-----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, BIHppfQA8zjzxPBZqesalghBEs8P/YGwYNvLen/CcQ9USoevrr4dcmOrh2zODSvI U26fUAJH5EWOc3WzemSVLQ== 0000950134-97-002096.txt : 19970325 0000950134-97-002096.hdr.sgml : 19970325 ACCESSION NUMBER: 0000950134-97-002096 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NYSE SROS: PSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03473 FILM NUMBER: 97561715 BUSINESS ADDRESS: STREET 1: 8700 TESORO DR CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 2108288484 10-K 1 TESORO PETROLEUM CORPORATION 12/31/96 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 210-828-8484 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.16 2/3 par value New York Stock Exchange Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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 [ ] --------------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] --------------------- At February 28, 1997, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $283,905,638 based upon the closing price of its shares on the New York Stock Exchange Composite tape. At February 28, 1997, there were 26,426,333 shares of the registrant's Common Stock outstanding. --------------------- DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K PART -------- -------------- Proxy Statement for 1997 Annual Meeting Part III
================================================================================ 2 TESORO PETROLEUM CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 3 Refining and Marketing.................................... 3 Exploration and Production................................ 6 Marine Services........................................... 12 Competition and Other..................................... 13 Government Regulation and Legislation..................... 14 Employees................................................. 17 Executive Officers of the Registrant...................... 18 Item 2. Properties.................................................. 19 Item 3. Legal Proceedings........................................... 19 Item 4. Submission of Matters to a Vote of Security Holders......... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 20 Item 6. Selected Financial Data..................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Item 8. Financial Statements and Supplementary Data................. 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 69 PART III Item 10. Directors and Executive Officers of the Registrant.......... 69 Item 11. Executive Compensation...................................... 69 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 69 Item 13. Certain Relationships and Related Transactions.............. 69 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 69 SIGNATURES............................................................ 75
THIS ANNUAL REPORT CONTAINS STATEMENTS WITH RESPECT TO THE COMPANY'S EXPECTATIONS OR BELIEFS AS TO FUTURE EVENTS. THESE TYPES OF STATEMENTS ARE FORWARD-LOOKING AND SUBJECT TO UNCERTAINTIES. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 36. 2 3 PART I ITEM 1. BUSINESS Tesoro Petroleum Corporation, together with its subsidiaries ("Tesoro" or the "Company"), is a natural resource company engaged primarily in petroleum refining and marketing, natural gas exploration and production, marketing and distributing of petroleum products and providing marine logistics services. The Company was incorporated in Delaware in 1968 (a successor by merger to a California corporation incorporated in 1939). For financial information relating to industry segments, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note B of Notes to Consolidated Financial Statements in Item 8. REFINING AND MARKETING OVERVIEW The Company conducts petroleum refining operations in Alaska and sells refined products to a wide variety of customers in Alaska, along the U.S. West Coast, in the Pacific Northwest and in certain Far Eastern markets, including Russia. During 1996, products from the Company's refinery accounted for approximately 79% of these sale volumes, including products received on exchange in the U.S. West Coast market, with the remaining 21% being purchased from other refiners and suppliers. The Company's purchases from other refiners and suppliers declined in 1996 as the Company withdrew from certain California markets which is further discussed below. The Company's refinery, which is located in Kenai, Alaska, has a rated throughput capacity of 72,000 barrels per day and is capable of producing liquefied petroleum gas, gasoline, jet fuel, diesel fuel, heating oil, heavy oils and residual products. Alaska North Slope ("ANS") and Cook Inlet crude oils are the primary feedstocks for the refinery. To assure the availability of crude oil to the refinery, the Company has a royalty crude oil purchase contract with the State of Alaska ("State") (see "Crude Oil Supply" discussed below). During 1996, the refinery processed approximately 72% ANS crude oil, 25% Cook Inlet crude oil and 3% other refinery feedstocks, which yielded refined products consisting of approximately 26% gasoline, 41% middle distillates, 28% heavy oils and residual products and 5% other products. CRUDE OIL SUPPLY The refinery is designed to process crude oil with up to 1.0% sulphur content. As such, the refinery can process Cook Inlet, ANS and certain foreign crude oils. ANS Crude Oil. ANS crude oil is a heavy crude oil which contains an average of 1.0% sulphur. In 1996, approximately 72% of the refinery's feedstock was ANS crude oil, of which approximately 39,200 barrels per day were purchased under a royalty crude oil purchase contract with the State. The contract with the State, which covers the period January 1, 1996 through December 31, 1998, provides for the purchase of approximately 40,000 barrels per day of ANS royalty crude oil and is priced based on royalty values computed by the State. Under the contract, the Company is required to utilize in its refinery operations volumes equal to at least 80% of the ANS crude oil to be purchased from the State. This contract contains provisions that, under certain conditions, allow the Company to temporarily or permanently reduce its purchase obligation. All ANS crude oil feedstock is delivered to the refinery by tanker through the Kenai Pipe Line Company ("KPL") marine terminal which the Company purchased in early 1995. For information related to settlement of a contractual dispute with the State in 1993, see Note I of Notes to Consolidated Financial Statements in Item 8. Cook Inlet Crude Oil. Cook Inlet crude oil, a lighter crude oil that contains an average of .1% sulphur, accounted for approximately 25% of the refinery's feedstock supply in 1996. The Company obtains Cook Inlet crude oil from several producers on the Kenai Peninsula under short-term contracts. Cook Inlet crude oil is 3 4 delivered by tanker through the Company's KPL marine terminal or through an existing pipeline to the refinery. Other Supply. In 1996, the Company's refinery obtained approximately 3% of its feedstock supply from other sources. The other supply consisted of heavy atmospheric gas oil ("HAGO") and foreign crude oil. The HAGO feedstock was purchased from a local competitor's refinery and from a U.S. West Coast refinery under short-term contracts. HAGO is a refinery by-product which generates various light refined products with no residual fuel oil. Foreign crude oil, purchased in spot quantities, is delivered to the refinery by tanker through the Company's KPL marine terminal. The Company evaluates the economic viability of processing foreign crude oil in its refinery and will occasionally purchase spot quantities to supplement its normal crude oil supply. During 1996, the Company imported its first cargo of crude oil from Russia. REFINING AND MARKETING ACTIVITIES The following table summarizes the Company's refining and marketing operations:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ Refinery Throughput (average daily barrels)............... 47,486 50,569 46,032 ====== ====== ====== Refinery Production (average daily barrels): Gasoline................................................ 12,763 14,298 11,728 Middle distillates, including jet fuel and diesel fuel................................................. 19,975 20,693 18,402 Heavy oils and residual products........................ 13,739 14,516 15,118 Other................................................... 2,600 2,489 2,213 ------ ------ ------ Total Refinery Production....................... 49,077 51,996 47,461 ====== ====== ====== Product Sales (average daily barrels): Gasoline................................................ 17,427 24,526 23,191 Middle distillates...................................... 29,651 37,988 33,256 Heavy oils and residual products........................ 15,089 14,787 14,228 ------ ------ ------ Total Product Sales............................. 62,167 77,301 70,675 ====== ====== ====== Product Sales Prices ($/barrel): Gasoline................................................ $32.72 28.21 27.03 Middle distillates...................................... $29.01 24.40 24.47 Heavy oils and residual products........................ $17.61 13.66 10.93 Number of Marketing Outlets Selling the Company's Gasoline(1): Alaska -- 7-Eleven convenience stores (Company-operated)....... 33 32 32 Branded stations..................................... 126 99 90 Unbranded stations................................... 29 28 24 Pacific Northwest -- branded stations................... 18 10 -- ------ ------ ------ Total Locations...................................... 206 169 146 ====== ====== ======
- --------------- (1) Branded gasoline outlets sell the Company's gasoline under the "Tesoro Alaska" name. Outlets that sell the Company's gasoline under a different name are considered unbranded. The Company's refinery production was reduced in September 1996 for a scheduled 30-day maintenance downtime. During the maintenance period, the hydrocracker catalyst was replaced and, beginning in the fourth quarter of 1996, the Company was able to produce higher volumes of jet fuel, which better matches the Company's production with demand in Alaska. To further improve the refinery's feedstock and product slate, the Company intends to modify the refinery hydrocracker during 1997 at an estimated cost of $17 million. In conjunction with the modification and other initiatives, a refinery downtime of approximately 30 days is anticipated during 1997. 4 5 ALASKA MARKETING Gasoline. The Company distributes gasoline to end users in Alaska, either by retail sales through its 7-Eleven convenience store locations, by wholesale sales through 126 branded and 29 unbranded dealers and jobbers or by deliveries to major oil companies for their retail operations in Alaska in exchange for gasoline delivered to the Company on the U.S. West Coast. In 1996, the Company continued implementing initiatives to increase the Company's share of gasoline sales in Alaska and added 31 stations to its marketing network, including its initial expansion into Southeast Alaska with nine locations. Two uneconomic outlets were closed in 1996. The Company holds an exclusive license agreement for all 7-Eleven convenience stores in Alaska and operates such stores in 36 locations, 33 of which sell Company-branded gasoline. During 1996, these convenience stores sold an average of 53,000 gallons of gasoline per day. Gasoline produced in excess of Alaska's market demand is shipped to the U.S. West Coast or exported to the Far East by chartered vessel. Middle Distillates. The Company is a major supplier of commercial jet fuel into the Alaskan marketplace, with all of its production being marketed in Alaska to passenger and cargo airlines. The demand for jet fuel in Alaska currently exceeds the production of all refiners in Alaska, and several marketers, including the Company, import jet fuel into Alaska to meet excess demand. Substantially all of the Company's diesel fuel production is sold on a wholesale basis in Alaska primarily for marine and industrial purposes. Generally, the production of diesel fuel by refiners in Alaska is in balance with demand; however, because of the high variability of the demand, there are occasions when diesel fuel is imported into or exported from Alaska. See "Government Regulation and Legislation -- Environmental Controls" for a discussion of the effect of governmental regulations on the production of low-sulphur diesel fuel for on-highway use in Alaska. Heavy Oils and Residual Products. The refinery's vacuum unit uses residual fuel oil as a feedstock by further processing these volumes into light vacuum gas oil ("LVGO"), heavy vacuum gas oil ("HVGO") and vacuum tower bottoms ("VTB"). The LVGO is further processed in the refinery's hydrocracker, where it is converted into gasoline and jet fuel. HVGO is sold to refiners on the U.S. West Coast, where it is used as a catalytic hydrocracker feedstock, while the VTBs are generally sold on the U.S. West Coast where they are blended with light cycle oil to produce bunker fuel. In 1996, the Company began producing liquid asphalt, a heavy product left after petroleum is refined into gasoline and other products. Liquid asphalt, which is used in the manufacturing of concrete asphalt for paving, was sold to customers in Alaska and California. This product is seasonal in the Alaska market due to mild weather conditions needed for highway construction. U.S. WEST COAST AND PACIFIC NORTHWEST MARKETING In 1996, the Company conducted wholesale marketing operations, primarily in Oregon and Washington, selling refined products in the bulk market and through nine terminal facilities, including four owned by the Company during the year. To a lesser extent, the Company sold refined products through numerous other terminals to facilitate disposal of inventories in California. In 1996, these operations sold approximately 14,000 barrels per day of refined products, primarily gasoline and diesel fuel, of which approximately 19% was received from major oil companies in exchange for products from the Company's refinery, approximately 13% was received directly from the refinery and 68% was purchased from other suppliers. In 1996, the Company expanded its retail presence in the Pacific Northwest by adding eight branded stations. At year-end 1996, the Company had 18 branded gasoline distributors in Oregon and Washington. The Company will continue to sell refined products in the Pacific Northwest through branded stations in addition to six terminal facilities, one of which is owned by the Company. Due to market conditions, the Company withdrew from certain West Coast markets and initiated a plan to sell its three Company-owned facilities in California. One of these facilities was sold in December 1996 and two facilities remain for sale at year-end. 5 6 TRANSPORTATION The Company charters an American flag vessel, the Potomac Trader, whose primary use is to transport ANS crude oil from the Trans Alaska Pipeline System ("TAPS") terminal at Valdez, Alaska to the Company's refinery. The Company charters another American flag vessel, the Chesapeake Trader, which is used primarily to transport heavy oils and residual products to the U.S. West Coast and occasionally to transport feedstocks to the Company's refinery. The Potomac Trader and Chesapeake Trader are chartered under five-year agreements expiring in 2000. Under an agreement expiring in June 1997, the Company charters a Russian flag vessel, the Igrim, which is used primarily to transport refined products from the Company's refinery to the Far East. The Company plans to continue marketing its products in the Far East and is evaluating transportation alternatives. From time to time, the Company also charters tankers and ocean-going barges to transport petroleum products to its customers within Alaska, on the U.S. West Coast and in the Far East. The Company operates a common carrier petroleum products pipeline from the Company's refinery to its terminal in Anchorage. This ten-inch diameter pipeline has a capacity to transport approximately 40,000 barrels of petroleum products per day and allows the Company to transport light products to the terminal throughout the year, regardless of weather conditions. During 1996, the pipeline transported an average of approximately 22,000 barrels of petroleum products per day, all of which were transported for the Company. The Company's subsidiary, KPL, is a common carrier pipeline and marine dock facility. By owning this facility, the Company is assured of uninterrupted use of the dock and pipeline for unloading crude oil feedstocks and loading product inventory on tankers and barges. During 1996, KPL transported approximately 47,200 barrels of crude oil per day and 34,100 barrels of refined products per day, all of which were transported for the Company. For further information on transportation in Alaska, see "Government Regulation and Legislation -- Environmental Controls." EXPLORATION AND PRODUCTION OVERVIEW The Exploration and Production segment is engaged in the exploration, development and production of natural gas and oil, primarily in the Wilcox Trend in South Texas and the Chaco Basin in Bolivia. In the U.S., the Company's focus has recently shifted outside of the maturing Bob West Field in South Texas to other areas. During 1996 and early 1997, the Exploration and Production segment purchased interests in the Frio/Vicksburg Trend adjacent to the Wilcox Trend in South Texas, the Cotton Valley Pinnacle Reef Play in East Texas and the Val Verde Basin in Southwest Texas. This segment also includes the transportation of natural gas, including the Company's production, to common carrier pipelines in the South Texas area. In Bolivia, the Company operates through two contracts with the Bolivian government to explore for and produce hydrocarbons. The Company's Bolivian gas production is sold under contract to the Bolivian government for export to Argentina. The majority of the Company's Bolivian natural gas and oil reserves are shut-in awaiting access to gas-consuming markets which is expected to be provided by a 1,900-mile pipeline from Bolivia to Brazil. The pipeline is scheduled to begin construction in late 1997, with first gas deliveries expected in 1999. UNITED STATES Bob West Field. The Bob West Field, which was discovered by the Company in 1990, is located in the southern part of the Wilcox Trend in Starr and Zapata counties, Texas. The Wilcox Trend extends from Northern Mexico through South Texas into the other Gulf Coast states. Multiple pay sands exist within the Wilcox Trend, where extensive faulting has trapped hydrocarbons in numerous producing zones. Continued successful development of the Bob West Field led to the completion of 12 gross development wells during 1996. One well was being drilled at year-end and three additional well locations, all of which are expected to be drilled during 1997, have been selected for further development of this 4,000-acre field. During 1996, the 6 7 Company's net production from the Bob West Field averaged approximately 82 million cubic feet ("Mmcf") per day. The Company's revenue interests in the Bob West Field range from 28% to 57% and its working interests range from 33% to 70%. In addition, the Company owns a 70% interest in the field's central gas processing facility which has a capacity of 350 Mmcf per day. The Company also owns 25% of a central compression facility, rated at 10,000 horsepower with an estimated capacity of 150 Mmcf per day, that was installed in the Bob West Field in late 1996. During the first two months of operation, the Company's production in the Bob West Field increased by approximately 9 Mmcf per day primarily as a result of the new compression facility. Other Areas. In addition to the continued development of the Bob West Field, during 1996 the Company also participated in the drilling of six exploratory wells in other portions of the Wilcox Trend in South Texas, four of which were successfully completed as producing wells. In December 1996, the Company purchased 25% to 50% interests in portions of the Los Indios and La Reforma Fields, located in Hidalgo and Starr counties of South Texas, for $15 million. The two fields are located in the Frio/Vicksburg Trend, which lies immediately adjacent to the Wilcox Trend. The Company's working interest covers 11,700 acres and the acquisition is over 90% natural gas. The area is believed to have significant further development potential beyond the current net production of 6 Mmcf equivalents ("Mmcfe") per day and net proved reserves acquired of 20 billion cubic feet equivalents ("Bcfe"). The acquisition includes recent three-dimensional seismic data covering nearly 50 square miles which will be used to exploit the remaining reserve potential of the properties. Tesoro will jointly operate the fields with a private producer. During 1996, the Company also acquired interests in the Berry R. Cox and the West Goliad Fields for a total of $5.4 million. Both fields are located in South Texas in the Wilcox Trend. The acquisitions consisted of ten wells producing at initial rates totaling 6.7 Mmcfe per day. Workovers and recompletions have increased production to a total of 9.3 Mmcfe per day at year-end. In January 1997, one exploratory well and one development well were drilled and completed on these prospects and these wells are producing at a combined rate of 5.5 Mmcfe per day. Also, in 1996, the Company purchased approximately 35,000 net undeveloped acres for a total of $5.3 million. The acquired acreage is located in four areas, the Cotton Valley Pinnacle Reef Play in East Texas, the Val Verde Basin in Southwest Texas, the Frio/Vicksburg Trend in South Texas and the Wilcox Trend in South Texas. 7 8 Reserves. The following table shows the estimated net proved reserves, based on evaluations prepared by Netherland, Sewell & Associates, Inc., and gross producing wells for each of the Company's U.S. fields as of December 31, 1996, compared with certain data at December 31, 1995:
DECEMBER 31, DECEMBER 31, 1996 1995 -------------------------------------------- --------------- PRESENT VALUE OF NET PROVED GAS NET PROVED GAS PROVED GROSS RESERVES RESERVES RESERVES(1) PRODUCTIVE --------------- --------------- FIELD TEXAS COUNTIES ($ THOUSANDS) WELLS BCFE % BCFE % ----- -------------- ------------- ---------- ------ ----- ------ ----- Bob West............... Starr and Zapata $ 178,623 61 88.0 75% 100.0 94% Los Indios............. Hidalgo 16,746 29 16.8 14 -- -- Lopeno................. Zapata 6,190 5 3.7 3 2.1 2 Berry R. Cox........... Webb 7,053 5 2.9 3 -- -- La Reforma............. Starr and Hidalgo 5,092 12 2.8 2 -- -- West Goliad............ Goliad 5,351 8 2.3 2 -- -- Other.................. 3,681 13 1.4 1 4.3 4 ---------- --- ----- ---- ----- ---- $ 222,736 133 117.9 100% 106.4 100% ========== === ===== ==== ===== ====
- --------------- (1) Represents the discounted future net cash flows before income taxes. See Note O of Notes to Consolidated Financial Statements in Item 8 for additional information regarding the Company's proved reserves and standardized measure. Tennessee Gas Contract. In August 1996, the Supreme Court of Texas denied a motion for rehearing by Tennessee Gas Pipeline Company ("Tennessee Gas") and upheld all aspects of a Gas Purchase and Sales Agreement ("Tennessee Gas Contract") which had been the subject of litigation since 1990. As provided for in the Tennessee Gas Contract, the Company was selling a portion of the gas produced from two 352-acre producing units in the Bob West Field pursuant to a contract price ("Contract Price"). In 1996, approximately 12% of the Company's total U.S. production was sold under the Tennessee Gas Contract at a Contract Price that averaged $8.41 per thousand cubic feet ("Mcf"), representing 38% of the Company's U.S. natural gas revenues for the year. In December 1996, the Tennessee Gas Contract, which was to expire in January 1999, was terminated by the parties effective October 1, 1996, and the Company began selling this gas on the spot market. See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note D of Notes to Consolidated Financial Statements in Item 8. Gas Gathering and Transportation. The Company owns a 70% interest in the Starr County Gathering System which consists of two ten-inch diameter pipelines and one twenty-inch diameter pipeline that transport natural gas eight miles from the Bob West Field to common carrier pipeline facilities. In addition, the Company owns a 50% interest in the twenty-inch diameter Starr-Zapata natural gas pipeline that was constructed during 1994 to transport gas 26 miles from the Starr County Gathering System to a market hub at Fandango, Texas. The Company does not operate either facility. During 1996, the gross average daily throughput was 205 Mmcf per day for the Starr County Gathering System and 173 Mmcf per day for the Starr-Zapata pipeline, with approximately 50% of the throughput consisting of the Company's working interest share of Bob West Field production. The Starr County Gathering System receives a transportation fee of $.06 per Mcf and the Starr-Zapata Pipeline receives a fee of $.07 per Mcf for volumes transported. For further information regarding the Company's U.S. operations, see Notes B, C, N and O of Notes to Consolidated Financial Statements in Item 8. 8 9 U.S. Operating Statistics
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 ------- -------- ------- Net Natural Gas Production (average daily Mcf).............. 87,654 114,490 83,796 Average Natural Gas Sales Price ($/Mcf): Spot market(1)............................................ $ 1.95 1.34 1.48 Tennessee Gas Contract(2)................................. $ 8.41 8.41 7.93 Weighted average.......................................... $ 2.75 2.57 2.86 Average Operating Expenses ($/Mcfe): Lease operating expenses.................................. $ .14 .11 .11 Severance taxes........................................... .03 .18 .18 ------- -------- ------- Total production costs................................. .17 .29 .29 Administrative support and other.......................... .10 .06 .08 ------- -------- ------- Total operating expenses............................... $ .27 .35 .37 ======= ======== ======= Depletion Rate ($/Mcfe)..................................... $ .79 .69 .79 Exploratory Wells Drilled: Productive -- Gross....................................... 4.0 5.0 3.0 Productive -- Net......................................... 1.7 1.5 1.5 Dry holes -- Gross........................................ 2.0 4.0 2.0 Dry holes -- Net.......................................... 1.0 2.1 1.1 Development Wells Drilled: Productive -- Gross....................................... 15.0 17.0 20.0 Productive -- Net......................................... 6.3 9.7 11.1 Dry holes -- Gross........................................ 1.0 -- 1.0 Dry holes -- Net.......................................... .5 -- .4
JANUARY 31, 1997 ----------------- GROSS NET ------ ----- Productive Gas Wells(3)..................................... 133 61.0 Acreage (in thousands): Developed................................................. 27 9 Undeveloped............................................... 109 46
- --------------- (1) Includes effects of the Company's natural gas price agreements which amounted to a loss of $.11 per Mcf in 1996 and a gain of $.01 per Mcf in 1995 and 1994 (see Note N of Notes to Consolidated Financial Statements in Item 8). (2) See Note D of Notes to Consolidated Financial Statements in Item 8 related to the Tennessee Gas Contract. (3) Included in total productive wells are 8 gross (.4 net) wells with multiple completions. At January 31, 1997, the Company was participating in the drilling of 8 gross (3.7 net) wells. (4) Mcfe is defined as net equivalent one thousand cubic feet. BOLIVIA The Company's Bolivian exploration and production operations are located in southern Bolivia near the border of Argentina, where the Company has discovered six fields since 1976 with estimated net proved natural gas reserves of 253 Bcfe at December 31, 1996. With gross average production of 55 Mmcfe per day in 1996, Tesoro is one of the largest operators in Bolivia. The Company is the operator of a joint venture that holds two Shared Risk Contracts with Yacimientos Petroliferos Fiscales Bolivianos ("YPFB"), the Bolivian state-owned oil and gas company. 9 10 Bolivian Hydrocarbons Law. In 1996, a new Hydrocarbons Law was passed by the Bolivian government that significantly impacts the Company's operations in Bolivia. The new law, among other matters, granted the Company the option to convert its Contracts of Operation to new Shared Risk Contracts. During 1996, the Company signed agreements to convert its Contracts of Operation to Shared Risk Contracts subject to recision at the option of the Company if the Company is not satisfied with modifications to the Bolivian fiscal law. The Company expects to complete this conversion during the first half of 1997. The new contracts extend the Company's term of operation, provide more favorable acreage relinquishment terms and provide for a more favorable fiscal regime of royalties and taxes. The new contracts will extend the term of the Company's operations for Block 18 ten additional years to the year 2017. For Block 20, the new contract extends the Company's term 21 additional years to the year 2029 for acreage that is in the exploration phase of the contract, and 10 additional years to the year 2018 for an area within Block 20 that is designated as being in the development phase of the new contract. The new contract provisions, along with a substantial discovery during 1996, significantly increased the Company's reserves (see Note O of Notes to Consolidated Financial Statements in Item 8). Access To New Markets. A lack of market access has constrained natural gas production in Bolivia. With little internal gas demand, all of the Company's Bolivian natural gas production is sold under contract to the Bolivian government for export to Argentina. Major developments in South America indicate that new markets may open for the Company's production in the near future. Progress has been made toward construction of a new 1,900-mile pipeline that will link Bolivia's extensive gas reserves with markets in Brazil. In early 1997, a contract to supply pipe for the project was awarded. Construction is scheduled to start in late 1997, with first gas deliveries expected in 1999. Block 18. The Company has a 75% interest in a Shared Risk Contract, subject to final conversion, expiring in 2017 and covering 92,625 acres in Block 18. During 1996, the Company's net production from this block averaged 20.3 Mmcf of gas per day and 584 barrels of condensate per day. The new contract for Block 18 provides that the Company and its joint venture participant will continue to be subject to a 29% participation that was stipulated in YPFB's favor in the old contract. In addition, income taxes and taxes on gross revenues will be paid which are expected to equal 31% of Block 18 gross revenues, leaving the Company and its joint venture participant with 40% of Block 18 revenues, after royalties and taxes. The aftertax effect of the new contract is essentially the same as the old contract. The Company is currently selling all of its natural gas production from the La Vertiente, Escondido and Taiguati Fields in Block 18 to YPFB which in turn sells the natural gas to Yacimientos Petroliferos Fiscales, S.A. ("YPF"), a publicly-held company based in Argentina. During 1994, the contract between YPFB and YPF was extended through March 31, 1997, maintaining approximately the same volumes as the previous contract. YPFB and YPF are currently negotiating a two-year contract extension through March 1999. Currently, the Company is selling its natural gas production to YPFB based on the volume and pricing terms in the contract between YPFB and YPF. Block 20. The Company has a 72.6% interest in a Shared Risk Contract, subject to final conversion, expiring in 2029 and covering 787,313 acres in Block 20. For Block 20, the Company and its joint venture participant will no longer be required to pay a 19% royalty that had been required under the old contract. Under the old contract, taxes on gross revenues were paid to the national and local governments totaling 31% of gross revenues. Under the new contract, a combination of income taxes and taxes on gross revenues are expected to approximate the amount of taxes paid under the old contract. The Company is investigating whether the Bolivian taxes can be treated as creditable for U.S. tax purposes. During 1996, the Company drilled two discovery wells in Bolivia. The Palo Marcado X-4 found gas in four zones and had a combined test flow rate of 19.1 Mmcf per day. The well will be reentered in 1997 to test a fifth, deeper zone that may also bear hydrocarbons. The discovery added 65 Bcfe of net proved reserves for Tesoro. In 1997, a three-dimensional seismic survey is planned for the Palo Marcado structure, as well as the shut-in Los Suris Field. A second discovery well, the Ibibobo X-2, found hydrocarbons in two zones and was the Company's first oil discovery in the country. Additional three-dimensional seismic work is required to 10 11 identify appraisal drilling sites on this structure. Both discoveries, which are shut-in due to a lack of market, are expected to be placed on production following completion of the Bolivia-Brazil pipeline. Reserves. The table below shows the estimated net proved reserves, based on evaluations prepared by Netherland, Sewell & Associates, Inc., and gross productive wells for each of the Company's Bolivian fields as of December 31, 1996, compared with certain data at December 31, 1995. Each of the following fields is operated by the Company:
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------------------------------------------------------- -------------------- NET PROVED RESERVES ----------------------------- OIL GAS PV-10 AFTER PV-10 AFTER GROSS (MILLIONS (BILLION BOLIVIAN TAXES(1) BOLIVIAN TAXES(1) PRODUCTIVE OF CUBIC TOTAL -------------------- -------------------- FIELD BLOCK WELLS BARRELS) FEET) (BCFE) ($ THOUSANDS) % ($ THOUSANDS) % - ----- ----- ---------- --------- -------- ------ ------------- ---- ------------- ---- Palo Marcado......... 20 2 1.5 101.7 110.5 $24,667 38% $ -- --% Escondido............ 18 5 1.3 64.8 72.8 23,330 36 15,577 58 Los Suris............ 20 2 .5 46.8 50.0 13,135 20 3,043 11 La Vertiente......... 18 5 .4 16.5 19.0 3,090 5 8,162 30 Taiguati............. 18 1 -- .7 .7 221 1 376 1 -- --- ----- ----- ------- ---- ------- ---- 15 3.7 230.5 253.0 $64,443 100% $27,158 100% == === ===== ===== ======= ==== ======= ====
- --------------- (1) Represents the after Bolivian tax discounted future net cash flows, which included an increase of $23 million at December 31, 1996 due to the anticipated completion of the Bolivia-Brazil pipeline. See Notes B and O of Notes to Consolidated Financial Statements in Item 8 for additional information regarding the Company's proved reserves and standardized measure. For further information regarding the Company's Bolivian operations, see Notes B and O of Notes to Consolidated Financial Statements in Item 8. Bolivia Operating Statistics
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Net Production(1): Natural gas (average daily Mcf)...................... 20,251 18,650 22,082 Condensate (average barrels per day)................. 584 567 733 Average Sales Price: Natural gas ($/Mcf).................................. $ 1.33 1.28 1.20 Condensate ($/barrel)................................ $ 17.98 14.39 13.28 Average Operating Expenses ($/Mcfe): Production costs..................................... $ .10 .07 .06 Value-added taxes.................................... .05 .06 .10 Administrative support and other..................... .27 .35 .25 ------- ------- ------- Total Operating Expenses..................... $ .42 .48 .41 ======= ======= ======= Depletion Rate ($/Mcfe)................................ $ .15 .03 -- Exploratory Wells Drilled: Productive -- Gross.................................. 2.0 1.0 1.0 Productive -- Net.................................... 1.5 .7 .7 Dry Holes -- Gross................................... -- -- 1.0 Dry Holes -- Net..................................... -- -- .7
11 12 Bolivia Operating Statistics (Continued)
DECEMBER 31, 1996 ----------------- GROSS NET ----- ---- Productive Gas Wells(2)..................................... 15 11.2 Acreage (in thousands): Developed................................................. 93 69 Undeveloped............................................... 787 571
- --------------- (1) Represents the Company's net production before Bolivian taxes, which were payable in-kind for the years presented. (2) Included in total productive wells are 4 gross (3.0 net) wells with multiple completions. At December 31, 1996, the Company was participating in the drilling of 2 gross (1.5 net) wells. WORLDWIDE RESERVE REPLACEMENT AND COSTS OF ADDING RESERVES In 1996, the Company's worldwide proved reserve additions included 113 Bcfe from discoveries, extensions and domestic purchases of proved properties (65 Bcfe from Bolivia and 48 Bcfe domestically); 36 Bcfe from extensions in the terms of the Company's Bolivian contracts and 62 Bcfe from other changes in the Bolivian Hydrocarbons Law; less 4 Bcfe from revisions of previous estimates. Excluding revisions, 211 Bcfe were added for a 517% replacement of 41 Bcfe of production. Additions were realized with an 87.5% drilling success rate during 1996, reflecting a 94% success rate on 16 development wells and a 75% success rate on 8 exploratory wells. The Company's three-year worldwide average cost of adding these reserves was $.53 per Mcfe. Domestically, 48 Bcfe were added for a 151% replacement of 32 Bcfe of production. The three-year average cost of adding domestic reserves was $.94 per Mcfe. See Note O of Notes to Consolidated Financial Statements in Item 8. MARINE SERVICES OVERVIEW The Company's Marine Services segment markets and distributes a broad range of products, including diesel fuel, lubricants, chemicals and supplies, and provides logistical support services to the marine and offshore exploration and production industries operating in the Gulf of Mexico through a network of 20 terminals. These deep water marine terminals are located on the Texas Gulf Coast in Galveston, Freeport, Harbor Island, Port O'Connor, Ingleside and Sabine Pass. The Company also operates along the Louisiana Gulf Coast with terminals in Cameron, Intracoastal City, Morgan City, Venice, Eunice, Amelia and Harahan. These terminals are bulkheaded and dredged to provide easy access to vessels receiving products for delivery to customers. Products are delivered offshore aboard vessels owned or chartered by customers, which include companies engaged in oil and gas exploration and production, seismic evaluation, offshore construction and other drilling-related businesses. The Marine Services segment achieved profitability in 1996 after a merger and restructuring that established the Company as a major marine terminal operator in the Gulf of Mexico. In February 1996, the Company purchased 100% of the capital stock of Coastwide Energy Services, Inc. ("Coastwide"), a company that provided shore-based services for the offshore exploration and production industry, for approximately 1.4 million shares of Tesoro's Common Stock and $7.7 million in cash. These operations were combined with the Company's marine petroleum distribution operation, forming a Marine Services segment. See Note C of Notes to Consolidated Financial Statements in Item 8. DIESEL FUEL AND LUBRICANTS Diesel fuel and lubricants, which are used in operations such as offshore drilling rigs, offshore production and transmission platforms and various ships and equipment engaged in seismic surveys, are marketed and distributed from all 20 of the Company's terminals. Through these terminals and a fleet of six tugboats (including three owned by the Company) and 14 barges (including ten owned by the Company), the Company serves offshore workboats, tugboats and barges using the Intracoastal Canal System, as well as ships 12 13 entering the ports of Houston, New Orleans, Lake Charles, Corpus Christi and Port Arthur. Tesoro obtains its supply of diesel fuel from refiners in the Gulf Coast area. Total gallons of diesel fuel and other refined products sold by Marine Services amounted to 142.7 million, 112.5 million and 119.2 million in 1996, 1995 and 1994, respectively. The Company is a distributor of lubricants and cylinder oil produced by certain major oil companies, which are delivered to customers by trucks or barges. SERVICES Through nine of its terminals, the Company provides full-service shore-based support for offshore drilling rigs and production platforms. These quayside services include loading docks and slips for offshore supply boats. In addition, the Company provides dispatchers and stevedores, cranes, forklifts, warehouses, office and dormitory accommodations, helicopter landing pads and car parking for offshore workers. Tesoro also serves as delivery points for drilling products, primarily mud, by providing warehousing, inventory control and delivery services. Tesoro's bunkering services operate in major ports along the Texas and Louisiana Gulf Coast. In 1996, 1995 and 1994, revenues from services amounted to $10.9 million, $3.1 million and $2.7 million, respectively. COMPETITION AND OTHER The oil and gas industry is highly competitive in all phases, including the refining and marketing of crude oil and petroleum products and the search for and development of oil and gas reserves. The industry also competes with other industries that supply the energy and fuel requirements of industrial, commercial, individual and other consumers. The Company competes with a substantial number of major integrated oil companies and other companies having materially greater financial and other resources. These competitors have a greater ability to bear the economic risks inherent in all phases of the industry. In addition, unlike the Company, many competitors also produce large volumes of crude oil that may be used in connection with their refining operations. The North American Free Trade Agreement has further streamlined and simplified procedures for the importation and exportation of natural gas among Mexico, the United States and Canada. These changes are likely to enhance the ability of Canadian and Mexican producers to export natural gas and other products to the United States, thereby further increasing competition for domestic sales. The refining and marketing businesses are highly competitive, with price being the principal factor in competition. In the refining market, the Company's refinery competes primarily with other refineries in Alaska and on the U.S. West Coast. The Company's refining competition in Alaska includes a refinery situated near Fairbanks owned by MAPCO, Inc. and two refineries situated near Valdez and Fairbanks owned by Petro Star Inc. The Company estimates that such other refineries have a combined capacity to process approximately 176,000 barrels per day of crude oil. ANS crude oil is the only feedstock used in these competing refineries. After processing the crude oil and removing the lighter-end products, which represent approximately 30% of each barrel processed, these refiners are permitted, because of their direct connection to the TAPS, to return the remainder of the processed crude back into the pipeline system as "return oil" in consideration for a fee, thereby eliminating their need to market residual products. The Company's refinery is not directly connected to the TAPS, and the Company, therefore, cannot return its residual products to the TAPS. The Company's refining competition from the U.S. West Coast includes many large, integrated oil companies that do substantial business in Alaska and have materially greater financial and other resources. A growing number of foreign sources also compete with the Company. The Company's marketing business in Alaska is segmented by product line. The Company is a substantial producer and distributor of gasoline in Alaska, with the largest network of branded and unbranded dealers and jobbers. The Company is a supplier to a major oil company through a product exchange agreement, whereby gasoline in Alaska is provided in exchange for gasoline delivered to the Company on the U.S. West Coast. Jet fuel sales are concentrated in Anchorage, where the Company is one of the principal suppliers to the Anchorage International Airport, which is a major hub for air cargo traffic to the Far East. Diesel fuel is sold primarily on a wholesale basis. 13 14 The Company's Pacific Northwest marketing business is primarily a distribution business selling to independent dealers and jobbers outside major urban areas. In addition, the Company sells to 18 branded gasoline distributors in the Pacific Northwest who obtain the majority of their supply from the Company's refinery in Alaska. The Company competes against independent marketing companies and integrated oil companies when engaging in these marketing operations. Demand for services and products offered by the Company's Marine Services segment is closely related to the level of oil and gas exploration, development and production in the Gulf of Mexico. Various factors, including general economic conditions, demand for and prices of natural gas, availability of equipment and materials and government regulations and energy policies cause exploration and development activity to fluctuate and directly impact the revenues of the Marine Services segment. Management believes that the principal competitive factors affecting the Marine Services operations are location of facilities, availability of logistical support services, experience of personnel and dependability of service. The market for the Marine Services segment's products and services, particularly diesel fuel, is price sensitive. The Company competes with several independent operations, and in certain locations with one or more major mud companies who maintain their own marine terminals. A portion of the Company's operations are conducted in foreign countries where the Company is also subject to risks of a political nature and other risks inherent in foreign operations. The Company's operations outside the United States in recent years have been, and in the future may be, materially affected by host governments through increases or variations in taxes, royalty payments, export taxes and export restrictions and adverse economic conditions in the foreign countries, the future effects of which the Company is unable to predict. GOVERNMENT REGULATION AND LEGISLATION UNITED STATES Natural Gas Regulations. Historically, all domestic natural gas sold in so-called "first sales" was subject to federal price regulations under the Natural Gas Policy Act of 1978 ("NGPA"), the Natural Gas Act ("NGA"), and the regulations and orders issued by the Federal Energy Regulatory Commission ("FERC") in implementing such Acts. Under the Natural Gas Wellhead Decontrol Act of 1989, all remaining natural gas wellhead pricing, sales, certificate and abandonment regulation of first sales by the FERC was terminated on January 1, 1993. The FERC also regulates interstate natural gas pipeline transportation rates and service conditions, which affect the marketing of gas produced by the Company, as well as the revenues received by the Company for sales of such natural gas. Since the latter part of 1985, through its Order Nos. 436, 500 and 636, the FERC has endeavored to make natural gas transportation more accessible to gas buyers and sellers on an open and non-discriminatory basis, and the FERC's efforts have significantly altered the marketing and pricing of natural gas. A related effort has been made with respect to intrastate pipeline operations pursuant to the FERC's authority under Section 311 of the NGPA, under which the FERC establishes rules by which intrastate pipelines may participate in certain interstate activities without becoming subject to full NGA jurisdiction. These Orders have gone through various permutations, but have generally remained intact as promulgated. The FERC considers these changes necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put gas sellers into more direct contractual relations with gas buyers than has historically been the case. Order No. 636, issued April 8, 1992, reflected the FERC's finding that under the current regulatory structure, interstate pipelines and other gas merchants, including producers, do not compete on an equal basis. The FERC asserted that Order No. 636 was designed to equalize that marketplace. This equalization process was implemented largely through negotiated settlements in individual pipeline service restructuring proceedings, designed specifically to "unbundle" those services (e.g., gathering, transportation, sales and storage) provided by many interstate pipelines so that producers of natural gas may secure services from the most economical source, whether interstate pipelines or other parties. The result of the FERC initiatives has brought to an end the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing 14 15 only gathering, transportation and storage services for others which will buy and sell natural gas. The FERC has issued final orders in all of the individual pipeline restructuring proceedings and all of the interstate pipelines are now operating under new open access tariffs. In addition, the FERC has announced its intention to reexamine certain of its transportation related policies, including the appropriate manner in which interstate pipelines release transportation capacity under Order No. 636 and, more recently, the price which shippers can charge for released capacity. The FERC has also issued a new policy regarding the use of nontraditional methods of setting rates for interstate gas pipelines in certain circumstances as alternatives to cost-of service based rates. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. Although Order No. 636 does not regulate gas producers, such as the Company, Order No. 636 is intended to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company and its gas sales efforts. The U.S. Court of Appeals for the District of Columbia Circuit has affirmed the Commission's Order No. 636 restructuring rule and remanded certain issues for further explanation or clarification. Numerous petitions seeking judicial review of the individual pipeline restructuring orders are currently pending in the United States Court of Appeals for the District of Columbia Circuit. It is not possible to predict what, if any, effect the order on remand or the Court's decision in the individual pipeline cases will have on the Company. The Company does not believe, however, that it will be affected any differently than other gas producers or marketers with which it competes. In 1993, the FERC initiated a proceeding seeking industry-wide comments about its role in regulating natural gas gathering performed by interstate pipelines or their affiliates. The proceeding did not result in a proposed rulemaking. In 1994, the FERC granted a number of interstate pipeline applications to abandon certificated gathering facilities to non-jurisdictional entities. Under those orders, the rates charged by these entities, which may or may not be affiliated with the interstate pipeline, are not regulated by the FERC. Under the individual orders, gathering services must be continued to existing customers under "default" contracts and be provided in an open-access and non-discriminatory manner. The District of Columbia Court of Appeals upheld the Commission's decision to not regulate gathering rates but found that the Commission's "default" contract requirement was unlawful as outside the Commission's jurisdiction. The court remanded the case to the Commission and the agency has not yet acted on remand. The U.S. Supreme Court declined to review the D.C. Circuit's decision. The oil and gas exploration and production operations of the Company are subject to various types of regulation at the state and local levels. Such regulation includes requiring drilling permits and the maintenance of bonds in order to drill or operate wells; the regulation of the location of wells; the method of drilling and casing of wells and the surface use and restoration of properties upon which wells are drilled; and the plugging and abandoning of wells. The operations of the Company are also subject to various conservation regulations, including regulation of the size of drilling and spacing units or proration units, the density of wells that may be drilled in a given area and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of crude oil, condensate and natural gas the Company can produce from its wells and the number of wells or the locations at which the Company can drill. Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. The Company cannot predict when or if any such proposals might become effective, or their effect, if any, on the Company's operations. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue indefinitely into the future. Environmental Controls. Federal, state, area and local laws, regulations and ordinances relating to the protection of the environment affect all operations of the Company to some degree. An example of a federal environmental law that will require operational additions and modifications is the Clean Air Act, which was 15 16 amended in 1990. While the Company believes that its facilities generally are in substantial compliance with current regulatory standards for air emissions, over the next several years the Company's facilities will be required to comply with the new requirements being adopted and promulgated by the U.S. Environmental Protection Agency ("EPA") and the states in which the Company operates. These regulations will necessitate the installation of additional controls or other modifications or changes in use for certain emission sources. Specifics as to the cost of these requirements, at certain facilities, are still being determined. As part of these requirements, the Company's refinery as well as some other Company facilities will be required to submit an application for a Clean Air Act Amendment Title V permit; dates of submittal of these applications vary upon the implementation of the State's Title V permit program. The Company believes it can comply with these new requirements, and in some cases already has done so, without adversely affecting operations. The passage of the Federal Clean Air Act Amendments of 1990 prompted adoption of regulations by the State of Alaska obligating the Company to produce oxygenated gasoline for delivery to the Anchorage and Fairbanks, Alaska markets starting on November 1, 1992. Controversies surrounding the potential health effects in Arctic regions of oxygenated gasoline containing methyl tertiary butyl ether ("MTBE") prompted early discontinuance of the program in Fairbanks. On October 21, 1993, the United States Congress granted the State one additional year of exemption from requiring the use of oxygenated gasoline. In addition, the EPA has been directed to conduct additional studies of potential health effects of oxygenated fuel in Alaska. The State of Alaska mandated the use of oxygenated fuels containing ethanol in the Anchorage area from November 1 through the last day of February of the succeeding year. No requirements for use of such products in Fairbanks have been issued, but are expected. Additional federal regulations promulgated on August 21, 1990, which went into effect on October 1, 1993, set limits on the quantity of sulphur in on-highway diesel fuels which the Company produces. The State filed an application with the federal government in February 1993 for a waiver from this requirement since only 5% of the diesel fuel sold in Alaska was for on-highway vehicles. On March 14, 1994, the EPA granted the State of Alaska a waiver from the requirements of the EPA's low sulphur diesel fuel program, permanently exempting Alaska's remote areas and providing a temporary exemption for areas served by the Federal Aid Highway System until October 1, 1996. On August 19, 1996, the EPA extended the temporary exemption until October 1, 1998. The Company estimates that substantial capital expenditures would be required to enable the Company to produce low-sulphur diesel fuel to meet these federal regulations. If the State is unable to obtain a permanent waiver from the federal regulations, the Company would discontinue sales of diesel fuel for on-highway use after October 1, 1998. The Company estimates that such sales accounted for less than 1% of its refined product sales in Alaska during 1996. While the Company is unable to predict the outcome of these matters, their ultimate resolution should not have a material impact on its operations. Oil Spill Prevention and Response. The Federal Oil Pollution Act of 1990 ("OPA 90") and related state regulations require most refining, transportation and oil storage facilities to prepare oil spill prevention contingency plans for use during an oil spill response. The Company has prepared and submitted these plans for approval and, in most cases, has received federal and state approvals necessary to meet various regulations and to avoid the potential of negative impacts on the operation of its facilities. The Company currently charters a tanker to transport crude oil from the Valdez, Alaska pipeline terminal through Prince William Sound and Cook Inlet to its refinery. In addition, the Company routinely charters, on a long-term and short-term basis, additional tankers and barges for shipment of crude oil and refined products through Cook Inlet, as well as other locations. OPA 90 requires, as a condition of operation, that the Company demonstrate the capability to respond to the "worst case discharge" to the maximum extent practicable. Alaska law requires the Company to provide spill-response capability to contain or control, and clean-up within 72 hours, an amount equal to 50,000 barrels for a tanker carrying fewer than 500,000 barrels of crude oil or equal to 300,000 barrels for a tanker carrying more than 500,000 barrels. To meet these requirements, the Company has entered into a contract with Alyeska Pipeline Service Company ("Alyeska") to provide initial spill response services in Prince William Sound, with the Company later to assume those responsibilities after mutual agreement with Alyeska and State and Federal On-Scene Coordinators. The Company has also entered into an agreement with Cook Inlet Spill Prevention and Response, Incorporated for oil spill response 16 17 services in Cook Inlet. The Company believes these contracts provide for the additional services necessary to meet spill response requirements established by Alaska and federal law. Transportation, storage, and refining of crude oil in Alaska result in the greatest regulatory impact, with respect to oil spill prevention and response. Oil transportation and terminaling operations at other Company facilities also result in compliance mandates for oil spill prevention and response. The Company contracts with various oil spill response cooperatives or local contractors to provide necessary oil spill response capabilities which may be required on a location by location basis. Regulations promulgated by the Alaska Department of Environmental Conservation ("ADEC") would have required the installation of dike liners in secondary containment systems for petroleum storage tanks by January 1997. Such installation would have required the Company to make capital improvements starting in 1996 of approximately $9.5 million. However, on December 18, 1996, ADEC approved the Company's alternative compliance schedule which allows the Company until the year 2002 to implement alternative secondary containment systems for the Company's existing petroleum storage tank facilities in the State of Alaska at a reduced cost of approximately $6 million. Underground Storage Tanks. Regulations promulgated by the EPA on September 23, 1988, require that all underground storage tanks used for storing gasoline or diesel fuel either be closed or upgraded not later than December 22, 1998, in accordance with standards set forth in the regulations. The Company's service stations subject to the upgrade requirements are limited to locations within the State of Alaska. The Company continues to monitor, test and make physical improvements in its current operations, which result in a cleaner environment. The Company is required to make expenditures for removal or upgrading of underground storage tanks at several of its current and former service station locations by December 22, 1998; the Company expects that such expenditures during 1997 will cost approximately $2 million. Environmental Expenditures. The Company's capital expenditures for environmental control purposes totaled $.7 million during 1996. The Company anticipates that it will incur total capital expenditures for such purposes of approximately $6 million in 1997 and $3 million in 1998. The Company also expects to spend approximately $6 million by the year 2002 for secondary containment systems for existing storage tanks in Alaska. For further information regarding environmental matters, see "Legal Proceedings" in Item 3 and "Environmental Controls" and "Underground Storage Tanks" discussed above. BOLIVIA The Company's operations in Bolivia are subject to the Bolivian Hydrocarbons Law and various other laws and regulations. The Hydrocarbons Law imposes certain requirements on the Company's ability to conduct its operations in Bolivia. In the Company's opinion, neither the Hydrocarbons Law nor other requirements currently imposed by Bolivian laws, regulations and practices will have a material adverse effect upon its Bolivian operations. In 1996, a new Hydrocarbons Law was passed by the Bolivian government that significantly impacts the Company's operation in Bolivia. For information on the Bolivian Hydrocarbons Law and Bolivian taxation, see "Exploration and Production -- Bolivia" discussed above. EMPLOYEES At December 31, 1996, the Company employed approximately 1,000 persons, of which approximately 40 were located in foreign countries. None of the Company's employees are represented by a union for collective bargaining purposes. The Company considers its relations with its employees to be satisfactory. 17 18 EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the Company's executive officers, their ages and their positions with the Company at February 28, 1997.
POSITION HELD NAME AGE POSITION SINCE - ---- --- -------- ------------- Bruce A. Smith................. 53 Chairman of the Board of Directors, President June 1996 and Chief Executive Officer James C. Reed, Jr.............. 52 Executive Vice President, General Counsel and September 1995 Secretary William T. Van Kleef........... 45 Executive Vice President, Operations September 1996 Don E. Beere................... 56 Vice President, Controller April 1992 Thomas E. Reardon.............. 50 Vice President, Human Resources and September 1995 Environmental Gregory A. Wright.............. 47 Vice President and Treasurer September 1995
There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. Officers are elected annually by the Board of Directors at its first meeting following the Annual Meeting of Stockholders, each to hold office until the corresponding meeting of the Board in the next year or until a successor shall have been elected or shall have qualified. The business experience of the Company's executive officers for the past five years is described below. Positions, unless otherwise specified, are with the Company. Bruce A. Smith -- Chairman of the Board of Directors, President and Chief Executive Officer since June 1996. President and Chief Executive Officer from September 1995 to June 1996. Executive Vice President, Chief Financial Officer and Chief Operating Officer from July 1995 through September 1995. Executive Vice President responsible for Exploration and Production Operations and Chief Financial Officer from September 1993 to July 1995. Vice President and Chief Financial Officer from September 1992 to September 1993. Vice President and Treasurer of Valero Energy Corporation from 1986 to 1992. James C. Reed, Jr. -- Executive Vice President, General Counsel and Secretary since September 1995. Senior Vice President, General Counsel and Secretary from August 1994 to September 1995. Vice President, General Counsel and Secretary from September 1993 to August 1994. Vice President, Secretary from December 1992 to September 1993. Vice President, Secretary of Tesoro Petroleum Companies, Inc., from February 1992 to December 1992. Vice President, Assistant Secretary of Tesoro Petroleum Companies, Inc., from 1990 to 1992. William T. Van Kleef -- Executive Vice President, Operations since September 1996. Senior Vice President and Chief Financial Officer from September 1995 to September 1996. Vice President, Treasurer from March 1993 to September 1995. Financial Consultant from January 1992 to February 1993. Don E. Beere -- Vice President, Controller since April 1992. Vice President, Controller of Tesoro Petroleum Companies, Inc. from February 1992 to April 1992. Vice President, Internal Audit and Management Systems of Tesoro Petroleum Companies, Inc. from 1990 to 1992. Thomas E. Reardon -- Vice President, Human Resources and Environmental since September 1995. Vice President, Human Resources and Environmental Services of Tesoro Petroleum Companies, Inc. from October 1994 to September 1995. Vice President, Human Resources of Tesoro Petroleum Companies, Inc. from February 1990 to October 1994. Gregory A. Wright -- Vice President and Treasurer since September 1995. Vice President, Corporate Communications from February 1995 to September 1995. Vice President, Corporate Communications of Tesoro Petroleum Companies, Inc. from January 1995 to February 1995. Vice President, Business Develop- 18 19 ment of Valero Energy Corporation from 1994 to January 1995. Vice President, Corporate Planning of Valero Energy Corporation from 1992 to 1994. Vice President, Investor Relations of Valero Energy Corporation from 1989 to 1992. ITEM 2. PROPERTIES See information appearing under Item 1, Business herein and Notes B, C and O of Notes to Consolidated Financial Statements in Item 8. ITEM 3. LEGAL PROCEEDINGS The Company, along with numerous other parties, has been identified by the Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the Mud Superfund site in Abbeville, Louisiana ("Site"). The Company arranged for the disposal of a minimal amount of materials at the Site, but CERCLA might impose joint and several liability on each PRP at the Site. The EPA is seeking reimbursement for its response costs incurred to date at the Site, as well as a commitment from the PRPs either to conduct future remedial activities or to finance such activities. The extent of the Company's allocated financial contributions to the cleanup of the site is expected to be limited based upon the number of companies, volumes of waste involved, and an estimated total cost of approximately $500,000 among all of the parties to close the Site. The Company is currently involved in settlement discussions with the EPA and other PRP's involved at the Site. The Company expects, based on these discussions, that its liability at the Site will not exceed $25,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 19 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal markets on which the Company's Common Stock is traded are the New York Stock Exchange and the Pacific Stock Exchange. The per share market price ranges for the Company's Common Stock during 1996 and 1995 are summarized below:
1996 1995 ------------ ------------ QUARTERS HIGH LOW HIGH LOW -------- ---- ---- ---- ---- First............................................... $ 9 1/8 8 10 5/8 8 3/4 Second.............................................. $11 5/8 8 1/4 12 9 1/2 Third............................................... $13 1/2 10 1/2 10 3/8 8 Fourth.............................................. $15 1/2 12 7/8 9 1/2 7 1/4
At February 28, 1997, there were approximately 3,700 holders of record of the Company's 26,426,333 outstanding shares of Common Stock. The Company did not pay dividends on its Common Stock for the periods set forth above. For information regarding restrictions on future dividend payments, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note I of Notes to Consolidated Financial Statements in Item 8. 20 21 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Company's Consolidated Financial Statements, including the notes thereto, in Item 8.
YEARS ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 1993 1992 -------- ------- ------ ------ ------ (IN MILLIONS EXCEPT PER SHARE AMOUNTS) REVENUES Gross Operating Revenues -- Refining and Marketing.................................... $ 745.4 771.0 687.0 687.2 810.7 Exploration and Production U.S. oil and gas........................................ 88.4 107.3 87.5 48.4 18.2 U.S. gas transportation................................. 5.4 5.7 3.1 1.0 -- Foreign(1).............................................. 13.7 11.7 13.2 12.6 23.9 Marine Services(2)........................................ 122.5 74.5 77.9 80.7 93.1 -------- ------- ------ ------ ------ Total Gross Operating Revenues..................... 975.4 970.2 868.7 829.9 945.9 Income from Settlement of a Natural Gas Contract(3)......... 60.0 -- -- -- -- Other, Including Gain (Loss) on Asset Sales(3).............. 4.4 32.7 3.2 .5 6.4 -------- ------- ------ ------ ------ Total Revenues..................................... $1,039.8 1,002.9 871.9 830.4 952.3 ======== ======= ====== ====== ====== SEGMENT OPERATING PROFIT (LOSS)(3) Refining and Marketing.................................... $ 6.0 .7 2.4 15.2 (14.9) Exploration and Production U.S. oil and gas........................................ 119.1 96.9 52.1 31.4 8.9 U.S. gas transportation................................. 4.8 5.1 2.9 .9 -- Foreign(1).............................................. 8.8 7.6 9.3 8.4 20.2 Marine Services(2)........................................ 6.1 (4.4) (2.3) (3.6) (4.7) -------- ------- ------ ------ ------ Total Segment Operating Profit..................... $ 144.8 105.9 64.4 52.3 9.5 ======== ======= ====== ====== ====== EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM(4)................ $ 76.8 57.5 20.5 17.0 (65.9) EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT, NET OF INCOME TAXES..................................................... (2.3) (2.9) (4.8) -- -- -------- ------- ------ ------ ------ NET EARNINGS (LOSS)......................................... $ 74.5 54.6 15.7 17.0 (65.9) ======== ======= ====== ====== ====== NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK.............. $ 74.5 54.6 13.0 7.8 (75.1) ======== ======= ====== ====== ====== EARNINGS (LOSS) PER SHARE Earnings (Loss) Before Extraordinary Item(4).............. $ 2.90 2.29 .77 .54 (5.34) Extraordinary Loss on Debt Extinguishment, Net............ (.09) (.11) (.21) -- -- -------- ------- ------ ------ ------ Net Earnings (Loss)....................................... $ 2.81 2.18 .56 .54 (5.34) ======== ======= ====== ====== ====== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Primary................................................... 26.5 25.1 23.2 14.3 14.1 Fully Diluted............................................. 26.5 25.1 24.7 19.1 18.8 CASH FLOWS FROM (USED IN) Operations................................................ $ 179.0 35.4 60.3 21.8 11.4 Investing................................................. (94.2) 2.4 (91.2) (23.4) (21.1) Financing................................................. (75.9) (37.9) 8.3 (8.7) (4.5) -------- ------- ------ ------ ------ Increase (Decrease) in Cash and Cash Equivalents........ $ 8.9 (.1) (22.6) (10.3) (14.2) ======== ======= ====== ====== ====== CAPITAL EXPENDITURES(5) Refining and Marketing.................................... $ 11.1 9.3 32.0 7.1 3.7 Exploration and Production U.S. oil and gas........................................ 59.7 49.4 60.4 28.6 8.9 U.S. gas transportation................................. -- .2 5.2 .7 -- Foreign(1).............................................. 6.9 3.8 -- -- .4 Marine Services and Other................................. 7.3 1.2 2.0 1.1 2.4 -------- ------- ------ ------ ------ Total Capital Expenditures......................... $ 85.0 63.9 99.6 37.5 15.4 ======== ======= ====== ====== ====== BALANCE SHEET AND OTHER DATA Current Assets............................................ $ 237.3 182.5 182.1 196.5 228.4 Property, Plant and Equipment, Net........................ $ 316.5 261.7 273.3 213.2 198.5 Total Assets.............................................. $ 582.6 519.2 484.4 434.5 446.7 Current Liabilities....................................... $ 137.8 105.0 96.2 72.0 105.8 Working Capital........................................... $ 99.5 77.5 85.9 124.5 122.6 Current Ratio............................................. 1.72:1 1.74:1 1.89:1 2.73:1 2.16:1 Long-Term Debt and Other Obligations(6)................... $ 79.3 155.0 192.2 180.7 175.5 Redeemable Preferred Stock(6)............................. $ -- -- -- 78.1 71.7 Stockholders' Equity (6)(7)............................... $ 304.1 216.5 160.7 58.5 50.7
21 22 - --------------- (1) Represents the Company's Bolivian operations, except for 1992 which also included a former operation in Indonesia that was sold. (2) Beginning in February 1996, the Marine Services segment includes the results of operations of an acquired entity (see Note C of Notes to Consolidated Financial Statements in Item 8). (3) Segment operating profit (loss) is gross operating revenues, gains and losses on asset sales and other income less applicable costs of sales, operating expenses, depreciation, depletion and other items. Income taxes, interest expense, interest income and corporate expenses are not included in determining operating profit. In the Exploration and Production segment, operating profit included income of $60 million from termination of a natural gas contract in 1996 and a gain of $33 million from the sale of certain interests in the Bob West Field in 1995 (see Notes B, C and D of Notes to Consolidated Financial Statements in Item 8). In addition, operating profit included $25 million, $47 million, $39 million, $20 million and $8 million in the years 1996, 1995, 1994, 1993 and 1992, respectively, from the excess of the natural gas contract prices over spot market prices (see Note D of Notes to Consolidated Financial Statements in Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7). (4) The net loss for 1992 is after a charge of $20.6 million ($1.47 per share) for the cumulative effect of the adoption of SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes". (5) Excludes acquisitions of stock. (6) For information on the Company's recapitalization and equity offering in 1994, see Note K of Notes to Consolidated Financial Statements in Item 8. (7) No dividends were paid on common shares during the periods presented above. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SUMMARY Net earnings of $74.5 million ($2.81 per share) in 1996 compare to $54.6 million ($2.18 per share) in 1995 and $15.7 million ($.56 per share) in 1994. Noncash extraordinary losses for early extinguishment of debt amounted to $2.3 million in 1996, $2.9 million in 1995 and $4.8 million in 1994. Earnings before extraordinary losses amounted to $76.8 million ($2.90 per share), $57.5 million ($2.29 per share) and $20.5 million ($.77 per share) in 1996, 1995 and 1994, respectively. Comparability between the results for these years was impacted by significant items which are highlighted in the table below (in millions except per share amounts):
1996 1995 1994 ----- ----- ---- Net Earnings as Reported.................................... $74.5 54.6 15.7 Extraordinary Loss on Debt Extinguishment, Net of Income Tax Benefit................................................... 2.3 2.9 4.8 ----- ----- ---- Earnings Before Extraordinary Item.......................... 76.8 57.5 20.5 ----- ----- ---- Significant Items Affecting Comparability, Pretax: Income from settlement of a natural gas contract (Note D)..................................................... 60.0 -- -- Interest and reimbursement of fees and costs from resolution of litigation (Note D)...................... 8.1 -- -- Retroactive severance tax refund.......................... 5.0 -- -- Gain (loss) on sale of assets............................. (.8) 33.5 2.4 Employee terminations and restructuring costs............. (2.9) (5.2) -- Costs of shareholder consent solicitation resolved in April 1996............................................. (2.3) -- -- Refund from settlement of tariff issue.................... -- -- 8.5 Environmental and other................................... (2.5) -- (7.1) ----- ----- ---- Total Significant Items, Pretax........................ 64.6 28.3 3.8 Income Tax Effect...................................... 19.5 -- -- ----- ----- ---- Total Significant Items, Aftertax...................... 45.1 28.3 3.8 ----- ----- ---- Net Earnings Excluding Significant Items and Extraordinary Loss................................... $31.7 29.2 16.7 ===== ===== ==== Earnings Per Share: As Reported............................................... $2.81 2.18 .56 Extraordinary Loss........................................ .09 .11 .21 Effect of Significant Items............................... (1.70) (1.13) (.16) ----- ----- ---- Excluding Significant Items and Extraordinary Loss........ $1.20 1.16 .61 ===== ===== ====
As shown above, excluding the significant items, the Company's net earnings would have been $31.7 million ($1.20 per share) in 1996, as compared to $29.2 million ($1.16 per share) in 1995 and $16.7 million ($.61 per share) in 1994. The resulting increase in net earnings in 1996, compared to 1995, was primarily attributable to improvements within the Company's Refining and Marketing and Marine Services segments, each of which reported significant improvements from the prior year. Results from the Company's Exploration and Production segment increased, even when excluding the above items and removing the incremental value of an above-market pricing contract (see Note D of Notes to Consolidated Financial Statements in Item 8) from both 1996 and 1995. Additionally, at the corporate level, initiatives implemented in the fourth quarter of 1995 helped reduce general and administrative expenses and interest expense. These improvements were partially offset by an increase in the Company's total effective tax rate in 1996 as earnings subject to U.S. taxes exceeded available net operating loss and tax credit carryforwards. When comparing 1995 to 1994, the improvement in net earnings of approximately $12 million was primarily attributable to increased natural gas production from the Company's exploration and production operations in South Texas 23 24 and improvements in the Company's refining and marketing operations. In 1994, dividend requirements on preferred stock amounted to $2.7 million (see Note K of Notes to Consolidated Financial Statements in Item 8). A discussion and analysis of the factors contributing to these results are presented below. The accompanying consolidated financial statements and related footnotes, together with the following information, are intended to provide shareholders and other investors with a reasonable basis for assessing the Company's operations, but should not serve as the sole criterion for predicting the future performance of the Company. The Company conducts its operations in the following business segments: Refining and Marketing, Exploration and Production, and Marine Services. REFINING AND MARKETING
1996 1995 1994 --------- --------- --------- (DOLLARS IN MILLIONS EXCEPT PER BARREL AMOUNTS) GROSS OPERATING REVENUES Refined products.......................................... $ 620.8 664.5 582.7 Other, primarily crude oil resales and merchandise........ 124.6 106.5 104.3 ------- ------- ------- Gross Operating Revenues.......................... $ 745.4 771.0 687.0 ======= ======= ======= OPERATING PROFIT Gross margin -- refined products.......................... $ 94.0 85.3 85.3 Gross margin -- other..................................... 13.3 12.3 13.1 ------- ------- ------- Gross margin...................................... 107.3 97.6 98.4 Operating expenses........................................ 87.9 84.7 88.2 Depreciation and amortization............................. 12.5 11.9 10.4 Other, including gain (loss) on asset sales............... (.9) (.3) 2.6 ------- ------- ------- Operating Profit.................................. $ 6.0 .7 2.4 ======= ======= ======= CAPITAL EXPENDITURES........................................ $ 11.1 9.3 32.0 ======= ======= ======= REFINERY OPERATIONS -- THROUGHPUT (average daily barrels)... 47,486 50,569 46,032 ======= ======= ======= REFINERY OPERATIONS -- PRODUCTION (average daily barrels) Gasoline.................................................. 12,763 14,298 11,728 Middle distillates........................................ 19,975 20,693 18,402 Heavy oils and residual products.......................... 13,739 14,516 15,118 Other..................................................... 2,600 2,489 2,213 ------- ------- ------- Total Refinery Production......................... 49,077 51,996 47,461 ======= ======= ======= REFINERY OPERATIONS -- PRODUCT SPREAD ($/barrel)(1) Average yield value of products manufactured.............. $ 24.61 20.35 19.48 Cost of raw materials..................................... 19.80 16.88 15.65 ------- ------- ------- Refinery Product Spread........................... $ 4.81 3.47 3.83 ======= ======= ======= REFINING AND MARKETING -- TOTAL PRODUCT SALES (average daily barrels)(2) Gasoline.................................................. 17,427 24,526 23,191 Middle distillates........................................ 29,651 37,988 33,256 Heavy oils and residual products.......................... 15,089 14,787 14,228 ------- ------- ------- Total Product Sales............................... 62,167 77,301 70,675 ======= ======= ======= REFINING AND MARKETING -- TOTAL PRODUCT SALES PRICES ($/barrel) Gasoline.................................................. $ 32.72 28.21 27.03 Middle distillates........................................ $ 29.01 24.40 24.47 Heavy oils and residual products.......................... $ 17.61 13.66 10.93
24 25
1996 1995 1994 --------- --------- --------- (DOLLARS IN MILLIONS EXCEPT PER BARREL AMOUNTS) REFINING AND MARKETING -- GROSS MARGINS ON TOTAL PRODUCT SALES ($/barrel)(3) Average sales price....................................... $ 27.28 23.55 22.59 Average costs of sales.................................... 23.15 20.53 19.67 ------- ------- ------- Gross Margin...................................... $ 4.13 3.02 2.92 ======= ======= =======
- --------------- (1) Refinery product spread represents the excess of yield value of the products manufactured at the refinery over the cost of raw materials used to manufacture such products. (2) Sources of total product sales include products manufactured at the refinery, products drawn from inventory balances and products purchased from third parties. The Company's purchases of refined products for resale were approximately 11,600; 25,500; and 27,200 average daily barrels for 1996, 1995 and 1994, respectively. (3) Margins on sales of purchased products, together with the effect of changes in inventories, are included in the gross margin on total product sales. Computations of average costs of sales per barrel in 1994 exclude the benefits of an $8.5 million tariff refund and $1.5 million favorable feedstock cost adjustments. 1996 Compared to 1995. Results from the Company's Refining and Marketing segment improved during 1996 with operating profit of $6.0 million, compared to operating profit of $.7 million in 1995. This improvement was achieved during a year when the industry was facing rapidly rising prices in the crude oil market. In addition, the Company's production level at the refinery was reduced in September 1996 for a scheduled 30-day maintenance downtime. Despite these factors, the Company was able to achieve a refinery product spread of $4.81 per barrel for 1996, compared to $3.47 per barrel in 1995. The Company's results were helped by its initiatives to control costs, improve its refinery product slate and expand the marketing program for its refined products. The Company's refined product yield values increased by 21% to $24.61 per barrel in 1996, from $20.35 per barrel in 1995, while the Company's feedstock costs increased by 17% to $19.80 per barrel in 1996 from $16.88 per barrel in 1995. During 1996, the Company's production of refined products declined in total by 6%, which included the impact of the scheduled maintenance period. Of this decline, gasoline production decreased by 11% and middle distillates, consisting of jet fuel and diesel fuel, decreased by only 3%. These reductions reflected the change of a hydrocracker catalyst, during the maintenance period, which allows for increased production of jet fuel and reduced production of gasoline, beginning in the fourth quarter of 1996, which better matches the Company's product supply with demand in Alaska. To further improve the refinery's feedstock and product slate, the Company intends to modify the refinery hydrocracker during 1997, at an estimated cost of $17 million. In conjunction with the modification and other initiatives, a refinery downtime of approximately 30 days is anticipated during 1997. The Company continued its marketing efforts during 1996, adding 31 locations in Alaska and 8 locations in the Pacific Northwest, bringing the total to 188 branded, unbranded and Company-owned retail outlets in Alaska and 18 branded stations in the Pacific Northwest. Two uneconomic outlets in these areas were closed in 1996. In addition, the Company began producing and marketing liquid asphalt, a heavy product remaining after the refining process, which is a seasonal product in Alaska. Export sales of refined products, including sales to the Russian Far East, amounted to $22.0 million in 1996 and $18.5 million in 1995. Revenues from sales of refined products in the Company's Refining and Marketing segment decreased in 1996 due primarily to a 20% decline in sales volumes, partially offset by a 16% increase in average sales prices. Total refined product sales averaged 62,167 barrels per day in 1996 as compared to 77,301 barrels per day in 1995. This decline reflected the lower production volumes and the Company's withdrawal from certain West Coast markets during 1996, which also reduced the Company's purchases from other refiners and suppliers to 11,600 barrels per day in 1996 as compared to 25,500 barrels per day in 1995. The Company plans to sell its Company-owned facilities in California. One of these facilities was sold in 1996 resulting in a loss of 25 26 $.8 million; two facilities remain for sale at year-end 1996. The Company at times resells previously purchased crude oil, sales of which increased to $93.8 million in 1996, compared to $75.8 million in 1995, due primarily to higher crude oil prices and in part due to sales of excess crude supply volumes during the maintenance period. Costs of sales decreased in 1996 due to lower volumes of refined products, partially offset by higher prices for crude oil and refined products. Operating expenses were higher in 1996 due primarily to higher environmental and employee costs partially offset by lower insurance costs. Although results from the Company's Refining and Marketing segment for 1996 improved over 1995 levels, future profitability of this segment will continue to be significantly 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. 1995 Compared to 1994. The Refining and Marketing's segment operating profit of $.7 million in 1995 decreased $1.7 million from operating profit of $2.4 million in 1994. Results for 1994 benefited from an $8.5 million refund received in settlement of a tariff dispute, a gain of $2.4 million from the sale of assets and favorable feedstock cost adjustments of $1.5 million, partially offset by $6.6 million for environmental contingencies and other matters. Excluding these items from 1994, operating profit in 1995 reflected an improvement of $4.1 million from the 1994 operating results. The Company's average feedstock costs increased by 8%, to $16.88 per barrel in 1995 from $15.65 per barrel in 1994, while the average yield value of the Company's refinery production increased by only 4%, to $20.35 per barrel in 1995 from $19.48 per barrel in 1994. Increased demand for Alaska North Slope ("ANS") crude oil for use as a feedstock in West Coast refineries and declining production volumes of ANS, combined with an oversupply of products in Alaska and on the West Coast, resulted in higher feedstock costs for the Company relative to increases in refined product sales prices. As a result, the Company's refined product margins were depressed in 1995. The start-up in December 1994 of a vacuum unit at the Company's refinery increased the yield of higher-valued products during 1995 and lessened the impact of these industry conditions on the Company's refinery spread. The Company's refinery yield of residual products was reduced to 18% of total production in 1995 from 32% of total production in 1994. In addition, margins on sales of inventories and purchased volumes combined to improve the segment's gross margins on total product sales to $3.02 per barrel in 1995, compared to $2.92 per barrel in 1994. The Company's total refinery production increased by 10%, including a 22% increase in gasoline volumes and a 12% increase in middle distillates volumes. Accordingly, in 1995, the Company implemented initiatives that increased the demand for the refinery's production and improved the refinery's capacity utilization and efficiencies. In these regards, the Company expanded its marketing efforts by branding and rebranding sales outlets in Alaska and the Pacific Northwest and by exporting refined products to the Far East, including Russia. Revenues from export sales totaled $18.5 million in 1995 compared to $5.2 million in 1994. The Company's total product sales increased to 77,301 average barrels per day in 1995 from 70,675 average barrels per day in 1994. Revenues from sales of refined products in 1995 were higher than in 1994 due to higher sales prices and the increase in sales volumes. Resales of crude oil aggregated $75.8 million in 1995 and $72.3 million in 1994. Costs of sales were higher in 1995 due to higher volumes and prices. Operating expenses decreased by $3.5 million in 1995 primarily due to lower environmental costs, partly offset by increased employee costs and fuels and utilities expense. Depreciation and amortization increased by $1.5 million in 1995 due to capital additions, primarily the vacuum unit, completed in late 1994. Included in 1994 was a $2.4 million gain from the sale of assets. 26 27 EXPLORATION AND PRODUCTION
1996 1995 1994 ------- ------- ------ (DOLLARS IN MILLIONS EXCEPT PER UNIT AMOUNTS) U.S. OIL AND GAS Gross operating revenues.................................. $ 88.4 107.3 87.5 Production costs.......................................... 5.3 12.0 9.0 Administrative support and other operating expenses....... 3.5 2.9 2.3 Depreciation, depletion and amortization.................. 25.3 29.0 24.1 Income from settlement of a natural gas contract(1)....... 60.0 -- -- Gain on sale of assets and other income................... 4.8 33.5 -- ------- ------- ------ Operating Profit -- U.S. Oil and Gas.............. 119.1 96.9 52.1 ------- ------- ------ U.S. GAS TRANSPORTATION Gross operating revenues.................................. 5.4 5.7 3.1 Operating expenses........................................ .3 .3 -- Depreciation and amortization............................. .3 .3 .2 ------- ------- ------ Operating Profit -- U.S. Gas Transportation....... 4.8 5.1 2.9 ------- ------- ------ BOLIVIA OIL AND GAS Gross operating revenues.................................. 13.7 11.7 13.2 Production costs.......................................... .8 .6 .6 Administrative support and other operating expenses....... 2.8 3.2 3.3 Depreciation, depletion and amortization.................. 1.3 .3 -- ------- ------- ------ Operating Profit -- Bolivia....................... 8.8 7.6 9.3 ------- ------- ------ TOTAL OPERATING PROFIT -- EXPLORATION AND PRODUCTION........ $ 132.7 109.6 64.3 ======= ======= ====== U.S. Capital expenditures (including U.S. gas transportation)........................................ $ 59.7 49.6 65.6 ======= ======= ====== Net natural gas production (average daily Mcf) -- Spot market and other(2)............................... 76,857 94,668 65,841 Tennessee Gas Contract(1).............................. 10,797 19,822 17,955 ------- ------- ------ Total Production.................................. 87,654 114,490 83,796 ======= ======= ====== Average natural gas sales price ($/Mcf) -- Spot market............................................ $ 1.95 1.34 1.48 Tennessee Gas Contract(1).............................. $ 8.41 8.41 7.93 Average................................................ $ 2.75 2.57 2.86 Average operating expenses ($/Mcfe) -- Lease operating expenses............................... $ .14 .11 .11 Severance taxes........................................ .03 .18 .18 ------- ------- ------ Total production costs............................ .17 .29 .29 Administrative support................................. .10 .06 .08 ------- ------- ------ Total operating expenses.......................... $ .27 .35 .37 ======= ======= ====== Depletion ($/Mcfe)........................................ $ .79 .69 .79
27 28
1996 1995 1994 --------- --------- --------- (DOLLARS IN MILLIONS EXCEPT PER UNIT AMOUNTS) BOLIVIA Capital expenditures......................................................... $ 6.9 3.8 -- Net natural gas production (average daily Mcf)............................... 20,251 18,650 22,082 Average natural gas sales price ($/Mcf)...................................... $ 1.33 1.28 1.20 Net condensate production (average daily barrels)............................ 584 567 733 Average condensate sales price ($/barrel).................................... $ 17.98 14.39 13.28 Average operating expenses ($/Mcfe) -- Production costs.......................................................... $ .10 .07 .06 Value-added taxes......................................................... .05 .06 .10 Administrative support.................................................... .27 .35 .25 --------- --------- --------- Total operating expenses............................................. $ .42 .48 .41 ========= ========= ========= Depletion ($/Mcfe)........................................................... $ .15 .03 --
- --------------- (1) See Note D of Notes to Consolidated Financial Statements in Item 8 for information related to the Tennessee Gas Contract. (2) Includes 24,500 Mcf per day in 1995 related to certain interests in the Bob West Field that were sold in the 1995 third quarter (see Note C of Notes to Consolidated Financial Statements in Item 8). (3) Mcf is defined as one thousand cubic feet; Mcfe is defined as net equivalent one thousand cubic feet. EXPLORATION AND PRODUCTION -- UNITED STATES 1996 Compared to 1995. Operating profit of $119.1 million from the Company's U.S. oil and gas operations in 1996 increased $22.2 million from operating profit of $96.9 million in 1995. Comparability between these years was impacted by several major transactions in 1996, which will also impact future results of operations. These transactions included the favorable resolution in August 1996 of litigation with Tennessee Gas Pipeline Company ("Tennessee Gas") regarding a natural gas purchase and sales contract ("Tennessee Gas Contract") and the termination of the remainder of such contract in December 1996. As provided for in the Tennessee Gas Contract, which was to expire in January 1999, the Company was selling a portion of the gas produced in the Bob West Field pursuant to a contract price ("Contract Price"), which was above the average spot market price. In total, during 1996 the Company received approximately $120 million in cash for the resolution of litigation and termination of the Tennessee Gas Contract, with the Company's Exploration and Production segment recording operating profit of $60 million for the termination of the contract effective October 1, 1996. Results of operations in future years will no longer benefit from the above-market pricing provisions of the Tennessee Gas Contract. In 1996, 1995 and 1994, the Exploration and Production segment's operating profit also included $24.6 million, $47.1 million and $38.9 million, respectively, from the excess of Tennessee Gas Contract prices over spot market prices. See Note D of Notes to Consolidated Financial Statements in Item 8 and "Capital Resources and Liquidity" discussed below. Additionally, during 1996, substantially all of the Company's proved producing reserves in the Bob West Field were certified by the Texas Railroad Commission as high-cost gas from a designated tight formation, eligible for state severance tax exemptions from the date of first production through August 2001. Accordingly, no severance tax is recorded on current production from exempt wells beginning in 1996 and the Company recognized income of $5 million for retroactive refunds for production in prior years. Operating profit for 1995 included a gain of $33 million from the sale of certain interests in the Bob West Field (see Note C of Notes to Consolidated Financial Statements in Item 8). Excluding these significant transactions and the impact of the incremental contract value from both years, operating profit from the Company's U.S. oil and gas operations for 1996 would have been $29 million compared to $16 million for 1995. This resulting increase was primarily due to higher spot market prices for sales of natural gas, as industry demand increased due to unusually cold weather combined with below-normal storage levels. 28 29 Prices realized by the Company on its spot natural gas production increased 46% to $1.95 per Mcf in 1996 from $1.34 per Mcf in 1995. Excluding 24,500 Mcf per day related to the sold interests from 1995, the Company's spot production increased by 6,600 Mcf per day. The Company's exploration and acquisition programs outside of the Bob West Field contributed 3,800 Mcf per day of the increase in spot production with the remaining increase attributable to sales to Tennessee Gas at spot prices effective October 1, 1996. The Company's weighted average sales price, which included the above-market pricing of the Tennessee Gas Contract through October 1, 1996, increased 7% to $2.75 per Mcf in 1996 as compared to $2.57 per Mcf in 1995. For the Bob West Field, production declined by 6,100 Mcf per day after excluding amounts related to sold interests in 1995. Gross operating revenues from the Company's U.S. oil and gas operations, after excluding $11.7 million related to the sold interests from 1995 and excluding price agreements discussed below, decreased by $3.8 million due primarily to the decline in volumes sold under the Tennessee Gas Contract, partially offset by increases in spot market sales prices and production. The decline in production costs of $6.7 million, or $.12 per Mcf, was mainly attributable to the severance tax exemptions in the Bob West Field. Total depreciation, depletion and amortization was lower in 1996 due to lower production volumes, partially offset by a higher depletion rate. 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 1996 and 1995, the Company used such agreements to set the price of 30% and 38%, respectively, of the natural gas production that it sold in the spot market. The Company recognized a loss of $3.1 million ($.11 per Mcf) in 1996 and a gain of $.3 million ($.01 per Mcf) in 1995 related to these price agreements. As of January 9, 1997, the Company had entered into price agreements for 1997 production totaling .9 Bcf of gas for an average Houston Ship Channel price of $2.18 per Mcf. In addition, the Company has entered into price agreements with collars, under which no payment will be made by either party unless the price falls below a designated floor price or above a designated ceiling price, at which time the Company receives or pays the difference, respectively. The Company has entered into price agreements with collars for 1997 production totaling 1.8 Bcf of gas with an average Houston Ship Channel floor price of $1.93 per Mcf and a ceiling price of $2.42 per Mcf. See Note N of Notes to Consolidated Financial Statements in Item 8 for further information on the price agreements. In addition to the natural gas and oil producing activities, the Company's results included revenues of $5.4 million and operating profit of $4.8 million in 1996 for transportation of natural gas to common carrier pipelines in the South Texas area, of which approximately 50% relates to transportation of the Company's production. These amounts were relatively unchanged from the prior year. 1995 Compared to 1994. Operating profit of $96.9 million in 1995 from the Company's U.S. oil and gas operations included a gain of approximately $33 million from the sale of certain interests in the Bob West Field. Excluding this gain, operating profit from these operations would have been approximately $63 million in 1995 compared with $52 million in 1994, reflecting a continued successful drilling program which resulted in an increase in the Company's U.S. natural gas production in South Texas. After the sale of certain Bob West Field interests in September 1995, which included interests in 14 gross producing wells, the number of wells in which the Company had an interest was reduced to 57 at year-end 1995, compared with 48 producing wells at year-end 1994. The Company's U.S. natural gas production sold into the spot market increased by 44% and production sold under the Tennessee Gas Contract increased by 10%. Revenues increased by $20 million due to these increases in production, but were partially offset by lower spot market natural gas sales prices. The Company's weighted average sales price decreased to $2.57 per Mcf during 1995 from $2.86 per Mcf in 1994, reflecting lower spot market sales prices and a lower percentage of production sold to Tennessee Gas at above-market prices. In 1995, approximately 17% of the Company's total U.S. production was sold to Tennessee Gas, compared to 21% in 1994 and 27% in 1993. Total production costs and other operating expenses were higher in 1995 due to the increased production levels and severance taxes related to the above-market pricing of sales to Tennessee Gas, but were relatively unchanged on a per Mcf basis. The impact of the increased production volumes on depletion expense was substantially offset by a 13% reduction in the depletion rate which resulted from additions to proved reserves during the year and elimination of proportionately higher future development costs on the reserves sold in the Bob West Field. 29 30 In 1995, operating results from the Exploration and Production segment included natural gas production of approximately 24 Mmcf per day, revenues of $11.7 million and operating profit of $4 million related to the interests that were sold in the Bob West Field. Operating results from the Company's natural gas transportation operations increased by $2.2 million in 1995 due to higher transmission volumes associated with the increased production levels in South Texas. Transportation of the Company's production accounted for approximately 51% and 58% of these results in 1995 and 1994, respectively. EXPLORATION AND PRODUCTION -- BOLIVIA 1996 Compared to 1995. Operating profit from the Company's Bolivian operations increased to $8.8 million in 1996, from the $7.6 million operating profit in 1995. This improvement was primarily due to a 9% increase in production of natural gas together with higher prices received for both natural gas and condensate. During the second and third quarters of 1996, the Company benefited from increased demand from the Bolivian state-owned oil and gas company for higher quality natural gas, in order to meet contract specifications for exports to Argentina, together with the inability of another producer to meet supply requirements. Total operating expenses declined by 12% on a per unit basis reflecting a 6% decrease in costs combined with the increase in volumes. Partially offsetting these improvements was an increase in depreciation, depletion and amortization of $1.0 million. In 1996, a new Hydrocarbons Law was passed by the Bolivian government that significantly impacts the Company's operations in Bolivia. The new law, among other matters, granted the Company the option to convert its Contracts of Operation to new Shared Risk Contracts. During 1996, the Company signed agreements to convert its Contracts of Operation to Shared Risk Contracts subject to recision at the option of the Company if the Company is not satisfied with modifications to the Bolivian fiscal law. The Company expects to complete this conversion during the first half of 1997. The new contracts extend the Company's term of operation, provide more favorable acreage relinquishment terms and provide for a more favorable fiscal regime of royalties and taxes. The new contracts will extend the term of the Company's operations for Block 18 ten additional years to the year 2017. For Block 20, the new contract extends the Company's term 21 additional years to the year 2029 for acreage that is in the exploration phase of the contract, and ten additional years to the year 2018 for an area within Block 20 that is designated as being in the development phase of the new contract. The new contract provisions, along with a substantial discovery during 1996, significantly increased the Company's reserves (see Note O of Notes to Consolidated Financial Statements in Item 8). The Company's Bolivian natural gas production is sold to Yacimientos Petroliferos Fiscales Bolivianos ("YPFB"), which in turn sells the natural gas to Yacimientos Petroliferos Fiscales, S.A. ("YPF"), a publicly-held company based in Argentina. During 1994, the contract between YPFB and YPF was extended through March 31, 1997, maintaining approximately the same volumes as the previous contract. YPFB and YPF are currently negotiating a new two-year contract through March 1999. Currently, the Company is selling its natural gas production to YPFB based on the volume and pricing terms in the contract between YPFB and YPF. 1995 Compared to 1994. In 1995, operating profit from the Company's Bolivian operations decreased by $1.7 million, reflecting a 16% decrease in net natural gas production. During 1994, the Company had benefited from higher levels of production due to the inability of another producer to satisfy gas supply requirements. Partially offsetting the decrease in production in 1995 were increases in the average prices of natural gas and condensate production. 30 31 MARINE SERVICES
1996 1995 1994 ------ ------ ------ (DOLLARS IN MILLIONS) GROSS OPERATING REVENUES Fuels, lubricants and other............................... $111.6 71.4 75.2 Services.................................................. 10.9 3.1 2.7 ------ ------ ------ Gross Operating Revenues.......................... $122.5 74.5 77.9 ====== ====== ====== OPERATING PROFIT Gross profit.............................................. $ 29.5 9.6 10.4 Operating and other expenses.............................. 22.2 13.7 12.4 Depreciation and amortization............................. 1.2 .3 .3 ------ ------ ------ Operating Profit (Loss)........................... $ 6.1 (4.4) (2.3) ====== ====== ====== CAPITAL EXPENDITURES (excluding acquisitions)............... $ 6.9 .4 .2 ====== ====== ====== FUEL SALES, PRIMARILY DIESEL (millions of gallons).......... 142.7 112.5 119.2 ====== ====== ====== NUMBER OF TERMINALS......................................... 20 14 17
1996 Compared to 1995. On February 20, 1996, the Company acquired Coastwide Energy Services, Inc. ("Coastwide") and combined these operations with the Company's marine petroleum products distribution business, forming a Marine Services segment. As a combined operation, the Marine Services segment is a marketer and distributor of diesel fuel and lubricants and a provider of logistical services to the offshore exploration and production industry in the Gulf of Mexico. Operating results from Coastwide have been included in the Company's Marine Services segment since the date of acquisition. See Note C of Notes to Consolidated Financial Statements in Item 8. The Marine Services segment currently consists of 20 terminals, compared to 14 at the prior year-end. The added locations and associated volumes, mainly related to the Coastwide acquisition, combined with higher fuel prices have contributed to an increase of $40.2 million in fuels and lubricants revenues. In addition, revenues from services has grown by $7.8 million. These increases in revenues together with improved margins during 1996 were partially offset by higher operating and other expenses associated with the increased activity. Depreciation and amortization increased during 1996 due to capital additions during the year. In total, results for the Marine Services segment reflected a turnaround from the losses incurred in the prior year with operating profit of $6.1 million for 1996. 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. During 1996, 1995 and 1994, wells drilled in the Gulf of Mexico totaled 1,068, 1,024 and 958, respectively. 1995 Compared to 1994. In 1995, the Company consolidated certain operations by exiting the land-based portion of its petroleum product distribution business, reducing the total number of Company sites to 14, primarily marine-based, at year-end. In these regards, four Texas locations were sold in 1995. Included in operating and other expenses in 1995 was a charge of $.8 million related to employee terminations and other exit costs. Revenues and costs of sales were lower in 1995 due to reduced volumes while these operations were being consolidated. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses of $12.7 million in 1996 compare with $16.4 million in 1995 and $14.7 million in 1994. The decrease in 1996 was primarily due to lower employee and labor costs resulting from cost reduction measures implemented by the Company in late 1995. When comparing 1995 to 1994, the increase was primarily due to higher employee and other benefits costs. 31 32 INTEREST EXPENSE AND INTEREST INCOME Interest expense of $15.4 million in 1996 compares with $20.9 million in 1995 and $18.7 million in 1994. The Company's redemption of public debt of $74.1 million in November 1996 and $34.6 million in December 1995 contributed to interest expense savings of $5.9 million in 1996, equating to future interest savings of approximately $10 million annually. The increase in 1995, compared to 1994, was primarily due to interest on the refinery vacuum unit financing and cash borrowings under the corporate revolving credit facility during 1995 and interest capitalized in 1994 related to the construction of the vacuum unit. In September 1996, the Company received and recorded interest income of approximately $7 million from Tennessee Gas in conjunction with the collection of a receivable that resulted from underpayment for natural gas sold in prior periods (see Note D of Notes to Consolidated Financial Statements in Item 8). OTHER EXPENSE Other expense of $10.0 million in 1996 compares with $8.5 million in 1995 and $7.4 million in 1994. The increase in 1996 included costs of $2.3 million related to a shareholder consent solicitation which was resolved in April 1996 together with a write-off of deferred financing costs and higher environmental and other costs related to the Company's former operations, partially offset by lower employee termination and restructuring costs. The increase in 1995, compared with 1994, was primarily due to severance costs and related benefits of $3.8 million resulting from a reduction in administrative workforce and other employee terminations (see Note J of Notes to Consolidated Financial Statements in Item 8), partially offset by lower environmental and other expenses related to the Company's former operations. INCOME TAXES Income taxes of $38.3 million in 1996 compare with $4.4 million in 1995 and $5.6 million in 1994. The Company's effective tax rate increased to 33% in 1996, compared to a 7% effective rate in 1995, due to earnings subject to U.S. taxes in 1996 exceeding available net operating loss and tax credit carryforwards. The decrease in income taxes in 1995, compared with 1994, was primarily due to lower state income taxes. IMPACT OF CHANGING PRICES The Company's operating 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 gross 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. This method results in inventory carrying amounts that are less likely to represent current values and in costs of sales which more closely represent current costs. Likewise, changes in natural gas 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 writedowns based on changes in natural gas prices and other determining factors. Changes in natural gas prices also influence the level of drilling activity in the Gulf of Mexico. The Company's marine services operation, whose customers include offshore drilling contractors and related industries, could be impacted by significant fluctuations in natural gas prices. 32 33 CAPITAL RESOURCES AND LIQUIDITY OVERVIEW The Company's primary sources of liquidity are its cash and cash equivalents, internal cash generation and external financing. During 1996, these sources were significantly enhanced with the (i) receipt of $67.7 million for the favorable resolution of the Tennessee Gas litigation in August 1996 and (ii) the receipt of $51.8 million for the termination of the Tennessee Gas Contract effective October 1, 1996 (see Note D of Notes to Consolidated Financial Statements in Item 8). Although the resolution of the litigation and termination of the remainder of the Tennessee Gas Contract will cause a decrease in the Company's average natural gas sales prices in future years, it removed a major financial uncertainty from the Company's capital structure, which improves the predictability of the Company's cash flows, provides for additional financial flexibility, and allows the Company to focus on growth initiatives. Furthermore, during 1996, the Company achieved improvement in profitability from all of its business segments. Cash flows from operations of $179 million in 1996, which included approximately $120 million received from Tennessee Gas discussed above, were used in part to fully redeem the Company's two public debt issues and to finance the Company's capital expenditure program. The redemption of debt strengthened the Company's financial condition, reducing the debt-to-capital ratio to 21% and lowering interest expense (see Note I of Notes to Consolidated Financial Statements in Item 8). The resolution of the litigation and termination of the remainder of the Tennessee Gas Contract together with the lower debt position have improved the Company's ability to access capital markets. The Company continues to assess its existing asset base in order to maximize returns and develop full value through strategic diversification and acquisitions in all of its operating segments. This ongoing assessment includes, in the Exploration and Production segment, evaluating ways in which the Company could diversify the mix of its oil and gas reserves and offset the impact of declining production through domestic development, exploration and acquisition activity outside of the Bob West Field. In the Refining and Marketing segment, the Company has been engaged in studies to improve profitability and has also evaluated possible joint ventures, strategic alliances or business combinations; such evaluations have not resulted in any transaction but operating strategies have been developed to optimize the product and feedstock slates, improve efficiencies and reliability, and expand marketing to increase placement of products in Alaska. The Company continues to evaluate its Marine Services segment, pursuing opportunities for expansion as well as optimizing existing operations. In these regards, during 1996, the Company made significant progress with each of its operating segments contributing to improved profitability. In 1996, the Company acquired Coastwide for approximately 1.4 million shares of Tesoro's Common Stock and $7.7 million in cash and purchased exploration and production properties, proved and unproved, outside of the Bob West Field for $25.7 million (see Note C of Notes to Consolidated Financial Statements in Item 8). 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 facility and other sources of capital will be affected by these conditions. CREDIT ARRANGEMENTS In June 1996, the Company amended and restated its corporate revolving credit agreement ("Credit Facility"), expiring in April 2000, which provides total commitments of $150 million from a consortium of nine banks. The Credit Facility provides for cash borrowings up to $100 million and issuance of letters of credit up to a borrowing base (which was approximately $141 million at December 31, 1996). The Credit Facility replaced a higher-cost $90 million facility and provides the Company with more financial flexibility, including lower interest rates, reduced fees on letters of credit, elimination of certain restrictive financial tests, 33 34 an increased borrowing base, increased cash borrowing availability, and the right to enter into non-recourse or limited financings for certain subsidiaries. The Company, at its option, has currently activated total commitments of $100 million. At December 31, 1996, the Company had outstanding letters of credit of $33 million with no cash borrowings outstanding. Outstanding obligations under the Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and by mortgages on the Company's refinery and South Texas natural gas reserves. Under the terms of the Credit Facility, the Company is required to maintain specified levels of consolidated working capital, tangible net worth, cash flow and interest coverage. Among other matters, the Credit Facility contains covenants which limit the incurrence of additional indebtedness and restricted payments. Although the terms of the Credit Facility allow for the payment of cash dividends subject to a cumulative amount available for dividend payments (which is defined as the difference of (i) the sum since December 31, 1995, of (a) $5 million and (b) 50% of consolidated net earnings of the Company in any calendar year and (ii) any amount previously paid for dividends since June 1996), cash dividends cannot exceed a maximum of $5 million annually. The Credit Facility also permits the Company to repurchase a limited amount of Common Stock for oddlot buyback programs, employee benefit plans and open market repurchases. The Board of Directors has no present plans to pay dividends. However, from time to time, the Board of Directors reevaluates the feasibility of declaring future dividends. In November 1996, a subsidiary of the Company entered into a loan facility with a bank, which provides a three-year line of credit up to $10 million to the Marine Services segment for the purchase of real estate and equipment at the bank's prime rate. The loan facility, which is subject to a borrowing base, is not guaranteed by the Company and is secured only by such real estate and equipment that are financed. Beginning in March 1998, credit availability is reduced quarterly by 6.667%. At December 31, 1996, $.9 million was outstanding under the loan facility. DEBT AND OTHER OBLIGATIONS Under an agreement reached in 1993, which settled a contractual dispute with the State of Alaska ("State"), the Company is obligated to make variable monthly payments to the State through December 2001 based on a per barrel charge on the volume of feedstock processed at the Company's refinery. In 1995 and 1994, based on a per barrel throughput charge of 16 cents, the Company's variable payments to the State amounted to $2.9 million and $2.8 million, respectively. The per barrel charge increased to 24 cents in 1996 with the Company's variable payment to the State totaling $4.0 million in the year. The per barrel charge of 24 cents in 1997 increases to 30 cents in 1998 with one cent annual incremental increases thereafter through 2001. In January 2002, the Company is obligated to pay the State $60 million; provided, however, that such payment may be deferred indefinitely by continuing the variable monthly payments to the State beginning at 34 cents per barrel for 2002 and increasing one cent per barrel annually thereafter. Variable monthly payments made after January 2002 will not reduce the $60 million obligation to the State. The $60 million obligation is evidenced by a security bond, and the bond and the throughput barrel obligations are secured by a mortgage on the Company's refinery. The Company's obligations under the agreement with the State and the mortgage are subordinated to current and future senior debt of up to $175 million plus any indebtedness incurred subsequent to the date of the agreement to improve the Company's refinery. CAPITAL SPENDING Capital spending in 1996 amounted to $85 million, which was funded from available cash reserves, cash flows from operations and borrowings under revolving credit lines. Capital expenditures for the Company's Exploration and Production segment were approximately $67 million, including $26 million for proved and unproved property acquisitions, $22 million for development and $19 million for exploration. During 1996, the Company participated in the drilling of 16 development wells and 6 exploratory wells in the U.S. and two exploratory wells in Bolivia. Capital projects for the Company's Refining and Marketing operations in 1996 totaled $11 million, primarily for installation of facilities to produce and market asphalt, improvements and 34 35 upgrades at the refinery and expansion of its retail marketing facilities. In the Marine Services segment, capital spending totaled $7 million during 1996 (excluding amounts for the Coastwide acquisition) primarily for equipment to improve operating efficiencies. For 1997, the Company has a total capital budget of approximately $156 million. The Exploration and Production segment accounts for $76 million, or 49%, of the budget with $68 million planned for U.S. activities and $8 million for Bolivia. Planned U.S. expenditures include $30 million for property acquisitions; $19 million for development drilling (participation in 19 wells) and workovers; $9 million for leasehold, geological and geophysical; and $10 million for exploratory drilling (participation in 15 wells). In Bolivia, the drilling program is budgeted at $2 million for one exploratory well, with the remainder planned for three-dimensional seismic activity. Capital spending for the Refining and Marketing segment is planned at $50 million, which includes $17 million for modification and expansion of the refinery hydrocracker to improve the feedstock and product slate. Additionally, in 1997 the Company will direct $20 million towards a three-year capital program to build new retail outlets and remodel existing stations in the Refining and Marketing segment. The Marine Services segment's capital budget is $29 million, primarily for expansion of its operations along the Gulf of Mexico and potential acquisitions. Capital expenditures for 1997 are expected to be financed through a combination of cash flows from operations, available cash reserves and borrowings under revolving credit lines. CASH FLOWS Components of the Company's cash flows are set forth below (in millions):
1996 1995 1994 ------ ----- ----- Cash Flows From (Used In): Operating Activities..................................... $179.0 35.4 60.3 Investing Activities..................................... (94.2) 2.4 (91.2) Financing Activities..................................... (75.9) (37.9) 8.3 ------ ----- ----- Increase (Decrease) in Cash and Cash Equivalents........... $ 8.9 (.1) (22.6) ====== ===== =====
During 1996, net cash from operating activities totaled $179 million, compared with $35 million in 1995. This increase in operating cash flows in 1996 was primarily due to the receipt of $120 million from Tennessee Gas for the favorable resolution of litigation in August 1996 and termination of the natural gas purchase and sales contract effective October 1, 1996. In addition, improved profitability plus noncash items, such as depreciation, depletion and amortization and deferred income taxes, contributed to higher cash flows from operations. Partially offsetting these increases were higher net working capital balances, particularly receivables which increased due to higher year-end sales volumes together with higher prices. Net cash used in investing activities of $94 million in 1996 included capital expenditures of $85 million and cash consideration of nearly $8 million for the acquisition of Coastwide. Net cash used in financing activities of $76 million during 1996 was primarily due to the redemption of Subordinated Debentures and Exchange Notes aggregating $74 million together with payments of other long-term debt. During 1996, the Company's gross borrowings and repayments under its revolving credit lines amounted to $166 million. At December 31, 1996, the Company's net working capital totaled $99 million, which included cash and cash equivalents of $23 million. During 1995, net cash from operating activities totaled $35 million, compared with $60 million in 1994. Although natural gas production from the Company's South Texas operations increased during 1995, lower cash receipts for sales of natural gas adversely affected the Company's cash flows from operations. Net cash from investing activities of $2 million in 1995 included proceeds of $70 million from sales of assets, primarily certain interests in the Bob West Field, partially offset by $64 million of capital expenditures and $3 million for acquisition of the Kenai Pipe Line Company ("KPL"). Net cash used in financing activities of $38 million in 1995 was primarily related to the redemption of $34.6 million of Subordinated Debentures and payments of other long-term debt. The Company's gross borrowings and repayments under the Facility totaled $262 million during 1995. 35 36 Net cash from operating activities of $60 million in 1994 included net earnings adjusted for certain noncash charges, together with reduced working capital requirements. Net cash used in investing activities of $91 million during 1994 included capital expenditures of $100 million, mainly for exploration and production activities in the Bob West Field and installation of the vacuum unit at the Company's refinery. These uses of cash in investing activities in 1994 were partially offset by a net decrease of $6 million in short-term investments and cash proceeds of $3 million from sales of assets. Net cash from financing activities of $8 million during 1994 included $15 million in borrowings under the Vacuum Unit Loan and $4 million net proceeds from an equity offering (see Note K of Notes to Consolidated Financial Statements in Item 8). These financing sources of cash during 1994 were partially offset by the repayment of net borrowings of $5 million under interim financing arrangements early in 1994 and dividends of $2 million paid on preferred stock. ENVIRONMENTAL AND OTHER MATTERS 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 a remedial response and has incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of its own properties. At December 31, 1996, the Company's accruals for environmental expenses amounted to $8.9 million, which included a noncurrent liability of $3.5 million for remediation of the KPL properties that has been funded by the former owners through a restricted escrow deposit. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. In addition, to comply with environmental laws and regulations, the Company anticipates that it will make capital improvements of approximately $6 million in 1997 and $3 million in 1998. The Company also expects to spend approximately $6 million by the year 2002 for secondary containment systems for existing storage tanks in Alaska. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refinery, retail gasoline outlets (current and closed locations) and petroleum product terminals, and for compliance with the Clean Air Act. The amount of such future expenditures cannot currently be determined by the Company. For further information on environmental contingencies, see Note L of Notes to Consolidated Financial Statements in Item 8. CRUDE OIL PURCHASE CONTRACT The Company has a three-year contract with the State of Alaska for the purchase of royalty crude oil covering the period January 1, 1996 through December 31, 1998. The contract provides for the purchase of approximately 40,000 barrels per day of ANS royalty crude oil, the primary feedstock for the Company's refinery, and is priced based on royalty values computed by the State. Under this agreement, the Company is required to utilize in its refinery operations volumes equal to at least 80% of the ANS crude oil to be purchased from the State. This contract contains provisions that, under certain conditions, allow the Company to temporarily or permanently reduce its purchase obligations. FORWARD-LOOKING STATEMENTS Statements in this Annual Report, including those contained in the foregoing discussion and other items herein, concerning the Company which are (a) projections of revenues, earnings, earnings per share, capital expenditures or other financial items, (b) statements of plans and objectives for future operations, (c) statements of future economic performance, or (d) statements of assumptions or estimates underlying or supporting the foregoing are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The ultimate accuracy of forward-looking statements is subject to a wide range of business risks and changes in circumstances, and actual results and outcomes often differ from expectations. Any number of important factors could cause actual results to 36 37 differ materially from those in the forward-looking statements herein, including the following: the timing and extent of changes in commodity prices and underlying demand and availability of crude oil and other refinery feedstocks, refined products, and natural gas; actions of our customers and competitors; changes in the cost or availability of third-party vessels, pipelines and other means of transporting feedstocks and products; state and federal environmental, economic, safety and other policies and regulations, any changes therein, and any legal or regulatory delays or other factors beyond the Company's control; execution of planned capital projects; weather conditions affecting the Company's operations or the areas in which the Company's products are marketed; future well performance; the extent of Tesoro's success in acquiring oil and gas properties and in discovering, developing and producing reserves; political developments in foreign countries, the conditions of the capital markets and equity markets during the periods covered by the forward-looking statements; earthquakes or other natural disasters affecting operations; adverse rulings, judgments, or settlements in litigation or other legal matters, including unexpected environmental remediation costs in excess of any reserves; and adverse changes in the credit ratings assigned to the Company's trade credit. 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. 37 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Tesoro Petroleum Corporation We have audited the accompanying consolidated balance sheets of Tesoro Petroleum Corporation and subsidiaries as of December 31, 1996 and 1995, and the related statements of consolidated operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Tesoro Petroleum Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Antonio, Texas January 23, 1997 38 39 TESORO PETROLEUM CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- -------- REVENUES Refining and marketing.................................. $ 745,413 771,035 686,994 Exploration and production.............................. 107,415 124,670 103,773 Marine services......................................... 122,533 74,467 77,917 Income from settlement of a natural gas contract (Note D)................................................... 60,000 -- -- Gain on sales of assets and other income................ 4,417 32,711 3,259 ---------- ---------- -------- Total Revenues.................................. 1,039,778 1,002,883 871,943 ---------- ---------- -------- OPERATING COSTS AND EXPENSES Refining and marketing.................................. 726,029 758,329 676,697 Exploration and production.............................. 12,968 19,055 15,302 Marine services......................................... 115,314 77,803 80,507 Depreciation, depletion and amortization................ 40,627 41,776 35,041 ---------- ---------- -------- Total Operating Costs and Expenses.............. 894,938 896,963 807,547 ---------- ---------- -------- OPERATING PROFIT.......................................... 144,840 105,920 64,396 General and Administrative................................ (12,733) (16,453) (14,750) Interest Expense, Net of Capitalized Interest in 1994..... (15,382) (20,902) (18,749) Interest Income........................................... 8,423 1,845 2,522 Other Expense, Net........................................ (10,001) (8,542) (7,363) ---------- ---------- -------- EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM....... 115,147 61,868 26,056 Income Tax Provision...................................... 38,347 4,379 5,573 ---------- ---------- -------- EARNINGS BEFORE EXTRAORDINARY ITEM........................ 76,800 57,489 20,483 Extraordinary Loss on Extinguishment of Debt (Net of Income Tax Benefit of $886 in 1996)..................... (2,290) (2,857) (4,752) ---------- ---------- -------- NET EARNINGS.............................................. 74,510 54,632 15,731 Dividend Requirements on Preferred Stock.................. -- -- 2,680 ---------- ---------- -------- NET EARNINGS APPLICABLE TO COMMON STOCK................... $ 74,510 54,632 13,051 ========== ========== ======== EARNINGS PER SHARE Earnings Before Extraordinary Item...................... $ 2.90 2.29 .77 Extraordinary Loss on Extinguishment of Debt, Net of Income Tax Benefit................................... (.09) (.11) (.21) ---------- ---------- -------- Net Earnings.................................... $ 2.81 2.18 .56 ========== ========== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES...... 26,499 25,107 23,196 ========== ========== ========
The accompanying notes are an integral part of these consolidated financial statements. 39 40 TESORO PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ------------------- 1996 1995 -------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 22,796 13,941 Receivables, less allowance for doubtful accounts......... 128,013 77,534 Inventories............................................... 74,488 80,453 Prepayments and other..................................... 12,046 10,536 -------- ------- Total Current Assets.............................. 237,343 182,464 -------- ------- PROPERTY, PLANT AND EQUIPMENT Refining and marketing.................................... 328,522 322,023 Exploration and production, full-cost method of accounting: Properties being amortized............................. 179,433 119,836 Properties not yet evaluated........................... 12,344 5,118 Gas transportation..................................... 6,703 6,703 Marine services........................................... 33,820 12,757 Corporate................................................. 12,531 12,443 -------- ------- 573,353 478,880 Less accumulated depreciation, depletion and amortization.......................................... 256,842 217,191 -------- ------- Net Property, Plant and Equipment...................... 316,511 261,689 -------- ------- RECEIVABLE FROM TENNESSEE GAS PIPELINE COMPANY (Note D)..... -- 50,680 -------- ------- OTHER ASSETS................................................ 28,733 24,320 -------- ------- Total Assets...................................... $582,587 519,153 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 80,747 61,389 Accrued liabilities....................................... 33,256 33,066 Current income taxes payable.............................. 13,822 1,007 Current maturities of long-term debt and other obligations............................................ 10,043 9,473 -------- ------- Total Current Liabilities......................... 137,868 104,935 -------- ------- DEFERRED INCOME TAXES....................................... 19,151 5,389 -------- ------- OTHER LIABILITIES........................................... 42,243 37,308 -------- ------- LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT MATURITIES................................................ 79,260 155,007 -------- ------- COMMITMENTS AND CONTINGENCIES (Note L) STOCKHOLDERS' EQUITY Preferred stock, no par value; authorized 5,000 shares including redeemable preferred shares; none issued or outstanding Common stock, par value $.16 2/3; authorized 50,000 shares; 26,414 shares issued and outstanding (24,780 in 1995).................................................. 4,402 4,130 Additional paid-in capital................................ 189,368 176,599 Retained earnings......................................... 110,295 35,785 -------- ------- Total Stockholders' Equity............................. 304,065 216,514 -------- ------- Total Liabilities and Stockholders' Equity........ $582,587 519,153 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 40 41 TESORO PETROLEUM CORPORATION STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK RETAINED EARNINGS --------------- ADDITIONAL (ACCUMULATED SHARES AMOUNT PAID-IN CAPITAL DEFICIT) ------ ------ --------------- ----------------- DECEMBER 31, 1993............................. 14,089 $2,348 $ 86,748 $(31,898) Recapitalization and equity offering, net (Note K)................................. 10,265 1,710 88,481 -- Stock awards and options.................... 36 7 285 -- Net earnings................................ -- -- -- 15,731 Accrued dividends on preferred stocks....... -- -- -- (2,680) ------ ------ -------- -------- DECEMBER 31, 1994............................. 24,390 4,065 175,514 (18,847) Stock awards and options.................... 390 65 1,085 -- Net earnings................................ -- -- -- 54,632 ------ ------ -------- -------- DECEMBER 31, 1995............................. 24,780 4,130 176,599 35,785 Issuance of Common Stock for acquisition.... 1,308 218 11,054 -- Stock awards and options.................... 326 54 1,715 -- Net earnings................................ -- -- -- 74,510 ------ ------ -------- -------- DECEMBER 31, 1996............................. 26,414 $4,402 $189,368 $110,295 ====== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 41 42 TESORO PETROLEUM CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- ------- ------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings.............................................. $ 74,510 54,632 15,731 Adjustments to reconcile net earnings to net cash from operating activities: Extraordinary loss on extinguishment of debt, net of income tax benefit................................... 2,290 2,857 4,752 Depreciation, depletion and amortization............... 41,459 42,620 36,016 Loss (gain) on sales of assets......................... 835 (32,659) (2,379) Amortization of deferred charges and other............. 1,601 1,556 2,800 Changes in operating assets and liabilities: Receivable from Tennessee Gas Pipeline Company....... 50,680 (37,456) (13,224) Receivables, other trade............................. (42,542) 9,746 (7,279) Inventories.......................................... 7,210 (11,599) 5,884 Other assets......................................... (3,521) (3,573) (1,808) Accounts payable and accrued liabilities............. 28,165 4,605 20,567 Deferred income taxes................................ 14,649 807 790 Obligation payments to State of Alaska............... (4,047) (2,892) (2,754) Other liabilities and obligations.................... 7,673 6,769 1,201 -------- ------- ------- Net cash from operating activities................ 178,962 35,413 60,297 -------- ------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures...................................... (84,957) (63,930) (99,587) Acquisitions (Note C)..................................... (7,720) (3,029) -- Proceeds from sales of assets............................. 2,569 69,786 2,544 Sales of short-term investments, net of $1,974 purchases in 1994................................................ -- -- 5,952 Other..................................................... (4,092) (423) (50) -------- ------- ------- Net cash from (used in) investing activities...... (94,200) 2,404 (91,141) -------- ------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Repurchase of debentures.................................. (74,116) (34,634) -- Payments of long-term debt................................ (3,838) (2,979) (1,383) Net borrowings (repayments) under revolving credit facilities............................................. 883 -- (5,000) Issuance of long-term debt................................ -- -- 15,000 Proceeds from issuance of common stock, net............... -- -- 56,967 Repurchase of common and preferred stock.................. -- -- (52,948) Dividends on preferred stocks............................. -- -- (1,684) Other..................................................... 1,164 (281) (2,686) -------- ------- ------- Net cash from (used in) financing activities...... (75,907) (37,894) 8,266 -------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 8,855 (77) (22,578) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 13,941 14,018 36,596 -------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 22,796 13,941 14,018 ======== ======= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid, net of $915 capitalized in 1994............ $ 12,450 18,132 15,898 ======== ======= ======= Income taxes paid......................................... $ 6,285 4,046 5,361 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 42 43 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements include the accounts of Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company" or "Tesoro"). Tesoro is a natural resource company primarily engaged in petroleum refining and marketing, natural gas exploration and production, marketing and distributing of petroleum products and providing marine logistics services. All significant intercompany accounts and transactions have been eliminated. Use of Estimates and Presentation The preparation of the Company's 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 year. Actual results could differ from those estimates. Certain previously reported amounts have been reclassified to conform with the 1996 presentation. Cash and Cash Equivalents Cash equivalents consist of highly-liquid debt instruments such as commercial paper and certificates of deposit purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates market value. The Company's policy is to invest cash in conservative, highly-rated instruments and to invest in various institutions to limit the amount of credit exposure in any one institution. The Company performs ongoing evaluations of the credit standing of these financial institutions. Inventories Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO") method was used to determine the cost of the Company's inventories of crude oil and U.S. wholesale refined products. The cost of remaining inventories was determined principally on the first-in, first-out ("FIFO") or weighted average basis. See Note F. Property, Plant and Equipment Additions to property, plant and equipment and major renewals and improvements are capitalized at cost. Maintenance and repairs are charged to operations when incurred. Depletion of oil and gas producing properties is determined principally by the unit-of-production method and is based on estimated recoverable reserves. Depreciation of other property, plant and equipment is generally computed on the straight-line method based upon the estimated useful lives of the assets, ranging from 3 years to 33 years for refining and marketing assets and 3 years to 25 years for other assets. Salvage values are estimated at 20% for refinery assets and 10% for other assets. Assets recorded under capital leases and leasehold improvements are amortized on the straight-line method over the shorter of the term of the lease or the useful life of the related asset. Oil and gas properties are accounted for using the full-cost method of accounting. Under this method, all costs associated with property acquisition and exploration and development activities are capitalized into cost centers that are established on a country-by-country basis. For each cost center, the capitalized costs are subject to a limitation so as not to exceed the present value of future net revenues from estimated production of proved oil and gas reserves net of income tax effect plus the lower of cost or estimated fair value of unproved properties included in the cost center. Capitalized costs within a cost center, together with estimates of costs for future development, dismantlement and abandonment, are amortized on a unit-of-production method 43 44 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) using the proved oil and gas reserves for each cost center. The Company's investment in certain oil and gas properties is excluded from the amortization base until the properties are evaluated. Gain or loss is recognized only on the sale of oil and gas properties involving significant reserves. Proceeds from the sale of insignificant reserves and undeveloped properties are applied to reduce the costs in the cost centers. Income Taxes Deferred tax assets and liabilities are recognized for future income tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Measurement of deferred tax assets and liabilities is based on enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Environmental Expenditures Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that extend the life, increase the capacity, or mitigate or prevent environmental contamination, are capitalized. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated. Such amounts are based on the estimated timing and extent of remedial actions required by applicable governing agencies, experience gained from similar sites on which environmental assessments or remediation has been completed, and the amount of the Company's anticipated liability considering the proportional liability and financial abilities of other responsible parties. Estimated liabilities are not discounted to present value. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company's commitment to a formal plan of action. Financial Instruments The carrying amount of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates fair value because of the short maturity of these instruments. The carrying amount of the Company's long-term debt and other obligations approximated the Company's estimates of the fair value of such items. Earnings Per Share Earnings per share is based on the weighted average number of common shares outstanding during the year, including the dilutive effect of common stock equivalents, principally stock options. For 1994, the assumed conversion of preferred stocks to common shares was anti-dilutive. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's Common Stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as included in Note K. 44 45 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- BUSINESS SEGMENTS The Company's revenues are derived from three business segments: Refining and Marketing, Exploration and Production, and Marine Services. Refining and Marketing operates a petroleum refinery at Kenai, Alaska, which manufactures gasoline, jet fuel, diesel fuel, heavy oils and residual products. These products, together with products purchased from third parties, are sold at wholesale through terminal facilities and other locations in Alaska and the Pacific Northwest. In addition, Refining and Marketing markets gasoline, other petroleum products and convenience store items at retail through a chain of 7-Eleven convenience stores in Alaska. Refining and Marketing also markets petroleum products through other branded and unbranded stations in Alaska and the Pacific Northwest. Revenues from export sales, primarily to Far East markets, amounted to $22.0 million, $18.5 million and $5.2 million in 1996, 1995 and 1994, respectively. The Company at times resells previously purchased crude oil, sales of which amounted to $93.8 million, $75.8 million and $72.3 million in 1996, 1995 and 1994, respectively. The Exploration and Production segment is engaged in the exploration, development and production of natural gas and oil, primarily in the Wilcox Trend in South Texas and the Chaco Basin in Bolivia. In the U.S., the Company's focus has recently shifted outside of the maturing Bob West Field in South Texas to other areas. During 1996 and early 1997, the Exploration and Production segment purchased interests in the Frio/Vicksburg Trend adjacent to the Wilcox Trend in South Texas, the Cotton Valley Pinnacle Reef Play in East Texas and the Val Verde Basin in Southwest Texas (see Note C). This segment also includes the transportation of natural gas, including the Company's production, to common carrier pipelines in the South Texas area. In Bolivia, the Company operates through two contracts with the Bolivian government to explore for and produce hydrocarbons. The Company's Bolivian gas production is sold under contract to the Bolivian government for export to Argentina. The majority of the Company's Bolivian natural gas and oil reserves are shut-in awaiting access to gas-consuming markets. Major developments in South America indicate that new markets may open for the Company's production in the near future, particularly with the construction of a Bolivia-Brazil pipeline scheduled to start in late 1997, with first gas deliveries expected in 1999. Marine Services markets and distributes petroleum products and provides logistics services, primarily to the marine and offshore exploration and production industries operating in the Gulf of Mexico. This segment currently operates 20 terminals along the Texas and Louisiana Gulf Coast. For information regarding an acquisition in this segment, see Note C. During 1995, the Company consolidated certain operations in this segment by exiting the land-based portion of its petroleum product distribution business, and in 1994 the Company discontinued an environmental remediation products and services operation formerly included in this segment. Segment operating profit is gross operating revenues, gains and losses on asset sales and other income less applicable segment costs of sales, operating expenses, depreciation, depletion and other items. Income taxes, interest expense, interest income and corporate general and administrative expenses are not included in determining operating profit. In the Exploration and Production segment, operating profit in 1996 included $60 million of income from termination of a natural gas contract and $5 million for retroactive severance tax refunds, and 1995 included a gain of $33 million from the sale of certain interests in the Bob West Field. In 1996, 1995 and 1994, the Exploration and Production segment's operating profit included $24.6 million, $47.1 million and $38.9 million, respectively, from the excess of Tennessee Gas Contract prices over spot market prices (see Note D). Operating profit from the Refining and Marketing segment in 1994 included a gain of $2.4 million from the sale of assets and a refund of $8.5 million for a tariff issue, partially offset by net charges of approximately $5 million for environmental contingencies and other matters. 45 46 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Identifiable assets are those assets utilized by the segment. Corporate assets are principally cash, investments and other assets that cannot be directly associated with the operations of a business segment. Segment information for the years ended December 31, 1996, 1995 and 1994 is as follows (in millions):
1996 1995 1994 -------- -------- -------- REVENUES Gross operating revenues: Refining and Marketing -- Refined products............................... $ 620.8 664.5 582.7 Other, primarily crude oil resales and merchandise................................. 124.6 106.5 104.3 Exploration and Production -- U.S. oil and gas............................... 88.4 107.3 87.5 U.S. gas transportation........................ 5.4 5.7 3.1 Bolivia........................................ 13.7 11.7 13.2 Marine Services.................................. 122.5 74.5 77.9 -------- -------- -------- Total Gross Operating Revenues.............. 975.4 970.2 868.7 Income from settlement of a natural gas contract.... 60.0 -- -- Other, including gain (loss) on asset sales......... 4.4 32.7 3.2 -------- -------- -------- Total Revenues.............................. $1,039.8 1,002.9 871.9 ======== ======== ======== OPERATING PROFIT (LOSS) Refining and Marketing.............................. $ 6.0 .7 2.4 Exploration and Production -- U.S. oil and gas................................. 119.1 96.9 52.1 U.S. gas transportation.......................... 4.8 5.1 2.9 Bolivia.......................................... 8.8 7.6 9.3 Marine Services..................................... 6.1 (4.4) (2.3) -------- -------- -------- Total Operating Profit........................... 144.8 105.9 64.4 Corporate and Unallocated Costs..................... (29.7) (44.0) (38.3) -------- -------- -------- Earnings Before Income Taxes and Extraordinary Item............................................. $ 115.1 61.9 26.1 ======== ======== ======== IDENTIFIABLE ASSETS Refining and Marketing.............................. $ 317.0 313.3 309.1 Exploration and Production -- U.S. oil and gas................................. 136.3 128.9 105.5 U.S. gas transportation.......................... 7.3 7.8 8.4 Bolivia.......................................... 27.0 17.8 11.1 Marine Services..................................... 56.0 18.0 19.8 Corporate........................................... 39.0 33.4 30.5 -------- -------- -------- Total Assets................................ $ 582.6 519.2 484.4 ======== ======== ========
46 47 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1995 1994 -------- -------- -------- DEPRECIATION, DEPLETION AND AMORTIZATION Refining and Marketing.............................. $ 12.5 11.9 10.4 Exploration and Production -- U.S. oil and gas................................. 25.3 29.0 24.1 U.S. gas transportation.......................... .3 .3 .2 Bolivia.......................................... 1.3 .3 -- Marine Services..................................... 1.2 .3 .3 Corporate........................................... .9 .8 1.0 -------- -------- -------- Total Depreciation, Depletion and Amortization.............................. $ 41.5 42.6 36.0 ======== ======== ======== CAPITAL EXPENDITURES Refining and Marketing.............................. $ 11.1 9.3 32.0 Exploration and Production -- U.S. oil and gas................................. 59.7 49.4 60.4 U.S. gas transportation.......................... -- .2 5.2 Bolivia.......................................... 6.9 3.8 -- Marine Services..................................... 6.9 .4 .2 Corporate........................................... .4 .8 1.8 -------- -------- -------- Total Capital Expenditures.................. $ 85.0 63.9 99.6 ======== ======== ========
NOTE C -- ACQUISITIONS AND DIVESTITURES During 1996, the Company's Exploration and Production segment recorded acquisitions of proved and unproved properties totaling $25.7 million. The most significant of these was the purchase in December 1996 of interests in the Los Indios and La Reforma Fields, located in Hidalgo and Starr counties of South Texas, for $15 million. These two fields are in the Frio/Vicksburg Trend, which lies immediately adjacent to the Wilcox Trend. Other acquisitions in 1996 included the purchase of interests in the Berry R. Cox and the West Goliad Fields, both located in the Wilcox Trend, for $5.4 million and the purchase of approximately 35,000 net undeveloped acres in four areas of Texas for $5.3 million. In September 1995, the Company sold, effective April 1, 1995, certain interests in its producing and non-producing oil and gas properties located in the Bob West Field in South Texas. The interests sold included the Company's approximate 55% net revenue interest and 70% working interest in Units C, D and E and a convertible override in Unit F of the Bob West Field. Excluded from the sale were the Company's interests in the State Park and Sanchez-O'Brien leases and the Ramirez USA E-6 well within the Bob West Field. In total, the sale included interests in 14 gross producing wells amounting to 77 Bcf, or 40%, of the Company's total net proved domestic reserves at the time of the sale (see Note O). For 1995, natural gas production from the interests sold had contributed approximately $11.7 million to revenues and $4 million to operating profit in the Company's Exploration and Production segment. Consideration for the sale was $74 million, which was adjusted for production, capital expenditures and certain other items after the effective date to approximately $68 million in cash received at closing, resulting in a gain of approximately $33 million in the 1995 third quarter. The consideration received by the Company was used to redeem $34.6 million of the Company's outstanding 12 3/4% Subordinated Debentures in 1995, reduce borrowings under the Company's revolving credit facility and improve corporate liquidity (see Note I). In February 1996, the Company purchased 100% of the capital stock of Coastwide Energy Services, Inc. ("Coastwide"). The consideration included approximately 1.4 million shares of Tesoro's Common Stock and $7.7 million in cash. The market price of Tesoro's Common Stock was $9.00 per share at closing of this transaction. In addition, Tesoro repaid approximately $4.5 million of Coastwide's outstanding debt. Coastwide 47 48 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was primarily a provider of logistical support services and a distributor of diesel fuel and lubricants to the offshore oil and gas industry in the Gulf of Mexico. The Company combined the Coastwide operation with its marine petroleum distribution operations, forming a Marine Services segment. The acquisition was accounted for as a purchase whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. In March 1995, the Company acquired all of the outstanding stock of Kenai Pipe Line Company ("KPL") for approximately $3 million cash. The Company's Refining and Marketing segment transports crude oil and a substantial portion of refined products utilizing KPL's pipeline and marine terminal facilities in Kenai, Alaska. The acquisition was accounted for using the purchase method. NOTE D -- GAS PURCHASE AND SALES CONTRACT Resolution of Litigation in 1996 Third Quarter On August 16, 1996, the Supreme Court of Texas issued a mandate that denied a motion for rehearing by Tennessee Gas Pipeline Company ("Tennessee Gas") and upheld all aspects of a Gas Purchase and Sales Agreement ("Tennessee Gas Contract") which had been the subject of litigation since 1990. As provided for in the Tennessee Gas Contract, the Company was selling a portion of the gas produced from the Bob West Field to Tennessee Gas at a maximum price as calculated in accordance with Section 102(b)(2) ("Contract Price") of the Natural Gas Policy Act of 1978 ("NGPA"). Subsequent to the mandate, the Company received cash of $67.7 million from Tennessee Gas, which included collection of a $59.6 million bonded receivable for underpayment for natural gas sold in prior periods. The remaining $8.1 million received was for interest and reimbursement of legal fees and court costs, which had not previously been recorded by the Company and resulted in income during the 1996 third quarter. Tennessee Gas resumed paying the Contract Price to the Company for gas taken beginning with May 1996 volumes up until termination of the Tennessee Gas Contract discussed below. Settlement and Termination of Contract in 1996 Fourth Quarter On December 24, 1996, the Company settled all other claims and disputes with Tennessee Gas, including litigation in Zapata County, Texas filed by Tennessee Gas, and agreed to terminate the Tennessee Gas Contract effective October 1, 1996. The Tennessee Gas Contract would have extended through January 1999. Under the settlement, the Company received $51.8 million and the right to recover severance taxes paid by Tennessee Gas of approximately $8.2 million, which resulted in income of $60 million to the Company during the 1996 fourth quarter. NOTE E -- RECEIVABLES Concentrations of credit risk with respect to accounts receivable are limited, due to the large number of customers comprising the Company's customer base and their dispersion across the Company's industry segments and geographic areas of operations. The Company performs ongoing credit evaluations of its customers' financial condition and in certain circumstances requires letters of credit or other collateral arrangements. The Company's allowance for doubtful accounts is reflected as a reduction of receivables in the 48 49 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Consolidated Balance Sheets. The following table reconciles the change in the Company's allowance for doubtful accounts for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 ------ ----- ----- Balance at Beginning of Year................................ $1,842 1,816 2,487 Charged to Costs and Expenses............................... 589 300 299 Recoveries of Amounts Previously Written Off and Other...... (44) 122 (4) Write-off of Doubtful Accounts.............................. (872) (396) (966) ------ ----- ----- Balance at End of Year............................ $1,515 1,842 1,816 ====== ===== =====
NOTE F -- INVENTORIES Components of inventories at December 31, 1996 and 1995 were as follows (in thousands):
1996 1995 ------- ------ Crude Oil and Wholesale Refined Products, at LIFO........... $55,858 70,406 Merchandise and Other Refined Products...................... 13,539 5,153 Materials and Supplies...................................... 5,091 4,894 ------- ------ Total Inventories................................. $74,488 80,453 ======= ======
At December 31, 1996 and 1995, inventories valued using LIFO were lower than replacement cost by approximately $17.7 million and $3.8 million, respectively. NOTE G -- ACCRUED LIABILITIES The Company's current accrued liabilities and noncurrent other liabilities as shown in the Consolidated Balance Sheets at December 31, 1996 and 1995 included the following (in thousands):
1996 1995 ------- ------- Accrued Liabilities -- Current: Accrued environmental costs............................... $ 5,367 5,935 Accrued employee and pension costs........................ 7,759 6,839 Accrued taxes other than income taxes..................... 5,988 3,910 Accrued interest.......................................... 1,155 2,879 Other..................................................... 12,987 13,503 ------- ------- Total Accrued Liabilities -- Current.............. $33,256 33,066 ======= ======= Other Liabilities -- Other: Accrued postretirement benefits........................... $30,508 28,706 Accrued environmental costs............................... 3,496 3,968 Other..................................................... 8,239 4,634 ------- ------- Total Other Liabilities -- Noncurrent............. $42,243 37,308 ======= =======
49 50 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- INCOME TAXES The income tax provision for the years ended December 31, 1996, 1995 and 1994 included the following (in thousands):
1996 1995 1994 ------- ----- ----- Federal -- Current......................................... $16,206 708 700 Federal -- Deferred........................................ 17,405 -- -- Foreign.................................................... 3,654 3,183 3,588 State...................................................... 1,082 488 1,285 ------- ----- ----- Income Tax Provision............................. $38,347 4,379 5,573 ======= ===== =====
Deferred income taxes and benefits are provided for differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Temporary differences and the resulting deferred tax assets and liabilities at December 31, 1996 and 1995 are summarized as follows (in thousands):
1996 1995 -------- ------- Deferred Federal Tax Assets: Investment tax and other credits.......................... $ 11,962 9,762 Accrued postretirement benefits........................... 9,941 9,424 Settlement with Department of Energy...................... 3,694 3,981 Settlement with the State of Alaska....................... 728 810 Acquisition............................................... 713 -- Net operating losses...................................... -- 29,695 Other..................................................... 3,417 8,594 -------- ------- Total Deferred Federal Tax Assets................. 30,455 62,266 -------- ------- Deferred Federal Tax Liabilities: Accelerated depreciation and property-related items....... (47,147) (39,734) Receivable related to a natural gas contract.............. -- (17,699) -------- ------- Total Deferred Federal Tax Liabilities............ (47,147) (57,433) -------- ------- Net Deferred Federal Tax Asset (Liability) Before Valuation Allowance................................................. (16,692) 4,833 Valuation Allowance......................................... -- (4,833) -------- ------- Net Deferred Federal Tax Liability.......................... (16,692) -- State Income and Other Taxes................................ (2,459) (5,389) -------- ------- Net Deferred Tax Liability........................ $(19,151) (5,389) ======== =======
50 51 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables set forth the components of the Company's results of operations (in thousands) and a reconciliation of the normal statutory federal income tax rate with the Company's effective tax rate:
1996 1995 1994 -------- ------ ------ Earnings Before Income Taxes and Extraordinary Loss: United States......................................... $106,675 55,221 18,336 Foreign............................................... 8,472 6,647 7,720 -------- ------ ------ Total Earnings Before Income Taxes and Extraordinary Loss.......................... $115,147 61,868 26,056 ======== ====== ====== Statutory U.S. Corporate Tax Rate (%)................... 35 35 35 Effect of: Accounting recognition of operating loss tax benefits........................................... (4) (33) (35) Foreign income taxes (net of tax benefit)............. 2 5 14 State income taxes (net of tax benefit)............... 1 1 5 Other................................................. (1) (1) 2 -------- ------ ------ Effective Income Tax Rate (%)........................... 33 7 21 ======== ====== ======
At December 31, 1996, the Company had approximately $8.2 million of investment tax credits and employee stock ownership credits available for carryover to subsequent years, which, if not used, will expire in the years 1997 through 2006. Additionally, at December 31, 1996, the Company had approximately $3.8 million of alternative minimum tax credit carryforwards, with no expiration dates, to offset future regular tax liabilities. NOTE I -- LONG-TERM DEBT AND OTHER OBLIGATIONS Long-term debt and other obligations at December 31, 1996 and 1995 consisted of the following (in thousands):
1996 1995 ------- -------- Liability to State of Alaska................................ $62,079 62,313 Vacuum Unit Loan............................................ 11,250 13,393 Liability to Department of Energy........................... 10,555 11,874 Revolving Credit Lines...................................... 883 -- Industrial Revenue Bonds.................................... 558 1,654 12 3/4% Subordinated Debentures (net of discount of $2,194 in 1995).................................................. -- 27,806 13% Exchange Notes.......................................... -- 44,116 Other....................................................... 3,978 3,324 ------- -------- 89,303 164,480 Less Current Maturities..................................... 10,043 9,473 ------- -------- $79,260 155,007 ======= ========
Aggregate maturities of long-term debt and obligations for each of the five years following December 31, 1996 are as follows: 1997 - $10.0 million; 1998 - $9.7 million; 1999 - $9.6 million; 2000 - $10.7 million; and 2001 - $11.3 million. Revolving Credit Lines In June 1996, the Company amended and restated its corporate revolving credit agreement ("Credit Facility"), expiring in April 2000, which provides total commitments of $150 million from a consortium of nine banks. The Company, at its option, has currently activated $100 million of these commitments. The 51 52 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Credit Facility provides for cash borrowings up to $100 million and issuance of letters of credit up to a borrowing base (which was approximately $141 million at December 31, 1996). Outstanding obligations under the Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and by mortgages on the Company's refinery and South Texas natural gas reserves. At December 31, 1996, the Company had outstanding letters of credit of $33 million with no cash borrowings outstanding. Cash borrowings under the Credit Facility bear interest at the prime rate plus .50% per annum or the London Interbank Offered Rate ("LIBOR") plus 1.5% per annum. Fees on outstanding letters of credit under the Credit Facility are 1.5% per annum. Under the terms of the Credit Facility, the Company is required to maintain specified levels of consolidated working capital, tangible net worth, cash flow and interest coverage. Among other matters, the Credit Facility contains covenants which limit the incurrence of additional indebtedness and restricted payments. Under the Credit Facility, dividends up to $5 million per year are allowed, subject to the restricted payment limit. During 1996 and 1995, the Company's gross borrowings and repayments under its corporate revolving credit line totaled $166 million and $262 million, respectively, which were used on a short-term basis to finance working capital requirements and capital expenditures. In November 1996, a subsidiary of the Company entered into a loan facility with a bank which provides a three-year line of credit up to $10 million to the Marine Services segment for the purchase of real estate and equipment at the bank's prime rate. The loan facility, which is subject to a borrowing base, is not guaranteed by the Company and is secured only by such real estate and equipment that are financed. Beginning in March 1998, credit availability is reduced quarterly by 6.667%. At December 31, 1996, $.9 million was outstanding under the loan facility. Vacuum Unit Loan In 1994, the National Bank of Alaska and the Alaska Industrial Development & Export Authority provided a $15 million loan to the Company towards the cost of the Company's refinery vacuum unit ("Vacuum Unit Loan"). The Vacuum Unit Loan matures January 1, 2002, requires equal quarterly payments of approximately $536,000 and bears interest at the unsecured 90-day commercial paper rate, adjusted quarterly, plus 2.6% per annum (8.23% at December 31, 1996) for two-thirds of the amount borrowed and at the National Bank of Alaska floating prime rate plus one-fourth of 1% per annum (8.5% at December 31, 1996) for the remainder. The Vacuum Unit Loan is secured by a first lien on the Company's refinery. Under the terms of the Vacuum Unit Loan, the Company is required to maintain specified levels of working capital, tangible net worth and cash flow, as defined. For 1996, the Company satisfied all of its covenants except for working capital and refinery cash flow requirements, which were waived by the lenders. 12 3/4% Subordinated Debentures and 13% Exchange Notes In November 1996, the Company fully redeemed its two public debt issues, totaling approximately $74 million, at a price equal to 100% of the principal amount, plus accrued interest to the redemption date. The redemption of debt was comprised of $44.1 million of outstanding 13% Exchange Notes ("Exchange Notes"), due December 1, 2000, and $30 million of outstanding 12 3/4% Subordinated Debentures ("Subordinated Debentures"), due March 15, 2001. The redemption was accounted for as an early extinguishment of debt in the 1996 third quarter, resulting in a pretax charge of $3.2 million ($2.3 million aftertax) which represented a write-off of unamortized bond discount and issue costs. The extraordinary losses on debt extinguishments of $2.9 million and $4.8 million in 1995 and 1994, respectively, related to the redemption of $34.6 million principal amount of Subordinated Debentures in December 1995 and the exchange of $44.1 million principal amount of Subordinated Debentures for Exchange Notes in February 1994 (see Note K). 52 53 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) State of Alaska In 1993, the Company entered into an agreement ("Agreement") with the State of Alaska ("State") that settled a contractual dispute with the State. Under the Agreement, the Company is obligated to make variable monthly payments to the State through December 2001 based on a per barrel charge on the volume of feedstock processed at the Company's refinery. In 1995 and 1994, based on a per barrel throughput charge of 16 cents, the Company's variable payments to the State totaled $2.9 million and $2.8 million, respectively. The per barrel charge increased to 24 cents in 1996 with the Company's variable payment to the State totaling $4.0 million in the year. The per barrel charge of 24 cents in 1997 increases to 30 cents in 1998 with one cent annual incremental increases thereafter through 2001. In January 2002, the Company is obligated to pay the State $60 million; provided, however, that such payment may be deferred indefinitely by continuing the variable monthly payments to the State beginning at 34 cents per barrel for 2002 and increasing one cent per barrel annually thereafter. Variable monthly payments made after January 2002 will not reduce the $60 million obligation to the State. The imputed rate of interest used by the Company on the $60 million obligation was 13%. The $60 million obligation is evidenced by a security bond, and the bond and the throughput barrel obligations are secured by a mortgage on the Company's refinery. The Company's obligations under the Agreement and the mortgage are subordinated to current and future senior debt of up to $175 million plus any indebtedness incurred subsequent to the date of the Agreement to improve the Company's refinery. Department of Energy A Consent Order entered into by the Company with the Department of Energy ("DOE") in 1989 settled all issues relating to the Company's compliance with federal petroleum price and allocation regulations from 1973 through decontrol in 1981. At December 31, 1996, the Company's remaining obligation is to pay the DOE $10.6 million, exclusive of interest at 6%, over the next six years. Industrial Revenue Bonds The industrial revenue bonds mature in 1997 and require semiannual payments of approximately $365,000. The bonds bear interest at a variable rate (6.1875% at December 31, 1996), which is equal to 75% of the National Bank of Alaska's prime rate. The bonds are collateralized by the Company's refinery sulphur recovery unit, which had a carrying value of approximately $5.6 million at December 31, 1996. NOTE J -- BENEFIT PLANS Retirement Plan For all eligible employees, the Company provides a qualified noncontributory retirement plan. Plan benefits are based on years of service and compensation. The Company's funding policy is to make contributions at a minimum in accordance with the requirements of applicable laws and regulations, but no more than the amount deductible for income tax purposes. The components of net pension expense for the Company's retirement plan for the years ended December 31, 1996, 1995 and 1994 are presented below (in thousands):
1996 1995 1994 ------- ------- ------- Service Costs............................................ $ 1,306 1,147 1,121 Interest Cost............................................ 3,536 3,549 3,351 Actual Return on Plan Assets............................. (6,212) (8,299) (217) Net Amortization and Deferral............................ 1,687 4,288 (3,408) ------- ------- ------- Net Pension Expense.................................... $ 317 685 847 ======= ======= =======
53 54 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of the Company's retirement plan and amounts included in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995 are set forth in the following table (in thousands):
1996 1995 ------- ------ Actuarial Present Value of Benefit Obligation: Vested benefit obligation................................. $40,539 39,012 ======= ====== Accumulated benefit obligation............................ $43,404 41,659 ======= ====== Plan Assets at Fair Value................................... $46,356 42,406 Projected Benefit Obligation................................ 50,163 47,992 ------- ------ Plan Assets Less Than Projected Benefit Obligation.......... (3,807) (5,586) Unrecognized Net Loss....................................... 5,903 7,319 Unrecognized Prior Service Costs............................ (341) (415) Unrecognized Net Transition Asset........................... (3,176) (4,412) ------- ------ Accrued Pension Liability................................. $(1,421) (3,094) ======= ======
Retirement plan assets are primarily comprised of common stock and bond funds. Actuarial assumptions used to measure the projected benefit obligations at December 31, 1996, 1995 and 1994 included a discount rate of 7 1/2%, 7 1/2% and 8 1/2%, respectively, and a compensation increase rate of 5%, 5% and 6%, respectively. The expected long-term rate of return on assets was 8 1/2%, 8 1/2% and 9% for 1996, 1995 and 1994, respectively. Executive Security Plan The Company's executive security plan ("ESP") provides executive officers and other key personnel with supplemental death or retirement benefits in addition to those benefits available under the Company's group life insurance and retirement plans. These supplemental retirement benefits are provided by a nonqualified, noncontributory plan and are based on years of service and compensation. Contributions are made based upon the estimated requirements of the plan. The components of net pension expense for the ESP for the years ended December 31, 1996, 1995 and 1994 are presented below (in thousands):
1996 1995 1994 ----- ---- ---- Service Costs............................................... $ 354 364 474 Interest Cost............................................... 204 205 273 Actual Return on Plan Assets................................ (439) (325) (230) Net Amortization and Deferral............................... 751 471 228 ----- ---- ---- Net Pension Expense....................................... $ 870 715 745 ===== ==== ====
During 1996, 1995 and 1994, the Company incurred additional ESP expense of $.9 million, $1.5 million and $.4 million, respectively, for settlements, curtailments and other benefits resulting from employee terminations. 54 55 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of the ESP and amounts included in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995 are set forth in the following table (in thousands):
1996 1995 ------ ------ Actuarial Present Value of Benefit Obligation: Vested benefit obligation................................. $3,300 2,470 ====== ====== Accumulated benefit obligation............................ $4,434 3,038 ====== ====== Plan Assets at Fair Value................................... $7,139 4,447 Projected Benefit Obligation................................ 6,467 4,155 ------ ------ Plan Assets in Excess of Projected Benefit Obligation....... 672 292 Unrecognized Net Loss....................................... 4,532 2,343 Unrecognized Prior Service Costs............................ 537 395 Unrecognized Net Transition Obligation...................... 417 643 ------ ------ Prepaid Pension Asset..................................... $6,158 3,673 ====== ======
Assets of the ESP consist of a group annuity contract. Actuarial assumptions used to measure the projected benefit obligation at December 31, 1996, 1995 and 1994 included a discount rate of 7 1/2%, 7 1/2% and 8 1/2%, respectively, and a compensation increase rate of 5%. The expected long-term rate of return on assets was 8%, 8% and 9% for 1996, 1995 and 1994, respectively. Retiree Health Care and Life Insurance Benefits The Company provides health care and life insurance benefits to retirees who were participating in the Company's group insurance program at retirement. Health care is also provided to qualified dependents of participating retirees. These benefits are provided through unfunded, defined benefit plans. The health care plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The life insurance plan is noncontributory. The Company funds its share of the cost of postretirement health care and life insurance benefits on a pay-as-you-go basis. The components of net periodic postretirement benefits expense, other than pensions, for the years ended December 31, 1996, 1995 and 1994 included the following (in thousands):
1996 1995 1994 ------ ----- ------ Health Care: Service costs........................................... $ 558 447 471 Interest costs.......................................... 1,294 1,399 1,264 ------ ----- ------ Net Periodic Postretirement Expense.................. $1,852 1,846 1,735 ====== ===== ====== Life Insurance: Service costs........................................... $ 158 174 198 Interest costs.......................................... 548 584 518 ------ ----- ------ Net Periodic Postretirement Expense.................. $ 706 758 716 ====== ===== ======
55 56 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables show the status of the plans reconciled with the amounts in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995 (in thousands):
1996 1995 ------- ------- Health Care: Accumulated Postretirement Benefit Obligation -- Retirees.................................................. $12,549 13,831 Active participants eligible to retire.................... 1,203 1,382 Other active participants................................. 4,181 4,118 ------- ------- 17,933 19,331 Unrecognized Net Gain....................................... 2,621 328 ------- ------- Accrued Postretirement Benefit Liability............... $20,554 19,659 ======= ======= Life Insurance: Accumulated Postretirement Benefit Obligation -- Retirees.................................................. $ 6,274 5,888 Active participants eligible to retire.................... 484 452 Other active participants................................. 1,205 1,590 ------- ------- 7,963 7,930 Unrecognized Net Loss....................................... (115) (665) ------- ------- Accrued Postretirement Benefit Liability............... $ 7,848 7,265 ======= =======
The weighted average annual rate of increase in the per capita cost of covered health care benefits is assumed to be 8% for 1997, decreasing gradually to 6% by the year 2005 and remaining at that level thereafter. This health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. For example, an increase in the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement obligation at December 31, 1996 by $3.3 million and the aggregate of service cost and interest cost components of net periodic postretirement benefits for the year then ended by $.5 million. Actuarial assumptions used to measure the accumulated postretirement benefit obligation at December 31, 1996, 1995 and 1994 included a discount rate of 7 1/2%, 7 1/2% and 8 1/2%, respectively, and a compensation rate increase of 5%, 5% and 6%, respectively. Thrift Plan The Company sponsors an employee thrift plan which provides for contributions by eligible employees into designated investment funds with a matching contribution by the Company. Employees may contribute up to 10% of their compensation, subject to certain limitations, and may elect tax deferred treatment in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Effective October 1, 1996, the thrift plan was amended to change the Company's matching contribution from 50% (of up to 6% of the employee's eligible contribution) to 100% (of up to 4% of the employee's eligible contributions), with 50% of the Company's match invested in Common Stock of the Company. The Company's contributions amounted to $754,000, $400,000 and $547,000 during 1996, 1995 and 1994, respectively. Employee Terminations and Other Costs In 1996 and 1995, the Company incurred charges of $2.9 million and $5.2 million, respectively, primarily for employee termination costs and other restructuring costs. Other expense in 1996 and 1995 included $2.0 million and $3.8 million of these charges, representing primarily severance and related benefits resulting from a reduction in administrative workforce and other employee terminations together with settlements and curtailments under the Company's executive security plan. Operating expenses and other included the remaining amounts of these charges which were related to employee terminations and exit costs in the Company's operating segments. At December 31, 1995, the Company's Consolidated Balance Sheet included 56 57 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an accrual of approximately $.9 million relating to the costs incurred in 1995, all of which were subsequently paid in 1996. Costs incurred in 1996 were paid and settled during the year. Non-Employee Director Retirement Plan The Company has an unfunded Non-Employee Director Retirement Plan ("Director Retirement Plan") which provides that any eligible non-employee director who elects to participate in the Director Retirement Plan and who has served on the Company's Board of Directors for at least three full years will be entitled to a retirement payment beginning the later of the director's sixty-fifth birthday or such later date that the individual's service as a director ends. In 1995, the Company recognized expense of $.8 million related to the Director Retirement Plan, substantially all attributable to nonrecurring prior service costs. At December 31, 1996 and 1995, the Director Retirement Plan's projected benefit obligation and present value of the vested and accumulated benefit obligation discounted at 7 1/2% were estimated to be $.8 million. The Company's Consolidated Balance Sheet at December 31, 1996 and 1995 included $.7 million in other liabilities related to the Director Retirement Plan. The Compensation Committee of the Board of Directors is considering the termination of the Director Retirement Plan and the conversion of the lump-sum present value of each director's benefit into an unfunded deferred phantom stock plan. NOTE K -- STOCKHOLDERS' EQUITY Stock Plans and Incentive Compensation Strategy The Company has two employee incentive stock plans, the Executive Long-Term Incentive Plan ("1993 Plan") and Amended Incentive Stock Plan of 1982 ("1982 Plan"), and the 1995 Non-Employee Director Stock Option Plan ("1995 Plan") (collectively, the "Plans"). Shares of unissued Common Stock reserved for the Plans totaled 2,775,191 at December 31, 1996. The 1993 Plan provides for the grant of up to 2,650,000 shares of the Company's Common Stock in a variety of forms, including restricted stock, incentive stock options, nonqualified stock options, stock appreciation rights and performance share and performance unit awards. Stock options may be granted at exercise prices equal to the market value on the date the options are granted. The options granted generally become exercisable after one year in 20% or 33% increments per year and expire ten years from date of grant. The 1993 Plan will expire, unless earlier terminated, as to the issuance of awards in the year 2003. At December 31, 1996, the Company had 461,807 shares available for future grants under the 1993 Plan. The 1982 Plan expired in 1994 as to issuance of stock appreciation rights, stock options and stock awards; however, grants made before the expiration date that have not been fully exercised remain outstanding pursuant to their terms. The 1995 Plan provides for the grant of up to an aggregate of 150,000 nonqualified stock options to eligible non-employee directors of the Company. The option price per share is equal to the fair market value per share of the Company's Common Stock on the date of grant. The term of each option is ten years, and an option first becomes exercisable six months after the date of grant. Under the 1995 Plan, each person serving as a non-employee director on February 23, 1995 or appointed thereafter, received an option to purchase 5,000 shares of Common Stock. In addition, each non-employee director, while the 1995 Plan is in effect and shares are available to grant, will be granted an option to purchase 1,000 shares of Common Stock on the next day after each annual meeting of the Company's stockholders but not later than June 1. At December 31, 1996, the Company had 67,000 options outstanding and 83,000 shares available for future grants under the 1995 Plan. In June 1996, the Company's Board of Directors unanimously approved an incentive compensation strategy in order to encourage a longer-term focus for all employees to perform at an outstanding level. The strategy provides eligible employees with incentives to achieve a significant increase in the market price of the 57 58 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's Common Stock. Under the strategy, awards would be earned only if the market price of the Company's Common Stock reaches an average price per share of $20 or higher over any 20 consecutive trading days after June 30, 1997 and before December 31, 1998 (the "Performance Target"). In connection with this strategy, non-executive employees will be able to earn cash bonuses equal to 25% of their individual payroll amounts for the previous twelve complete months and certain executives have been granted, from the 1993 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 1993 Plan) of a share of the Company's Common Stock on the date of grant, and 350,000 shares of restricted Common Stock, all of which vest only upon achieving the Performance Target. A summary of stock option activity in the Plans is set forth below:
OPTIONS WEIGHTED-AVERAGE OUTSTANDING EXERCISE PRICE ----------- ---------------- December 31, 1993........................................ 1,016,870 $ 4.89 Granted................................................ 524,600 9.34 Exercised.............................................. (18,764) 10.15 Forfeited and expired.................................. (26,413) 5.37 --------- December 31, 1994........................................ 1,496,293 6.37 Granted................................................ 450,000 8.34 Exercised.............................................. (507,467) 4.85 Forfeited and expired.................................. (266,745) 9.10 --------- December 31, 1995........................................ 1,172,081 7.16 Granted................................................ 1,095,500 13.45 Exercised.............................................. (315,664) 5.67 Forfeited and expired.................................. (95,171) 8.50 --------- December 31, 1996........................................ 1,856,746 11.05 =========
Options exercisable amounted to 380,230; 360,779; and 478,879 at December 31, 1996, 1995 and 1994, respectively. The following table summarizes information about stock options outstanding under the Plans at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------ WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 3.92 - $ 6.67............. 199,806 6.3 years $ 4.59 152,470 $ 4.39 $ 6.68 - $ 9.43............. 445,323 8.6 years 8.25 118,843 8.46 $ 9.44 - $12.17............. 531,397 8.9 years 10.89 102,197 10.17 $12.18 - $14.94............. 680,220 9.8 years 14.92 6,720 12.63 --------- ------- $ 3.92 - $14.94............. 1,856,746 8.9 years 11.05 380,230 7.36 ========= =======
Performance shares granted to officers and key employees under the 1993 Plan amounted to 137,253 common shares in 1994. Compensation expense, representing the excess of the market value of the Common Stock on the dates of the awards over the purchase price to be paid by the employee, is charged to earnings over the periods that the shares are earned and amounted to $1.3 million in 1994. No performance shares were granted in 1996 and 1995. 58 59 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company applies APB No. 25 and related Interpretations in accounting for its stock plans. Accordingly, no compensation expense has been recognized for stock option transactions or the incentive compensation strategy discussed above. Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards (granted after January 1, 1995) in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings in 1996 would have been reduced from $74.5 million ($2.81 per share) to pro forma net earnings of approximately $72.6 million ($2.74 per share). Net earnings in 1995 of $54.6 million ($2.18 per share) would have been reduced to pro forma net earnings of approximately $53.8 million ($2.15 per share). The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: no dividend yield; expected volatility of 45% and 30%; risk free interest rates of 7% for both periods; and expected lives of 7 years for both periods. The estimated fair values of options granted during 1996 and 1995 were $4.26 per share and $3.65 per share, respectively, and the fair value of restricted stock awards in 1996 was $.95 per share. 1994 Recapitalization and Equity Offering In February 1994, the Company consummated exchange offers and adopted amendments to its Restated Certificate of Incorporation pursuant to which the Company's outstanding debt and preferred stocks were restructured (the "Recapitalization"). Significant components of the Recapitalization were as follows: (i) The Company exchanged $44.1 million principal amount of Subordinated Debentures for a like principal amount of Exchange Notes, both of which were fully redeemed in 1996 (see Note I). (ii) The 1.3 million outstanding shares of the Company's $2.16 Cumulative Convertible Preferred Stock ("$2.16 Preferred Stock"), which had a $25 per share liquidation preference, plus accrued and unpaid dividends of $9.5 million, were reclassified into 6.6 million shares of Common Stock. (iii) The Company and the holder ("Holder") of all of the Company's $2.20 Cumulative Convertible Preferred Stock ("$2.20 Preferred Stock") entered into an agreement pursuant to which the Holder agreed, among other matters, to waive all existing mandatory redemption requirements, to consider all accrued and unpaid dividends on the $2.20 Preferred Stock (aggregating $21 million) to be paid and to grant to the Company an option to purchase all of the Holder's $2.20 Preferred Stock and Common Stock for approximately $53 million, all in consideration for, among other things, the issuance by the Company of 1.9 million shares of Common Stock. In June 1994, the Company completed a public offering of 5.9 million shares of its Common Stock, receiving net proceeds of $57 million. These proceeds were used by the Company in part to pay the Holder $53 million, reacquiring 2.9 million shares of $2.20 Preferred Stock and 4.1 million shares of Common Stock. In total, the transactions related to the Recapitalization and equity offering in 1994 resulted in the reclassification of the $2.16 Preferred Stock, the retirement of the $2.20 Preferred Stock and net increases in Common Stock of $1.7 million (10.3 million shares) and additional paid-in capital of $88.5 million. 59 60 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE L -- COMMITMENTS AND CONTINGENCIES Operating Leases The Company has various noncancellable operating leases related to convenience stores, equipment, property and other facilities. Lease terms range from one year to 35 years and generally contain multiple renewal options. Future minimum annual payments for operating leases existing at December 31, 1996, excluding marine charters, were as follows (in thousands): 1997........................................................ $ 5,624 1998........................................................ 4,978 1999........................................................ 2,310 2000........................................................ 1,972 2001........................................................ 1,687 Remainder................................................... 13,472 ------- Total Minimum Lease Payments...................... $30,043 =======
In addition to the long-term lease commitments above, the Company has leases for two vessels that are used to transport crude oil and refined products to and from the Company's refinery. At December 31, 1996, future minimum annual lease payments remaining for these two vessels, which include operating costs, are approximately $28 million for each of the years 1997 through 1999 and $16 million for the year 2000. Operating costs related to these vessels, which may vary from year to year, comprised approximately 30% of the total minimum payments in 1996. The Company also enters into various month-to-month and other short-term rentals, including a six-month charter of a vessel used to primarily transport refined products from the Company's refinery to the Far East. Total rental expense, including short-term leases in addition to rents paid and accrued under long-term lease commitments, amounted to approximately $42 million, $36 million and $34 million for 1996, 1995 and 1994, respectively. Rental expense included amounts related to the lease of chartered vessels totaling approximately $30 million, $26 million and $25 million for 1996, 1995 and 1994, respectively. 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, at which it has been named a potentially responsible party under the Federal Superfund law. Although this law might impose joint and several liability upon each party at the site, the extent of the Company's allocated financial contributions to the cleanup of the site is expected to be limited based upon the number of companies, volumes of waste involved, and an estimated total cost of approximately $500,000 among all of the parties to close the site. The Company is currently involved in settlement discussions with the Environmental Protection Agency ("EPA") and other potentially responsible parties at the Abbeville, Louisiana site. The Company expects, based on these discussions, that its liability will not exceed $25,000. The Company is also involved in remedial responses and has incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of its own properties. At December 31, 1996, the Company's accruals for environmental expenses amounted to $8.9 million, which included a noncurrent liability of $3.5 million for remediation of the KPL properties that has been funded by the former owners through a restricted escrow deposit. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes 60 61 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these accruals are adequate. In addition, to comply with environmental laws and regulations, the Company anticipates that it will make capital improvements of approximately $6 million in 1997 and $3 million in 1998. The Company also expects to spend approximately $6 million by the year 2002 for secondary containment systems for existing storage tanks in Alaska. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refinery, retail gasoline outlets (current and closed locations) and petroleum product terminals, and for compliance with the Clean Air Act. The amount of such future expenditures cannot currently be determined by the Company. Crude Oil Purchase Contract The Company has a three-year contract with the State of Alaska for the purchase of royalty crude oil covering the period January 1, 1996 through December 31, 1998. The contract provides for the purchase of approximately 40,000 barrels per day of Alaska North Slope ("ANS") royalty crude oil, the primary feedstock for the Company's refinery, and is priced based on royalty values computed by the State. Under this agreement, the Company is required to utilize in its refinery operations volumes equal to at least 80% of the ANS crude oil to be purchased from the State. This contract contains provisions that, under certain conditions, allow the Company to temporarily or permanently reduce its purchase obligations. 61 62 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS --------------------------------- TOTAL FIRST SECOND THIRD FOURTH YEAR ------ ------ ------ ------ -------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1996 Revenues: Gross operating revenues..................... $238.6 233.8 262.8 240.2 975.4 Income from gas contract settlement.......... -- -- -- 60.0 60.0 Other, including gain (loss) on asset sales...................................... 5.0 .1 (.7) -- 4.4 ------ ------ ------ ------ -------- Total Revenues.......................... $243.6 233.9 262.1 300.2 1,039.8 ====== ====== ====== ====== ======== Operating Profit................................ $ 20.7 27.6 25.2 71.3 144.8 ====== ====== ====== ====== ======== Earnings Before Extraordinary Item.............. $ 6.0 12.0 16.2 42.6 76.8 Extraordinary Loss on Extinguishment of Debt, Net.......................................... -- -- (2.3) -- (2.3) ------ ------ ------ ------ -------- Net Earnings............................ $ 6.0 12.0 13.9 42.6 74.5 ====== ====== ====== ====== ======== Earnings Per Share: Earnings Before Extraordinary Item........... $ .23 .45 .61 1.59 2.90 Extraordinary Loss........................... -- -- (.09) -- (.09) ------ ------ ------ ------ -------- Net Earnings............................ $ .23 .45 .52 1.59 2.81 ====== ====== ====== ====== ======== 1995 Revenues: Gross operating revenues..................... $234.0 264.2 244.2 227.8 970.2 Other, including gain (loss) on asset sales...................................... -- -- 33.1 (.4) 32.7 ------ ------ ------ ------ -------- Total Revenues.......................... $234.0 264.2 277.3 227.4 1,002.9 ====== ====== ====== ====== ======== Operating Profit................................ $ 12.4 19.1 53.8 20.6 105.9 ====== ====== ====== ====== ======== Earnings Before Extraordinary Item.............. $ 1.8 7.4 36.8 11.5 57.5 Extraordinary Loss on Extinguishment of Debt, Net.......................................... -- -- -- (2.9) (2.9) ------ ------ ------ ------ -------- Net Earnings............................ $ 1.8 7.4 36.8 8.6 54.6 ====== ====== ====== ====== ======== Earnings Per Share: Earnings Before Extraordinary Item........... $ .07 .30 1.47 .46 2.29 Extraordinary Loss........................... -- -- -- (.11) (.11) ------ ------ ------ ------ -------- Net Earnings............................ $ .07 .30 1.47 .35 2.18 ====== ====== ====== ====== ========
The 1996 first quarter included pretax income of $5 million related to a retroactive severance tax refund. The 1996 third quarter included pretax income of $8 million for interest and reimbursement of costs from Tennessee Gas (see Note D) and an aftertax extraordinary loss of $2.3 million for the early extinguishment of debt (see Note I). The contract with Tennessee Gas was terminated during the 1996 fourth quarter resulting in pretax income of $60 million (see Note D). The 1995 third quarter included a gain of approximately $33 million from the sale of certain interests in the Bob West Field (see Note C), partially offset by approximately $5 million for employee terminations and other restructuring costs (see Note J). An extraordinary loss of $2.9 million was recognized in the 1995 fourth quarter for the early extinguishment of debt (see Note I). 62 63 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- NATURAL GAS PRICE AGREEMENTS The Company enters into commodity price agreements to reduce the risk caused by fluctuations in the prices of natural gas in the spot market. During 1996, 1995 and 1994, the Company used such agreements to set the price of 30%, 38% and 11%, respectively, of the natural gas production that it sold in the spot market. It is the Company's policy to use such agreements to set the price of not more than 50% of the annual volumes of natural gas production that are sold in the spot market. The agreements provide for the Company to receive, or make, payments based upon the differential between a specified fixed price and the market price for natural gas. The market price is determined by reference to a published index for natural gas traded at the Houston Ship Channel. The Houston Ship Channel index is the price upon which the cash prices for substantially all of the Company's spot market gas sales are based and, accordingly, the risk of losses from large fluctuations in the basis differentials (normally approximating the cost of transporting gas between the Henry Hub and the Houston Ship Channel) is substantially eliminated. The Company includes the related gains or losses in gas revenues in the period in which the gas is produced, which amounted to a loss of $3.1 million ($.11 per Mcf) in 1996 and to gains of $.3 million ($.01 per Mcf) in 1995 and 1994. As of January 9, 1997, the Company had entered into price agreements for 1997 production totaling .9 Bcf of gas for an average Houston Ship Channel price of $2.18 per Mcf. In addition, the Company has entered into price agreements with collars, under which no payment will be made by either party unless the price falls below a designated floor price or above a designated ceiling price, at which time the Company receives or pays the difference, respectively. The Company has entered into price agreements with collars for 1997 production totaling 1.8 Bcf of gas with an average floor Houston Ship Channel price of $1.93 per Mcf and an average ceiling Houston Ship Channel price of $2.42 per Mcf. In 1996, the Company's average spot market wellhead price per Mcf for gas sales was $.23 less than the average Houston Ship Channel index, the difference representing transportation and marketing costs from the wellhead in South Texas. NOTE O -- OIL AND GAS PRODUCING ACTIVITIES The information presented below represents the oil and gas producing activities of the Company's Exploration and Production segment. Amounts related to the U.S. natural gas transportation operations, as disclosed in Note B, have been excluded. Other information pertinent to the Exploration and Production segment is contained in Notes B, C, D and N. In 1996, a new Hydrocarbons Law was passed by the Bolivian government that significantly impacts the Company's operations in Bolivia. The new law, among other matters, granted the Company the option to convert its Contracts of Operation to new Shared Risk Contracts. During 1996, the Company signed agreements to convert its Contracts of Operation to Shared Risk Contracts subject to recision at the option of the Company if the Company is not satisfied with modifications to the Bolivian fiscal law. The Company expects to complete this conversion during the first half of 1997. The new contracts extend the Company's term of operation, provide more favorable acreage relinquishment terms and provide for a more favorable fiscal regime of royalties and taxes. The new contracts will extend the term of the Company's operations for Block 18 ten additional years to the year 2017. For Block 20, the new contract extends the Company's term 21 additional years to the year 2029 for acreage that is in the exploration phase of the contract, and ten additional years to the year 2018 for an area within Block 20 that is designated as being in the development phase of the new contract. The new contract provisions, along with a substantial discovery during 1996, significantly increased the Company's reserves. 63 64 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Capitalized Costs Relating to Oil and Gas Producing Activities
DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Capitalized Costs: Proved properties................................. $179,433 119,836 131,930 Unproved properties not being amortized(1)........ 12,344 5,118 3,758 -------- -------- -------- 191,777 124,954 135,688 Accumulated depreciation, depletion and amortization................................... 78,222 51,549 50,261 -------- -------- -------- Net Capitalized Costs..................... $113,555 73,405 85,427 ======== ======== ========
- --------------- (1) The Company anticipates that the majority of the costs at December 31, 1996, incurred primarily in 1996, will be included in the amortization base during 1997. Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
UNITED STATES BOLIVIA TOTAL ------- ------- ------- (IN THOUSANDS) 1996 Property acquisitions -- Proved............................................. $20,454 -- 20,454 Unproved........................................... 5,216 -- 5,216 Exploration........................................... 11,830 6,704 18,534 Development........................................... 22,228 149 22,377 ------- ------ ------- $59,728 6,853 66,581 ======= ====== ======= 1995 Property acquisition, unproved........................ $ 1,432 -- 1,432 Exploration........................................... 10,011 2,994 13,005 Development........................................... 38,003 792 38,795 ------- ------ ------- $49,446 3,786 53,232 ======= ====== ======= 1994 Property acquisition, unproved........................ $ 438 -- 438 Exploration........................................... 8,808 -- 8,808 Development........................................... 51,133 -- 51,133 ------- ------ ------- $60,379 -- 60,379 ======= ====== =======
64 65 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Results of Operations from Oil and Gas Producing Activities The following table sets forth the results of operations for oil and gas producing activities, in the aggregate by geographic area, with income tax expense computed using the statutory tax rate for the period adjusted for permanent differences, tax credits and allowances.
UNITED STATES BOLIVIA TOTAL ---------- --------- --------- (IN THOUSANDS EXCEPT AS INDICATED) 1996 Gross revenues -- sales to nonaffiliates............. $ 88,358 13,701 102,059 Production costs..................................... 5,326 837 6,163 Administrative support and other..................... 3,649 2,830 6,479 Depreciation, depletion and amortization............. 25,235 1,279 26,514 Income from settlement of a natural gas contract(1)....................................... 60,000 -- 60,000 Other income(2)...................................... 5,000 -- 5,000 -------- ------ ------- Pretax results of operations......................... 119,148 8,755 127,903 Income tax expense................................... 41,702 5,439 47,141 -------- ------ ------- Results of operations from producing activities(3)... $ 77,446 3,316 80,762 ======== ====== ======= Depletion rates per net equivalent Mcf............... $ .79 .15 ======== ====== 1995 Gross revenues -- sales to nonaffiliates............. $107,276 11,707 118,983 Production costs..................................... 12,005 600 12,605 Administrative support and other..................... 2,842 3,289 6,131 Gain on sales of assets(4)........................... 33,532 -- 33,532 Depreciation, depletion and amortization............. 29,004 250 29,254 -------- ------ ------- Pretax results of operations......................... 96,957 7,568 104,525 Income tax expense................................... 33,935 4,718 38,653 -------- ------ ------- Results of operations from producing activities(3)... $ 63,022 2,850 65,872 ======== ====== ======= Depletion rates per net equivalent Mcf............... $ .69 .03 ======== ====== 1994 Gross revenues -- sales to nonaffiliates............. $ 87,478 13,211 100,689 Production costs..................................... 8,945 619 9,564 Administrative support and other..................... 2,289 3,242 5,531 Depreciation, depletion and amortization............. 24,143 -- 24,143 -------- ------ ------- Pretax results of operations......................... 52,101 9,350 61,451 Income tax expense................................... 19,104 5,605 24,709 -------- ------ ------- Results of operations from producing activities(3)... $ 32,997 3,745 36,742 ======== ====== ======= Depletion rates per net equivalent Mcf............... $ .79 -- ======== ======
- --------------- (1) See Note D. (2) Represents retroactive severance tax refunds resulting from exemptions on substantially all of the Company's reserves in the Bob West Field. (3) Excludes corporate general and administrative expenses and financing costs. (4) Represents gain on sale of certain interests in the Bob West Field (see Note C). 65 66 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves (Unaudited) The following table sets forth the computation of the standardized measure of discounted future net cash flows relating to proved reserves and the changes in such cash flows in accordance with SFAS No. 69. The standardized measure is the estimated excess future cash inflows from proved reserves less estimated future production and development costs, estimated future income taxes and a discount factor. Future cash inflows represent expected revenues from production of year-end quantities of proved reserves based on year-end prices and any fixed and determinable future escalation provided by contractual arrangements in existence at year-end. Escalation based on inflation, federal regulatory changes and supply and demand are not considered. Estimated future production costs related to year-end reserves are based on year-end costs. Such costs include, but are not limited to, production taxes and direct operating costs. Inflation and other anticipatory costs are not considered until the actual cost change takes effect. Estimated future income tax expenses are computed using the appropriate year-end statutory tax rates. Consideration is given for the effects of permanent differences, tax credits and allowances. A discount rate of 10% is applied to the annual future net cash flows. The methodology and assumptions used in calculating the standardized measure are those required by SFAS No. 69. The standardized measure is not intended to be representative of the fair market value of the Company's proved reserves. The calculations of revenues and costs do not necessarily represent the amounts to be received or expended by the Company.
UNITED STATES BOLIVIA TOTAL -------- ------- ------- (IN THOUSANDS) DECEMBER 31, 1996 Future cash inflows................................... $376,103 368,119 744,222 Future production costs............................... 66,524 72,766 139,290 Future development costs.............................. 13,156 30,632 43,788 -------- ------- ------- Future net cash flows before income tax expense....... 296,423 264,721 561,144 10% annual discount factor............................ 73,687 130,915 204,602 -------- ------- ------- Discounted future net cash flows before income taxes.............................................. 222,736 133,806 356,542 Discounted future income tax expense(1)............... 70,251 80,102 150,353 -------- ------- ------- Standardized measure of discounted future net cash flows(2)........................................... $152,485 53,704 206,189 ======== ======= ======= DECEMBER 31, 1995 Future cash inflows................................... $265,379 120,510 385,889 Future production costs............................... 53,095 32,005 85,100 Future development costs.............................. 8,625 7,548 16,173 -------- ------- ------- Future net cash flows before income tax expense....... 203,659 80,957 284,616 10% annual discount factor............................ 34,920 32,231 67,151 -------- ------- ------- Discounted future net cash flows before income taxes.............................................. 168,739 48,726 217,465 Discounted future income tax expense.................. 45,939 25,897 71,836 -------- ------- ------- Standardized measure of discounted future net cash flows.............................................. $122,800 22,829 145,629 ======== ======= =======
66 67 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED STATES BOLIVIA TOTAL -------- ------- ------- (IN THOUSANDS) DECEMBER 31, 1994 Future cash inflows................................... $292,620 120,886 413,506 Future production costs............................... 52,534 30,873 83,407 Future development costs.............................. 29,933 7,258 37,191 -------- ------- ------- Future net cash flows before income tax expense....... 210,153 82,755 292,908 10% annual discount factor............................ 30,706 34,674 65,380 -------- ------- ------- Discounted future net cash flows before income taxes.............................................. 179,447 48,081 227,528 Discounted future income tax expense.................. 52,661 26,092 78,753 -------- ------- ------- Standardized measure of discounted future net cash flows.............................................. $126,786 21,989 148,775 ======== ======= =======
- --------------- (1) For Bolivia, the discounted future income tax expense as of December 31, 1996 consisted of $69,363 Bolivian taxes and $10,739 U.S. taxes. (2) Gross production rates were increased from 45 MMcf per day to 90 MMcf per day in the year 2000 due to the anticipated completion of the Bolivia-Brazil pipeline discussed in Note B. This increase accounts for approximately $19 million of the standardized measure of discounted future net cash flows for Bolivia at December 31, 1996. Changes in Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
1996 1995 1994 -------- -------- ------- (IN THOUSANDS) Sales and transfers of oil and gas produced, net of production costs..................................... $(93,275) (106,378) (88,751) Net changes in prices and production costs............. 39,409 (32,931) 12,834 Extensions, discoveries and improved recovery.......... 81,201 83,045 54,503 Development costs incurred............................. 22,228 38,795 51,148 Changes in estimated future development costs.......... (39,932) (19,574) (34,738) Revisions of previous quantity estimates............... (7,244) 60,800 1,818 Purchases (sales) of minerals in-place................. 55,484 (48,698) -- Extension of Bolivian contract terms................... 26,564 -- -- Other changes in Bolivian Hydrocarbons Law............. 32,894 -- -- Accretion of discount.................................. 14,563 14,878 12,919 Net changes in income taxes............................ (71,332) 6,917 9,850 -------- -------- ------- Net increase (decrease)................................ 60,560 (3,146) 19,583 Beginning of period.................................... 145,629 148,775 129,192 -------- -------- ------- End of period.......................................... $206,189 145,629 148,775 ======== ======== =======
Reserve Information (Unaudited) The following estimates of the Company's net proved oil and gas reserves are based on evaluations prepared by Netherland, Sewell & Associates, Inc. Reserves were estimated in accordance with guidelines established by the Securities and Exchange Commission and Financial Accounting Standards Board, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. 67 68 TESORO PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED STATES BOLIVIA TOTAL -------- ------- ------- NET PROVED GAS RESERVES (millions of cubic feet)(1) December 31, 1993..................................... 120,198 99,295 219,493 Revisions of previous estimates.................... 9,881 (9,678) 203 Extensions, discoveries and other additions........ 29,606 14,199 43,805 Production......................................... (30,586) (8,060) (38,646) -------- ------- ------- December 31, 1994..................................... 129,099 95,756 224,855 Revisions of previous estimates.................... 46,239 (553) 45,686 Extensions, discoveries and other additions........ 50,201 -- 50,201 Production......................................... (41,789) (6,807) (48,596) Sales of minerals in-place......................... (77,373) -- (77,373) -------- ------- ------- December 31, 1995..................................... 106,377 88,396 194,773 Extension of Bolivian contract terms............... -- 32,998 32,998 Other changes in Bolivian Hydrocarbons Law......... -- 56,704 56,704 Revisions of previous estimates.................... (4,792) (149) (4,941) Extensions, discoveries and other additions........ 22,977 59,964 82,941 Production......................................... (32,081) (7,412) (39,493) Purchases of minerals in-place..................... 24,309 -- 24,309 -------- ------- ------- December 31, 1996(2).................................. 116,790 230,501 347,291 ======== ======= ======= NET PROVED DEVELOPED GAS RESERVES (millions of cubic feet) December 31, 1993..................................... 65,652 99,295 164,947 December 31, 1994..................................... 110,071 81,558 191,629 December 31, 1995..................................... 95,930 72,500 168,430 December 31, 1996(2).................................. 107,509 123,154 230,663 NET PROVED OIL RESERVES (thousands of barrels)(1) December 31, 1993..................................... -- 2,173 2,173 Revisions of previous estimates.................... -- (280) (280) Extensions, discoveries and other additions........ -- 168 168 Production......................................... -- (268) (268) -------- ------- ------- December 31, 1994..................................... -- 1,793 1,793 Revisions of previous estimates.................... 1 10 11 Extensions, discoveries and other additions........ 8 -- 8 Production......................................... (1) (207) (208) -------- ------- ------- December 31, 1995..................................... 8 1,596 1,604 Extension of Bolivian contract terms............... -- 459 459 Other changes in Bolivian Hydrocarbons Law......... -- 913 913 Revisions of previous estimates.................... (4) 150 146 Extensions, discoveries and other additions........ -- 840 840 Production......................................... (10) (214) (224) Purchases of minerals in-place..................... 188 -- 188 -------- ------- ------- December 31, 1996(2).................................. 182 3,744 3,926 ======== ======= ======= NET PROVED DEVELOPED OIL RESERVES (thousands of barrels) December 31, 1993..................................... -- 2,173 2,173 December 31, 1994..................................... -- 1,627 1,627 December 31, 1995..................................... 4 1,407 1,411 December 31, 1996(2).................................. 126 2,291 2,417
- --------------- (1) The Company was not required to file reserve estimates with federal authorities or agencies during the periods presented. (2) No major discovery or adverse event has occurred since December 31, 1996 that would cause a significant change in net proved reserve volumes. 68 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required under this Item will be contained in the Company's 1997 Proxy Statement, incorporated herein by reference. See also Executive Officers of the Registrant under Business in Item 1. ITEM 11. EXECUTIVE COMPENSATION Information required under this Item will be contained in the Company's 1997 Proxy Statement, incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this Item will be contained in the Company's 1997 Proxy Statement, incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this Item will be contained in the Company's 1997 Proxy Statement, incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The following Consolidated Financial Statements of Tesoro Petroleum Corporation and its subsidiaries are included in Part II, Item 8 of this Form 10-K:
PAGE ---- Independent Auditors' Report................................ 38 Statements of Consolidated Operations -- Years Ended December 31, 1996, 1995 and 1994.......................... 39 Consolidated Balance Sheets -- December 31, 1996 and 1995... 40 Statements of Consolidated Stockholders' Equity -- Years Ended December 31, 1996, 1995 and 1994.................... 41 Statements of Consolidated Cash Flows -- Years Ended December 31, 1996, 1995 and 1994.......................... 42 Notes to Consolidated Financial Statements.................. 43
2. FINANCIAL STATEMENT SCHEDULES All schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or notes thereto. 69 70 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 -- Agreement and Plan of Merger dated as of November 20, 1995, between the Company, Coastwide Energy Services, Inc. and CNRG Acquisition Corp. (incorporated by reference herein to Registration Statement No. 333-00229). 2.2 -- First Amendment to Agreement and Plan of Merger dated effective February 19, 1996 between the Company, Coastwide Energy Services, Inc. and CNRG Acquisition Corp. (incorporated by reference herein to Exhibit 2(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-3473). 3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference herein to Exhibit 3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473). 3.2 -- By-Laws of the Company, as amended through June 6, 1996. 3.3 -- Amendment to Restated Certificate of Incorporation of the Company adding a new Article IX limiting Directors' Liability (incorporated by reference herein to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473). 3.4 -- Certificate of Designation Establishing a Series of $2.20 Cumulative Convertible Preferred Stock, dated as of January 26, 1983 (incorporated by reference herein to Exhibit 3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473). 3.5 -- Certificate of Designation Establishing a Series A Participating Preferred Stock, dated as of December 16, 1985 (incorporated by reference herein to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473). 3.6 -- Certificate of Amendment, dated as of February 9, 1994, to Restated Certificate of Incorporation of the Company amending Article IV, Article V, Article VII and Article VIII (incorporated by reference herein to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473). 4.1 -- Amended and Restated Credit Agreement ("Credit Facility") dated as of June 7, 1996 among the Company and Banque Paribas, individually, as an Issuing Bank and as Administrative Agent, and The Bank of Nova Scotia, individually and as Documentation Agent, and certain other financial institutions named therein (incorporated by reference herein to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.2 -- Second Amended and Restated Guaranty Agreement dated as of January 28, 1997 among various subsidiaries of the Company and Banque Paribas, individually, as Administrative Agent and as an Issuing Bank, and certain other financial institutions named therein, entered into in connection with the Credit Facility. 4.3 -- Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between the Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.4 -- Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Alaska Petroleum Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.5 -- Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Refining, Marketing & Supply Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.6 -- Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Kenai Pipe Line Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.7 -- Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Coastwide Services Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.8 -- Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Coastwide Marine Services, Inc. and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.9 -- Security Agreement (Accounts) dated as of June 7, 1996 between Tesoro Vostok Company and Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.10 -- Amended and Restated Security Agreement (Pledge) dated as of June 7, 1996 by the Company in favor of Banque Paribas, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.11 -- First Amendment to Amended and Restated Security Agreement (Pledge) dated as of September 12, 1996 between the Company and Banque Paribas, entered into in connection with the Credit Facility. 4.12 -- First Amendment to Deed of Trust, Security Agreement and Financing Statement dated as of June 7, 1996 among Tesoro Alaska Petroleum Company, TransAlaska Title Insurance Agency, Inc., as Trustee, and Banque Paribas, as Administrative Agent, entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.13 -- First Amendment to Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 7, 1996 from Tesoro E&P Company, L.P., entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.14 -- Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 7, 1996 from Tesoro E&P Company, L.P., entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 1-3473). 4.15 -- Loan Agreement (the "Loan Agreement") dated as of May 26, 1994 among Tesoro Alaska Petroleum Company, as Borrower, the Company, as Guarantor, and National Bank of Alaska ("NBA"), as Lender (incorporated by reference herein to Exhibit 4.30 to Registration Statement No. 33-53587).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.16 -- Guaranty Agreement dated as of May 26, 1994 between the Company and NBA, entered into in connection with the Loan Agreement (incorporated by reference herein to Exhibit 4.31 to Registration Statement No. 33-53587). 4.17 -- $15,000,000 Promissory Note dated as of May 26, 1994 of Tesoro Alaska Petroleum Company payable to the order of NBA, in connection with the Loan Agreement (incorporated by reference herein to Exhibit 4.32 to Registration Statement No. 33-53587). 4.18 -- Construction Loan Agreement dated as of May 26, 1994 between Tesoro Alaska Petroleum Company and NBA, entered into in connection with the Loan Agreement (incorporated by reference herein to Exhibit 4.33 to Registration Statement No. 33-53587). 4.19 -- Deed of Trust dated as of May 26, 1994 from Tesoro Alaska Petroleum Company, entered into in connection with the Loan Agreement (incorporated by reference herein to Exhibit 4.34 to Registration Statement No. 33-53587). 4.20 -- Security Agreement dated as of May 26, 1994 between Tesoro Alaska Petroleum Company and NBA, entered into in connection with the Loan Agreement (incorporated by reference herein to Exhibit 4.35 to Registration Statement No. 33-53587). 4.21 -- Consent and Intercreditor Agreement dated as of May 26, 1994 entered into in connection with the Credit Facility (incorporated by reference herein to Exhibit 4.36 to Registration Statement No. 33-53587). 4.22 -- Copy of First Amendment to the Loan Agreement dated as of January 26, 1995 among Tesoro Alaska Petroleum Company, Tesoro Petroleum Corporation and NBA (incorporated by reference herein to Exhibit 4(aa) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 4.23 -- Form of Coastwide Energy Services Inc. 8% Convertible Subordinated Debenture (incorporated by reference herein to Exhibit 4.3 to Post-Effective Amendment No. 1 to Registration No. 333-00229). 4.24 -- Debenture Assumption and Conversion Agreement dated as of February 20, 1996, between the Company, Coastwide Energy Services, Inc. and CNRG Acquisition Corp. (incorporated by reference herein to Exhibit 4.4 to Post-Effective Amendment No. 1 to Registration No. 333-00229). 4.25 -- Form of Stock Option Agreement for option grant under the Coastwide Energy Services, Inc. 1993 Long-Term Incentive Plan (incorporated by reference herein to Exhibit 4.5 to Post-Effective Amendment No. 1 to Registration No. 333-00229). 4.26 -- Form of Cancellation/Substitution Agreement by and between the Company, Coastwide Energy Services, Inc. and Optionee (incorporated by reference herein to Exhibit 4.6 to Post-Effective Amendment No. 1 to Registration No. 333-00229). 10.1 -- The Company's Amended Executive Security Plan, as amended through November 13, 1989, and Funded Executive Security Plan, as amended through February 28, 1990, for executive officers and key personnel (incorporated by reference herein to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990, File No. 1-3473). 10.2 -- Sixth Amendment to the Company's Amended Executive Security Plan and Seventh Amendment to the Company's Funded Executive Security Plan, both dated effective March 6, 1991 (incorporated by reference herein to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1991, File No. 1-3473).
72 73
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.3 -- Seventh Amendment to the Company's Amended Executive Security Plan and Eighth Amendment to the Company's Funded Executive Security Plan, both dated effective December 8, 1994 (incorporated by reference herein to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.4 -- Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated February 15, 1996 (incorporated by reference herein to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-3473). 10.5 -- Amended and Restated Employment Agreement between the Company and James C. Reed, Jr. dated as of December 12, 1996. 10.6 -- Amended and Restated Employment Agreement between the Company and William T. Van Kleef dated as of December 12, 1996. 10.7 -- Management Stability Agreement between the Company and Don E. Beere dated December 14, 1994 (incorporated by reference herein to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.8 -- Management Stability Agreement between the Company and Gregory A. Wright dated February 23, 1995 (incorporated by reference herein to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.9 -- Management Stability Agreement between the Company and Thomas E. Reardon dated December 14, 1994 (incorporated by reference herein to Exhibit 10(w) to Registration Statement No. 333-00229). 10.10 -- The Company's Amended Incentive Stock Plan of 1982, as amended through February 24, 1988 (incorporated by reference herein to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1988, File No. 1-3473). 10.11 -- Resolution approved by the Company's stockholders on April 30, 1992 extending the term of the Company's Amended Incentive Stock Plan of 1982 to February 24, 1994 (incorporated by reference herein to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-3473). 10.12 -- Amended and Restated Tesoro Petroleum Corporation Executive Long-Term Incentive Plan, as amended through June 6, 1996. 10.13 -- Copy of the Company's Non-Employee Director Retirement Plan dated December 8, 1994 (incorporated by reference herein to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.14 -- Copy of the Company's Board of Directors Deferred Compensation Plan dated February 23, 1995 (incorporated by reference herein to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.15 -- Copy of the Company's Board of Directors Deferred Compensation Trust dated February 23, 1995 (incorporated by reference herein to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473). 10.16 -- Agreement for the Sale and Purchase of State Royalty Oil dated as of April 21, 1995 by and between Tesoro Alaska Petroleum Company and the State of Alaska (incorporated by reference herein to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-3473).
73 74 10.17 -- Copy of Settlement Agreement dated effective January 19, 1993, between Tesoro Petroleum Corporation, Tesoro Alaska Petroleum Company and the State of Alaska (incorporated by reference herein to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-3473). 10.18 -- Form of Indemnification Agreement between the Company and its officers and directors (incorporated by reference herein to Exhibit B to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 25, 1987, File No. 1-3473). 10.19 -- Settlement and Standstill Agreement, dated as of April 4, 1996, among Kevin S. Flannery, Alan Kaufman, Robert S. Washburn, James H. Stone, George F. Baker, Douglas Thompson, Gales E. Galloway, Whelan Management Corp., Ardsley Advisory Partners and Tesoro Petroleum Corporation (incorporated by reference herein to Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 1-3473). 10.20 -- Settlement Agreement and Release, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company, Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P., and Tennessee Gas Pipeline Company. 10.21 -- Termination Agreement, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company, Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P., and Tennessee Gas Pipeline Company. 11 -- Information Supporting Earnings Per Share Computations 21 -- Subsidiaries of the Company 23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Netherland, Sewell & Associates, Inc. 27 -- Financial Data Schedule
Copies of exhibits filed as part of this Form 10-K may be obtained by stockholders of record at a charge of $.15 per page, minimum $5.00 each request. Direct inquiries to the Corporate Secretary, Tesoro Petroleum Corporation, 8700 Tesoro Drive, San Antonio, Texas, 78217-6218. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1996. 74 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ BRUCE A. SMITH ---------------------------------- Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer March 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ BRUCE A. SMITH Chairman of the Board of Directors March 24, 1997 - ----------------------------------------------------- and Director, President and (Bruce A. Smith) Chief Executive Officer (Principal Executive Officer) /s/ JAMES C. REED, JR. Executive Vice President, General March 24, 1997 - ----------------------------------------------------- Counsel and Secretary (Principal (James C. Reed, Jr.) Financial Officer) /s/ DON E. BEERE Vice President, Controller March 24, 1997 - ----------------------------------------------------- (Principal Accounting Officer) (Don E. Beere) /s/ STEVEN H. GRAPSTEIN Vice Chairman of the Board of March 24, 1997 - ----------------------------------------------------- Directors and Director (Steven H. Grapstein) /s/ ROBERT J. CAVERLY Director March 24, 1997 - ----------------------------------------------------- (Robert J. Caverly) /s/ WILLIAM J. JOHNSON Director March 24, 1997 - ----------------------------------------------------- (William J. Johnson) /s/ ALAN J. KAUFMAN Director March 24, 1997 - ----------------------------------------------------- (Alan J. Kaufman) /s/ RAYMOND K. MASON, SR. Director March 24, 1997 - ----------------------------------------------------- (Raymond K. Mason, Sr.) /s/ PATRICK J. WARD Director March 24, 1997 - ----------------------------------------------------- (Patrick J. Ward) /s/ MURRAY L. WEIDENBAUM Director March 24, 1997 - ----------------------------------------------------- (Murray L. Weidenbaum)
75 76 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.2 -- Bylaws of the Company, as amended through June 6, 1996. 4.2 -- Second Amended and Restated Guaranty Agreement dated as of January 28, 1997 among various subsidiaries of the Company and Banque Paribas, individually, as Administrative Agent and as an Issuing Bank, and certain other financial institutions named therein, entered into in connection with the Credit Facility. 4.11 -- First Amendment to Amended and Restated Security Agreement (Pledge) dated as of September 12, 1996 between the Company and Banque Paribas, entered into in connection with the Credit Facility. 10.5 -- Amended and Restated Employment Agreement between the Company and James C. Reed, Jr. dated as of December 12, 1996. 10.6 -- Amended and Restated Employment Agreement between the Company and William T. Van Kleef dated as of December 12, 1996. 10.12 -- Amended and Restated Tesoro Petroleum Corporation Executive Long-Term Incentive Plan, as amended through June 6, 1996. 10.20 -- Settlement Agreement and Release, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company, Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P., and Tennessee Gas Pipeline Company. 10.21 -- Termination Agreement, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company, Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P., and Tennessee Gas Pipeline Company. 11 -- Information Supporting Earnings Per Share Computations 21 -- Subsidiaries of the Company 23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Netherland, Sewell & Associates, Inc. 27 -- Financial Data Schedule
78 EX-3.2 2 BY-LAWS AS AMENDED JUNE 6, 1996 1 ITEM 14(a)3, EXHIBIT 3.2 Adopted: September 22, 1971 Amended: May 31, 1973 November 20, 1974 November 1, 1975 September 29, 1976 September 29, 1979 August 27, 1980 November 22, 1988 April 14, 1989 June 28, 1989 January 2, 1992 September 29, 1992 February 9, 1994 February 23, 1995 July 26, 1995 September 27, 1995 June 6, 1996 BY-LAWS OF TESORO PETROLEUM CORPORATION (As Amended June 6, 1996) 2 BY-LAWS OF TESORO PETROLEUM CORPORATION ARTICLE I Meeting of Stockholders Section 1.1 Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as properly may come before such meeting shall be held on such date, and at such time and place within or without the State of Delaware, as may be designated by the Board of Directors. Section 1.2 Special Meetings. Special meetings of the stockholders for any proper purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, or any Vice President, to be held on such date, and at such time and place within or without the State of Delaware, as the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, or a Vice President, whichever has called the meeting, shall direct. A special meeting of the stockholders shall be called by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, or any Vice President whenever stockholders holding shares representing a majority of the votes of the shares of the Corporation then issued and outstanding and entitled to vote on matters to be submitted to stockholders of the Corporation shall make application therefor in writing. Any such written request shall state a proper purpose or purposes of the meeting and shall be delivered to the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, or any Vice President. A special meeting of the stockholders shall be called by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, or any Vice President, for the purpose of electing one additional member to the Board of Directors in the event there should occur three tie votes of the Board of Directors with respect to any matter or series of matters at any meeting or series of meetings within a three consecutive month period. Section 1.3 Notice of Meeting. Written notice, signed by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President, the Secretary or an Assistant Secretary, of every meeting of stockholders (other than an adjourned meeting unless otherwise required by statute) stating the purpose or purposes for which the meeting is called, and the date and time when, and the place where, it is to be held shall be either delivered personally or mailed to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the meeting, except as otherwise provided by statute. If mailed, such notice shall be 3 directed to a stockholder at his address as it shall appear on the stock books of the Corporation, unless he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request, and shall be given when deposited in the United States mail, postage prepaid. Section 1.4 Quorum. The presence at any meeting, in person or by proxy, of the holders of record of shares representing a majority of the votes of the shares then issued and outstanding and entitled to vote shall be necessary and sufficient to constitute a quorum for the transaction of business, except where otherwise provided by statute. Section 1.5 Adjournments. In the absence of a quorum, a majority of the votes of the stockholders entitled to vote, present in person or by proxy, or, if no stockholder entitled to vote is present in person or by proxy, any officer entitled to preside at or act as secretary of such meeting, may adjourn the meeting from time to time until a quorum shall be present. Section 1.6 Voting. Directors shall be chosen by a plurality of the votes cast at the election, and, except where otherwise provided by statute, or the Certificate of Incorporation, all other questions shall be determined by a majority of the votes cast on such question. Section 1.7 Proxies. Any stockholders entitled to vote may vote by proxy, provided that the instrument authorizing such proxy to act shall have been executed in writing (which shall include telegraphing or cabling) by the stockholder himself or by his duly authorized attorney. Section 1.8 Judges of Election. The Board of Directors may appoint judges of election to serve at any election of directors and at balloting on any other matter that may properly come before a meeting of stockholders. If no such appointment shall be made, or if any of the judges so appointed shall fail to attend, or refuse or be unable to serve, then such appointment may be made by the presiding officers at the meeting. Section 1.9 Consent of Stockholders in Lieu of Meeting. (a) Any action required to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to - 2 - 4 its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings or meetings of stockholders are recorded. Delivery shall be made by hand or by certified or registered mail, return receipt requested. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed in paragraph (c) of this Section. (c) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than fifteen days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten days after the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with paragraphs (a) and (b) of this Section. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. (d) Within three business days after receipt of the earliest dated consent delivered to the Corporation in the manner provided in this Section, the Corporation shall retain nationally recognized independent inspectors of elections for the purpose of performing a ministerial review of the validity of consents and any revocations thereof. The Corporation shall promptly deliver all consents and revocations of consents received by it to the inspectors of election. The cost of retaining inspectors of election shall be borne by the Corporation. - 3 - 5 (e) At any time that stockholders soliciting consents in writing to corporate action have a good faith belief that the requisite number of valid and unrevoked consents to authorize or take the action specified has been received by them, the consents shall be delivered by the soliciting stockholders to the Corporation's registered office in the State of Delaware or principal place of business or to the Secretary of the Corporation, together with a certificate stating their belief that the requisite number of valid and unrevoked consents has been received as of a specific date, which date shall be identified in the certificate. In the event that delivery is made to the Corporation's registered office in the State of Delaware, such delivery shall be made by hand or by certified or registered mail, return receipt requested. (f) As promptly as practicable after the consents and revocations are received by them, the inspectors of election shall issue a preliminary report to the Corporation stating: (i) the number of shares represented by valid and unrevoked consents; (ii) the number of shares represented by invalid consents; (iii) the number of shares represented by invalid revocations; and (iv) the number of shares entitled to submit consents as of the record date. Unless the Corporation and the soliciting stockholders agree to a shorter or longer period, the Corporation and the soliciting stockholders shall have five days to review the consents and revocations and to advise the inspectors and the opposing party in writing as to whether they intend to challenge the preliminary report. If no timely written notice of an intention to challenge the preliminary report is received, the inspectors shall certify the preliminary report (as corrected or modified by virtue of the detection by the inspectors of clerical errors) as their final report and deliver it to the Corporation. If the Corporation or the soliciting stockholders give timely written notice of an intention to challenge the preliminary report, a challenge session shall be scheduled by the inspectors as promptly as practicable. A transcript of the challenge session shall be recorded by a certified court reporter. Following completion of the challenge session, the inspectors shall issue as promptly as practicable their final report and deliver it to the Corporation. A copy of the final report shall be included in the book in which the proceedings of meetings of stockholders are recorded. (g) The Corporation shall give prompt notice to the stockholders of the results of any consent solicitation or the taking of corporate action without a meeting by less than unanimous written consent. (h) This Section shall in no way impair or diminish the right of any stockholder or director, or any officer whose title to office is contested, to contest the validity of any consent or revocation thereof, or to take any action with respect thereto. - 4 - 6 Section 1.10 Nominations for Director and Proposal of Business. (a) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of the stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. (b) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to this Section, such stockholder must have given timely notice thereof in writing to the Secretary, and such business must be a proper subject for stockholder action under the Delaware General Corporation Law. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made, and (c) as to the stockholder giving the notice and such beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (c) Notwithstanding anything in this Section to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased - 5 - 7 and there is no public announcement specifying the size of the increased Board of Directors made by the Corporation at least seventy days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (d) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of the Corporation's giving of notice provided for in this Section, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by this Section shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (e) Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors at a meeting of stockholders. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section and, if any proposed nominations or business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. (f) For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service. (g) Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange - 6 - 8 Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II Board of Directors Section 2.1 Number, Election and Term of Office. The number of directors which shall constitute the whole Board of Directors shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 2.2, and each director elected at an annual meeting of stockholders, and directors elected in the interim to fill vacancies and newly created directorships shall hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified or until their earlier resignation or removal. A director need not be a stockholder. Section 2.2 Vacancies and Additional Directorships. Unless otherwise provided in the Certificate of Incorporation or these By-laws: (1) vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum; (2) whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office. Section 2.3 The Vice Chairman of the Board of Directors. The Board of Directors may appoint a Vice Chairman of the Board of Directors who shall be a director but need not be a stockholder of the Corporation. The Vice Chairman shall not, by reason of said title, be or be deemed to be an officer of the Corporation. In the absence of the Chairman of the Board of Directors, the Vice Chairman shall preside at all meetings of the stockholders and of the Board of Directors. The Vice Chairman may sign, with an officer thereunto duly authorized (the signatures to which may be facsimile signatures) and may sign and execute in the name of the Corporation other instruments which the Board of Directors has authorized to be executed. From time to time, but only in the absence or at the direction of the Chairman of the Board of Directors, the Vice Chairman shall report to the Board of Directors all matters which to his knowledge the interests of the Corporation may require be brought to their attention. The Vice Chairman shall perform such other duties as are given to him by - 7 - 9 these By-laws or as from time to time may be assigned to him by the Board of Directors. Section 2.4 Meetings. A meeting of the Board of Directors shall be held for organization, for the election of officers and for the transaction of such other business as may properly come before the meeting, within thirty days after each annual election of directors. The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required to be given, provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be mailed promptly to each director who shall not have been present at the meeting at which such action was taken, addressed to him at his residence or usual place of business. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President or any two directors. Except as otherwise required by statute, notice of each special meeting shall be mailed to each director, addressed to him at his residence or usual place of business, or shall be sent to him at such place by telegram, radio or cable, or telephoned or delivered to him personally, not later than two days before the day on which the meeting is to be held. Such notice shall state the time and place of such meeting, but unless otherwise required by statute, the Certificate of Incorporation of the Corporation or these By-laws need not state the purposes thereof. Notice of any meeting need not be given to any director who shall attend such meeting in person or who shall waive notice thereof, before or after such meeting, in writing or by telegram, radio or cable. Section 2.5 Quorum. One-third of the total number of members of the Board of Directors as constituted from time to time, but not less than two, shall be necessary and sufficient to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of those present at the time and place of any meeting may adjourn the meeting from time to time until a quorum shall be present, and the meeting may be held as adjourned without further notice of waiver. A majority of those present at any meeting at which a quorum is present may decide any question brought before such meeting, except as otherwise provided by law, the Certificate of Incorporation or these By-laws. Section 2.6 Resignation of Directors. Any director may resign at any time by giving written notice of such resignation to the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President or the Secretary. Any such resignation shall take effect at the time specified therein, or, if no time be specified, upon receipt thereof by the Board of Directors or - 8 - 10 one of the above-named officers; and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 2.7 Removal of Directors. At any special meeting of the stockholders, duly called for the purpose of removing a director or directors as provided in these By-laws, any director or directors may, by the affirmative vote of the holders of shares representing a majority of the votes of all the shares of stock outstanding and entitled to vote for the election of directors, be removed from office, either for or without cause. Such vacancy shall be filled by the directors as provided in Section 2.2. Section 2.8 Compensation of Directors. Directors shall receive such reasonable compensation for their service as such, whether in the form of salary or a fixed fee for attendance at meetings, with expenses, if any, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 2.9 Indemnification. The Corporation shall indemnify to the full extent authorized or permitted by the laws of the State of Delaware any person who is made, or threatened to be made, a party to an action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or serves or served any other enterprise at the request of the Corporation. ARTICLE III Committees of the Board Section 3.1 Designation, Power, Alternate Members and Term of Office. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees including an Executive Committee, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in such resolution or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger of consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation or, unless the resolution of the Board of Directors establishing any such - 9 - 11 committee shall expressly so provide or these By-laws shall expressly so provide, declaring a dividend on the Corporation's capital stock or authorizing the issuance of the Corporation's capital stock. The Board may designate one or more directors as alternate members of any committee who, in the order specified by the Board, may replace any absent or disqualified member at any meeting of the committee. If at a meeting of any committee one or more of the members thereof should be absent or disqualified, and if either the Board of Directors has not so designated any alternate member or members, or the number of absent or disqualified members exceeds the number of alternate members who are present at such meeting, then the member or members of such committee (including alternates) present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. The term of office of the members of each committee shall be as fixed from time to time by the Board, subject to these By-laws; provided, however, that any committee member who ceases to be a member of the Board shall ipso facto cease to be a committee member. Each committee shall appoint a secretary, who may be the Secretary of the Corporation or an Assistant Secretary thereof. Section 3.2 Meetings, Notices and Records. Each committee may provide for the holding of regular meetings, with or without notice, and may fix the time and place at which such meetings shall be held. Special meetings of each committee shall be held upon call by or at the direction of its chairman or, if there be no chairman, by or at the direction of any two of its members, at the time and place specified in the respective notices or waivers of notice thereof. Notice of each special meeting of a committee shall be mailed to each member of such committee, addressed to him at his residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent by telegram, radio or cable, addressed to him at such place, or telephoned or delivered to him personally not later than the day before the day on which the meeting is to be held. Notice of any meeting of a committee need not be given to any member thereof who shall attend the meeting in person or who shall waive notice thereof, before or after such meeting, in writing or by telegram, radio or cable. Notice of any adjourned meeting need not be given. Each committee shall keep a record of its proceedings. Section 3.3 Quorum and Manner of Acting. At each meeting of any committee the presence of one-third but not less than two of its members then in office shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of such committee. In the absence of a quorum, a majority of the members present at the time and place of any meeting may adjourn the meeting from time to time until a quorum shall be present. Subject to the foregoing and other provisions of these By-laws and except as otherwise determined by the Board of Directors, each committee may make rules for the conduct of its business. Any - 10 - 12 determination made in writing and signed by all the members of such committee shall be as effective as if made by such committee at a meeting. Section 3.4 Resignations. Any member of a committee may resign at any time by giving written notice of such resignation to the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President or the Secretary. Any such resignation shall take effect at the time specified therein, or if no time be specified, upon receipt thereof by the Board of Directors or one of the above-named officers; and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.5 Removal. Any member of any committee may be removed at any time by the Board of Directors with or without cause. Section 3.6 Vacancies. If any vacancy shall occur in any committee by reason of death, resignation, disqualification, removal or otherwise, the remaining members of such committee, though less than a quorum, shall continue to act until such vacancy is filled by a resolution passed by a majority of the whole Board of Directors. Section 3.7 Compensation. Committee members shall receive such reasonable compensation for their services as such, whether in the form of salary or a fixed fee for attendance at meetings, with expenses, if any, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any committee member from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Officers Section 4.1 Officers. The officers of the Corporation shall be a Chairman of the Board of Directors who shall also be the President and Chief Executive Officer, one or more Vice Presidents (which may include Executive Vice Presidents, Group Vice Presidents, Senior Vice Presidents and other categories of Vice Presidents), a Secretary, a Treasurer, and such other officers as may be appointed in accordance with the provisions of Section 4.3. Section 4.2 Election, Term of Office and Qualifications. Each officer (except such officers as may be appointed in accordance with the provisions of Section 4.3) shall be elected by the Board of Directors. Each such officer (whether elected at the first meeting of the Board of Directors after the annual meeting of stockholders or to fill a vacancy otherwise) shall hold his office until the first meeting of the Board of - 11 - 13 Directors after the next annual meeting of stockholders and until his successor shall have been elected, or until his death, or until he shall have resigned in the manner provided in Section 4.4 or shall have been removed in the manner provided in Section 4.5. Section 4.3 Subordinate Officers and Agents. The Board of Directors from time to time may appoint other officers or agents (including one or more Assistant Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers), to hold office for such period, have such authority and perform such duties as are provided in these By-laws or as may be provided in the resolutions appointing them. The Board of Directors may delegate to any officer or agent the power to appoint any such subordinate officers or agents and to prescribe their respective terms of office, authorities and duties. Section 4.4 Resignations. Any officer may resign at any time by giving written notice of such resignation to the Board of Directors, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President or the Secretary. Any such resignation shall take effect at the time specified therein or, if no time be specified, upon receipt thereof by the Board of Directors or one of the above-named officers; and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 Removal. Any officer specifically designated in Section 4.1 may be removed at any time, either with or without cause, at any meeting of the Board of Directors by the vote of a majority of all the Directors then in office. Any officer or agent appointed in accordance with the provisions of Section 4.3 may be removed, either with or without cause, by the Board of Directors at any meeting, by the vote of a majority of the Directors present at such meeting, or by any superior officer or agent upon whom such power of removal shall have been conferred by the Board of Directors. Section 4.6 Vacancies. A vacancy in any office by reason of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed by these By-laws for regular election or appointment to such office. Section 4.7 The Chairman of the Board of Directors. The Chairman of the Board of Directors shall be the President and Chief Executive Officer of the Corporation. Subject to the direction of the Board of Directors, he shall have general charge of the business affairs and property of the Corporation. He shall see that all orders and resolutions of the Board of Directors are carried into effect. If present, he shall preside at all meetings of stockholders. He may sign, with any other officer thereunto duly authorized, certificates of stock of the Corporation the issuance of which shall have been duly authorized (the signatures to which may be facsimile signatures), and may sign and execute in the name of the Corporation, deeds, mortgages, bonds, contracts, - 12 - 14 agreements or other instruments duly authorized by the Board of Directors except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by statute to some other officer or agent. From time to time he shall report to the Board of Directors all matters within his knowledge which the interests of the Corporation may require to be brought to their attention. He shall perform such other duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors. Section 4.8 Executive Vice President. In the absence of the Chairman of the Board of Directors and the Vice Chairman of the Board of Directors, the Executive Vice President shall preside at all meetings of stockholders. The Executive Vice President may sign, with any other officer thereunto duly authorized, certificates of stock of the Corporation the issuance of which shall have been duly authorized (the signatures to which may be facsimile signatures), and may sign and execute in the name of the Corporation, deeds, mortgages, bonds, contracts, agreements or other instruments duly authorized by the Board of Directors except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by statute to some other officer or agent. He shall perform such other duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors or the Chairman of the Board of Directors. Section 4.9 The Vice Presidents. In the event of the absence or disability of the Chairman of the Board of Directors, any Vice President designated by the Chairman of the Board of Directors (or in the absence of such designation, the Vice President designated by the Board of Directors) shall perform all the duties of the Chairman of the Board of Directors and, when so acting, shall have all the powers of and be subject to all restrictions upon the Chairman of the Board of Directors. Any Vice President may also sign, with any other officer thereunto duly authorized, certificates of stock of the Corporation the issuance of which shall have been duly authorized (the signature to which may be a facsimile signature), and may sign and execute in the name of the Corporation, deeds, mortgages, bonds and other instruments duly authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by statute to some other officer or agent. Each Vice President shall perform such other duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors or the Chairman of the Board of Directors. Section 4.10 The Secretary. The Secretary shall (a) record all the proceedings of the meetings of the stockholders, the Board of Directors, and any committees in a book or books to be kept for that purpose; (b) cause all notices to be duly given in accordance with the provisions of these By-laws and as required by statute; - 13 - 15 (c) whenever any committee shall be appointed in pursuance of a resolution of the Board of Directors, furnish the chairman of such committee with a copy of such resolution; (d) be custodian of the records and of the seal of the Corporation, and cause such seal to be affixed to all certificates representing stock of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized; (e) see that the lists, books, reports, statements, certificates and other documents and records required by statute are properly kept and filed; (f) have charge of the stock and transfer books of the Corporation, and exhibit such stock book at all reasonable times to such persons as are entitled by statute to have access thereto; (g) sign (unless the Treasurer or an Assistant Secretary or an Assistant Treasurer shall sign) certificates representing stock of the Corporation the issuance of which shall have been duly authorized (the signature to which may be a facsimile signature); and (h) in general, perform all duties incident to the office of Secretary and such other duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board of Directors or the Executive Vice President. Section 4.11 Assistant Secretaries. At the request of the Secretary or in his absence or disability, the Assistant Secretary designated by him (or in the absence of such designation, the Assistant Secretary designated by the Board of Directors, the Chairman of the Board of Directors, or the Executive Vice President) shall perform all the duties of the Secretary and, when so acting, shall have all the powers of and be subject to all restrictions upon the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board of Directors, the Executive Vice President or the Secretary. Section 4.12 The Treasurer. The Treasurer shall (a) have charge of and supervision over and be responsible for the funds, securities, receipts and disbursements of the Corporation; (b) cause the monies and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected - 14 - 16 in accordance with Section 5.3 of these By-laws or to be otherwise dealt with in such manner as the Board of Directors may direct; (c) cause the funds of the Corporation to be disbursed by checks or drafts upon the authorized depositaries of the Corporation, and cause to be taken and preserved proper vouchers for all monies disbursed; (d) render to the Board of Directors or the Chairman of the Board of Directors, whenever requested, a statement of the financial condition of the Corporation and of all his transactions as Treasurer; (e) cause to be kept at the Corporation's principal office correct books of account of all its business and transactions and such duplicate books of account as he shall determine and upon application cause such books or duplicates thereof to be exhibited to any director; (f) be empowered, from time to time, to require from the officers or agents of the Corporation reports or statements giving such information as he may desire with respect to any and all financial transactions of the Corporation; (g) sign (unless the Secretary or an Assistant Secretary or an Assistant Treasurer shall sign) certificates representing stock of the Corporation the issuance of which shall have been duly authorized (the signature to which may be a facsimile signature); and (h) in general, perform all duties incident to the office of Treasurer and such other duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board of Directors or the Executive Vice President. Section 4.13 Assistant Treasurers. At the request of the Treasurer or in his absence or disability, the Assistant Treasurer designated by him (or in the absence of such designation, the Assistant Treasurer designated by the Board of Directors, the Chairman of the Board of Directors or the Executive Vice President) shall perform all the duties of the Treasurer and, when so acting, shall have all the powers of and be subject to all restrictions upon the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board of Directors, the Executive Vice President or the Treasurer. Section 4.14 Salaries. The salaries of the officers of the Corporation shall be fixed from time to time by the Board of Directors, except that the Board of Directors may delegate to any person the power to fix the salaries or other compensation of any officers or agents appointed in accordance with the provisions of Section 4.3. No - 15 - 17 officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 4.15 Surety Bonds. If the Board of Directors shall so require, any officer or agent of the Corporation shall execute to the Corporation a bond in such sum and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful discharge of his duties, including responsibilities for negligence and for the accounting for all property, funds or securities of the Corporation which may come into his hands. ARTICLE V Execution of Instruments and Deposit of Corporate Funds Section 5.1 Execution of Instruments Generally. The Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, any Vice President, the Secretary or the Treasurer, subject to the approval of the Board of Directors, may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation, and such authorization may be general or confined to specific instances. Section 5.2 Borrowing. No loans or advances shall be obtained or contracted for, by or on behalf of the Corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors. Such authorization may be general or confined to specific instances. Any officer or agent of the Corporation thereunto so authorized may obtain loans and advances for the Corporation, and for such loans and advances may make, execute and deliver promissory notes, bonds, or other evidences of indebtedness of the Corporation. Any officer or agent of the Corporation thereunto so authorized may pledge, hypothecate or transfer as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, bonds, other securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same and so every act and thing necessary or proper in connection therewith. Section 5.3 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to its credit in such banks or trust companies or with such bankers or other depositaries as the Board of Directors may select, or as may be selected by any officer or officers or agent or agents authorized so to do by - 16 - 18 the Board of Directors. Endorsements for deposit to the credit of the Corporation in any of its duly authorized depositaries shall be made in such manner as the Board of Directors from time to time may determine. Section 5.4 Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, and all notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers or agent or agents of the Corporation, and in such manner, as from time to time shall be determined by the Board of Directors. Section 5.5 Proxies. Proxies to vote with respect to shares of stock of other corporations owned by or standing in the name of the Corporation may be executed and delivered from time to time on behalf of the Corporation by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors or a Vice President or by any other person or persons thereunto authorized by the Board of Directors. ARTICLE VI Record Dates Section 6.1. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversation or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall be not more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. Only those stockholders of record on the date so fixed shall be entitled to any of the foregoing rights, notwithstanding the transfer of any such stock on the books of the Corporation after any such record date fixed by the Board of Directors. ARTICLE VII Corporate Seal Section 7.1. The corporate seal shall be circular in form and shall bear the name of the Corporation and words and figures denoting its organization under the - 17 - 19 laws of the State of Delaware and the year thereof and otherwise shall be in such form as shall be approved from time to time by the Board of Directors. ARTICLE VIII Fiscal Year Section 8.1. The fiscal year of the Corporation shall begin on the 1st day of January in each year and shall end on the 31st day of December in the same year. ARTICLE IX Amendments Section 9.1. Except as otherwise provided in Article VII of the Certificate of Incorporation, all By-laws of the Corporation may be amended, altered or repealed, and new By-laws may be made, by the affirmative vote of the holders of record of shares representing a majority of the votes of the outstanding shares of stock of the Corporation entitled to vote cast at any annual or special meeting, or by the affirmative vote of a majority of the Directors cast at any regular or special meeting at which a quorum is present. - 18 - EX-4.2 3 SECOND AMENDED & RESTATED GUARANTY AGREEMENT 1 ITEM 14(a)3, EXHIBIT 4.2 SECOND AMENDED AND RESTATED GUARANTY AGREEMENT (Subsidiaries) SECOND AMENDED AND RESTATED GUARANTY AGREEMENT, dated as of January 28, 1997 (this "Guaranty Agreement"), among TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation, TESORO EXPLORATION AND PRODUCTION COMPANY, a Delaware corporation, and TESORO PETROLEUM COMPANIES, INC., a Delaware corporation, DIGICOMP, INC., a Delaware corporation, TESORO TECHNOLOGY PARTNERS COMPANY, a Delaware corporation, INTERIOR FUELS COMPANY, an Alaskan corporation, TESORO ALASKA PIPELINE COMPANY, a Delaware corporation, TESORO NORTHSTORE COMPANY, an Alaskan corporation, TESORO REFINING, MARKETING & SUPPLY COMPANY, a Delaware corporation, TESORO NATURAL GAS COMPANY, a Delaware corporation, TESORO BOLIVIA PETROLEUM COMPANY, a Texas corporation, TESORO GAS RESOURCES COMPANY, INC., a Delaware corporation, TESORO E&P COMPANY, L.P., a Delaware limited partnership, TESORO VOSTOK COMPANY, a Delaware corporation, TESORO COASTWIDE SERVICES COMPANY, a Delaware corporation, COASTWIDE MARINE SERVICES, INC., a Texas corporation, KENAI PIPE LINE COMPANY, a Delaware corporation TESORO FINANCIAL SERVICES HOLDING COMPANY, a Delaware corporation, VICTORY FINANCE COMPANY, a Delaware corporation, and TESORO MARINE SERVICES COMPANY, a Delaware corporation (the "Guarantors"), in favor of BANQUE PARIBAS, individually, as Administrative Agent and as an Issuing Bank, and the other financial institutions now or hereafter parties to the Credit Agreement (as such term is hereinafter defined). RECITALS A. Tesoro Petroleum Corporation, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") entered into that certain Amended and Restated Credit Agreement dated as of June 7, 1996 (the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery of that certain Amended and Restated Guaranty Agreement dated of even date therewith by certain Subsidiaries of the Company (the "1996 Guaranty Agreement") which by Amended and Restated Guaranty Agreement dated as of September 12, 1996 (the "Prior Guaranty Agreement"), such 1996 Guaranty Agreement was amended and restated to include additional entities as Guarantors to obtain the benefits thereof under the Credit Agreement. C. The Company desires to include an additional entity as a Guarantor to obtain the benefits thereof under the Credit Agreement. D. Therefore, in consideration of the premises contained herein, the Guarantors and the Administrative Agent agree to amend and restate the Prior Guaranty Agreement as follows: 2 AGREEMENT 1. Defined Terms. As used in this Guaranty Agreement, capitalized terms defined in the Credit Agreement are used herein as defined therein unless otherwise noted herein, and the following additional capitalized terms shall have the following meanings: "Collateral" shall mean any Property in which the Agent is granted a Lien from time to time as security for the Lender Indebtedness. "Contribution Obligation" shall mean an amount equal, at any time and from time to time and for each respective Guarantor, to the product of (i) its Contribution Percentage times (ii) the sum of all payments made previous to or at the time of calculation by all Guarantors in respect of the Obligations, as a Guarantor or debtor under any Loan Document (less the amount of any such payments previously returned to any Guarantor by operation of law or otherwise, but not including payments received by any Guarantor by way of its rights of subrogation and contribution under this Guaranty Agreement), provided, however, such Contribution Obligation for any Guarantor shall in no event exceed such Guarantor's Maximum Guaranteed Amount. "Contribution Percentage" shall mean for any Guarantor for any applicable date as of which such percentage is being determined, an amount equal to the quotient of (i) the Net Worth of such Guarantor as of such date, divided by (ii) the sum of the Net Worth of all the Guarantors as of such date. "Maximum Guaranteed Amount" shall mean, for each Guarantor, the greater of (i) the "reasonably equivalent value" or "fair consideration" (or equivalent concept) received by such Guarantor in exchange for the obligation incurred hereunder by such Guarantor, within the meaning of any state or federal fraudulent conveyance or transfer laws applicable to such Guarantor; or (ii) the lesser of (A) the maximum amount that will not render such Guarantor insolvent, or (B) the maximum amount that will not leave such Guarantor (after giving effect to this Guaranty Agreement) with Property deemed an unreasonably small capital. Clauses (A) and (B) are and shall be determined pursuant to and as of the appropriate date mandated by such applicable state or federal fraudulent conveyance or transfer laws and to the extent allowed by law take into account the rights to contribution and subrogation under this Guaranty Agreement so as to provide for the largest Maximum Guaranteed Amount possible. "Net Payments" shall mean an amount equal, at any time and from time to time and for each respective Guarantor, to the difference of (i) the sum of all payments made previous to or at the time of calculation by such Guarantor in respect to the Obligations, as a Guarantor, and in respect of its obligations contained in this Guaranty Agreement or any other Financing Document, less (ii) the sum of all such payments previously returned to such Guarantor by operation of law or otherwise and including payments received by such -2- 3 Guarantor by way of its rights of subrogation and contribution under this Guaranty Agreements. "Net Worth" shall mean for any Guarantor, calculated on and as of any applicable date on which such amount is being determined, the greater of (i) zero or (ii) the difference between (A) the sum of all such Guarantor's property, at a fair valuation and as of such date, minus (B) the sum of all such Guarantor's debts, at a fair valuation and as of such date, excluding the Obligations. "Obligations" shall mean (i) all Lender Indebtedness now or hereafter owing, including, but not limited to, (A) the unpaid principal of and accrued interest on (including interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes, and (B) the obligation of the Company to otherwise reimburse the Lender, whether on account of fees, indemnities, costs, taxes, expenses (including all fees and disbursements set forth in Sections 2.21 or 9.04 of the Credit Agreement) or otherwise, (ii) payment of and performance of any and all present or future obligations of the Company according to the terms of any present or future interest or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement or other exchange or rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between the Company and the Administrative Agent or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iii) payment of and performance of any and all present or future obligations of the Company according to the terms of any present or future swap agreements, cap, floor, collar, exchange transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other hydrocarbons or any option with respect to any such transaction now existing or hereafter entered into between the Company and the Administrative Agent or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; and (iv) any and all other sums payable by the Company or any of its Subsidiaries under or in respect of any Financing Document. 2. Guarantee. (a) Each of the Guarantors hereby unconditionally and irrevocably and jointly and severally guarantees to the Agent, the Issuing Banks and each Lender the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, and each of the Guarantors further agrees, jointly and severally, to pay any and all expenses which may be paid or incurred by the Agent, either Issuing Bank or any Lender in enforcing any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, any Guarantor under this Guaranty Agreement; provided, however, that, notwithstanding anything herein or in any other Financing Document to the contrary, the maximum liability of each Guarantor hereunder and under the other Financing Documents shall in no event exceed the Maximum Guaranteed Amount for such Guarantor. -3- 4 (b) Each Guarantor agrees that the Obligations may at any time and from time to time exceed the Maximum Guaranteed Amount for such Guarantor without impairing this Guaranty Agreement or affecting the rights and remedies of the Agent, either Issuing Bank or any Lender. (c) No payment or payments made by the Company, any Guarantor, any other guarantor or any other Person or received or collected by the Agent, either Issuing Bank or any Lender from the Company, any Guarantor, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of each Guarantor hereunder, which shall, notwithstanding any such payment or payments, other than payments made by such Guarantor in respect of the Obligations or payments received or collected from such Guarantor in respect of the Obligations, remain liable for the Obligations up to the Maximum Guaranteed Amount for such Guarantor until the Obligations are paid in full. (d) It is the intention of the parties hereto that all intercompany indebtedness either owed to or by any Guarantor not be included as either an asset or a liability, respectively, in determining the solvency or capital of any Guarantor. Accordingly, each Guarantor agrees that in connection with any determination of the Maximum Guaranteed Amount, such intercompany indebtedness may be treated in the manner that would achieve the result intended by the first sentence of this subsection (d). (e) Right to Collect on the Notes. The Company and the Guarantors are personally obligated and fully liable for the amounts due under the Notes. The Lenders have the right to sue on the Notes and obtain a personal judgment against the Company and the Guarantors for satisfaction of the amounts due under the Notes either before or after a judicial foreclosure of the Alaska Deed of Trust under Alaska Statute 09.45.170 - 09.45.220. (f) Senior Debt. Tesoro Alaska's guarantee of the payment of the Obligations constitutes Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1993, among the Company, Tesoro Alaska, and the State of Alaska, attached as Exhibit 7 to the Settlement Agreement dated December 15, 1992, among the Company, Tesoro Alaska, and the State of Alaska. 3. Right of Contribution. Each Guarantor agrees that after all the Obligations have been paid in full that if its then current Net Payments are less than the amount of its then current Contribution Obligation, such Guarantor shall pay to the other Guarantors an amount (together with any payments required of the other Guarantors by this Section 3) such that the Net Payments made by all Guarantors in respect of the Obligations shall be shared among all of the Guarantors in proportion to their respective Contribution Percentage. The provisions of this Paragraph 3 shall in no respect limit the obligations and liabilities of any Guarantor to the Agent, the Issuing Banks or any Lender, and each Guarantor shall remain liable to the Agent, the Issuing Banks and each Lender for the full amount guaranteed by such Guarantor hereunder. -4- 5 4. Right of Set-off. The Agent, the Issuing Bank and each Lender is hereby irrevocably authorized upon the occurrence of an Event of Default without notice to the Guarantors, any such notice being expressly waived by each Guarantor, to set-off and credit against any credits, indebtedness or claims, in any currency, in each case whether direct or indirect or contingent or matured or unmatured, at any time held or owing by the Agent, either Issuing Bank or any Lender to or for the credit or the account of any Guarantor, or any part thereof in such amounts as the Agent, such Issuing Bank or such Lender may elect, against and on account of the obligations and liabilities of the applicable Guarantor to the Agent, the Issuing Banks and the Lenders hereunder and claims of every nature and description of the Agent, the Issuing Banks and the Lenders against such Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, any other Financing Document or otherwise, as the Agent, either Issuing Bank or any Lender may elect, whether or not the Agent, such Issuing Bank or such Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Agent agrees to notify (promptly after receipt of notice by the Agent) the Company and the applicable Guarantor of any such set-off and the application made by the Agent, such Issuing Bank or any such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Agent, either Issuing Bank and each Lender under this paragraph are in addition to other rights and remedies (including, without limitation, other rights of set-off) which any such Person may have. If foreign currency is exchanged for U.S. Dollars by the Agent, either Issuing Bank or any Lender, such Person shall use the rate of exchange prevailing at the time for customers exchanging a similar amount of currency. 5. No Subrogation. Notwithstanding any payment or payments made by any Guarantor hereunder or any set-off or application of funds of any Guarantors by the Agent, either Issuing Bank or any Lender, any such Guarantor shall not be entitled to be subrogated to any of the rights of the Agent, either Issuing Bank or any Lender against the Company or any collateral security or guaranty or right of offset held by any such Person for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Company in respect of payments made by any such Guarantor hereunder, until all Obligations are paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Agent, the Issuing Banks and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Agent, if required), to be applied against the Obligations, whether matured or unmatured in such order as the Agent may determine. 6. Amendments, etc. with respect to the Obligations; Waiver of Rights. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors, any demand for payment of any of the Obligations made by the Agent, either Issuing Bank or any Lender may be rescinded and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto, may, -5- 6 from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent, the Issuing Banks or the Lenders and the Credit Agreement, the Notes and any collateral security document or other guaranty or document in connection therewith (including, without limitation, the other Financing Documents) may be amended, modified, supplemented or terminated, in whole or in part, as the Agent, the Issuing Banks or the Lenders may deem advisable from time to time, and any collateral security or guaranty or right of offset at any time held by the Agent, the Issuing Banks or the Lenders for the payment of the Obligations may be sold, exchanged, waived, surrendered or released, all without the necessity of any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors which will remain bound hereunder, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. Neither the Agent, either Issuing Bank nor any Lender shall have an obligation to protect, secure, perfect or insure any Lien at any time held as security for the Obligations or this Guaranty Agreement or any Property subject thereto. When making any demand hereunder against any Guarantor, the Agent may, but shall be under no obligation to, make a similar demand on the Company or any other guarantor, and any failure by the Agent to make any such demand or to collect any payments from the Company or any such other guarantor, or any release of the Company or other guarantor, shall not relieve any such Guarantor of its obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent, the Issuing Banks of the Lenders against each Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 7. Guaranty Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent, either Issuing Bank or any Lender upon this Guaranty Agreement or acceptance of this Guaranty Agreement, and the Obligations (and any of them) shall conclusively be deemed to have been created, contracted or incurred and extended, amended and waived in reliance upon this Guaranty Agreement, and all dealings between the Company or the Guarantors and the Agent, either Issuing Bank or any Lender shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guaranty Agreement. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment, notice of intention to accelerate maturity and notice of acceleration of maturity to or upon the Company or the Guarantors with respect to the Obligations. Each Guarantor understands and agrees that this Guaranty Agreement shall be construed as a continuing, absolute, completed, unconditional (except as expressly conditioned pursuant to the terms hereof) and irrevocable guarantee of payment and not of collection without regard to (a) the validity, regularity or enforceability of the Credit Agreement, the other Financing Documents, any of the Obligations or any collateral security or guaranty therefor or right of offset with respect thereto at any time or from time to time held by the Agent, either Issuing Bank or any Lender, (b) any defense, set-off or counterclaim which may at any time be available to or be asserted by the Company or any other Person liable for the Obligations against the Agent, either Issuing Bank or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Company or any Guarantor) which constitutes, or might be construed -6- 7 to constitute, an equitable or legal discharge of the Company or any other Person liable for the Obligations, or of any Guarantor under this Guaranty Agreement, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Agent, the Issuing Banks and the Lenders may, but shall be under no obligation to, pursue such rights and remedies as they may have against the Company or any other Person or against any collateral security or guaranty for the Obligations or any right of offset with respect thereto, and any failure by the Agent, the Issuing Banks or the Lenders to pursue such other rights or remedies or to collect any payments from the Company or any such other Person or to realize upon any such collateral security or guaranty or to exercise any such right of offset, or any release of the Company or any such other Person or any such collateral security, guaranty or right of offset, shall not relieve any Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Agent, either Issuing Bank or any Lender against any Guarantor. This Guaranty Agreement shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the respective successors and assigns thereof, and shall inure to the benefit of the Agent, Issuing Banks and the Lenders, and the respective successors, indorsees, transferees and assigns thereof, until all the Obligations and the obligations of the Guarantors under this Guaranty Agreement shall have been satisfied by payment in full. 8. Reinstatement. This Guaranty Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent, either Issuing Bank or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Company or any Guarantor or any substantial part of such Person's property, or otherwise, all as though such payments had not been made. 9. Payments. Each Guarantor hereby guarantees that payments hereunder will be paid, without set-off or counterclaim and in immediately available funds and in lawful currency of the United States of America, to Agent in Houston, Texas, at the Agent's Payment Office, not later than 11:00 A.M., Houston time. 10. Representations and Warranties. Each Guarantor hereby represents and warrants that: (a) Corporate Existence. Each Guarantor (other than Tesoro E&P Company, L.P.) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and lease its property and to conduct its business. (b) Corporate Power; Authorization. Each Guarantor (other than Tesoro E&P Company, L.P.) has the corporate power and authority and the legal right to make, deliver and perform this Guaranty Agreement. Each Guarantor has taken all necessary corporate action to authorize the execution, delivery and performance of this Guaranty Agreement. -7- 8 (c) Partnership Existence and Authorization. Tesoro E&P Company, L.P. is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware and has the partnership power and authority and the legal right to own and lease its property and to conduct its business. Tesoro E&P Company, L.P. has the partnership power and authority and the legal right to make, deliver and perform this Guaranty Agreement and has taken all necessary partnership action to authorize the execution, delivery and performance of this Guaranty Agreement. (d) Enforceable Obligations. This Guaranty Agreement has been duly executed and delivered by each Guarantor and constitutes a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. 11. No Waiver; Cumulative Remedies. Neither the Agent, either Issuing Bank nor any of the Lenders shall by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise and no delay in exercising, on the part of the Agent, either Issuing Bank or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power, privilege or right. A waiver by the Agent, either Issuing Bank or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which any such Person would have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 12. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telecopy or similar teletransmission or writing) and, in the case of any Guarantor, shall be given to such Guarantor at the address or telecopy number of the Company now or hereafter provided for in the Credit Agreement and in the case of the Agent, either Issuing Bank or any Lender, at the address or telecopy number for such Person now or hereafter provided for in the Credit Agreement. Each such notice, request or other communication shall be effective (i) if given by telecopier during regular business hours, once such telecopy is transmitted to the telecopy number specified in the Credit Agreement, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means (including, without limitation, by air courier), when delivered at the address specified in the Credit Agreement; provided that notices to the Agent shall not be effective until received. 13. ENTIRE AGREEMENT. THIS GUARANTY AGREEMENT, THE CREDIT AGREEMENT, THE NOTES, THE SECURITY INSTRUMENTS, THE OTHER FINANCING DOCUMENTS REFERRED TO IN SECTIONS 3.02 THE CREDIT AGREEMENT, AND THE FEE LETTER EMBODY THE ENTIRE -8- 9 AGREEMENT AND UNDERSTANDING BETWEEN THE AGENT, THE ISSUING BANKS, THE LENDERS AND THE OTHER RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ANY CONFLICT OR AMBIGUITY BETWEEN THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS IN ANY OTHER FINANCING DOCUMENT SHALL BE CONTROLLED BY THE TERMS AND PROVISIONS HEREOF. 14. Governing Law; Submission to Jurisdiction, Etc. (a) This Guaranty Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the law (without giving effect to the conflict of law principles thereof) of the State of Texas. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH GUARANTOR HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING BUT NOT LIMITED TO ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. (c) THE COMPANY AND THE AGENT, EACH ISSUING BANK AND EACH LENDER HEREBY (I) IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY AGREEMENT OR ANY FINANCING DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (III) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE FINANCING DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. (d) Each Guarantor that is not a Texas corporation hereby irrevocably designates the General Counsel of the Company (as of the date hereof, James C. Reed, Jr.) located at 8700 Tesoro Drive, San Antonio, Texas 78217, as the designee, appointee and agent of such Guarantor to receive, for and on behalf of such Guarantor, service of process in such respective jurisdictions in any legal action or proceeding with respect to this Agreement, the Notes, the Security Instruments or the other Financing Documents. It is understood that a copy of such process served on such agent will be promptly forwarded by mail to such Guarantor at its address set forth opposite its signature below, -9- 10 but the failure of such Guarantor to receive such copy shall not affect in any way the service of such process. Each Guarantor further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its said address, such service to become effective 30 days after such mailing. (e) Nothing herein shall affect the right of the Agent or any Lender or any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Guarantor in Texas or any other jurisdiction in which assets of any Guarantor are located. 15. Severability. Any provision of this Guaranty Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Paragraph Headings. The Paragraph headings used in this Guaranty Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to each Lender and the Transactions. Accordingly, if the Transactions would be usurious as to any Lender under applicable law, then, notwithstanding anything to the contrary in the Notes, this Agreement or in any Financing Document or agreement entered into in connection with the Transactions or as security for the Obligations, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest as to any Lender under applicable law that is contracted for, taken, reserved, charged or received by such Lender under the Notes, this Agreement or under any of the Financing Documents or agreements or otherwise in connection with the Transactions shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Notes is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest as to any Lender under applicable law may never include more than the maximum amount allowed by such applicable law, and (iii) excess interest, if any, provided for in this Agreement or otherwise in connection with the Transactions shall be cancelled automatically and, if theretofore paid, shall be credited by such Lender on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by such Lender to the Company). The right to accelerate the maturity of the Notes does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Lenders do not intend to collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to each Lender for the use, forbearance or detention of sums included in the Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Notes until payment in full so that the rate or amount of interest on -10- 11 account of the Obligations does not exceed the applicable usury ceiling, if any. As used in this Section, the term "applicable law" shall mean the laws of the State of Texas (or of any other jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Agreement) or laws of the United States of America applicable to any Lender and the Transactions, which would permit such Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas (or such other jurisdiction's) law. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to the Lenders for the purpose of determining the Highest Lawful Rate, the Lenders hereby elect to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to the Lenders' right subsequently to change such method in accordance with applicable law. In no event shall the provisions of Tex. Rev. Civ. Stat. art. 5069-2.01 through 5069-8.06 or 5069-15.01 through 5069-15.11 be applicable to the Loans evidenced hereby. 18. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original but all of which shall together constitute one and the same instrument. [SIGNATURES BEGIN NEXT PAGE] -11- 12 IN WITNESS WHEREOF, the undersigned has caused this Guaranty Agreement to be duly executed and delivered by its duly authorized officer on the day and year first above written. TESORO ALASKA PETROLEUM COMPANY TESORO EXPLORATION AND PRODUCTION COMPANY TESORO PETROLEUM COMPANIES, INC. DIGICOMP, INC. TESORO TECHNOLOGY PARTNERS COMPANY INTERIOR FUELS COMPANY TESORO ALASKA PIPELINE COMPANY TESORO NORTHSTORE COMPANY TESORO REFINING, MARKETING & SUPPLY COMPANY TESORO NATURAL GAS COMPANY TESORO BOLIVIA PETROLEUM COMPANY TESORO VOSTOK COMPANY KENAI PIPE LINE COMPANY TESORO MARINE SERVICES COMPANY TESORO COASTWIDE SERVICES COMPANY COASTWIDE MARINE SERVICES, INC. By:/s/ G. A. WRIGHT -------------------------------------------- G. A. Wright Vice President and Treasurer TESORO GAS RESOURCES COMPANY, INC. TESORO FINANCIAL SERVICES HOLDING COMPANY By:/s/ JEFFREY B. FABIAN -------------------------------------------- Jeffrey B. Fabian President VICTORY FINANCE COMPANY By:/s/ KAREN B. THOMAS -------------------------------------------- Karen B. Thomas Assistant Secretary -12- 13 BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By:/s/ BRIAN MALONE -------------------------------------------- Brian Malone Vice President By:/s/ BARTON D. SCHOUEST -------------------------------------------- Barton D. Schouest Group Vice President -13- EX-4.11 4 FIRST AMENDED & RESTATED SECURITY AGREEMENT 1 ITEM 14(a)3, EXHIBIT 4.11 FIRST AMENDMENT TO AMENDED AND RESTATED SECURITY AGREEMENT (Pledge) THIS FIRST AMENDMENT TO AMENDED AND RESTATED SECURITY AGREEMENT (Pledge) (this "First Amendment") is executed as of September 12, 1996, by TESORO PETROLEUM CORPORATION, a Delaware corporation, with principal offices at 8700 Tesoro Drive, San Antonio, Texas 78217 ("Pledgor"); in favor of BANQUE PARIBAS, with offices at 1200 Smith Street, Houston, Texas 77002, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS: A. Pledgor, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") entered into that certain Amended and Restated Credit Agreement dated as of June 7, 1996 (the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery by Pledgor of that certain Amended and Restated Security Agreement (Pledge) dated of even date therewith (the "Security Agreement"). C. Pledgor and Secured Party mutually desire to amend (i) the description of the "Collateral" (as defined in the Security Agreement) by amending Exhibit A to the Security Agreement to include additional Securities and (ii) the definition of Issuer by amending Schedule 1.02 to the Security Agreement to include additional Persons. D. Therefore, for and in consideration of the premises and the agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Pledgor and Secured Party hereby agree as follows: AGREEMENT: 1. All capitalized terms used but not defined in this First Amendment which are defined in the Security Agreement or the Credit Agreement shall have the same meanings herein as therein unless the context otherwise requires. 2. The definition of Collateral in Section 1.02 of the Security Agreement and Exhibit A to the Security Agreement are each hereby supplemented to include the securities described on Exhibit A attached hereto (the "Additional Securities"). 3. The definition of Issuer in Section 1.02 of the Security Agreement and Schedule 1.02 to the Security Agreement are each hereby supplemented to include the Persons described on Schedule 1.02 attached hereto (the "Additional Issuers"). 2 4. Section 1.02 of the Security Agreement is hereby further amended and supplemented as follows: (i) the term "Security Agreement", as defined in Section 1.02, is hereby amended to mean the Security Agreement, as amended and supplemented by this First Amendment, and as the same may from time to time be further amended or supplemented. (ii) added thereto is a new definition to read in its entirety as follows: "First Amendment" shall mean that certain First Amendment to Amended and Restated Security Agreement (Pledge) dated as of September 12, 1996, by and between Pledgor and Secured Party. 5. Pledgor hereby confirms that it has assigned and granted and does hereby assign and grant to Secured Party a security interest in, lien upon and a right of set-off against all of the Collateral, including the Additional Securities, and all other Property relating thereto, arising therefrom, or in any way connected therewith, as security for the Obligations. 6. Pledgor represents and warrants to Secured Party that (i) there exists no default or event of default or any condition or act which constitutes, or with notice or lapse of time would constitute an Event of Default under the Credit Agreement or the Security Agreement, as amended and supplemented hereby; (ii) Pledgor has performed and complied with all covenants, agreements and conditions contained in the Security Agreement, as amended and supplemented hereby, required to be performed or complied with by it; and (iii) the representations and warranties of Pledgor contained in the Security Agreement, as amended and supplemented hereby, were true and correct when made and are true and correct in all material respects as of the time of delivery of this First Amendment. 7. On and after the date on which this First Amendment becomes effective, the terms "Security Agreement", "hereof", "herein", "hereunder" and terms of like import, when used in the Security Agreement shall, except where the context otherwise requires, refer to the Security Agreement, as amended and supplemented hereby. 8. Except as amended by this First Amendment, the Security Agreement shall remain in full force and effect, and Pledgor hereby reaffirms all covenants, representations and warranties made in the Security Agreement, as amended and supplemented hereby. 8. This First Amendment shall benefit and bind the parties hereto and their respective assigns, successors and legal representatives. -2- 3 WITNESS THE EXECUTION HEREOF as of the date first above written. PLEDGOR: TESORO PETROLEUM CORPORATION - ------- By: /s/ G. A. WRIGHT ---------------------------------- Name: G.A. Wright Title: Vice President, Corporate Communications and Treasurer SECURED PARTY: BANQUE PARIBAS, AS ADMINISTRATIVE - ------------- AGENT By: /s/ BRIAN MALONE ---------------------------------- Name: Brian Malone Title: Vice President By: /s/ BARTON D. SCHOUEST ---------------------------------- Name: Barton D. Schouest Title: Group Vice President -3- 4 SCHEDULE 1.02 ADDITIONAL ISSUERS Tesoro Financial Services Holding Company, a Delaware corporation -4- 5 EXHIBIT A ADDITIONAL SECURITIES 1000 shares of the common stock of Tesoro Financial Services Holding Company, a Delaware corporation ("TFHSC"), registered in the name of Tesoro Petroleum Corporation on the books of TFHSC, as represented by Certificate No. 1. -5- EX-10.5 5 AMENDED & RESTATED EMPLOYMENT AGREEMENT 1 ITEM 14(a)3, EXHIBIT 10.5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Agreement") is entered into as of December 12, 1996, by and between James C. Reed, Jr. ("Employee"), and Tesoro Petroleum Corporation, a Delaware corporation (the "Company"). Recitals: A. The Company and Employee are parties to an Employment Agreement dated December 14, 1994, including all amendments thereto prior to the date hereof (the "Prior Agreement"). B. The Company wishes to continue the employment of Employee as its Executive Vice President, General Counsel and Secretary; as such, Employee shall have certain responsibilities and shall receive certain compensation and benefits. C. Employee and the Company wish to formalize the continuation of this employment relationship by amending and restating the Prior Agreement, including extending its term, and by setting forth certain additional agreements between Employee and the Company. THE PARTIES AGREE AS FOLLOWS: 1. Employment and Duties. During the term of this Agreement, the Company agrees to employ Employee as Executive Vice President, General Counsel and Secretary, and Employee agrees to serve the Company in such capacity on the terms and subject to the conditions set forth in this Agreement. Employee shall devote substantially all of his business time, energy and skill to the affairs of the Company as the Company, acting through its Board of Directors or its Chief Executive Officer, shall reasonably deem necessary to discharge Employee's duties in such capacity. Employee may participate in social, civic, charitable, religious, business, educational or professional associations, so long as such participation would not materially detract from Employee's ability to perform his duties under this Agreement. Employee shall not engage in any other business activity during the term of this Agreement without the prior written consent of the Company, other than the passive management of Employee's personal investments or activities which would not materially detract from Employee's ability to perform his duties under this Agreement. 2. Compensation. (a) Salary; Withholding. During the term of this Agreement, the Company shall pay Employee a base salary of $275,000 per year ("base salary"), payable in arrears in equal bi-weekly installments. The parties shall comply with all applicable withholding requirements in connection with all compensation payable to Employee. The Company's Board of Directors may, in its sole discretion, review and adjust upward Employee's base salary from time to time, but no downward adjustment in Employee's base salary may be made during the term of this Agreement. 2 (b) Annual Incentive Plan. The Company shall establish an Annual Incentive Compensation Plan for executive officers in which the Employee shall be entitled to participate in a manner consistent with his position with the Company and the evaluations of his performance by the Board of Directors or any appropriate committee thereof. (c) Stock Options and Restricted Stock Grants. The Employee shall be entitled to receive stock options and restricted stock grants under the Company's plans in effect from time to time, if any, commensurate with his position with the Company and the evaluations of his performance by the Board of Directors or any appropriate committee thereof. (d) Flexible Perquisites Arrangement. The Employee shall receive annually a stipulated amount of $20,000 which will be expended by the Company on behalf of the Employee or paid to the Employee, at the Employee's election, to cover various business-related expenses such as monthly dues for country, luncheon or social clubs, automobile expenses and financial and tax planning expenses. The Employee may elect at any time by written notice to the Company to receive any of such stipulated amount which has not been paid to or on behalf of the Employee. In addition, the Company will pay on behalf of the Employee up to $15,000 to pay an initiation fee or fees for a country, luncheon or social club or clubs and will pay directly to the Employee an amount equal to 65 percent of the amount so paid on the Employee's behalf to offset the applicable income tax expense to the Employee. In addition, the Company will pay additional initiation fees and reimburse the Employee for related tax expenses to the extent the Board of Directors or a duly authorized committee thereof determines such fees are reasonable and in the best interest of the Company. (e) Other Benefits. Employee shall be eligible to participate in and have the benefits under the terms of all life, accident, disability and health insurance plans, pension, profit sharing, incentive compensation and savings plans and all other similar plans and benefits which the Company from time to time makes available to its management executives, including, without limitation, those listed on Exhibit A, in the same manner and at least at the same participation level as other senior management executives. 3. Business Expenses. The Company shall promptly reimburse Employee for all appropriately documented, reasonable business expenses incurred by Employee in accordance with Company policies. 4. Term. This Agreement shall commence effective as of December 12, 1996, and if not terminated earlier as herein provided, shall terminate on December 31, 1998. Notwithstanding the foregoing, if the Company shall not have offered to the Employee the opportunity to enter into a new employment agreement prior to December 31, 1998, with terms, in all respects, no less favorable to the Employee than the terms of this Agreement and with a term lasting until at least December 31, 2000, the Employee shall have the right to elect by written notice delivered to the Company prior to January 31, 1999, to terminate his employment and such termination shall be deemed to have been for Good Reason in accordance with Section 5 and the Employee shall be -2- 3 entitled to all payments and benefits as if he had terminated his employment for Good Reason in accordance with Section 5 on December 30, 1998. 5. Termination by the Company Without Cause, Termination by Employee for "Good Reason" or Failure to Extend Employment Contract. The Company may, by delivering 30 days prior written notice to Employee, terminate Employee's employment at any time without cause, and the Employee may, by delivering 30 days prior written notice to the Company, terminate Employee's employment for "good reason," as defined below. If such termination without cause or for good reason occurs or if the Company fails to offer to the Employee a new employment contract prior to December 31, 1998, with terms, in all respects, no less favorable to the employee than the terms of this Agreement, Employee shall be entitled to receive a lump-sum payment equal to the sum of (a) two times the sum of (i) his base salary at the then current rate and (ii) the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs and (b) if termination occurs in the fourth quarter of a calendar year, the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs prorated daily based on the number of days from the beginning of the calendar year in which the termination occurs to and including the date of termination. Employee shall also receive all unpaid bonuses for the year prior to the year in which the termination occurs and shall receive (i) for a period of two years following termination of employment continuing coverage and benefits comparable to all life, health and disability insurance plans which the Company from time to time makes available to its management executives and their families, (ii) a lump-sum payment equal to two times the stipulated flexible perquisites amount pursuant to Section 2(d), and (iii) two years additional service credit under the current non-qualified supplemental pension plans, or successors thereto, of the Company applicable to the Employee on the date of termination. All unvested stock options held by Employee on the date of the termination shall become immediately vested and all restrictions on Restricted Stock then held by the Employee shall terminate. For purposes of this Section 5, "good reason" shall mean the occurrence of any of the following events: (a) Removal, without the consent of Employee in writing, from one or more of the offices Employee holds on the date of this Agreement or a material reduction in Employee's authority or responsibility but not termination of Employee for "cause," as defined below; or (b) The Company otherwise commits a material breach of this Agreement. The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce the terms of this Section 5. 6. Termination upon Death or Disability. If the Employee's employment is terminated because of death or on account of his becoming permanently disabled (as defined below), the Employee, or his estate, if applicable, shall be entitled to receive the Employee's base salary earned pro rata to the date of his -3- 4 termination of employment, plus unpaid bonuses for the year prior to the year in which the termination occurs. All unvested stock options held by the Employee on the date of termination shall become immediately vested and all restrictions on restricted stock held by the Employee shall terminate. For purposes of this Agreement, Employee shall be deemed to be "permanently disabled" if Employee shall be considered to be permanently and totally disabled in accordance with the Company's Long-Term Disability Income Plan. If there should be a dispute between the Company and Employee as to Employee's physical or mental disability for purposes of this Agreement, the question shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten calendar days after a request for designation of such party, then a physician or psychiatrist shall be designated by the San Antonio, Texas Medical Association. The parties agree to be bound by the final decision of such physician or psychiatrist. 7. Termination by the Company for Cause. The Company may terminate this Agreement at any time if such termination is for "cause," as defined below, by delivering to Employee written notice describing the cause of termination 30 days before the effective date of such termination and by granting Employee at least 30 days to cure the cause. In the event the employment of Employee is terminated for "cause," Employee shall be entitled only to his base salary earned pro rata to his date of termination with no entitlement to any base salary continuation payments or benefit continuation (except as specifically provided by the terms of an employee benefit plan of the Company). Except as otherwise provided in this Agreement, the determination of whether Employee is terminated for "cause" shall be made by the Board of Directors of the Company, in the reasonable exercise of its business judgment, and shall be limited to the occurrence of the following events: (a) Conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to appeal); (b) Willful refusal without proper legal cause to perform, or gross negligence in performing, Employee's duties and responsibilities; (c) Material breach of fiduciary duty to the Company through the misappropriation of Company funds or property; or (d) The unauthorized absence of Employee from work (other than for sick leave or disability) for a period of 30 working days or more during a period of 45 working days. 8. Voluntary Termination by Employee. Employee may terminate this Agreement at any time upon delivering 30 days written notice to the Company. In the event of such voluntary termination other than for "good reason," as defined above, Employee shall be entitled to his base salary earned pro rata to the date of his resignation, plus unpaid bonuses for the year prior to the year in which the termination occurs, but no base salary continuation payments or benefits continuation (except as specifically provided -4- 5 by the terms of an employee benefit plan of the Company). On or after the date the Company receives notice of Employee's resignation, the Company may, at its option, pay Employee his base salary through the effective date of his resignation and terminate his employment immediately. 9. Termination Following Change of Control. Notwithstanding anything to the contrary contained herein, should Employee at any time within two years of a change of control cease to be an employee of the Company (or its successor), by reason of (i) involuntary termination by the Company (or its successor) other than for "cause" (following a change of control, "cause" shall be limited to the conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to appeal), or a material breach of fiduciary duty to the Company through the misappropriation of Company funds or property), or (ii) voluntary termination by Employee for "good reason upon change of control" (as defined below), the Company (or its successor) shall pay to Employee within ten days of such termination the following severance payments and benefits: (a) A lump-sum payment equal to three times the base salary of the Employee at the then current rate; (b) A lump-sum payment equal to the sum of (i) three times the sum of the target bonuses under all of the Company's incentive bonus plans applicable to the Employee for the year in which the termination occurs or the year in which the change of control occurred, whichever is greater, and (ii) if termination occurs in the fourth quarter of a calendar year, the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs prorated daily based on the number of days from the beginning of the calendar year in which the termination occurs to and including the date of termination; and (c) A lump-sum payment equal to the amount of any unpaid bonuses to which the Employee is entitled under any incentive bonus plan. The Company (or its successor) shall also provide to Employee (i) for a period of three years following termination of employment continuing coverage and benefits comparable to all life, health and disability plans of the Company in effect at the time a change of control is deemed to have occurred; (ii) a lump-sum payment equal to three times the stipulated flexible perquisites amount pursuant to Section 2(d); and (iii) three years additional service credit under the current non-qualified supplemental pension plans, or successors thereto, of the Company applicable to the Employee on the date of termination. For purposes of this Agreement, a "change of control" shall be deemed to have occurred if (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 -5- 6 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 director, 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-thirds of the directors then still in office who were directors at the beginning of such period. For purposes of this Section 9, "good reason upon change of control" shall exist if any of the following occurs: (i) without Employee's express written consent, the assignment to Employee of any duties inconsistent with the employment of Employee to the positions set forth in Section 1, or a significant diminution of Employee's positions, duties, responsibilities and status with the Company from those immediately prior to a change of control or a diminution in Employee's titles or offices as in effect immediately prior to a change of control, or any removal of Employee from, or any failure to reelect Employee to, any of such positions; -6- 7 (ii) a reduction by the Company in Employee's base salary 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 which would adversely affect Employee's participation in or materially reduce Employee's benefits under any of such plans or deprive Employee of any material fringe benefits enjoyed by Employee at the time of the change of control or the failure by the Company to provide the Employee 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 (including without limitation, the Company's Incentive Compensation Plan and similar incentive compensation benefits) in which Employee is participating at the time of a change of control (or to substitute and continue other plans or arrangements providing the 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; (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 Employee is participating at the time of a change of control (or to substitute and continue plans or arrangements providing the 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 which would adversely affect Employee's participation in or materially reduce Employee'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 Employee to be based anywhere other than at the location of the Company's principal executive offices, except for required travel on the Company's business to an extent -7- 8 substantially consistent with Employee's present business travel obligations, or, in the event Employee consents to any such relocation of the Company's principal executive or divisional offices, the failure by the Company to pay (or reimburse Employee for) all reasonable moving expenses incurred by Employee relating to a change of Employee's principal residence in connection with such relocation and to indemnify Employee 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 the Employee's principal residence is offered for sale in connection with any such change of residence); (vii) any material breach by the Company of any provision of this Agreement; (viii) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (ix) any purported termination of Employee's employment by the Company other than termination for cause fully in compliance with this Agreement and for purposes of this Agreement, no such purported termination shall be effective. In the event of a change of control as "change of control" is defined in any stock option plan or stock option agreement pursuant to which the Employee holds options to purchase common stock of the Company, Employee shall retain the rights to all accelerated vesting and other benefits under the terms of such plans and agreements. The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce the terms of this Section 9. 10. Exclusivity of Termination Provisions. The termination provisions of this Agreement regarding the parties' respective obligations in the event Employee's employment is terminated are intended to be exclusive and in lieu of any other rights or remedies to which Employee or the Company may otherwise be entitled at law, in equity, or otherwise. It is also agreed that, although the personnel policies and fringe benefit programs of the Company may be unilaterally modified from time to time, the termination provisions of this Agreement are not subject to modification, whether orally, impliedly or in writing, unless any such modification is mutually agreed upon and signed by the parties. -8- 9 11. Vacation. Employee shall be entitled to four weeks vacation annually in accordance with Company policy as in effect from time to time. In the event Employee does not use his entire vacation time in any year, Employee shall be entitled to carry over unused vacation into the following year until his accrued vacation reaches six weeks or such greater period as may be permitted under the Company's vacation policy for management executives. 12. Nondisclosure. During the term of this Agreement and thereafter, Employee shall not, without the prior written consent of the Board of Directors, disclose or use for any purpose (except in the course of his employment under this Agreement and in furtherance of the business of the Company) confidential information or proprietary data of the Company (or any of its subsidiaries), except as required by applicable law or legal process; provided, however, that confidential information shall not include any information known generally to the public or ascertainable from public or published information (other than as a result of unauthorized disclosure by Employee) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company (or any of its subsidiaries). 13. Noncompetition. The Company and Employee agree that the services rendered by Employee hereunder are unique. Employee hereby agrees that, during the term of this Agreement and for a period of one year thereafter, he shall not (except in the course of his employment under this Agreement and in furtherance of the business of the Company (or any of its subsidiaries)) (i) engage in as principal, consultant or employee in any segment of a business of a company, partnership or firm ("Business Segment") that is directly competitive with any significant business of the Company in one of its major commercial or geographic markets or (ii) hold an interest (except as a holder of a less than 5 percent interest in a publicly traded firm or mutual fund, or as a minority stockholder or unitholder in a firm not publicly traded) in a company, partnership, or firm with a Business Segment that is directly competitive with the Company, without prior written consent of the Company. 14. Remedies. Employee acknowledges that irreparable damage would result to the Company if the provisions of Sections 12 or 13 above are not specifically enforced and agrees that the Company shall be entitled to any appropriate legal, equitable or other remedy, including injunctive relief, in respect of any failure to comply with such provisions. 15. Miscellaneous. (a) Complete Agreement. This Agreement constitutes the entire agreement between the parties and cancels and supersedes all other agreements between the parties which may have related to the subject matter contained in this Agreement, including without limitation the Prior Agreement. -9- 10 (b) Modification; Amendment; Waiver. No modification, amendment or waiver of any provisions of this Agreement shall be effective unless approved in writing by both parties. The failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of either party thereafter to enforce each and every provision hereof in accordance with its terms. (c) Governing Law; Jurisdiction. This Agreement and performance under it, and all proceedings that may ensue from its breach, shall be construed in accordance with and under the laws of the State of Texas. (d) Employee's Representations. Employee represents and warrants that he is free to enter into this Agreement and to perform each of the terms and covenants of it. Employee represents and warrants that he is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that his execution and performance of this Agreement is not a violation or breach of any other agreement between Employee and any other person or entity. (e) Company's Representations. Company represents and warrants that it is free to enter into this Agreement and to perform each of the terms and covenants of it. Company represents and warrants that it is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that its execution and performance of this Agreement is not a violation or breach of any other agreement between Company and any other person or entity. The Company represents and warrants that this Agreement is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms. (f) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (g) Assignment. The rights and obligations of the parties under this Agreement shall be binding upon and inure to the benefit of their respective successors, assigns, executors, administrators and heirs, provided, however, that neither the Company nor Employee may assign any duties under this Agreement without the prior written consent of the other. (h) Limitation. This Agreement shall not confer any right or impose any obligation on the Company to continue the employment of Employee in any capacity, or limit the right of the Company or Employee to terminate Employee's employment. (i) Notices. All notices and other communications under this Agreement shall be in writing and shall be given in person or by telegraph, facsimile or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given when delivered personally or three days after mailing or one day after transmission of a telegram or facsimile, as the case may be, to the respective persons named below. -10- 11 If to the Company: Chief Executive Officer Tesoro Petroleum Corporation 8700 Tesoro Drive San Antonio, Texas 78217 If to the Employee: James C. Reed, Jr. 9050 Bat Cave Loop San Antonio, Texas 78266 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: TESORO PETROLEUM CORPORATION By /s/ BRUCE A. SMITH ------------------------------ Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer EMPLOYEE: /s/ JAMES C. REED, JR. ------------------------------------- James C. Reed, Jr. -11- 12 Exhibit A BENEFITS LISTING 1. Group Health Plan 2. Group Life and Accidental Death & Dismemberment Plan 3. Short Term Disability Income Plan 4. Long Term Disability Income Plan 5. Business Travel Accident Insurance Plan 6. Tesoro Petroleum Corporation Thrift/401K Plan 7. Tesoro Petroleum Corporation Retirement Plan 8. Tesoro Petroleum Corporation Amended Executive Security Plan 9. Tesoro Petroleum Corporation Funded Executive Security Plan 10. Tax Preparation and Financial Planning EX-10.6 6 AMENDED & RESTATED EMPLOYMENT AGREEMENT 1 ITEM 14(a)3, EXHIBIT 10.6 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Agreement") is entered into as of December 12, 1996, by and between William T. Van Kleef ("Employee") and Tesoro Petroleum Corporation, a Delaware corporation (the "Company"). Recitals: A. The Company and Employee are parties to an Employment Agreement dated December 14, 1994, including all amendments thereto prior to the date hereof (the "Prior Agreement"). B. The Company wishes to continue the employment of Employee as its Executive Vice President, Operations; as such, Employee shall have certain responsibilities and shall receive certain compensation and benefits. C. Employee and the Company wish to formalize the continuation of this employment relationship by amending and restating the Prior Agreement, including extending its term, and by setting forth certain additional agreements between Employee and the Company. THE PARTIES AGREE AS FOLLOWS: 1. Employment and Duties. During the term of this Agreement, the Company agrees to employ Employee as Executive Vice President, Operations, and Employee agrees to serve the Company in such capacity on the terms and subject to the conditions set forth in this Agreement. Employee shall devote substantially all of his business time, energy and skill to the affairs of the Company as the Company, acting through its Board of Directors or its Chief Executive Officer, shall reasonably deem necessary to discharge Employee's duties in such capacity. Employee may participate in social, civic, charitable, religious, business, educational or professional associations, so long as such participation would not materially detract from Employee's ability to perform his duties under this Agreement. Employee shall not engage in any other business activity during the term of this Agreement without the prior written consent of the Company, other than the passive management of Employee's personal investments or activities which would not materially detract from Employee's ability to perform his duties under this Agreement. 2. Compensation. (a) Salary; Withholding. During the term of this Agreement, the Company shall pay Employee a base salary of $285,000 per year ("base salary"), payable in arrears in equal bi-weekly installments. The parties shall comply with all applicable withholding requirements in connection with all compensation payable to Employee. The Company's Board of Directors may, in its sole discretion, review and adjust upward Employee's base salary from time to time, but no downward adjustment in Employee's base salary may be made during the term of this Agreement. 2 (b) Annual Incentive Plan. The Company shall establish an Annual Incentive Compensation Plan for executive officers in which the Employee shall be entitled to participate in a manner consistent with his position with the Company and the evaluations of his performance by the Board of Directors or any appropriate committee thereof. (c) Stock Options and Restricted Stock Grants. The Employee shall be entitled to receive stock options and restricted stock grants under the Company's plans in effect from time to time, if any, commensurate with his position with the Company and the evaluations of his performance by the Board of Directors or any appropriate committee thereof. (d) Flexible Perquisites Arrangement. The Employee shall receive annually a stipulated amount of $20,000 which will be expended by the Company on behalf of the Employee or paid to the Employee, at the Employee's election, to cover various business-related expenses such as monthly dues for country, luncheon or social clubs, automobile expenses and financial and tax planning expenses. The Employee may elect at any time by written notice to the Company to receive any of such stipulated amount which has not been paid to or on behalf of the Employee. In addition, the Company will pay initiation fees and reimburse the Employee for related tax expenses to the extent the Board of Directors or a duly authorized committee thereof determines such fees are reasonable and in the best interest of the Company. (e) Other Benefits. Employee shall be eligible to participate in and have the benefits under the terms of all life, accident, disability and health insurance plans, pension, profit sharing, incentive compensation and savings plans and all other similar plans and benefits which the Company from time to time makes available to its management executives, including, without limitation, those listed on Exhibit A, in the same manner and at least at the same participation level as other senior management executives. 3. Business Expenses. The Company shall promptly reimburse Employee for all appropriately documented, reasonable business expenses incurred by Employee in accordance with Company policies. 4. Term. This Agreement shall commence effective as of December 12, 1996, and if not terminated earlier as herein provided, shall terminate on December 31, 1998. Notwithstanding the foregoing, if the Company shall not have offered to the Employee the opportunity to enter into a new employment agreement prior to December 31, 1998, with terms, in all respects, no less favorable to the Employee than the terms of this Agreement and with a term lasting until at least December 31, 2000, the Employee shall have the right to elect by written notice delivered to the Company prior to January 31, 1999, to terminate his employment and such termination shall be deemed to have been for Good Reason in accordance with Section 5 and the Employee shall be entitled to all payments and benefits as if he had terminated his employment for Good Reason in accordance with Section 5 on December 30, 1998. -2- 3 5. Termination by the Company Without Cause, Termination by Employee for "Good Reason" or Failure to Extend Employment Contract. The Company may, by delivering 30 days prior written notice to Employee, terminate Employee's employment at any time without cause, and the Employee may, by delivering 30 days prior written notice to the Company, terminate Employee's employment for "good reason," as defined below. If such termination without cause or for good reason occurs or if the Company fails to offer to the Employee a new employment contract prior to December 31, 1998, with terms, in all respects, no less favorable to the employee than the terms of this Agreement, Employee shall be entitled to receive a lump-sum payment equal to the sum of (a) two times the sum of (i) his base salary at the then current rate and (ii) the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs and (b) if termination occurs in the fourth quarter of a calendar year, the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs prorated daily based on the number of days from the beginning of the calendar year in which the termination occurs to and including the date of termination. Employee shall also receive all unpaid bonuses for the year prior to the year in which the termination occurs and shall receive (i) for a period of two years following termination of employment continuing coverage and benefits comparable to all life, health and disability insurance plans which the Company from time to time makes available to its management executives and their families, (ii) a lump-sum payment equal to two times the stipulated flexible perquisites amount pursuant to Section 2(d), and (iii) two years additional service credit under the current non-qualified supplemental pension plans, or successors thereto, of the Company applicable to the Employee on the date of termination. All unvested stock options held by Employee on the date of the termination shall become immediately vested and all restrictions on Restricted Stock then held by the Employee shall terminate. For purposes of this Section 5, "good reason" shall mean the occurrence of any of the following events: (a) Removal, without the consent of Employee in writing, from one or more of the offices Employee holds on the date of this Agreement or a material reduction in Employee's authority or responsibility but not termination of Employee for "cause," as defined below; or (b) The Company otherwise commits a material breach of this Agreement. The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce the terms of this Section 5. 6. Termination upon Death or Disability. If the Employee's employment is terminated because of death or on account of his becoming permanently disabled (as defined below), the Employee, or his estate, if applicable, shall be entitled to receive the Employee's base salary earned pro rata to the date of his -3- 4 termination of employment, plus unpaid bonuses for the year prior to the year in which the termination occurs. All unvested stock options held by the Employee on the date of termination shall become immediately vested and all restrictions on restricted stock held by the Employee shall terminate. For purposes of this Agreement, Employee shall be deemed to be "permanently disabled" if Employee shall be considered to be permanently and totally disabled in accordance with the Company's Long-Term Disability Income Plan. If there should be a dispute between the Company and Employee as to Employee's physical or mental disability for purposes of this Agreement, the question shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten calendar days after a request for designation of such party, then a physician or psychiatrist shall be designated by the San Antonio, Texas Medical Association. The parties agree to be bound by the final decision of such physician or psychiatrist. 7. Termination by the Company for Cause. The Company may terminate this Agreement at any time if such termination is for "cause," as defined below, by delivering to Employee written notice describing the cause of termination 30 days before the effective date of such termination and by granting Employee at least 30 days to cure the cause. In the event the employment of Employee is terminated for "cause," Employee shall be entitled only to his base salary earned pro rata to his date of termination with no entitlement to any base salary continuation payments or benefit continuation (except as specifically provided by the terms of an employee benefit plan of the Company). Except as otherwise provided in this Agreement, the determination of whether Employee is terminated for "cause" shall be made by the Board of Directors of the Company, in the reasonable exercise of its business judgment, and shall be limited to the occurrence of the following events: (a) Conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to appeal); (b) Willful refusal without proper legal cause to perform, or gross negligence in performing, Employee's duties and responsibilities; (c) Material breach of fiduciary duty to the Company through the misappropriation of Company funds or property; or (d) The unauthorized absence of Employee from work (other than for sick leave or disability) for a period of 30 working days or more during a period of 45 working days. 8. Voluntary Termination by Employee. Employee may terminate this Agreement at any time upon delivering 30 days written notice to the Company. In the event of such voluntary termination other than for "good reason," as defined above, Employee shall be entitled to his base salary earned pro rata to the date of his resignation, plus unpaid bonuses for the year prior to the year in which the termination occurs, but no base salary continuation payments or benefits continuation (except as specifically provided by the terms of an employee benefit plan of the Company). On or after the date the Company receives notice of Employee's resignation, the Company may, at its option, pay Employee his -4- 5 base salary through the effective date of his resignation and terminate his employment immediately. 9. Termination Following Change of Control. Notwithstanding anything to the contrary contained herein, should Employee at any time within two years of a change of control cease to be an employee of the Company (or its successor), by reason of (i) involuntary termination by the Company (or its successor) other than for "cause" (following a change of control, "cause" shall be limited to the conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to appeal), or a material breach of fiduciary duty to the Company through the misappropriation of Company funds or property), or (ii) voluntary termination by Employee for "good reason upon change of control" (as defined below), the Company (or its successor) shall pay to Employee within ten days of such termination the following severance payments and benefits: (a) A lump-sum payment equal to three times the base salary of the Employee at the then current rate; (b) A lump-sum payment equal to the sum of (i) three times the sum of the target bonuses under all of the Company's incentive bonus plans applicable to the Employee for the year in which the termination occurs or the year in which the change of control occurred, whichever is greater, and (ii) if termination occurs in the fourth quarter of a calendar year, the sum of the target bonuses under all of the Company's incentive bonus plans applicable to Employee for the year in which the termination occurs prorated daily based on the number of days from the beginning of the calendar year in which the termination occurs to and including the date of termination; and (c) A lump-sum payment equal to the amount of any unpaid bonuses to which the Employee is entitled under any incentive bonus plan. The Company (or its successor) shall also provide to Employee (i) for a period of three years following termination of employment continuing coverage and benefits comparable to all life, health and disability plans of the Company in effect at the time a change of control is deemed to have occurred; (ii) a lump-sum payment equal to three times the stipulated flexible perquisites amount pursuant to Section 2(d); and (iii) three years additional service credit under the current non-qualified supplemental pension plans, or successors thereto, of the Company applicable to the Employee on the date of termination. For purposes of this Agreement, a "change of control" shall be deemed to have occurred if (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 -5- 6 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 director, 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-thirds of the directors then still in office who were directors at the beginning of such period. For purposes of this Section 9, "good reason upon change of control" shall exist if any of the following occurs: (i) without Employee's express written consent, the assignment to Employee of any duties inconsistent with the employment of Employee to the positions set forth in Section 1, or a significant diminution of Employee's positions, duties, responsibilities and status with the Company from those immediately prior to a change of control or a diminution in Employee's titles or offices as in effect immediately prior to a change of control, or any removal of Employee from, or any failure to reelect Employee to, any of such positions; (ii) a reduction by the Company in Employee's base salary in effect immediately prior to a change of control; -6- 7 (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 which would adversely affect Employee's participation in or materially reduce Employee's benefits under any of such plans or deprive Employee of any material fringe benefits enjoyed by Employee at the time of the change of control or the failure by the Company to provide the Employee 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 (including without limitation, the Company's Incentive Compensation Plan and similar incentive compensation benefits) in which Employee is participating at the time of a change of control (or to substitute and continue other plans or arrangements providing the 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; (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 Employee is participating at the time of a change of control (or to substitute and continue plans or arrangements providing the 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 which would adversely affect Employee's participation in or materially reduce Employee'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 Employee to be based anywhere other than at the location of the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Employee's present business travel obligations, or, in the event Employee consents to any such relocation of the Company's principal executive or divisional -7- 8 offices, the failure by the Company to pay (or reimburse Employee for) all reasonable moving expenses incurred by Employee relating to a change of Employee's principal residence in connection with such relocation and to indemnify Employee 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 Membership Appraisal Institute- approved real estate appraisers reasonably satisfactory to both Employee and the Company at the time the Employee's principal residence is offered for sale in connection with any such change of residence); (vii) any material breach by the Company of any provision of this Agreement; (viii) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (ix) any purported termination of Employee's employment by the Company other than termination for cause fully in compliance with this Agreement and for purposes of this Agreement, no such purported termination shall be effective. In the event of a change of control as "change of control" is defined in any stock option plan or stock option agreement pursuant to which the Employee holds options to purchase common stock of the Company, Employee shall retain the rights to all accelerated vesting and other benefits under the terms of such plans and agreements. The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce the terms of this Section 9. 10. Exclusivity of Termination Provisions. The termination provisions of this Agreement regarding the parties' respective obligations in the event Employee's employment is terminated are intended to be exclusive and in lieu of any other rights or remedies to which Employee or the Company may otherwise be entitled at law, in equity, or otherwise. It is also agreed that, although the personnel policies and fringe benefit programs of the Company may be unilaterally modified from time to time, the termination provisions of this Agreement are not subject to modification, whether orally, impliedly or in writing, unless any such modification is mutually agreed upon and signed by the parties. -8- 9 11. Vacation. Employee shall be entitled to four weeks vacation annually in accordance with Company policy as in effect from time to time. In the event Employee does not use his entire vacation time in any year, Employee shall be entitled to carry over unused vacation into the following year until his accrued vacation reaches six weeks or such greater period as may be permitted under the Company's vacation policy for management executives. 12. Nondisclosure. During the term of this Agreement and thereafter, Employee shall not, without the prior written consent of the Board of Directors, disclose or use for any purpose (except in the course of his employment under this Agreement and in furtherance of the business of the Company) confidential information or proprietary data of the Company (or any of its subsidiaries), except as required by applicable law or legal process; provided, however, that confidential information shall not include any information known generally to the public or ascertainable from public or published information (other than as a result of unauthorized disclosure by Employee) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company (or any of its subsidiaries). 13. Noncompetition. The Company and Employee agree that the services rendered by Employee hereunder are unique. Employee hereby agrees that, during the term of this Agreement and for a period of one year thereafter, he shall not (except in the course of his employment under this Agreement and in furtherance of the business of the Company (or any of its subsidiaries)) (i) engage in as principal, consultant or employee in any segment of a business of a company, partnership or firm ("Business Segment") that is directly competitive with any significant business of the Company in one of its major commercial or geographic markets or (ii) hold an interest (except as a holder of a less than 5 percent interest in a publicly traded firm or mutual fund, or as a minority stockholder or unitholder in a firm not publicly traded) in a company, partnership, or firm with a Business Segment that is directly competitive with the Company, without prior written consent of the Company. 14. Remedies. Employee acknowledges that irreparable damage would result to the Company if the provisions of Sections 12 or 13 above are not specifically enforced and agrees that the Company shall be entitled to any appropriate legal, equitable or other remedy, including injunctive relief, in respect of any failure to comply with such provisions. 15. Miscellaneous. (a) Complete Agreement. This Agreement constitutes the entire agreement between the parties and cancels and supersedes all other agreements between the parties which may have related to the subject matter contained in this Agreement, including without limitation the Prior Agreement. -9- 10 (b) Modification; Amendment; Waiver. No modification, amendment or waiver of any provisions of this Agreement shall be effective unless approved in writing by both parties. The failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of either party thereafter to enforce each and every provision hereof in accordance with its terms. (c) Governing Law; Jurisdiction. This Agreement and performance under it, and all proceedings that may ensue from its breach, shall be construed in accordance with and under the laws of the State of Texas. (d) Employee's Representations. Employee represents and warrants that he is free to enter into this Agreement and to perform each of the terms and covenants of it. Employee represents and warrants that he is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that his execution and performance of this Agreement is not a violation or breach of any other agreement between Employee and any other person or entity. (e) Company's Representations. Company represents and warrants that it is free to enter into this Agreement and to perform each of the terms and covenants of it. Company represents and warrants that it is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that its execution and performance of this Agreement is not a violation or breach of any other agreement between Company and any other person or entity. The Company represents and warrants that this Agreement is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms. (f) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (g) Assignment. The rights and obligations of the parties under this Agreement shall be binding upon and inure to the benefit of their respective successors, assigns, executors, administrators and heirs, provided, however, that neither the Company nor Employee may assign any duties under this Agreement without the prior written consent of the other. (h) Limitation. This Agreement shall not confer any right or impose any obligation on the Company to continue the employment of Employee in any capacity, or limit the right of the Company or Employee to terminate Employee's employment. (i) Notices. All notices and other communications under this Agreement shall be in writing and shall be given in person or by telegraph, facsimile or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given when delivered personally or three days after mailing or one day after transmission of a telegram or facsimile, as the case may be, to the respective persons named below. -10- 11 If to the Company: Corporate Secretary Tesoro Petroleum Corporation 8700 Tesoro Drive San Antonio, Texas 78217 If to the Employee: William T. Van Kleef 4351 F.M. 2673 Canyon Lake, Texas 78133 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: TESORO PETROLEUM CORPORATION By /s/ BRUCE A. SMITH ------------------------------ Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer EMPLOYEE: /s/ WILLIAM T. VAN KLEEF ----------------------------------- William T. Van Kleef -11- 12 Exhibit A BENEFITS LISTING 1. Group Health Plan 2. Group Life and Accidental Death & Dismemberment Plan 3. Short Term Disability Income Plan 4. Long Term Disability Income Plan 5. Business Travel Accident Insurance Plan 6. Tesoro Petroleum Corporation Thrift/401K Plan 7. Tesoro Petroleum Corporation Retirement Plan 8. Tesoro Petroleum Corporation Amended Executive Security Plan 9. Tesoro Petroleum Corporation Funded Executive Security Plan 10. Tax Preparation and Financial Planning EX-10.12 7 AMENDED/RESTATED EXEC. LONG-TERM INCENTIVE PLAN 1 ITEM 14(a)3, EXHIBIT 10.12 AMENDED AND RESTATED TESORO PETROLEUM CORPORATION 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. 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 2 (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 thereto continuing to represent (either by remaining outstanding or by being 2 3 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. (p) "Freestanding SAR" means a SAR that is granted independently of any Options. 3 4 (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. (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. 4 5 (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 Executive Long- Term 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 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 2,650,000. These 5 6 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. 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. 6 7 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. 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. 7 8 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 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. 8 9 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 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. 9 10 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. 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. 10 11 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 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 11 12 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 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. 12 13 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 500,000 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 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 13 14 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, 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). 14 15 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 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 15 16 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. 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. 16 17 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. (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. 17 18 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 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. 18 19 (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, 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 19 20 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-10.20 8 SETTLEMENT AGREEMENT AND RELEASE 1 ITEM 14(a)3, EXHIBIT 10.20 SETTLEMENT AGREEMENT AND RELEASE THIS SETTLEMENT AGREEMENT AND RELEASE (hereinafter "Settlement Agreement") is made, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company (hereinafter "Tesoro"), Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P. (collectively referred to as "Coastal"), and Tennessee Gas Pipeline Company (hereinafter "Tennessee"), as follows: WITNESSETH WHEREAS, Tesoro and Coastal (collectively referred to as "Sellers") are Sellers pursuant to a Gas Purchase and Sales Agreement dated January 16, 1979 by and between Tennessee, as buyer, National Exploration Company and Eton Partnership, as seller, and Gulf Energy & Development Corporation, as gatherer, as amended, covering certain leases in the Bob West Field and Falcon Field, Zapata County, Texas and identified as Tennessee's Contract No. 805 and the Gas Measurement Agreement dated January 16, 1979 by and between Tennessee, National Exploration Company and Eton Partnership, and Gulf Energy & Development Corporation (collectively, the "Contract"); WHEREAS, in 1990 and 1991, Sellers created two 352-acre gas units known as the Tesoro Exploration and Production Company Guerra 352 Acre Gas Unit (Guerra A Unit) and the Tesoro Exploration and Production Company U.S.A.-Guerra 352 Acre Gas Unit (Guerra B Unit) (collectively referred to as "the Guerra Units"); WHEREAS, the Guerra Units are composed of certain acreage and leases, limited to particular depths, including certain of the leases that were originally dedicated to the Contract (such leases insofar as they cover the particular depths in the Guerra Units are referred to as the "Dedicated Leases") and other leases and acreage that were not originally dedicated to the Contract, all of which is more specifically set forth and described in the Declarations of Unit recorded at Vol. 617, p. 550, and at Vol. 626, p. 168, respectively, in the official records of Starr County, Texas, and at Vol. 429, p. 529, and at Vol. 436, p. 210, respectively, in the official records of Zapata County, Texas, together with any amendments thereto (including the Amendment recorded in Vol. 516, p. 263 of the official records of Zapata County, Texas, and at Vol. 719, p. 531 of the official records of Starr County, Texas), which acreage and leases are collectively referred to herein as "the Unitized Acreage;" WHEREAS, Sellers and Tennessee have had numerous ongoing disputes involving the rights and obligations of the parties under the Contract; WHEREAS, Sellers and Tennessee have litigated certain disputes which were resolved by 2 the Texas Supreme Court in THE LENAPE RESOURCES CORP. V. TENNESSEE GAS PIPELINE COMPANY, 925 S.W. 2d 565 (Tex. 1996); WHEREAS, Tennessee filed suit, styled TENNESSEE GAS PIPELINE COMPANY V. KCS RESOURCES, INC., TESORO E&P COMPANY, AND COASTAL OIL & GAS CORPORATION, Cause No. 3,510 in the 49th Judicial District Court of Zapata County Texas (hereinafter the "Lawsuit") to litigate certain disputes; WHEREAS, Sellers denied Tennessee's allegations and filed counterclaims in the Lawsuit; WHEREAS, Tennessee, after the decision by the Texas Supreme Court, has asserted additional claims for repayment of moneys previously paid by Tennessee for gas delivered under the Contract; WHEREAS, the Federal Energy Regulatory Commission ("Commission") issued Order No. 636, III FERC Stats & Regs. paragraph 30,939 (1992), which, among other things, requires interstate pipelines that provided bundled sales service to unbundle the sales, transportation, and storage services offered to customers and to provide such unbundled services on a non-discriminatory basis; WHEREAS, Tennessee has determined that it must terminate, assign or otherwise realign its existing gas supply contracts with producers, including but not limited to the Contract, in connection with implementing the requirements of Order No. 636 in order to provide the unbundled services contemplated by the Commission in Order No. 636 and to mitigate any costs resulting from the realignment of Tennessee's existing gas supply contracts; and WHEREAS, Sellers and Tennessee now desire to reach a full and final settlement and compromise of all matters, claims and causes of action arising under the Contract or which were asserted or could have been asserted by them in the Lawsuit or under the Contract. NOW, THEREFORE, for and in consideration of the mutual covenants, promises and agreements herein contained Sellers and Tennessee hereby agree and stipulate as follows: 1. Tennessee and Sellers agree to settle and compromise all matters, issues, claims, demands, and causes of action, whether known or unknown, which have arisen, resulted from or arise out of or alleged to have arisen, resulted from, or arise out of the Contract or the Lawsuit and agree to terminate the Contract effective as of October 1, 1996 and release each other from the Contract. Tennessee shall have no further obligations under the Contract to Sellers or any obligation to buy gas attributable to Sellers' interests in the Dedicated Leases. Sellers shall have no further obligations under the Contract to Tennessee and shall not be obligated to sell gas attributable to their interests in the Dedicated Leases to Tennessee. In consideration of this Settlement Agreement, Tennessee shall pay to Sellers the aggregate sum of Seventy-Four Million and 00/100 Dollars ($74,000,000.00) (the "Settlement Sum"), by making, pursuant to written 2 3 wiring instructions timely provided by Sellers, the following wire transfers concurrently with the execution of this Settlement Agreement: Tesoro: $51,800,000.00 Coastal: $22,200,000.00 2. In further consideration of this Settlement, Tennessee grants to Sellers all rights and claims it may have to recover or recoup tax reimbursements paid by Tennessee to Sellers pursuant to the Contract. This grant does not include the right Tennessee may have to any repayment of tax reimbursements paid by Tennessee directly to KCS Resources, Inc. or its predecessors ("KCS") pursuant to the Contract. 3. In further consideration of this Settlement Agreement, Sellers and Tennessee, concurrently with the signing of this Settlement Agreement, agree to execute and deliver the Termination Agreement, a copy of which is attached hereto and identified as Exhibit "A" (the "Termination Agreement"). 4. Tennessee shall immediately dismiss Sellers and Sellers shall immediately dismiss Tennessee from the Lawsuit with prejudice pursuant to the Agreed Order of Dismissal, a copy of which is attached hereto and identified as Exhibit "B". 5. Tesoro represents and warrants to Tennessee, which representations and warranties Tesoro acknowledges are material, are relied on by Tennessee in entering into this Settlement Agreement and shall survive the execution and delivery of this Settlement Agreement, as follows: (a) Tesoro is the sole owner of all interests formerly owned by Tesoro Exploration and Production Company in the Dedicated Leases, the Lawsuit, and the Contract; (b) Except for the assignments to KCS of its back-in interest and that certain Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement, dated April 20, 1994, between Tesoro Exploration and Production Company and Texas Commerce Bank National Association, as agent, as subsequently assigned and amended, Tesoro has not made any assignment, conveyance, sublease, or transfer to any other person or entity of any interest in the Dedicated Leases, the Lawsuit, or the Contract; (c) Tesoro is a limited partnership duly organized, and in good standing under the laws of the State of Delaware and that Tesoro Exploration and Production Company is the general partner of Tesoro; (d) Tesoro has the power and authority to enter into and perform this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement; and 3 4 (e) The execution, delivery and performance by Tesoro of this Settlement Agreement, the Termination Agreement, and Agreed Order of Dismissal have been duly authorized by all requisite partnership authorities, and this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement have been duly and validly executed and delivered on behalf of Tesoro and are legal, valid and binding obligations of Tesoro enforceable against Tesoro in accordance with their terms. 6. Coastal represents and warrants to Tennessee, which representations and warranties Coastal acknowledges are material, are relied on by Tennessee in entering into this Settlement Agreement and shall survive the execution and delivery of this Settlement Agreement, as follows: (a) Coastal is the sole owner of all interests formerly owned by Coastal Oil & Gas Corporation in the Dedicated Leases, the Lawsuit, and the Contract; (b) Except for the assignments to KCS of its back-in interest, Coastal has not made any assignment, conveyance, sublease, or transfer to any other person or entity of any interest in the Dedicated Leases, the Lawsuit, or the Contract; (c) Coastal Oil & Gas USA, L.P. is a limited partnership duly organized, and in good standing under the laws of the State of Delaware and that Coastal Oil & Gas Corporation is the general partner of Coastal Oil & Gas USA, L.P. Coastal Oil & Gas Corporation is a corporation duly organized, and in good standing under the laws of the State of Delaware; (d) Coastal has the power and authority to enter into and perform this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement; and (e) The execution, delivery and performance by Coastal of this Settlement Agreement, the Termination Agreement, and Agreed Order of Dismissal have been duly authorized by all requisite corporate and partnership authorities, and this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement have been duly and validly executed and delivered on behalf of Coastal and are legal, valid and binding obligations of Coastal enforceable against Coastal in accordance with their terms. 7. Tennessee represents and warrants to Sellers, which representations and warranties Tennessee acknowledges are material, are relied on by Sellers in entering into this Settlement Agreement and shall survive the execution and delivery of this Settlement Agreement, as follows: (a) Tennessee is the sole buyer under the Contract and is the sole owner of all rights and obligations of the Buyer under the Contract and is the sole owner of all the claims it has made in the lawsuit; (b) Tennessee has not made any assignment, conveyance, sublease, or transfer to any other person or entity of any interest in the Lawsuit or the Contract; 4 5 (c) Tennessee is a corporation duly organized, and in good standing under the laws of the State of Delaware; (d) Tennessee has the power and authority to enter into and perform this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement; and (e) The execution, delivery and performance by Tennessee of this Settlement Agreement, the Termination Agreement, and Agreed Order of Dismissal have been duly authorized by all requisite corporate authorities, and this Settlement Agreement, the Agreed Order of Dismissal, and the Termination Agreement have been duly and validly executed and delivered on behalf of Tennessee and are legal, valid and binding obligations of Tennessee enforceable against Tennessee in accordance with their terms. 8. Sellers, for themselves, their affiliates, and their successors and assigns, covenant and agree that all rights and obligations under the Contract are terminated and Sellers' interests under the Contract are released. Sellers agree that their interests in the Dedicated Leases and the leases pooled therewith are not now and will not in the future be committed to any other gas purchase agreement under which Tennessee purchases gas without the express written agreement of Tennessee. 9. Tesoro, on behalf of itself, its parent, affiliates, successors, assigns, agents, officers, directors and employees (collectively, the "Tesoro Parties"), forever waives, relieves, acquits, and fully discharges Tennessee, its parent, affiliates, successors, assigns, agents, officers, directors, and employees, including, without limitation, El Paso Energy Corporation, (collectively, the "Tennessee Parties"), of and from any and all claims, demands, actions, causes of action, suits, damages, liabilities or other remedies whatsoever, known or unknown, in law or in equity, whether arising by statute or at common law, that Tesoro now has, had or may hereafter have or which could have been asserted, whether known or unknown, through and including the execution date hereof, arising out of, associated with or related in any way to the Contract or to the claims alleged in the Lawsuit (the "Tesoro Released Claims"). Tesoro acknowledges that the foregoing is a general release and' without limiting the generality thereof, is intended to release and extinguish all of Tesoro's interest in, and rights under, the Tesoro Released Claims. 10. Coastal, on behalf of itself, its parents, affiliates, successors, assigns, agents, officers, directors and employees (collectively, the "Coastal Parties"), forever waives, relieves, acquits, and fully discharges the Tennessee Parties of and from any and all claims, demands, actions, causes of action, suits, damages, liabilities or other remedies whatsoever, known or unknown, in law or in equity, whether arising by statute or at common law, that Coastal now has, had or may hereafter have or which could have been asserted, whether known or unknown, through and including the execution date hereof, arising out of, associated with or related in any way to the Contract or to the claims alleged in the Lawsuit (the "Coastal Released Claims"). Coastal acknowledges that the foregoing is a general release and, without limiting the generality thereof; is intended to release and extinguish all of Coastal's interests in, and rights under, the Coastal Released Claims. 5 6 11. Tennessee, on behalf of the Tennessee Parties, forever waives, relieves, acquits, and fully discharges the Tesoro Parties and the Coastal Parties of and from any and all claims, demands, actions, causes of action, suits, damages, liabilities or other remedies whatsoever, known or unknown, in law or in equity, whether arising by statute or at common law, that Tennessee now has, had or may hereafter have or which could have been asserted, whether known or unknown, through and including the execution date hereof, arising out of, associated with or related in any way to the Contract or to the claims alleged in the Lawsuit (the "Tennessee Released Claims"). Tennessee acknowledges that the foregoing is a general release and, without limiting the generality thereof; is intended to release and extinguish all of Tennessee's interests in, and rights under, the Tennessee Released Claims. 12. Tesoro agrees to indemnify, defend, and hold harmless the Tennessee Parties from and against all claims, costs, expenses (including, without limitation, attorneys fees), damages and liability whatsoever arising directly or indirectly from or in connection with: (a) any claim by the State of Texas or the Comptroller of the State of Texas for severance taxes (including any penalties and interest) for gas attributable to Tesoro's interest in the Dedicated Leases; (b) any claim made by any royalty owner or any other non-working interest owner in the Unitized Acreage for any royalty arising from or out of Tesoro's interest in the Dedicated Leases as a result of or in connection with the Contract, this Settlement Agreement, or the payments made by Tennessee hereunder; (c) the breach of any representation, warranty or covenant of Tesoro set forth in this Settlement Agreement; (d) nonperformance by Tesoro of any obligation under this Settlement Agreement, the Agreed Order of Dismissal, or the Termination Agreement; and (e) any claim related to the Contract asserted by any person or entity (other than KCS under the back-in assignments) who claims to have received the assignment, conveyance, license or other transfer from Tesoro of any interest under the Lawsuit, the Contract, the Unitized Acreage, or the Dedicated Leases. 13. Coastal agrees to indemnify, defend, and hold harmless the Tennessee Parties from and against all claims, costs, expenses (including, without limitation, attorneys fees), damages and liability whatsoever arising directly or indirectly from or in connection with: (a) any claim by the State of Texas or the Comptroller of the State of Texas for severance taxes (including any penalties and interest) for gas attributable to Coastal's interest in the Dedicated Leases; 6 7 (b) any claim made by any royalty owner or any other non-working interest owner in the Unitized Acreage for any royalty arising from or out of Coastal's interests in the Dedicated Leases as a result of or in connection with the Contract, this Settlement Agreement, or the payments made by Tennessee hereunder; (c) the breach of any representation, warranty or covenant of Coastal set forth in this Settlement Agreement; (d) nonperformance by Coastal of any obligation under this Settlement Agreement, the Agreed Order of Dismissal, or the Termination Agreement; and (e) any claim related to the Contract asserted by any person or entity who claims to have received the assignment, conveyance, license or other transfer from Coastal of any interest under the Lawsuit, the Contract, the Unitized Acreage, or the Dedicated Leases. 14. Tennessee agrees to indemnify, defend, and hold harmless the Tesoro Parties and Coastal Parties from and against all claims, costs, expenses (including, without limitation, attorneys fees), damages and liability whatsoever arising directly or indirectly from or in connection with: (a) any claim by Gulf Energy Pipeline Company, its parents, affiliates, successors, assigns, agents, officers, directors and employees (the "Gulf Parties") arising from or in connection with the Contract; provided, however, if Tennessee, Tesoro or Coastal is held to be liable to the Gulf Parties for such claim pursuant to either a judgement or a settlement, then Tesoro and Coastal shall be liable for 565/4100 of the amount of the judgement or settlement up to a maximum liability of Tesoro and Coastal, collectively, of Five Hundred Sixty Five Thousand Dollars ($565,000.00) and Tennessee shall be liable for the remaining portion; (b) any claim made by any customer of Tennessee for any refund, damages or other compensation as a result of or in connection with the Contract, this Settlement Agreement, or the payments made by Tennessee hereunder; (c) the breach of any representation, warranty or covenant of Tennessee set forth in this Settlement Agreement; (d) nonperformance by Tennessee of any obligation under this Settlement Agreement, the Agreed Order of Dismissal, or the Termination Agreement; and (e) any claim related to the Contract asserted by any person or entity who claims to have received the assignment, conveyance, license or other transfer from Tennessee of any interest under the Lawsuit or the Contract. 15. This Settlement Agreement and its attachments, including but not limited to the 7 8 Termination Agreement, embody the complete and entire agreement among the parties concerning its subject matter and supersede any prior oral or written representations, agreements or understandings or any contemporaneous oral understandings, representations or agreements. This Settlement Agreement may not be amended except in writing signed by all parties. Each party shall bear its own costs and attorneys' fees in connection with the preparation, negotiation, review and documentation of this Settlement Agreement and its various attachments. The parties may execute this Settlement Agreement in counterparts, by telecopy, which they shall confirm by promptly furnishing written originals to each of the other parties. Counterparts when executed by all parties shall constitute a complete Settlement Agreement as if each party had executed a single document. 16. This Settlement Agreement shall extend to, be binding upon, and inure to the benefit of the parties and their respective successors and assigns; provided, however, that any assignment shall not release a party of its obligations under this Settlement Agreement. 17. This Settlement Agreement shall be construed interpreted and enforced in accordance with the laws of the State of Texas. Venue for any claim arising out of this Settlement Agreement shall be Harris County, Texas. 18. Nothing in this Settlement Agreement or in the Termination Agreement shall (i) in any way constitute an admission of liability by Tennessee or Sellers with respect to the Lawsuit or any matters alleged therein, or (ii) in any way constitute an admission against interest of either Tennessee or Sellers. Executed this 24th day of December, 1996. TENNESSEE GAS PIPELINE COMPANY COASTAL OIL & GAS USA, L.P. By Coastal Oil & Gas Corporation its Managing Partner By: /s/ JOHN W. SOMERHALDER II By: /s/ R. D. ERSKINE --------------------------------- ------------------------------- Name: John W. Somerhalder II Name: R. D. Erskine ------------------------------- ---------------------------- Title: President Title: Sr. Vice President ------------------------------ ---------------------------- TESORO E&P COMPANY, L.P. COASTAL OIL & GAS CORPORATION By Tesoro Exploration and Production Company its General Partner By: /s/ BRUCE A. SMITH By: /s/ R. D. ERSKINE -------------------------------- -------------------------------- Name: Bruce A. Smith Name: R. D. Erskine ----------------------------- ----------------------------- Title: Chairman of the Board Title: Sr. Vice President ----------------------------- ----------------------------- 8 9 ACKNOWLEDGMENTS STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 9th day of January, 1997, by John W. Somerhalder II, President of Tennessee Gas Pipeline Company, a Delaware corporation, on behalf of said company. [SEAL] /s/ ANN C. MEYER --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF BEXAR ) This instrument was acknowledged before me on this 13th day of January, 1997, by Bruce A. Smith, Chairman of the Board of Tesoro Exploration and Production Company, a Delaware corporation, general partner of Tesoro E&P Company, L.P., a limited partnership, on behalf of said partnership. [SEAL] /s/ LINDA IDEN --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 23rd day of December, 1996 by R. D. Erskine, Sr. Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, on behalf of said corporation. [SEAL] /s/ SHIRLEY A. COOPER --------------------------------------------- Notary Public in and for the State of Texas 9 10 STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 23rd day of December, 1996 by R. D. Erskine, Sr. Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, general partner of Coastal Oil & Gas of Texas, L.P., a limited partnership, on behalf of said partnership. [SEAL] /s/ SHIRLEY A. COOPER --------------------------------------------- Notary Public in and for the State of Texas 10 11 EXHIBIT "A" TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (hereinafter "Termination Agreement") is made, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company (hereinafter "Tesoro"), Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P. (collectively referred to as "Coastal"), and Tennessee Gas Pipeline Company (hereinafter "Tennessee"), as follows: WITNESSETH WHEREAS, Tesoro and Coastal (collectively referred to as "Sellers") are Sellers pursuant to a Gas Purchase and Sales Agreement dated January 16, 1979 by and between Tennessee, as buyer, National Exploration Company and Eton Partnership, as seller, and Gulf Energy & Development, as gatherer, covering certain leases in the Bob West Field and Falcon Field, Zapata County, Texas and identified as Tennessee's Contract No. 805 (the "Contract"); WHEREAS, in 1990 and 1991, Sellers created two 352-acre gas units known as the Tesoro Exploration and Production Company Guerra 352 Acre Gas Unit (Guerra A Unit) and the Tesoro Exploration and Production Company U.S.A.-Guerra 352 Acre Gas Unit (Guerra B Unit) (collectively referred to as "the Guerra Units"); WHEREAS, the Guerra Units are composed of certain acreage and leases, limited to particular depths, including certain of the leases that were originally dedicated to the Contract (such leases insofar as they cover the particular depths in the Guerra Units are referred to as the "Dedicated Leases") and other leases and acreage that were not originally dedicated to the Contract, all of which is more specifically set forth and described in the Declarations of Unit recorded at Vol. 617, p. 550, and at Vol. 626, p. 168, respectively, in the official records of Starr County, Texas, and at Vol. 429, p. 529, and at Vol. 436, p. 210, respectively, in the official records of Zapata County, Texas, together with any amendments thereto (including the Amendment recorded in Vol. 516, p. 263 of the official records of Zapata County, Texas, and at Vol. 719, p. 531 of the official public records of Starr County, Texas), which acreage and leases are collectively referred to herein as "the Unitized Acreage;" and WHEREAS, the Federal Energy Regulatory Commission ("Commission") issued Order No. 636, III FERC Stats & Regs. paragraph 30,939 (1992), which, among other things, requires interstate pipelines that provided bundled sales service to unbundle the sales, transportation, and storage services offered to customers and to provide such unbundled services on a non-discriminatory basis; 1 12 WHEREAS, Tennessee has determined that it must terminate, assign or otherwise realign its existing gas supply contracts with producers, including but not limited to the Contract, in connection with implementing the requirements of Order No. 636 in order to provide the unbundled services contemplated by the Commission in Order No. 636 and to mitigate any costs resulting from the realignment of Tennessee's existing gas supply contracts. NOW, THEREFORE, for and in consideration of the mutual covenants, promises and agreements herein contained Sellers and Tennessee hereby agree to terminate the Contract and do hereby terminate the Contract as between Sellers and Tennessee effective as of October 1, 1996 insofar as the Contract covers Sellers' interest. Executed this ____ day of ________, 199__. TENNESSEE GAS PIPELINE COMPANY COASTAL OIL & GAS USA, L.P. By Coastal Oil & Gas Corporation its Managing Partner By: By: --------------------------------- -------------------------------- Name: Name: ------------------------------- ------------------------------ Title: Title: ------------------------------ ----------------------------- TESORO E&P COMPANY, L.P. COASTAL OIL & GAS CORPORATION By Tesoro Exploration and Production Company, its General Partner By: By: --------------------------------- -------------------------------- Name: Name: ------------------------------- ------------------------------ Title: Title: ------------------------------ ----------------------------- 2 13 ACKNOWLEDGMENTS STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this _____ day of _______________, 199__, by __________________________________, ________________________________ of Tennessee Gas Pipeline Company, a _______________ corporation, on behalf of said company. [SEAL] --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF __________ ) This instrument was acknowledged before me on this _____ day of _______________, 199__, by __________________________________, ________________________________ of Tesoro Exploration and Production Company, a Delaware corporation, general partner of Tesoro E&P Company, L.P., a limited partnership, on behalf of said partnership. [SEAL] --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this _____ day of _____________, 199__ by ________________________, Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, on behalf of said corporation. [SEAL] --------------------------------------------- Notary Public in and for the State of Texas 3 14 STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this _____ day of _____________, 199__ by ________________________, Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, general partner of Coastal Oil & Gas of Texas, L.P., a limited partnership, on behalf of said partnership. [SEAL] --------------------------------------------- Notary Public in and for the State of Texas 4 15 EXHIBIT "B" No. 3,510 TENNESSEE GAS PIPELINE COMPANY ) IN THE DISTRICT COURT OF ) Plaintiff, ) ) v. ) ZAPATA COUNTY, TEXAS ) KCS RESOURCES, INC. ) TESORO E&P COMPANY, and ) COASTAL OIL & GAS CORPORATION, ) ) Defendants. ) 49TH JUDICIAL DISTRICT JOINT MOTION TO DISMISS TO THE HONORABLE COURT: Tennessee Gas Pipeline Company ("Tennessee"), plaintiff, and Tesoro E&P Company L.P. ("Tesoro"), and Coastal Oil & Gas Corporation ("Coastal") defendants, move the Court to dismiss the claims each of them has asserted against the other in this action because all matters of fact and things in controversy between Tennessee and Tesoro and Coastal have been fully and finally compromised and settled. WHEREFORE, plaintiff Tennessee Gas Pipeline Company and Tesoro and Coastal request that the Court dismiss the claims asserted by Tennessee against Tesoro and Coastal with prejudice and dismiss the claims asserted by Tesoro and Coastal against Tennessee with prejudice, each party to bear its own costs. Respectfully submitted, SUSMAN GODFREY L.L.P. By: ------------------------------------------ Mark L.D. Wawro Texas State Bar No. 20988275 Charles R. Eskridge III Texas State Bar No. 06666350 16 EXHIBIT "B" 1000 Louisiana Street, Suite 5100 Houston, Texas 77002-5096 Telephone: 713-651-9366 Facsimile: 713-653-7897 Attorneys for Plaintiff Tennessee Gas Pipeline Company SCOTT, DOUGLASS, LUTON & McCONNICO, L.L.P. By: ------------------------------------- Elizabeth N. Miller State Bar No. 14071100 Jane Webre State Bar No. 21050060 600 Congress Avenue, Suite 1500 Austin, Texas 78701-3234 Telephone: 512-495-6300 Facsimile: 512-474-0731 Attorney for Defendants Tesoro E&P Company L.P. Coastal Oil & Gas Corporation 2 17 EXHIBIT "B" No. 3,510 TENNESSEE GAS PIPELINE COMPANY ) IN THE DISTRICT COURT OF ) Plaintiff, ) ) v. ) ZAPATA COUNTY, TEXAS ) KCS RESOURCES, INC. ) TESORO E&P COMPANY, and ) COASTAL OIL & GAS CORPORATION, ) ) Defendants. ) 49TH JUDICIAL DISTRICT AGREED ORDER OF DISMISSAL On _______________, 199__, this Court heard the Joint Motion of Tennessee Gas Pipeline Company, plaintiff, and Tesoro E&P Company L.P. ("Tesoro"), and Coastal Oil & Gas Corporation ("Coastal"), defendants, seeking dismissal of the claims each of them has asserted against the other with prejudice. The Court finds that all matters in dispute between Tennessee Gas Pipeline Company and Tesoro and Coastal have been fully and finally compromised and settled. IT IS, THEREFORE, ORDERED that the claims asserted by Tennessee Gas Pipeline Company against Tesoro and Coastal be and are hereby dismissed with prejudice to the rights of Tennessee to re-file the claims or any part of them against Tesoro and Coastal. IT IS FURTHER ORDERED that the claims asserted by defendants against Tennessee Gas Pipeline Company be and are dismissed with prejudice to the rights of Tesoro and Coastal to re-file the claims or any part of them against Tennessee. Each party is to bear its own costs. SIGNED this _____ day of ___________________, 199___. ------------------------------------- JUDGE PRESIDING 18 EXHIBIT "B" APPROVED: SUSMAN GODFREY L.L.P. By: --------------------------------- Mark L.D. Wawro Texas State Bar No. 20988275 Charles R. Eskridge III Texas State Bar No. 06666350 1000 Louisiana Street, Suite 5100 Houston, Texas 77002-5096 Telephone: 713-651-9366 Facsimile: 713-653-7897 Attorneys for Plaintiff Tennessee Gas Pipeline Company SCOTT, DOUGLASS, LUTON & McCONNICO, L.L.P. By: --------------------------------- Elizabeth N. Miller State Bar No. 14071100 Jane Webre State Bar No. 21050060 600 Congress Avenue, Suite 1500 Austin, Texas 78701-3234 Telephone: 512-495-6300 Facsimile: 512-474-0731 Attorneys for Defendants Tesoro E&P Company L.P. Coastal Oil & Gas Corporation 2 EX-10.21 9 TERMINATION AGREEMENT 1 ITEM 14(a)3, EXHIBIT 10.21 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (hereinafter "Termination Agreement") is made, entered into and effective as of October 1, 1996, by and between Tesoro E&P Company, L.P., acting through its General Partner, Tesoro Exploration and Production Company (hereinafter "Tesoro"), Coastal Oil & Gas Corporation and Coastal Oil & Gas USA, L.P. (collectively referred to as "Coastal"), and Tennessee Gas Pipeline Company (hereinafter "Tennessee"), as follows: WITNESSETH WHEREAS, Tesoro and Coastal (collectively referred to as "Sellers") are Sellers pursuant to a Gas Purchase and Sales Agreement dated January 16, 1979 by and between Tennessee, as buyer, National Exploration Company and Eton Partnership, as seller, and Gulf Energy & Development, as gatherer, covering certain leases in the Bob West Field and Falcon Field, Zapata County, Texas and identified as Tennessee's Contract No. 805 (the "Contract"); WHEREAS, in 1990 and 1991, Sellers created two 352-acre gas units known as the Tesoro Exploration and Production Company Guerra 352 Acre Gas Unit (Guerra A Unit) and the Tesoro Exploration and Production Company U.S.A.-Guerra 352 Acre Gas Unit (Guerra B Unit) (collectively referred to as "the Guerra Units"); WHEREAS, the Guerra Units are composed of certain acreage and leases, limited to particular depths, including certain of the leases that were originally dedicated to the Contract (such leases insofar as they cover the particular depths in the Guerra Units are referred to as the "Dedicated Leases") and other leases and acreage that were not originally dedicated to the Contract, all of which is more specifically set forth and described in the Declarations of Unit recorded at Vol. 617, p. 550, and at Vol. 626, p. 168, respectively, in the official records of Starr County, Texas, and at Vol. 429, p. 529, and at Vol. 436, p. 210, respectively, in the official records of Zapata County, Texas, together with any amendments thereto (including the Amendment recorded in Vol. 516, p. 263 of the official records of Zapata County, Texas, and at Vol. 719, p. 531 of the official public records of Starr County, Texas), which acreage and leases are collectively referred to herein as "the Unitized Acreage;" and WHEREAS, the Federal Energy Regulatory Commission ("Commission") issued Order No. 636, III FERC Stats & Regs. paragraph 30,939 (1992), which, among other things, requires interstate pipelines that provided bundled sales service to unbundle the sales, transportation, and storage services offered to customers and to provide such unbundled services on a non-discriminatory basis; 1 2 WHEREAS, Tennessee has determined that it must terminate, assign or otherwise realign its existing gas supply contracts with producers, including but not limited to the Contract, in connection with implementing the requirements of Order No. 636 in order to provide the unbundled services contemplated by the Commission in Order No. 636 and to mitigate any costs resulting from the realignment of Tennessee's existing gas supply contracts. NOW, THEREFORE, for and in consideration of the mutual covenants, promises and agreements herein contained Sellers and Tennessee hereby agree to terminate the Contract and do hereby terminate the Contract as between Sellers and Tennessee effective as of October 1, 1996 insofar as the Contract covers Sellers' interest. Executed this 24th day of December, 1996. TENNESSEE GAS PIPELINE COMPANY COASTAL OIL & GAS USA, L.P. By Coastal Oil & Gas Corporation its Managing Partner By: /s/ JOHN W. SOMERHALDER II By: /s/ R. D. ERSKINE --------------------------------- -------------------------------- Name: John W. Somerhalder II Name: R.D. Erskine ------------------------------ ----------------------------- Title: President Title: V.P. Production ------------------------------ ----------------------------- TESORO E&P COMPANY, L.P. COASTAL OIL & GAS CORPORATION By Tesoro Exploration and Production Company, its General Partner By: /s/ BRUCE A. SMITH By: /s/ R. D. ERSKINE --------------------------------- -------------------------------- Name: Bruce A. Smith Name: R. D. Erskine ------------------------------ ----------------------------- Title: Chairman of the Board Title: V. P. Production ------------------------------ ----------------------------- 2 3 ACKNOWLEDGMENTS STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 9th day of January, 1997, by John W. Somerhalder II, President of Tennessee Gas Pipeline Company, a Delaware corporation, on behalf of said company. [SEAL] /s/ ANN C. MEYER --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF BEXAR ) This instrument was acknowledged before me on this 13th day of January, 1997, by Bruce A. Smith, Chairman of the Board of Tesoro Exploration and Production Company, a Delaware corporation, general partner of Tesoro E&P Company, L.P., a limited partnership, on behalf of said partnership. [SEAL] /s/ LINDA IDEN --------------------------------------------- Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 23rd day of December, 1996 by R.D. Erskine, Sr. Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, on behalf of said corporation. [SEAL] /s/ SHIRLEY A. COOPER ------------------------------------------- Notary Public in and for the State of Texas 3 4 STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on this 23rd day of December, 1996 by R. D. Erskine, Sr. Vice President of Coastal Oil & Gas Corporation, a Delaware corporation, general partner of Coastal Oil & Gas of Texas, L.P., a limited partnership, on behalf of said partnership. [SEAL] /s/ SHIRLEY A. COOPER --------------------------------------------- Notary Public in and for the State of Texas 4 EX-11 10 COMPUTATION OF EARNINGS PER SHARE 1 ITEM 14(A)3, EXHIBIT 11 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES INFORMATION SUPPORTING EARNINGS PER SHARE COMPUTATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------ ------- PRIMARY EARNINGS PER SHARE COMPUTATION Earnings before extraordinary loss on extinguishment of debt...................................................... $76,800 57,489 20,483 Extraordinary loss on extinguishment of debt, net of income tax benefit............................................... (2,290) (2,857) (4,752) ------- ------ ------- Net earnings................................................ 74,510 54,632 15,731 Dividend requirements on preferred stock.................... -- -- 2,680 ------- ------ ------- Net earnings applicable to common stock..................... $74,510 54,632 13,051 ======= ====== ======= Average outstanding common shares........................... 25,999 24,557 22,552 Average outstanding common equivalent shares................ 500 550 644 ------- ------ ------- Average outstanding common and common equivalent shares... 26,499 25,107 23,196 ======= ====== ======= Primary Earnings Per Share: Earnings before extraordinary loss on extinguishment of debt................................................... $ 2.90 2.29 .77 Extraordinary loss on extinguishment of debt, net......... (.09) (.11) (.21) ------- ------ ------- Net earnings.............................................. $ 2.81 2.18 .56 ======= ====== ======= FULLY DILUTED EARNINGS PER SHARE COMPUTATION Net earnings applicable to common stock..................... $74,510 54,632 13,051 Add: Dividend requirements on preferred stock............... -- -- 2,680 ------- ------ ------- Net earnings applicable to common stock -- fully diluted.... $74,510 54,632 15,731 ======= ====== ======= Average outstanding common and common equivalent shares..... 26,499 25,107 23,196 Shares issuable on conversion of preferred shares........... -- -- 1,476 Additional fully diluted shares............................. 50 -- 58 ------- ------ ------- 26,549 25,107 24,730 ======= ====== ======= Fully Diluted Earnings Per Share*........................... $ 2.81 2.18 .56 ======= ====== =======
- --------------- * This calculation is submitted in accordance with paragraph 601(b)(11) of Regulation S-K, although it is not required by APB Opinion No. 15 because it produces an immaterial dilutive effect for 1996 and 1995 and an anti-dilutive result for 1994. EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 ITEM 14(A)3, EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Tesoro Petroleum Corporation is publicly held and has no parent. The subsidiaries listed below are wholly-owned. Small or inactive subsidiaries are omitted from the list below. Such omitted subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" at the end of the year covered by this annual report.
INCORPORATED OR ORGANIZED UNDER LAWS NAME OF SUBSIDIARY(1) OF --------------------- ------------- Tesoro Alaska Petroleum Company............................. Delaware Tesoro Alaska Pipeline Company.............................. Delaware Tesoro Bolivia Petroleum Company............................ Texas Tesoro Exploration and Production Company(2)................ Delaware Tesoro Financial Services Holding Company................... Delaware Victory Finance Company................................ Delaware Tesoro Gas Resources Company, Inc.(2)....................... Delaware Tesoro E&P Company, L.P.(2)............................ Delaware Tesoro Marine Services Company.............................. Delaware Tesoro Coastwide Services Company...................... Delaware Tesoro Natural Gas Company.................................. Delaware Tesoro Northstore Company................................... Alaska
- --------------- (1) Where the name of a subsidiary is indented, it is wholly-owned by its immediate parent listed at the margin above it, unless otherwise indicated. (2) Tesoro E&P Company, L.P. is owned 99% by Tesoro Gas Resources Company, Inc. and 1% by Tesoro Exploration and Production Company. EX-23.1 12 CONSENT OF INDEPENDENT AUDITORS 1 ITEM 14(a)3, EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT Board of Directors and Stockholders Tesoro Petroleum Corporation We consent to the incorporation by reference in Registration Statement No. 33- 53293 of Tesoro Petroleum Corporation on Form S-8 of our report dated January 23, 1997, appearing in this Annual Report on Form 10-K of Tesoro Petroleum Corporation for the year ended December 31, 1996. DELOITTE & TOUCHE LLP San Antonio, Texas March 24, 1997 EX-23.2 13 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS/GEOLOG. 1 ITEM 14(a)3, EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS We hereby consent to the references to our firm in the Annual Report of Tesoro Petroleum Corporation on Form 10-K for the fiscal year ended December 31, 1996, filed with the Securities and Exchange Commission in Washington, D.C. pursuant to the Securities Exchange Act of 1934. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ CLARENCE M. NETHERLAND -------------------------------------- Clarence M. Netherland Chairman Dallas, Texas March 21, 1997 EX-27 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 22,796 0 129,528 1,515 74,488 237,343 573,353 256,842 582,587 137,868 79,260 4,402 0 0 299,663 582,587 975,361 1,039,778 854,311 854,311 41,459 0 15,382 115,147 38,347 76,800 0 (2,290) 0 74,510 2.81 2.81 Earnings per share is after an extraordinary loss of $2.3 million ($.09 loss per share) on extinguishment of debt.
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