 31, 1997, 1996 and 1995 included a discount rate of 7.75% and a compensation rate increase of 6%. 12. RELATED PARTY BALANCES AND TRANSACTIONS The Company enters into transactions with BHP-affiliated companies primarily for petroleum operations and general financing activities. Crude oil is purchased through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil transportation costs are either included in the purchase price or paid to an affiliated BHP Transport company. Export products are sold through BHP Petroleum affiliates. Amounts due to and from BHP-affiliated companies as of May 31 were:
1997 1996 -------- --------- Due from affiliates: Current - trade receivables $ 9,906 $ 10,742 Current - other 22,115 22,369 Due to affiliates: Current - trade payables 29,933 4,587 Noncurrent notes payable, interest at variable rate 145,000 145,000
14 17 Transactions with BHP-affiliated companies for the three years ended May 31, 1997 were:
1997 1996 1995 --------- -------- -------- Revenues: Sales and other revenue $ 111,258 $ 72,992 $ 79,908 Operating Costs and Expenses: Petroleum purchases, including freight 614,076 584,714 575,175 Guarantee fees, included in operating costs 617 1,539 1,213 Interest on noncurrent promissory notes 8,734 8,364 9,415 Securitization fees, included in interest - - 1,287
Sales of refined products to BHP affiliates are negotiated with reference to current published market prices. Sales include export cargoes marketed primarily in Asia. Also, naphtha and LPG are sold to a Hawaii gas utility affiliate (the Gas Company) under term contracts. BHP sold the Gas Company to an unrelated company effective October 31, 1997 (see Note 15). Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum affiliate at their cost, net of their price hedging transactions. BHPPAR also imports crude oil, primarily from Australia and Asia, under term agreements with BHP Petroleum affiliates, and purchase prices are determined by a formula using current published market prices. 13. FUTURES CONTRACTS BHPPAR has a term agreement with a third-party customer for the sale of physical product in exchange for futures contracts (plus a cash location/quality differential), which are settled through a BHP Petroleum affiliate. The futures contracts are sold ratably over each month, and proceeds from selling the futures contracts at current market prices (plus the cash differential) determine the sales value of product delivered during the month. Futures contracts at May 31,1997 and 1996, are summarized below (amounts in 000's):
1997 1996 ---------- ---------- Contract barrels 240 250 Contract amounts $ 5,645 $ 5,597 Unrealized gains (losses) $ (19) $ (257) Maturity dates June 1997 June 1996
14. COMMITMENTS AND CONTINGENCIES The Company is party to litigation and claims in the normal course of business. The outcome of individual matters is not predictable. However, management believes that the ultimate resolution of all of these matters, after considering insurance coverages, is not likely to have a material adverse effect on the Company's combined financial statements. Environmental The Company's operations are subject to various Federal and state environmental laws and regulations. The Company has received notices of violation or potential liability from the U.S. Environmental Protection Agency (EPA), the State of Hawaii Department of Health (HDOH) and private parties relating to various environmental matters associated with the Company's ownership and/or operations of its assets. Generally, the timing of liability accruals corresponds 15 18 with the completion of remedial investigations or feasibility studies, and are adjusted as necessary. Although the amount of future environmental expenditures cannot be determined with certainty, Company management believe that compliance with present laws will not have a material adverse effect on its financial statements. Environmental provisions as of May 31 were as follows:
1997 1996 ------------ ------------ Accrued liabilities - current $ 3,950 $ 3,190 Other liabilities - noncurrent 16,724 19,785 ------------ ------------ Total $ 20,674 $ 22,975 ============ ============
Total environmental expense, including provisions, charged to cost of sales and operating expense, amounted to $4,936, $7,198 and $9,003 in 1997, 1996, and 1995, respectively. Refinery - Based on an inspection conducted by a U.S. EPA consultant, the EPA issued a Notice of Violation (NOV) in June 1997 against BHP Hawaii and BHPPAR pursuant to Section 311 of the Clean Water Act (CWA). The NOV alleged violations of the Spill Prevention, Control and Countermeasures (SPCC) regulations of the CWA. The Company has submitted information in response to EPA requests. The EPA has subsequently dropped its allegations relating to the oil releases and the parties remain engaged in settlement discussions over issues relating to the refinery's SPCC plan. In 1993, BHPPAR settled an administrative complaint filed by the EPA in May 1991. The complaint alleged various Resource Conservation and Recovery Act (RCRA) violations at the refinery involving surface impoundment closure and groundwater monitoring requirements. The settlement, embodied in a Consent Agreement/Final Order (dated July 1993) required BHPPAR to pay a fine (which was satisfied); conduct certain groundwater monitoring tasks and closure of the surface impoundments (which have been done and for which final EPA approval was received in January 1996); complete a supplemental environmental project (which has been done); and investigate and, if required, implement Corrective Action under RCRA in and about the refinery site (which is in progress). A report of the investigation results, dated March 1997, was submitted to the EPA. The majority of the costs related to the closure plans have been expended. At May 31, 1997, $1.9 million remained in other liabilities to provide for estimated post-closure monitoring costs over a 30 year period. Under authority of the Emergency Planning and Community Right-to-Know Act (EPCRA), the EPA issued a Request for Information relating to past releases of reportable quantities of regulated EPCRA substances and oil. Pertinent data and documentation were transmitted to the EPA. A Notice of Violation (NOV) was issued in June 1997 against BHP Hawaii and BHPPAR, alleging eight violations. The Company has submitted further information in response. The matter remains subject to EPA review. No penalty amounts have been assessed to date. Under a permit application and required compliance certification submitted by BHPPAR pursuant to Title V of the Clean Air Act (CAA), BHPPAR noted several regulatory requirements that were not being met at the time of submission, and included a schedule for addressing or correcting these in accordance with application regulations. BHPPAR has implemented corrective measures to address the foregoing items in accordance with its proposed compliance schedule. Under authority of the CAA, the EPA asked for additional information relating to such past non-compliance matters. BHPPAR provided the information and documents requested. In 1996 the EPA issued a Finding of Violation (FOV) against BHP Hawaii and BHPPAR. The parties 16 19 have engaged in settlement negotiations and no penalty amount has been assessed. It is not anticipated that any penalty imposed or settlement concluded will have a material adverse effect on the Company's financial condition. Honolulu Harbor - Properties adjacent to Honolulu Harbor have been impacted by the conduct of a variety of industrial activities since the beginning of this century. The HDOH, under the authority of the Hawaii Environmental Response Law, requested information from various owners and operators in the area surrounding the harbor to determine the extent of hydrocarbon contamination. A group of owners and operators, including BHP Hawaii Inc., on behalf of the Company, have entered into a voluntary agreement with the HDOH to undertake an initial phase of environmental site investigation in exchange for certain commitments from the HDOH, including the notification of additional potentially responsible parties to participate in this activity. A provision of $600 was accrued for the estimated costs of this initial phase. An additional $2.8 million was accrued to perform hydrogeological studies and groundwater monitoring in the vicinity of Pier 29 which was formerly leased and operated by the Company. Honolulu International Airport - As a result of environmental site assessments commissioned by the State of Hawaii Department of Transportation (HDOT) in conjunction with the proposed development of properties in the vicinity of the airport, the HDOT requested that costs be shared among certain facility owners and operators to remedy an alleged hydrocarbon condition in the area. At the time of the site assessment, BHPPAR operated certain aboveground fuel tanks located near the development area. The HDOT subsequently deferred its development plans indefinitely. BHPPAR sold its interests in the fuel tank facilities and underlying real property to an adjacent tank farm operator which continues to operate the facilities. To date no claims or demands have been made against BHPPAR. The Company has accrued $1.6 million for estimated hydrocarbon recovery and clean-up costs. Gas Express Retail Gas Stations - The Company has sixteen stations which have been subject to known petroleum product releases. Of these, eight have received "no further action" determinations from the HDOH, and one has a "no further action" request pending. Of the remaining stations, one site has been scheduled for demolition and the reconstruction of a new gas station facility. Contaminated soil is to be removed at the time of demolition. Another station has been completely reconstructed and a request for "no further action" status is in the process of being submitted. Five remaining stations are currently still being investigated and/or remediated in accordance with regulatory requirements. The Company is responsible to assure proper closure of the underground storage tank systems in compliance with regulatory requirements when each of its stations is eventually taken out of service. As closures occur, the Company incurs costs for the excavation of soils, the removal and disposal of tanks, environmental site assessments and media remediation, if necessary, as well as costs to buy-out unexpired lease commitments and write-off any unamortized improvements. The Company has prepared cost estimates for the closure of each site. As of May 31, 1997, total closure costs were estimated to be $14.3 million, of which $7.7 million has been provided for. Of this amount, $2.7 million was provided for stations with known or suspected product leakage. The remainder of the estimated closure costs are being accrued over the remaining terms of stations' respective leases. Capital Expenditure Commitments The Company had capital projects in progress at May 31, 1997, which were expected to require an additional $11.6 million to complete. 17 20 15. SUBSEQUENT EVENTS Sale of Company to Tesoro Petroleum Corporation - March 1998 On March 18, 1998, the Company's stockholders entered into a stock sale agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is expected to close by the end of May 1998, subject to regulatory review and other customary conditions. The price to be paid at closing amounts to $275 million in cash (including a $5 million escrow deposit). After closing, the cash price will be increased by the amount that net working capital sold exceeds $100 million, or reduced by the amount that net working capital is less than $100 million. In addition, Tesoro will issue an unsecured, non-interest bearing, promissory note for $50 million payable in five equal annual installments of $10 million each, beginning in 2009. The note will provide for earlier payment, depending on earnings performance of the acquired assets. The parties will execute a separate environmental agreement at closing, whereby the selling stockholders will indemnify Tesoro and the Company for environmental costs arising out of conditions which exist at, or existed prior to, closing subject to a maximum limit of $9.5 million. The environmental indemnity will survive for a ten-year period. Certain environmental liabilities of the Companies will be retained by BHP and are not subject to the $9.5 million indemnity. As a result of the sale, the Company anticipates recognizing an estimated loss of approximately $120-125 million. This estimated loss will increase or decrease based on results of operations and changes in noncurrent assets and liabilities through the closing date. Substantially all of the loss is expected to be allocated to a further reduction in the fair value of the property, plant and equipment. Sale of the Gas Company - October 1997 An affiliated Hawaii company, Gasco, Inc. (the Gas Company), was sold effective October 31, 1997. The Gas Company provides public utility gas service and non-utility propane (LPG) to residential and commercial customers throughout Hawaii. The Gas Company continues to purchase naphtha, for the manufacture of synthetic natural gas, and liquified petroleum gas from BHPPAR under term contracts. Sales to the Gas Company are included in sales to affiliates in the accompanying statements of operations and in related-party information (see Note 12). Sales to the Gas Company amounted to $21.8 million in 1997, $21.4 million in 1996, and $ 21.3 million in 1995. 18 EX-99.2 4 COMBINED FINANCIAL STATEMENTS - 12/31/97, 12/31/96 1 EXHIBIT 99.2 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 (UNAUDITED) 2 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED BALANCE SHEETS (UNAUDITED) (Amounts in 000s)
ASSETS As of December 31, --------------------------- 1997 1996 ---------- ---------- CURRENT ASSETS Cash $ 2,704 $ 3,978 Accounts receivable, net 45,044 59,865 Due from affiliates - trade 7,096 7,742 Due from affiliates - other 4,513 42,333 Inventories 84,331 63,682 Other current assets 3,539 3,700 ---------- ---------- Total current assets 147,227 181,300 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization 331,247 382,101 ---------- ---------- NON-CURRENT ASSETS Goodwill, net of accumulated amortization (Note 4) -- 31,426 Other 3,350 7,570 ---------- ---------- Total non-current assets 3,350 38,996 ---------- ---------- Total Assets $ 481,824 $ 602,397 ========== ==========
The accompanying notes are an integral part of these combined financial statements. 1 3 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED BALANCE SHEETS (UNAUDITED) (Amounts in 000s)
LIABILITIES AND STOCKHOLDERS' EQUITY As of December 31, --------------------------- 1997 1996 ---------- ---------- CURRENT LIABILITIES: Cash overdraft $ 4,842 $ 8,485 Accounts payable 10,545 18,610 Due to affiliates - trade 20,485 29,799 Capital lease obligations, current portion 1,007 685 Accrued liabilities 12,667 12,842 ---------- ---------- Total current liabilities 49,546 70,421 ---------- ---------- NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000 CAPITAL LEASE OBLIGATIONS, net of current portion 8,751 5,496 DEFERRED INCOME TAXES 36,086 62,839 OTHER LIABILITIES 31,032 32,891 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY Common stock, no par value, 1,000,500 shares authorized, issued and outstanding 8,208 8,208 Additional paid-in capital 52,362 52,362 Retained earnings: BHP Petroleum Americas Refining Inc. 140,517 216,490 BHP Petroleum South Pacific Inc. 10,322 8,690 ---------- ---------- Total stockholders' equity 211,409 285,750 ---------- ---------- Total Liabilities and Stockholders' Equity $ 481,824 $ 602,397 ========== ==========
The accompanying notes are an integral part of these combined financial statements. 2 4 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in 000s)
Seven Months Ended December 31, ------------------------------- 1997 1996 --------- --------- REVENUES Sales and other revenue - trade $ 456,817 $ 520,483 Sales and other revenue - affiliates 74,684 61,929 Other income 3 3 --------- --------- Total Revenue 531,504 582,415 --------- --------- OPERATING COSTS AND EXPENSES Cost of sales 460,310 504,913 Operating and selling 25,543 24,190 Depreciation and amortization (Note 4) -- 16,834 --------- --------- Total Operating Costs and Expenses 485,853 545,937 --------- --------- OPERATING INCOME 45,651 36,478 General and administrative (10,648) (10,325) Interest (5,802) (5,934) Capitalized interest 1,097 749 --------- --------- INCOME BEFORE INCOME TAXES 30,298 20,968 Income tax provision (11,876) (8,783) --------- --------- NET INCOME $ 18,422 $ 12,185 ========= =========
The accompanying notes are an integral part of these combined financial statements. 3 5 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in 000s)
Seven Months Ended December 31, ------------------------------- 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 18,422 $ 12,185 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization -- 16,834 Deferred income taxes 5,427 (3,175) Changes in: Accounts receivable, net 2,631 (15,952) Due from affiliates, trade and other 20,412 (16,964) Inventories (467) (11,328) Other assets 2,133 2,095 Accounts payable and accrued liabilities (11,855) 12,499 Due to affiliates, trade (9,448) 25,212 Other liabilities 2,492 1,145 ---------- ---------- Net cash provided by operating activities 29,747 22,551 CASH FLOWS FROM INVESTING ACTIVITIES -- Additions to property plant and equipment (27,805) (19,195) CASH FLOWS FROM FINANCING ACTIVITIES -- Repayment of principal on capital leases (658) (421) ---------- ---------- Net increase in cash 1,284 2,935 Cash, beginning of period 1,420 1,043 ---------- ---------- Cash, end of period $ 2,704 $ 3,978 ========== ==========
The accompanying notes are an integral part of these combined financial statements. 4 6 BHP PETROLEUM AMERICAS REFINING INC. BHP PETROLEUM SOUTH PACIFIC INC. NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in 000s) 1. ORGANIZATION BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively referred to as "the Company," are affiliated companies and wholly-owned indirect subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian company. All capital and financing requirements of the Company are provided for by BHP, except for capital and operating leases. BHPPAR operates an oil refinery, product storage and distribution facilities, and retail gasoline stations in the state of Hawaii. Crude oil is purchased through other BHP affiliates and shipped to Hawaii by tanker. Refined product exports usually are sold through other BHP affiliates. BHPPSP is a petroleum products marketer in American Samoa, and operates the government-owned product storage and distribution facilities. BHPPSP purchases most of its refined products from BHPPAR. The Companies were part of a consolidated group, Pacific Resources, Inc. and Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was allocated to assets and liabilities based on fair values at the acquisition date. The purchase price in excess of fair values was reported as goodwill until May 1997 when the refinery assets were written down to estimated fair value and the unamortized goodwill was written off. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The Company's interim combined financial statements and notes thereto have been prepared by management without audit. Accordingly, the accompanying financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, management believes that the disclosures presented herein are adequate to make the information not misleading. Combined Financial Statements - The combined financial statements include the accounts of BHPPAR and BHPPSP. These companies are combined to present the financial position and results of operations of BHP's downstream petroleum refining and marketing business. The combined financial statements have been prepared using the historical costs and results of operations of the affiliated entities. There were no significant differences in accounting methods or their application among the combining entities. All significant intercompany balances and transactions between the combined entities are eliminated. Use of Estimates and Presentation - Preparation of the combined financial statements, in conformity with generally accepted accounting principles, requires management to make 5 7 estimates and assumptions which affect the amounts of assets and liabilities, and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Financial Instruments - The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and certain other current liabilities, approximate fair value because of the short maturity of these instruments. The carrying amounts of the Company's long-term notes payable and other obligations approximate the Company's estimate of fair values of such items. Hedging Activities - The Company periodically enters into hedging arrangements through BHP affiliates to manage petroleum price risks and not for speculative purposes. Gains and losses from hedging are recognized in income when the hedged transaction occurs. Historically, gains and losses from hedging transactions have not been material. Inventories - Crude oil and refined products are valued at the lower of cost or market (net realizable value). Cost is determined primarily on the last-in, first-out (LIFO) basis. Other inventories held for sale, materials and supplies are stated at the lower of average cost, not in excess of market. Property, Plant and Equipment - Property, plant and equipment is stated at cost. Major replacements, renewals and improvements are capitalized. Maintenance, repairs and replacements, which do not improve or extend the lives of assets, are charged to expense. In accordance with provisions of Statement of Financial Accounting Standards No. 121, no depreciation or amortization has been recorded since May 1997. In previous years, depreciation and amortization, including amortization of assets under capital leases, were computed using the straight-line method over estimated useful lives or lease terms, if shorter. Estimated useful lives range up to 20 years for buildings and up to 25 years for plant and equipment. Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and maintenance turnaround costs are included in other assets and amortized over the estimated period of benefit, generally one to three years, depending on the process unit. Goodwill - Goodwill represents BHP's purchase price in excess of the fair values of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred tax liabilities on the difference between the assets' fair values and their income tax basis. Goodwill was amortized on a straight-line, 20 year rate until the goodwill was determined to be without further value and was written off in May 1997. Income Taxes - Deferred tax assets and liabilities are recognized for future income tax effects of temporary differences between financial statement carrying amounts and the related income tax bases of assets and liabilities. Deferred income tax assets and liabilities measurements are based on enacted tax rates expected to apply when the temporary differences are expected to be settled. The effect of tax rate changes on deferred tax assets and liabilities is recognized when rate changes are enacted. Income taxes are computed and recorded as if each company were filing separate tax returns, although BHPPAR and BHPPSP are included in different federal and state consolidated income tax returns which include other BHP companies in the affiliated groups. Current income tax liabilities or refunds are settled with BHP through intercompany accounts. 6 8 Environmental Expenditures - Environmental expenditures for current operations are expensed or capitalized, as appropriate. Expenditures are capitalized if they extend the useful lives of assets, increase capacity, or mitigate or prevent environmental contamination. Expenditures are expensed if they are for existing conditions caused by past operations, and if the expenditures will not contribute to future revenue generation. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and when costs can be estimated reasonably. Such amounts are based on the estimated timing and extent of remedial actions required by regulatory agencies, experience gained from other sites where assessments and remediation have been completed, and the amount of the Company's estimated liability, considering proportional liability and financial abilities of other responsible parties. Adjustments to accrued liabilities are made as changes in conditions and estimated costs become known. Pension Plans and Other Post-Employment Benefits - Pension costs are accounted for in conformity with Statements of Financial Accounting Standards No. 87 and 88. Funding is based on required contributions under the Employee Retirement Income Security Act of 1974. Other post-employment benefits, primarily medical insurance, are accounted for in conformity with Statement of Financial Accounting Standards No. 106. 3. INVENTORIES Inventories at December 31 consisted of:
1997 1996 ---------- ---------- Crude oil and refined products $ 75,366 $ 53,977 Merchandise and packaged petroleum products 1,189 868 Materials and supplies 7,776 8,837 ---------- ---------- Total inventories $ 84,331 $ 63,682 ========== ==========
At December 31, 1997 and 1996, crude oil and product inventories at LIFO cost were below current cost by approximately $7.8 million and $16.3 million, respectively. 4. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, RELATED WRITE-DOWNS, AND CHANGE IN DEPRECIATION METHOD In 1997 BHP developed a plan to sell the Company, engaged an investment advisor, completed an appraisal of assets, and began discussions with potential buyers. Management determined that net book value of refinery assets had been impaired based in part on the appraisal. The refinery property, plant and equipment were written down to estimated fair value in May 1997, based on an evaluation of these assets, related operating results, and in accordance with provisions of Statement of Financial Accounting Standards (SFAS) No. 121. The write-down, net of accumulated depreciation, amounted to $88.8 million ($54.2 million after a $34.6 million reduction in deferred income taxes). In accordance with SFAS No. 121, no depreciation and amortization expense has been included in the financial statements since May 1997. BHP reached an agreement in March 1998 to sell the Company, and as a result of the sale, the Company anticipates recognizing an estimated loss of approximately $120-125 million, in addition to the loss recognized in May 1997 (see Note 8). Substantially all of the loss is expected to be allocated to a further reduction in the fair value of the property, plant and equipment. 7 9 In connection with management's determination that the carrying amount of refinery assets had become impaired, it was also determined that goodwill had no continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net of accumulated amortization of $21,285) was also written off in May 1997. Goodwill amortization expense included in statements of operations was $1,505 for the seven months ended December 31, 1996. 5. INCOME TAXES The income tax provisions were 39% and 42% of income before income taxes for the seven months ended December 31, 1997 and 1996, respectively. The effective income tax rates differed from the normal 35% Federal income tax rate because of state income taxes and the effects of permanent differences between book and tax income, primarily the amortization of goodwill in 1996. 6. RELATED PARTY BALANCES AND TRANSACTIONS The Company enters into transactions with BHP-affiliated companies primarily for petroleum operations and general financing activities. Crude oil is purchased through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil transportation costs are either included in the purchase price or paid to an affiliated BHP Transport company. Export products are sold through BHP Petroleum affiliates. Sales of refined products to BHP affiliates are negotiated with reference to current published market prices. Sales include export cargoes marketed primarily in Asia. Also, naphtha and LPG were sold to a Hawaii gas utility affiliate (the Gas Company) under term contracts. BHP sold the Gas Company to an unrelated company effective October 31, 1997, and continues to sell products to the Gas Company. Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum affiliate at their cost, net of their price hedging transactions. BHPPAR also imports crude oil, primarily from Australia and Asia, under term agreements with BHP Petroleum affiliates, and purchase prices are determined by a formula using current published market prices. 7. COMMITMENTS AND CONTINGENCIES The Company is party to litigation and claims in the normal course of business. The outcome of individual matters is not predictable. However, management believes that the ultimate resolution of all of these matters, after considering insurance coverages, is not likely to have a material adverse effect on the Company's combined financial statements. Environmental The Company's operations are subject to various Federal and state environmental laws and regulations. The Company has received notices of violation or potential liability from the U.S. Environmental Protection Agency (EPA), the State of Hawaii Department of Health (HDOH) and private parties relating to various environmental matters associated with the Company's ownership and/or operations of its assets. There have been no significant changes in environmental matters disclosed in the audited financial statements for the fiscal year ended May 31, 1997. 8 10 8. SUBSEQUENT EVENT On March 18, 1998, the Company's stockholders entered into a stock sale agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is expected to close by the end of May 1998, subject to regulatory review and other customary conditions. The price to be paid at closing amounts to $275 million in cash (including a $5 million escrow deposit). After closing, the cash price will be increased by the amount that net working capital sold exceeds $100 million, or reduced by the amount that net working capital is less than $100 million. In addition, Tesoro will issue an unsecured, non-interest bearing, promissory note for $50 million payable in five equal annual installments of $10 million each, beginning in 2009. The note will provide for earlier payment, depending on earnings performance of the acquired assets. The parties will execute a separate environmental agreement at closing, whereby the selling stockholders will indemnify Tesoro and the Company for environmental costs arising out of conditions which exist at, or existed prior to, closing subject to a maximum limit of $9.5 million. The environmental indemnity will survive for a ten-year period. Certain environmental liabilities of the Companies will be retained by BHP and are not subject to the $9.5 million indemnity. As a result of the sale, the Company anticipates recognizing an estimated loss of approximately $120-125 million. This estimated loss will increase or decrease based on results of operations and changes in noncurrent assets and liabilities through the closing date. Substantially all of the loss is expected to be allocated to a further reduction in the fair value of the property, plant and equipment. 9 EX-99.3 5 PRO FORMA COMBINED FINANCIAL STATEMENTS 1 EXHIBIT 99.3 PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro forma combined condensed financial statements give effect to the following transactions, which are anticipated to occur on May 29, 1998, (collectively, the "Transactions"): (i) Tesoro Petroleum Corporation (the "Company" or "Tesoro") closes the acquisition (the "Hawaii Acquisition") of all of the outstanding capital stock of BHP Petroleum Americas Refining Inc. and BHP South Pacific Inc. (together, "BHP Hawaii"), both of which are affiliates of The Broken Hill Proprietary Company Limited ("BHP"). The cash purchase price for the Hawaii Acquisition is $275 million, subject to adjustment for an amount by which working capital of BHP Hawaii at the closing date differs from $100 million. In addition, Tesoro will issue an unsecured, non-interest bearing promissory note (the "BHP Note") in the amount of $50 million, payable in five equal annual installments of $10 million each, beginning on the eleventh anniversary date of the closing. (ii)In conjunction with closing the Hawaii Acquisition, Tesoro will borrow funds to finance the cash consideration for the Hawaii Acquisition and refinance substantially all of its existing indebtedness. These borrowings will be financed through term loans and a revolving credit facility which will be fully underwritten by Lehman Brothers. The unaudited pro forma combined condensed financial statements have been prepared from, and should be read in conjunction with, the historical combined financial statements and notes thereto of BHP Hawaii, which are included as Exhibits 99.1 and 99.2 to this Form 8-K, and the historical consolidated financial statements and notes thereto of Tesoro which have been previously filed. The Hawaii Acquisition will be accounted for using the purchase method of accounting for Tesoro's acquisition of BHP Hawaii after giving effect to the pro forma reclassifications and adjustments described in the accompanying notes. The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the Transactions as if each had occurred on December 31, 1997. The Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1997 gives effect to the Transactions as if each had occurred on January 1, 1997. BHP Hawaii's results of operations, which are reported on a fiscal year ending May 31, have been adjusted to a December 31 year end. The estimates of the fair value of BHP Hawaii's assets and liabilities are based on valuations that are preliminary. Such valuations will be updated to the closing date of the Hawaii Acquisition and may change from the amounts shown herein; however, the Company does not expect such changes to be material. The unaudited pro forma combined condensed financial statements are intended for informational purposes and are not necessarily indicative of the future financial position or future results of the combined companies or of the financial position or the results of operations that would have actually occurred had the Hawaii Acquisition been in effect as of the date or for the period presented. The Unaudited Pro Forma Combined Condensed Statement of Operations does not reflect any benefits from cost savings or revenue enhancements that are anticipated to result from the integration of operations of Tesoro and BHP Hawaii. There can be no assurance that the Hawaii Acquisition, related financing or any other pending transactions will be consummated. 2 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1997
Historical Pro Forma Pro Forma Tesoro BHP Hawaii Adjustments Combined --------- ---------- ------------ --------- (In Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents ...................................... $ 8,352 2,704 (2,704)(a) 8,352 Receivables .................................................... 76,282 56,653 (4,513)(a) 128,422 Inventories .................................................... 87,359 84,331 7,800(b) 179,490 Prepayments and other .......................................... 9,842 3,539 13,381 --------- ------- -------- --------- Total Current Assets ......................................... 181,835 147,227 583 329,645 --------- ------- -------- --------- Property, Plant and Equipment: Refining and marketing ......................................... 370,174 680,332 (467,018)(c) 583,488 Exploration and production ..................................... 291,411 291,411 Marine services ................................................ 43,072 43,072 Corporate ...................................................... 13,689 13,689 --------- ------- -------- --------- 718,346 680,332 (467,018) 931,660 Less accumulated depreciation, depletion and amortization..... 304,523 349,085 (349,085)(c) 304,523 --------- ------- -------- --------- Net Property, Plant and Equipment ............................ 413,823 331,247 (117,933)(c) 627,137 --------- ------- -------- --------- Other Assets ...................................................... 32,150 3,350 (1,008)(d) 47,643 14,200(d) (1,049)(e) -------- 12,143 --------- ------- -------- --------- Total Assets ............................................... $ 627,808 481,824 (105,207) 1,004,425 ========= ======= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ............................................... $ 58,767 35,872 94,639 Accrued liabilities and current income taxes payable ........... 31,726 12,667 (3,950)(f) 44,659 6,375(e) (2,159)(g) Current maturities of long-term debt and other obligations...... 17,002 1,007 (15,294)(d) 2,715 --------- ------- -------- --------- Total Current Liabilities .................................... 107,495 49,546 (15,028) 142,013 --------- ------- -------- --------- Deferred Income Taxes ............................................. 28,824 36,086 (36,086)(h) 28,824 --------- ------- -------- --------- Other Liabilities ................................................. 43,211 31,032 (15,858)(f) 58,385 --------- ------- -------- --------- Long-Term Debt and Other Obligations, Less Current Maturities 115,314 8,751 323,724(d) 447,789 --------- ------- -------- --------- Notes Payable to Affiliate ........................................ -- 145,000 (145,000)(a) -- --------- ------- -------- --------- Stockholders' Equity: Common stock ................................................... 4,418 8,208 (8,208)(i) 4,418 Additional paid-in capital ..................................... 190,925 52,362 (52,362)(i) 190,925 Retained earnings .............................................. 140,980 150,839 (150,839)(i) 135,430 (7,709)(d) 2,159(g) Treasury stock ................................................. (3,359) (3,359) --------- ------- -------- --------- Total Stockholders' Equity ................................... 332,964 211,409 (216,959) 327,414 --------- ------- -------- --------- Total Liabilities and Stockholders' Equity ................. $ 627,808 481,824 (105,207) 1,004,425 ========= ======= ======== =========
3 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1997 (a) Represents an adjustment to exclude assets and liabilities of BHP Hawaii that will not be acquired by Tesoro. (b) Represents an adjustment of BHP Hawaii's finished goods inventories to net realizable value, less an allowance for a normal profit margin, and of raw materials inventories to replacement cost. (c) Represents an adjustment of BHP Hawaii's property, plant and equipment to fair value. (d) Represents an adjustment to reflect the BHP Note (discounted at 10%) plus aggregate borrowings of $415 million to finance the Hawaii Acquisition, to refinance existing indebtedness of Tesoro and to pay related fees, expenses and debt issuance costs. (e) Represents an adjustment to conform BHP Hawaii's accounting policy for refinery maintenance costs to that of Tesoro. (f) Represents an adjustment of BHP Hawaii's liabilities for certain employee benefits and for environmental matters taking into effect an environmental agreement which provides for certain environmental indemnifications. (g) Represents an adjustment to reduce income taxes payable for the tax effect resulting from a charge to earnings related to the refinancing of existing indebtedness. (h) Represents the elimination of the deferred tax obligations of BHP Hawaii. (i) Represents the elimination of BHP Hawaii's historical equity. 4 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Historical Pro Forma Pro Forma Tesoro BHP Hawaii Adjustments Combined ------ ---------- ----------- -------- (In Thousands of Dollars, Except Per Share Amounts) Revenues: Refining and marketing ................................................. $ 720,868 946,727 1,667,595 Exploration and production ............................................. 84,798 -- 84,798 Marine services ........................................................ 132,251 -- 132,251 Other income ........................................................... 5,543 211 5,754 --------- ---------- --------- Total Revenues ...................................................... 943,460 946,938 1,890,398 --------- ---------- --------- Operating Costs and Expenses: Refining and marketing ................................................. 687,036 882,104 (1,000)(a)1,568,140 Exploration and production ............................................. 13,230 -- 13,230 Marine services ........................................................ 124,725 -- 124,725 Depreciation, depletion and amortization ............................... 45,729 13,762 (3,858)(b) 55,633 Refinery assets write-down ............................................. -- 88,813 (88,813)(c) -- Goodwill write-off ..................................................... -- 30,351 (30,351)(c) -- --------- ---------- -------- ---------- Total Operating Costs and Expenses .................................. 870,720 1,015,030 (124,022) 1,761,728 --------- ---------- -------- ---------- Operating Profit (Loss) .................................................... 72,740 (68,092) 124,022 128,670 General and Administrative ................................................ (13,588) (25,054)(h) (38,642) Interest Expense, Net of Capitalized Interest .............................. (6,699) (8,227) 13,966(d) (41,927) (37,312)(e) (3,655)(f) Interest Income ............................................................ 1,597 -- 1,597 Other Expense, Net ......................................................... (4,930) -- (4,930) --------- ---------- -------- ---------- Earnings Before Income Taxes ............................................... 49,120 (101,373) 97,021 44,768 Income Tax Provision ....................................................... 18,435 (27,032) 27,166(g) 18,569 --------- ---------- -------- ---------- Earnings Before Extraordinary Items ........................................ $ 30,685 (74,341) 69,855 26,199 ========= ========== ======== ========== Weighted Average Common Shares - Basic ..................................... 26,410 26,410 ========= ========== Weighted Average Common Shares and Potentially Dilutive Common Shares - Diluted ....................................... 26,868 26,868 ========= ========== Earnings Before Extraordinary Items: Per Share - Basic ...................................................... $ 1.16 0.99 ========= ========== Per Share - Diluted .................................................... $ 1.14 0.98 ========= ==========
5 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (a) Represents an adjustment for a Tesoro contract termination. (b) Represents an adjustment in depreciation expense due to the change in BHP Hawaii's property, plant and equipment to fair value. Pro Forma depreciation is calculated on the straight-line method over estimated useful lives of 28 years for the refinery and five to ten years for machinery, equipment and buildings. (c) Represents elimination of the charge for asset and goodwill impairment recognized in BHP Hawaii's historical financial statements. (d) Represents elimination of interest on BHP Hawaii's obligations that will not be assumed by Tesoro and the elimination of interest on Tesoro's obligations that will be refinanced. (e) Represents accretion, based on a 10% discount rate, of the $50 million BHP Note and additional interest on borrowings of approximately $415 million to finance the Hawaii Acquisition, refinance existing indebtedness and pay related fees and costs. (f) Represents amortization of debt issuance costs related to the financing under term loans and revolving credit facility. (g) Represents an adjustment to increase the income tax provision for the tax effect resulting from the adjustments to earnings described above. (h) Includes BHP Hawaii employee bonuses of $4 million, which were awarded based upon the performance of BHP operations that are not to be acquired by Tesoro. -----END PRIVACY-ENHANCED MESSAGE-----