-----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, U7/6SA7h0bZeZ2V/F8Jjt4WcsOA6m+O0mU9Icd2z+elS8SzC4Wj0s65bedvsgSIw 3Q9LXnxZvgVeNpF+OkQ/VQ== 0000950134-02-005749.txt : 20020515 0000950134-02-005749.hdr.sgml : 20020515 20020515161411 ACCESSION NUMBER: 0000950134-02-005749 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TESORO PETROLEUM CORP /NEW/ CENTRAL INDEX KEY: 0000050104 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 950862768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03473 FILM NUMBER: 02652523 BUSINESS ADDRESS: STREET 1: 300 CONCORD PLAZA DRIVE CITY: SAN ANTONIO STATE: TX ZIP: 78216-6999 BUSINESS PHONE: 2108288484 MAIL ADDRESS: STREET 1: 300 CONCORD PLAZA DRIVE CITY: SAN ANTONIO STATE: TX ZIP: 78216-6999 10-Q 1 d96862e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 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.) 300 CONCORD PLAZA DRIVE, SAN ANTONIO, TEXAS 78216-6999 (Address of principal executive offices) (Zip Code) 210-828-8484 (Registrant's telephone number, including area code) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ---------- There were 64,595,323 shares of the registrant's Common Stock outstanding at May 1, 2002. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 TABLE OF CONTENTS
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001................... 3 Condensed Statements of Consolidated Operations - Three Months Ended March 31, 2002 and 2001........................................................................ 4 Condensed Statements of Consolidated Cash Flows - Three Months Ended March 31, 2002 and 2001........................................................................ 5 Notes to Condensed Consolidated Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................................. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 28 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds...................................................... 30 Item 6. Exhibits and Reports on Form 8-K............................................................... 30 SIGNATURES.................................................................................................. 32 EXHIBIT INDEX............................................................................................... 33
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
March 31, December 31, 2002 2001 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents .............................................. $ 0.2 $ 51.9 Receivables, less allowance for doubtful accounts ...................... 434.7 384.9 Inventories ............................................................ 418.6 431.8 Prepayments and other .................................................. 14.9 9.4 ------------- ------------- Total Current Assets ................................................. 868.4 878.0 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT Refining ............................................................... 1,555.9 1,522.0 Retail ................................................................. 238.8 228.8 Marine Services ........................................................ 55.1 54.0 Corporate .............................................................. 53.2 47.9 ------------- ------------- 1,903.0 1,852.7 Less accumulated depreciation and amortization ......................... 346.8 330.4 ------------- ------------- Net Property, Plant and Equipment .................................... 1,556.2 1,522.3 ------------- ------------- OTHER ASSETS Deposit and restricted funds ........................................... 300.0 -- Goodwill ............................................................... 95.2 95.2 Acquired intangibles, net .............................................. 71.7 73.3 Other, net ............................................................. 107.1 93.5 ------------- ------------- Total Other Assets ................................................... 574.0 262.0 ------------- ------------- Total Assets ...................................................... $ 2,998.6 $ 2,662.3 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ....................................................... $ 381.5 $ 331.2 Accrued liabilities .................................................... 150.5 172.9 Current maturities of debt and other obligations ....................... 34.0 34.4 ------------- ------------- Total Current Liabilities ............................................ 566.0 538.5 ------------- ------------- DEFERRED INCOME TAXES ..................................................... 148.5 136.9 ------------- ------------- OTHER LIABILITIES ......................................................... 118.7 117.4 ------------- ------------- DEBT AND OTHER OBLIGATIONS ................................................ 1,217.4 1,112.5 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note H) STOCKHOLDERS' EQUITY Common stock, par value $0.16-2/3; authorized 100,000,000 shares; 66,372,575 shares issued (43,371,825 in 2001) ........................ 11.0 7.2 Additional paid-in capital ............................................. 689.5 448.4 Retained earnings ...................................................... 266.3 321.9 Treasury stock, 1,827,564 common shares (1,958,147 in 2001), at cost ... (18.8) (20.5) ------------- ------------- Total Stockholders' Equity ........................................... 948.0 757.0 ------------- ------------- Total Liabilities and Stockholders' Equity ........................ $ 2,998.6 $ 2,662.3 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED) (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- REVENUES ................................................... $ 1,243.2 $ 1,227.3 COSTS AND EXPENSES Costs of sales and operating expenses .................... 1,247.8 1,148.3 Selling, general and administrative expenses ............. 38.5 23.5 Depreciation and amortization ............................ 20.1 12.0 ------------- ------------- OPERATING INCOME (LOSS) .................................... (63.2) 43.5 Interest and financing costs, net of capitalized interest .. (30.3) (7.5) Interest income ............................................ 0.7 0.3 ------------- ------------- EARNINGS (LOSS) BEFORE INCOME TAXES ........................ (92.8) 36.3 Income tax provision (benefit) ............................. (37.2) 14.6 ------------- ------------- NET EARNINGS (LOSS) ........................................ (55.6) 21.7 Preferred dividends ........................................ -- 3.0 ------------- ------------- NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ............. $ (55.6) $ 18.7 ============= ============= NET EARNINGS (LOSS) PER SHARE Basic .................................................... $ (1.15) $ 0.61 ============= ============= Diluted .................................................. $ (1.15) $ 0.52 ============= ============= WEIGHTED AVERAGE COMMON SHARES Basic .................................................... 48.2 30.9 ============= ============= Diluted .................................................. 48.2 41.8 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (IN MILLIONS)
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings (loss) ................................................... $ (55.6) $ 21.7 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization ...................................... 20.1 12.0 Amortization of refinery turnarounds and other non-cash charges .... 16.9 5.3 Deferred income taxes .............................................. 11.6 8.1 Changes in operating assets and liabilities: Receivables ...................................................... (49.8) 17.4 Inventories ...................................................... 13.2 0.3 Accounts payable and accrued liabilities ......................... 21.9 (77.9) Other assets and liabilities ..................................... (26.2) (5.6) ------------- ------------- Net cash used in operating activities .......................... (47.9) (18.7) ------------- ------------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures .................................................. (52.6) (33.5) Deposit and restricted funds .......................................... (300.0) -- Other ................................................................. (0.1) 0.7 ------------- ------------- Net cash used in investing activities .......................... (352.7) (32.8) ------------- ------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Net borrowings under revolving credit facilities ...................... 115.0 42.0 Proceeds from equity offering, net .................................... 244.9 -- Repayments of debt .................................................... (7.9) (0.3) Payment of dividends on Preferred Stock ............................... -- (3.0) Financing costs and other ............................................. (3.1) 0.2 ------------- ------------- Net cash from financing activities ............................. 348.9 38.9 ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (51.7) (12.6) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 51.9 14.1 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 0.2 $ 1.5 ============= ============= SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid, net of capitalized interest ............................ $ 25.1 $ 14.2 ============= ============= Income taxes paid ..................................................... $ -- $ 5.4 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements and Notes thereto of Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company" or "Tesoro") have been prepared by management without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the accompanying financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature. The Consolidated Balance Sheet at December 31, 2001 has been condensed from the audited Consolidated Financial Statements at that date. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the SEC's rules and regulations. However, management believes that the disclosures presented herein are adequate to make the information not misleading. Unless otherwise indicated, the Notes do not include amounts and disclosures related to the pending acquisition described in Note C. The accompanying Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The preparation of the Company's Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year. NOTE B - EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are determined by dividing net earnings (loss) applicable to Common Stock by the weighted average number of common shares outstanding during the period. The assumed conversion of common stock equivalents produced anti-dilutive results for the three months ended March 31, 2002, and was not included in the dilutive calculation. For the three months ended March 31, 2001, the calculation of diluted earnings per share takes into account the effects of potentially dilutive shares outstanding during the period, principally the maximum shares which would have been issued assuming conversion of Preferred Stock at the beginning of the period and stock options. The Preferred Stock was converted into 10.35 million shares of Common Stock in July 2001. Earnings (loss) per share calculations are presented below (in millions except per share amounts):
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- BASIC: Numerator: Net earnings (loss) ........................................ $ (55.6) $ 21.7 Less dividends on preferred stock .......................... -- 3.0 ------------- ------------- Net earnings (loss) applicable to common shares ............ $ (55.6) $ 18.7 ============= ============= Denominator: Weighted average common shares outstanding ................. 48.2 30.9 ============= ============= Basic Earnings (Loss) Per Share ............................... $ (1.15) $ 0.61 ============= =============
6 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- DILUTED: Numerator: Net earnings (loss) applicable to common shares ................. $ (55.6) $ 18.7 Plus impact of assumed conversion of preferred stock ............ -- 3.0 ------------- ------------- Total ......................................................... $ (55.6) $ 21.7 ============= ============= Denominator: Weighted average common shares outstanding ...................... 48.2 30.9 Add potentially dilutive securities: Incremental dilutive shares from assumed exercise of stock options (anti-dilutive in 2002) ............................. -- 0.6 Incremental dilutive shares from assumed conversion of preferred stock .......................................... -- 10.3 ------------- ------------- Total diluted shares .......................................... 48.2 41.8 ============= ============= Diluted Earnings (Loss) Per Share .................................. $ (1.15) $ 0.52 ============= =============
NOTE C - PENDING ACQUISITION The Company entered into a sale and purchase agreement with Ultramar Inc., a subsidiary of Valero Energy Corporation, on February 4, 2002, which was amended on February 20, 2002 and May 3, 2002. The Company agreed to acquire the 168,000 barrel-per-day Golden Eagle refinery located in Martinez, California in the San Francisco Bay area along with 70 associated retail sites throughout northern California (collectively, the "Golden Eagle Assets"). Under the terms of the sale and purchase agreement, the Company paid a $53.75 million earnest money deposit in February 2002. The transaction has been approved by the Federal Trade Commission and the offices of the Attorneys General of the States of California and Oregon. The Company expects to close the acquisition on May 17, 2002, but in the event the acquisition is not consummated by May 31, 2002 and the failure to close is a result of the Company's default (including default because of the Company's failure to obtain adequate financing for the acquisition), the Company would forfeit its earnest money deposit. The deposit is included in noncurrent Other Assets - Deposit and Restricted Funds in the Condensed Consolidated Balance Sheet at March 31, 2002. The purchase price for the Golden Eagle Assets, as amended, is $945 million, plus $130 million for feedstock and refined product inventories, subject to post-closing adjustments. The Company will issue to the seller two ten-year junior subordinated notes with face amounts aggregating $150 million as part of the $945 million purchase price. The amount of debt that will be recorded on the balance sheet for the $150 million notes will reflect an appropriate discount rate. The notes consist of: (i) a $100 million junior subordinated note, due July 2012, which will be non-interest bearing for the first five years and carry a 7.5% interest rate for the remaining five-year period and (ii) a $50 million junior subordinated note, due July 2012, which will have no interest payment in year one, will include a 7.47% effective interest rate for the second through the fifth years, and will bear interest at 7.5% for years six through ten. The Company intends to further finance the pending acquisition with the proceeds of a recent common stock offering, a recent senior subordinated notes offering and additional borrowings under a proposed amendment to its senior secured credit facility (see Note D). 7 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In addition to paying the purchase price for the Golden Eagle Assets, upon the closing of the acquisition, the Company has agreed to assume a substantial portion of the seller's obligations, responsibilities, liabilities, costs and expenses arising out of or incurred in connection with the operation of the Golden Eagle Assets. These include, subject to certain exceptions, certain of the seller's obligations, liabilities, costs and expenses for violations of environmental laws relating to the assets, including certain known and unknown obligations, liabilities, costs and expenses arising or incurred prior to, on or after the closing date. Subject to certain conditions, the Company has also agreed to assume the seller's obligations pursuant to its settlement efforts with the EPA concerning the Section 114 refinery enforcement initiative under the Clean Air Act, except for any potential monetary penalties which the seller will retain. Following the closing of the pending acquisition of the Golden Eagle Assets, the Company also will assume and take assignment of certain of the seller's obligations and rights (including certain environmental and other indemnity rights) arising out of or related to the agreement pursuant to which the seller purchased the refinery from Tosco Corporation ("Tosco") in 2000. The seller has agreed to use commercially reasonable efforts to persuade Tosco to consent to this assignment. If the seller cannot obtain a consent from Tosco, the seller has agreed to provide the Company with a "back-to-back" indemnity that will indemnify the Company against any liability for which the seller is entitled to recover under the corresponding indemnity. The seller's indemnity, however, is non-recourse to the seller and is limited to amounts the seller actually receives from Tosco, less any legal or other enforcement costs the seller incurs. In addition, upon the closing of the pending acquisition of the Golden Eagle Assets, the Company expects to take assignment from the seller of two environmental insurance policies. The policies provide $140 million of coverage in excess of a $50 million environmental indemnity from Tosco. In the event the insurers do not consent to the assignment from the seller to the Company, the seller has agreed to have the Company named as an additional insured under both policies. The Golden Eagle Assets will require substantial expenditures to address "clean fuels" requirements and other capital projects. NOTE D - CAPITALIZATION SENIOR SECURED CREDIT FACILITY As of March 31, 2002, the Company's senior secured credit facility, as amended, the ("Senior Secured Credit Facility") consisted of a five-year $175 million revolving credit facility (with a $90 million sublimit for letters of credit), a five-year $175 million tranche A term loan and a six-year $450 million tranche B term loan. As of March 31, 2002, the Company had $115 million in borrowings and $3 million in letters of credit outstanding under the revolving credit facility. Total unused credit available under the revolving credit facility at March 31, 2002 was $57 million. On April 19, 2002, the Company exercised its right to increase the revolving credit facility from $175 million to $225 million. The Senior Secured Credit Facility is guaranteed by substantially all of the Company's active domestic subsidiaries and is secured by substantially all of the Company's material present and future assets as well as all material present and future assets of the Company's domestic subsidiaries. The Senior Secured Credit Facility requires the Company to maintain specified levels of interest and fixed charge coverage and sets limitations on the Company's debt-to-capital and leverage ratios. The Company did not meet the required ratio of total debt to earnings before interest, taxes, depreciation and amortization for the four quarters ended March 31, 2002. However, the lenders have waived compliance with this requirement. See discussion below regarding the proposed amendment to the Senior Secured Credit Facility. The Senior Secured Credit Facility also contains other covenants and restrictions customary in credit arrangements of this kind. The terms allow for payment of cash dividends on the Company's common stock and repurchase of shares of its common stock, not to exceed $15 million in any year. 8 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Borrowing rates under the Senior Secured Credit Facility are based on a pricing grid. Borrowings bear interest at either a base rate (4.75% at March 31, 2002) or a eurodollar rate (ranging from 1.88% to 1.91% at March 31, 2002), plus an applicable margin. The applicable margin at March 31, 2002 for the tranche A term loan and the revolving credit facility was 1.25% in the case of the base rate and 2.25% in the case of the eurodollar rate. The applicable margin for the tranche B term loan was 1.75% in the case of the base rate and 2.75% in the case of the eurodollar rate. Additionally, the tranche B eurodollar rate is deemed to be no less than 3.0%. To partially fund the pending acquisition of the Golden Eagle Assets, the Company will amend the Senior Secured Credit Facility which will substantially increase borrowing levels and modify covenants. Management believes the Company will be able to comply with the new covenants or will be able to obtain additional waivers if required. EQUITY OFFERING On March 6, 2002, the Company completed an underwritten public offering of 23 million shares of common stock. The net proceeds from the stock offering of $244.9 million, after deducting underwriting fees and offering expenses, will be used to partially fund the pending acquisition of the Golden Eagle Assets. At March 31, 2002, the net proceeds were held in a cash collateral account and included in noncurrent Other Assets - Deposit and Restricted Funds in the Condensed Consolidated Balance Sheet. If the Company does not close the acquisition of the Golden Eagle Assets, the net proceeds will be used to pay down term loans. NOTES OFFERING On April 9, 2002, the Company issued $450 million aggregate principal amount of 9-5/8% Senior Subordinated Notes due April 1, 2012 ("2012 Notes") through a private offering eligible for Rule 144A. The 2012 Notes have a ten-year maturity with no sinking fund requirements and are subject to optional redemption by the Company after five years at declining premiums. The Company, for the first three years, may redeem up to 35% of the aggregate principal amount at a redemption price of 109.625%. The indenture for the 2012 Notes contains covenants and restrictions which are customary for notes of this nature, and the 2012 Notes are guaranteed by substantially all of the Company's active domestic subsidiaries. The proceeds from the 2012 Notes and accrued interest are being held in escrow and will be used to partially fund the pending acquisition of the Golden Eagle Assets. If the Company does not close the acquisition of the Golden Eagle Assets, the proceeds and interest will be paid to the holders of the 2012 Notes. OTHER The Company has an effective universal shelf registration statement for debt or equity securities to be used for acquisitions or general corporate purposes. At March 31, 2002, the amount available under the shelf registration was approximately $85 million. The Company recently filed a second shelf registration statement for an additional $1 billion of debt or equity securities to be used for acquisitions, refinancing of existing indebtedness or general corporate purposes, which has not yet been declared effective. NOTE E - OPERATING SEGMENTS The Company's revenues are derived from three operating segments: (i) Refining, (ii) Retail and (iii) Marine Services. Management has identified these segments for managing operations and investing activities and evaluates the performance of these segments and allocates resources based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. Intersegment sales are primarily from Refining to Retail made at prevailing market rates. Income taxes, interest and financing costs, interest income and corporate general and administrative expenses are not included in determining segment operating income. The Company is evaluating various strategic opportunities to capitalize on the value of the Marine Services assets, including a possible sale of all or a part of this business. 9 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Segment information is as follows (in millions):
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- REVENUES Refining: Refined products ........................................... $ 1,086.3 $ 1,093.3 Crude oil resales and other ................................ 91.4 59.8 Retail: Fuel ....................................................... 167.9 71.1 Merchandise and other ...................................... 22.8 13.3 Marine Services .............................................. 26.4 46.4 Intersegment Sales from Refining to Retail ................... (151.6) (56.6) ------------- ------------- Total Revenues ........................................... $ 1,243.2 $ 1,227.3 ============= ============= SEGMENT OPERATING INCOME (LOSS) Refining ..................................................... $ (35.8) $ 50.8 Retail ....................................................... (9.7) 2.0 Marine Services .............................................. 0.4 2.7 ------------- ------------- Total Segment Operating Income (Loss) ...................... (45.1) 55.5 Corporate and Unallocated Costs .............................. (18.1) (12.0) ------------- ------------- Operating Income (Loss) .................................... (63.2) 43.5 Interest and Financing Costs, Net of Capitalized Interest .... (30.3) (7.5) Interest Income .............................................. 0.7 0.3 ------------- ------------- Earnings (Loss) Before Income Taxes ........................ $ (92.8) $ 36.3 ============= ============= DEPRECIATION AND AMORTIZATION Refining ..................................................... $ 15.3 $ 7.9 Retail ....................................................... 3.4 2.8 Marine Services .............................................. 0.7 0.7 Corporate .................................................... 0.7 0.6 ------------- ------------- Total Depreciation and Amortization ...................... $ 20.1 $ 12.0 ============= ============= CAPITAL EXPENDITURES Refining ..................................................... $ 36.3 $ 26.5 Retail ....................................................... 10.1 5.6 Marine Services .............................................. 1.2 0.2 Corporate .................................................... 5.0 1.2 ------------- ------------- Total Capital Expenditures ............................... $ 52.6 $ 33.5 ============= =============
10 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Identifiable assets are those assets utilized by the segment. Corporate assets are principally cash and other assets that are not associated with an operating segment. Corporate assets as of March 31, 2002 include the deposit and restricted funds of $300 million for the pending acquisition of the Golden Eagle Assets.
March 31, December 31, 2002 2001 ------------- ------------- IDENTIFIABLE ASSETS Refining ...................................... $ 2,181.9 $ 2,164.9 Retail ........................................ 287.2 283.8 Marine Services ............................... 60.6 62.0 Corporate ..................................... 468.9 151.6 ------------- ------------- Total Assets .............................. $ 2,998.6 $ 2,662.3 ============= =============
NOTE F - INVENTORIES Components of inventories were as follows (in millions):
March 31, December 31, 2002 2001 ------------- ------------- Crude oil and refined products, at LIFO ... $ 383.5 $ 398.4 Fuel products, at FIFO .................... 3.5 2.1 Merchandise and other ..................... 8.1 7.9 Materials and supplies .................... 23.5 23.4 ------------- ------------- Total Inventories ..................... $ 418.6 $ 431.8 ============= =============
NOTE G - GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. SFAS No. 142 requires that goodwill and other intangibles, determined to have an indefinite life, are no longer to be amortized but are to be tested for impairment at least annually. SFAS No. 142 requires that an impairment test related to the carrying values of existing goodwill be completed within the first six months of 2002. Impairment losses on existing goodwill, if any, would be recorded as the cumulative effect of a change in accounting principle upon adoption. The Company has not completed its initial impairment review, but believes that the carrying amount of its goodwill has not been impaired. The following table adjusts reported net earnings and earnings per share to exclude goodwill amortization for the three months ended March 31, 2001 (in millions except per share amounts): Reported net earnings.............................................. $ 21.7 Goodwill amortization, net of income taxes......................... 0.6 ------- Adjusted net earnings.............................................. $ 22.3 ======= Basic earnings per share: Reported basic earnings per share............................... $ 0.61 Goodwill amortization, net of income taxes...................... 0.02 ------- Adjusted basic earnings per share............................... $ 0.63 =======
11 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Diluted earnings per share: Reported diluted earnings per share............................. $ 0.52 Goodwill amortization, net of income taxes...................... 0.01 ------- Adjusted diluted earnings per share............................. $ 0.53 =======
The net carrying value of goodwill as of March 31, 2002 by operating segment is as follows (in millions): Refining........................................................... $ 86.9 Retail............................................................. 5.9 Marine Services.................................................... 2.4 ------- Total....................................................... $ 95.2 =======
The following table provides the gross carrying amount and accumulated amortization for each major class of acquired intangible assets, excluding goodwill (in millions):
March 31, 2002 December 31, 2001 ------------------------------------ ------------------------------------ Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Value Amount Amortization Value ---------- ------------ ---------- ---------- ------------ ---------- Refinery permits and plans ......... $ 23.9 $ 0.5 $ 23.4 $ 23.9 $ 0.3 $ 23.6 Jobber agreements .................. 23.5 0.7 22.8 23.5 0.4 23.1 Customer contracts ................. 16.8 2.2 14.6 16.8 1.3 15.5 Refinery technology ................ 3.7 0.1 3.6 3.7 0.1 3.6 Other intangibles .................. 10.0 2.7 7.3 9.9 2.4 7.5 ---------- ---------- ---------- ---------- ---------- ---------- Total ....................... $ 77.9 $ 6.2 $ 71.7 $ 77.8 $ 4.5 $ 73.3 ========== ========== ========== ========== ========== ==========
The weighted average lives of acquired intangible assets are as follows: refinery permits and plans - 27 years; jobber agreements - 20 years; customer contracts - 5 years; refinery technology - 28 years; and other intangible assets - - 13 years. Amortization expense of acquired intangible assets other than goodwill amounted to $1.7 million and $0.1 million for the three months ended March 31, 2002 and 2001, respectively. Estimated aggregate amortization expense for each of the next five years beginning January 1, 2002 is as follows: 2002 - $6.7 million; 2003 - $6.7 million; 2004 - $6.4 million; 2005 - $5.8 million; and 2006 - $4.9 million. NOTE H - COMMITMENTS AND CONTINGENCIES The Company is a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. The Company has made accruals in accordance with SFAS No. 5, "Accounting for Contingencies," in order to provide for these matters. The ultimate effects of these matters cannot be predicted with certainty, and related accruals are based on management's best estimates, subject to future developments. Although the resolution of certain of these matters could have a material adverse effect on interim or annual results of operations, the Company believes that the outcome of these matters will not result in a material adverse effect on its liquidity or consolidated financial position. 12 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 make other modifications or changes in use for certain emission sources. The Company is currently involved with the U.S. Environmental Protection Agency ("EPA") regarding a waste disposal site near Abbeville, Louisiana. The Company has been named a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") at this location. Although the Superfund law may impose joint and several liability upon each party at the site, the extent of the Company's allocated financial contributions for cleanup is expected to be de minimis based upon the number of companies, volumes of waste involved and total estimated costs to close the site. The Company believes, based on these considerations and discussions with the EPA, that its liability at the Abbeville site will not exceed $25,000. The Company is currently involved in remedial responses and has incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of its owned properties. At March 31, 2002, the Company's accruals for environmental expenses totaled approximately $37 million. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. In February 2000, the EPA finalized new regulations pursuant to the Clean Air Act requiring reduction in the sulfur content in gasoline starting January 1, 2004. To meet this revised gasoline standard, the Company expects to make capital improvements of approximately $65 million in the aggregate through 2006 and $15 million in years after 2006. The EPA also promulgated new regulations in January 2001 pursuant to the Clean Air Act requiring a reduction in the sulfur content in diesel fuel manufactured for on-road consumption. In general, the new diesel fuel standards will become effective on June 1, 2006. The Company expects to spend approximately $35 million in capital improvements through 2006 and $30 million in years after 2006 to meet the new diesel fuel standards. The Company expects to spend approximately $35 million in the aggregate in capital improvements at its refineries over the next four years to comply with the second phase of the Maximum Achievable Control Technologies standard for petroleum refineries ("Refinery MACT II"), promulgated in April 2002. The Refinery MACT II regulations require new emission controls at certain processing units at several of the Company's refineries. The Company is currently evaluating a selection of control technologies to assure operations flexibility and compatibility with long-term air emission reduction goals. In connection with the 2001 acquisition of the North Dakota and Utah refineries, the Company assumed the sellers' obligations and liabilities under a consent decree among the United States, BP Exploration and Oil Co., Amoco Oil Company and Atlantic Richfield Company. BP entered into this consent decree for both the North Dakota and Utah refineries for various alleged violations. As the new owner of these refineries, the Company is required to address issues, including leak detection and repair, flaring protection and sulfur recovery unit optimization. The Company currently estimates it will spend an aggregate of $7 million at the North Dakota and Utah refineries to comply with this consent decree. In addition, the Company has agreed to indemnify the sellers for all losses of any kind incurred in connection with or related to the consent decree. The Company anticipates it will make additional environmental capital improvements of approximately $11 million in 2002, primarily for improvements to storage tanks, tank farm secondary containment and pipelines. During the three months ended March 31, 2002, the Company spent approximately $1 million on environmental capital projects. Conditions that require additional expenditures may transpire for various Company sites, including, but not limited to, the Company's refineries, tank farms, retail gasoline stations (operating and closed locations) and petroleum product 13 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) terminals, and for compliance with the Clean Air Act and other state, federal and local requirements. The Company cannot currently determine the amount of such future expenditures. OTHER In October 1998, the Company's Board of Directors unanimously approved the 1998 Performance Incentive Compensation Plan ("Performance Plan"), which would provide the Company's employees with additional compensation, contingent upon achievement of targeted objectives. Under the Performance Plan, targeted objectives are comprised of the fair market value of the Company's Common Stock equaling or exceeding an average of $35 per share ("First Performance Target") and $45 per share ("Second Performance Target") on any 20 consecutive trading days during a period commencing on October 1, 1998 and ending on the earlier of September 30, 2002, or the date on which the Second Performance Target is achieved. No costs will be recorded until the First Performance Target is reached. NOTE I - NEW ACCOUNTING STANDARDS SFAS NO. 143 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to be recorded at fair value during the period incurred and an equal amount recorded as an increase in the value of the related long-lived asset. The capitalized cost is depreciated over the useful life of the asset and the obligation is accreted to its present value each period. SFAS No. 143 is effective for the Company beginning January 1, 2003 with earlier adoption encouraged. The Company is currently evaluating the impact the standard will have on its future results of operations and financial condition. SFAS NO. 144 Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the requirement to recognize an impairment loss only where the carrying value of a long-lived asset is not recoverable from its undiscounted cash flows and to measure such loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144, among other things, changes the criteria that have to be met to classify an asset as held-for-sale and requires that operating losses from discontinued operations be recognized in the period that the losses are incurred rather than as of the measurement date. The adoption of SFAS No. 144 did not have a significant impact on the Company's financial condition or results of operations. PROPOSED STATEMENT OF POSITION The American Institute of Certified Public Accountants has issued an Exposure Draft for a Proposed Statement of Position, "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment" which would require major maintenance activities to be expensed as costs are incurred. If this proposed Statement of Position is adopted in its current form, the Company would be required to write off the unamortized carrying value of deferred major maintenance costs, primarily for refinery turnarounds, which totaled $59 million at March 31, 2002 and expense future costs as incurred. Deferred major maintenance costs are included in noncurrent Other Assets - Other in the Condensed Consolidated Balance Sheets, and the amortization of such costs are included in Costs of Sales and Operating Expenses in the Condensed Statements of Consolidated Operations. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THOSE STATEMENTS IN THIS SECTION THAT ARE NOT HISTORICAL IN NATURE SHOULD BE DEEMED FORWARD-LOOKING STATEMENTS THAT ARE INHERENTLY UNCERTAIN. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 27 FOR A DISCUSSION OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THESE STATEMENTS. WE HAVE ENDEAVORED TO PROVIDE A MORE THOROUGH DISCUSSION OF OUR EXPECTATIONS AND GOALS IN THIS SECTION, AND WE ANTICIPATE THAT WE WILL CONTINUE TO DO THE SAME IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THE FUTURE. HOWEVER, EXPECTATIONS AND GOALS MAY CHANGE DURING INTERIM PERIODS OF TIME. WE DO NOT INTEND TO, AND YOU SHOULD NOT EXPECT THAT WE WILL, UPDATE THE INFORMATION CONTAINED HEREIN DURING ANY SUCH INTERIM PERIOD. UNLESS OTHERWISE INDICATED, THE DISCLOSURES IN THIS SECTION DO NOT INCLUDE THE PENDING ACQUISITION OF THE GOLDEN EAGLE ASSETS DESCRIBED IN NOTE C OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN PART I, ITEM 1 HEREOF. STRATEGY Our goal is to create value by: (i) maximizing our earnings, cash flows and return on capital by reducing costs, increasing efficiencies and optimizing existing assets and (ii) increasing our competitiveness by expanding our size and market presence through a combination of internal growth initiatives and selective acquisitions that are accretive to earnings and cash flows and provide significant operational synergies. We acquire and develop assets that we believe will provide us with a competitive advantage in connected markets which should lower our per barrel operating, transportation and distribution costs and provide market penetration with competitive prices. We consider connected markets to include markets that are connected to our refining operations by pipelines, trucks, railcars, vessels or other means of conveyance as well as markets that, while not physically connected, are joined by means of exchange supply agreements between participants in those markets. We are also focused on improving profitability in our Refining segment by enhancing processing capabilities, strengthening our wholesale marketing activities and improving supply and transportation logistics. Our Retail segment operations are an important component of our corporate strategy as they provide a ratable offtake for our products at higher margins than products sold at wholesale. The Marine Services segment seeks to optimize existing operations through ongoing development of customer services and cost management. As part of this strategy, we continue to assess our existing asset base to maximize returns and financial flexibility through market diversification and related acquisitions. We are evaluating various strategic opportunities to capitalize on the value of the Marine Services assets, including a possible sale of all or a part of this business. As a result of recent acquisitions and the pending Golden Eagle Assets acquisition, our total debt to capitalization ratio is projected to increase to a level which will prevent us from pursuing additional acquisitions until such time as our debt is significantly reduced. In connection with such proposed debt reductions, we are exploring divestitures of certain non-strategic retail and logistics assets. PENDING ACQUISITION We entered into a sale and purchase agreement with Ultramar Inc., a subsidiary of Valero Energy Corporation, on February 4, 2002, which was amended on February 20, 2002 and May 3, 2002. We agreed to acquire the 168,000-bpd Golden Eagle refinery located in Martinez, California in the San Francisco Bay area along with 70 associated retail sites throughout northern California (collectively, the "Golden Eagle Assets"). Under the terms of the sale and purchase agreement, we paid a $53.75 million earnest money deposit in February 2002. The transaction has been approved by the Federal Trade Commission and the offices of the Attorneys General of the States of California and Oregon. We expect to close the acquisition on May 17, 2002, but in the event the acquisition is not consummated by May 31, 2002 and the failure to close is a result of our default (including default because of our failure to obtain adequate financing for the acquisition), we would forfeit our earnest money deposit. 15 The purchase price for the Golden Eagle Assets, as amended, is $945 million, plus $130 million for feedstock and refined product inventories, subject to post-closing adjustments. We will issue to the seller two ten-year junior subordinated notes with face amounts aggregating $150 million as part of the $945 million purchase price. The amount of debt that will be recorded on the balance sheet for the $150 million notes will reflect an appropriate discount rate. The notes consist of: (i) a $100 million junior subordinated note, due July 2012, which will be non-interest bearing for the first five years and carry a 7.5% interest rate for the remaining five-year period and (ii) a $50 million junior subordinated note, due July 2012, which will have no interest payment in year one, will include a 7.47% effective interest rate for the second through the fifth years, and will bear interest at 7.5% for years six through ten. We intend to further finance the acquisition with the proceeds of a recent common stock offering, a recent senior subordinated notes offering and additional borrowings under a proposed amendment to our senior secured credit facility. In addition to paying the purchase price for the Golden Eagle Assets, upon the closing of the acquisition, we have agreed to assume a substantial portion of the seller's obligations, responsibilities, liabilities, costs and expenses arising out of or incurred in connection with the operation of the Golden Eagle Assets. These include, subject to certain exceptions, certain of the seller's obligations, liabilities, costs and expenses for environmental compliance matters relating to the assets, including certain known and unknown obligations, liabilities, costs and expenses arising or incurred prior to, on or after the closing date. Subject to certain conditions, we also have agreed to assume the seller's obligations pursuant to its settlement efforts with the Environmental Protection Agency concerning the Section 114 refinery enforcement initiative under the Clean Air Act, except for any potential monetary penalties, which the seller will retain. Following the closing of the pending acquisition of the Golden Eagle Assets, we also will assume and take assignment of certain of the seller's obligations and rights (including certain environmental and other indemnity rights) arising out of or related to the agreement pursuant to which the seller purchased the refinery from Tosco in 2000. The seller has agreed to use commercially reasonable efforts to persuade Tosco to consent to this assignment. If the seller cannot obtain a consent from Tosco, the seller has agreed to provide us with a "back-to-back" indemnity that will indemnify us against any liability for which the seller is entitled to recover under the corresponding indemnity. The seller's indemnity, however, is non-recourse to the seller and is limited to amounts the seller actually receives from Tosco, less any legal or other enforcement costs the seller incurs. In addition, upon the closing of the pending acquisition of the Golden Eagle Assets, we expect to take assignment from the seller of two environmental insurance policies. The policies provide $140 million of coverage in excess of a $50 million environmental indemnity from Tosco. In the event the insurers do not consent to the assignment from the seller to us, the seller has agreed to have us named as an additional insured under both policies. For further information regarding environmental expenditures, see "Environmental and Other", herein. BUSINESS ENVIRONMENT We operate in an environment where our results and cash flows are sensitive to volatile changes in energy prices. Fluctuations in the costs of crude oil and other refinery feedstocks and the price of refined products can result in changes in refining margins as prices received for refined products may not keep pace with changes in feedstock costs. As part of our marketing program, we also purchase refined products for sale to customers, and fluctuations in price levels can result in changes in product sales margins. Prices, together with volume levels, also determine the carrying value of crude oil and refined product inventory. We use the last-in, first-out ("LIFO") method of accounting for inventories of crude oil and refined products in our Refining and Retail segments. This method results in inventory carrying amounts that may be less than current values and costs of sales that more closely represent current costs. Changes in crude oil and natural gas prices also influence the level of drilling activity in the Gulf of Mexico. Our Marine Services segment, whose customers include offshore drilling contractors and related industries, can be impacted by significant fluctuations in crude oil and natural gas prices. The Marine Services segment uses the first-in, first-out ("FIFO") method of accounting for inventories of fuels. Changes in fuel prices can significantly affect inventory valuations and costs of sales. 16 For further information on commodity price and interest rate risks, see Quantitative and Qualitative Disclosures About Market Risk in Item 3 herein. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2001 SUMMARY Our net loss was $55.6 million ($1.15 net loss per basic share and diluted share) for the three months ended March 31, 2002 ("2002 Quarter") compared with net earnings of $21.7 million ($0.61 per basic share or $0.52 per diluted share) for the three months ended March 31, 2001 ("2001 Quarter"). The net loss for the 2002 Quarter was primarily a result of weak margins in each of our operating segments, scheduled downtime at our Washington refinery, unscheduled downtime at our Washington and Utah refineries, and financing and integration costs primarily associated with the pending acquisition of the Golden Eagle Assets. The financing and integration costs and unscheduled downtime incurred in the 2002 Quarter resulted in pretax charges of approximately $12 million or $0.15 per share. A discussion and analysis of the factors contributing to our results of operations are presented below. The accompanying Condensed Consolidated Financial Statements and related Notes, together with the following information, are intended to provide investors with a reasonable basis for assessing our operations, but should not serve as the only criteria for predicting our future performance. REFINING SEGMENT
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- (DOLLARS IN MILLIONS EXCEPT PER BARREL AMOUNTS) REVENUES Refined products (a) .................................... $ 1,086.3 $ 1,093.3 Crude oil resales and other ............................. 91.4 59.8 ------------- ------------- Total Revenues .................................... $ 1,177.7 $ 1,153.1 ============= ============= REFINING SEGMENT THROUGHPUT (thousand bpd) Pacific Northwest Washington ........................................... 84.8 114.2 Alaska ............................................... 50.3 45.6 Mid-Pacific Hawaii ............................................... 82.0 86.7 Mid-Continent North Dakota ......................................... 49.5 -- Utah ................................................. 47.1 -- ------------- ------------- Total Refining Segment Throughput ................. 313.7 246.5 ============= ============= GROSS REFINING MARGIN ($/throughput barrel) Pacific Northwest refineries ............................ $ 3.45 $ 8.04 Mid-Pacific refinery .................................... $ 3.83 $ 5.94 Mid-Continent refineries ................................ $ 3.04 $ -- Total Refining Segment ............................ $ 3.41 $ 7.30 SEGMENT OPERATING INCOME (LOSS) Gross refining margins (after inventory changes) (b) .... $ 105.2 $ 163.4 Expenses (c) ............................................ 125.7 104.7 Depreciation and amortization (d) ....................... 15.3 7.9 ------------- ------------- Segment Operating Income (Loss) ................... $ (35.8) $ 50.8 ============= =============
17
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 ------------- ------------- (DOLLARS IN MILLIONS EXCEPT PER BARREL AMOUNTS) PRODUCT SALES (thousand bpd) (a) (e) Gasoline and gasoline blendstocks ............. 208.0 138.9 Jet fuel ...................................... 88.0 77.3 Diesel fuel ................................... 95.5 55.4 Heavy oils, residual products and other ....... 59.4 60.4 ------------- ------------- Total Product Sales ..................... 450.9 332.0 ============= ============= PRODUCT SALES MARGIN ($/barrel) (e) Average sales price ........................... $ 26.77 $ 36.57 Average costs of sales ........................ 24.16 31.12 ------------- ------------- Gross Margin ............................ $ 2.61 $ 5.45 ============= =============
- ---------- (a) Includes intersegment sales to our Retail segment at prices which approximate market of $151.6 million and $56.6 million for the three months ended March 31, 2002 and 2001, respectively. (b) Approximates total refining segment throughput times the gross refining margin, adjusted for changes in refined product inventory due to selling a volume and mix of product that is different than actual volumes manufactured. Refined product inventories decreased by 1.4 million barrels and 0.5 million barrels during the 2002 Quarter and 2001 Quarter, respectively. Includes the effect of intersegment sales to the Retail segment at prices which approximate market. (c) Includes manufacturing costs per throughput barrel of $3.25 and $3.44 for the three months ended March 31, 2002 and 2001, respectively. Manufacturing costs include the cost of internally produced fuel of $0.88 per barrel and $1.28 per barrel for the three months ended March 31, 2002 and 2001, respectively. Manufacturing costs included non-cash amortization of maintenance turnaround costs of $0.15 per barrel (aggregate $4.1 million) and $0.19 per barrel (aggregate $4.2 million) for the three months ended March 31, 2002 and 2001, respectively. (d) Includes manufacturing depreciation per throughput barrel of approximately $0.37 and $0.26 for the three months ended March 31, 2002 and 2001, respectively. (e) Sources of total product sales included products manufactured at the refineries, products drawn from inventory balances and products purchased from third parties. Gross margins on total product sales included margins on sales of manufactured and purchased products and the effects of inventory changes. THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2001. The operating loss for the Refining segment was $35.8 million in the 2002 Quarter compared to operating income of $50.8 million for the 2001 Quarter. The operating loss was mainly driven by weaker refined product margins. Industry refining margins declined nearly 50% in our market areas compared to the margins in the 2001 Quarter. Low jet fuel and diesel fuel demand caused high inventory levels and rising crude costs put added pressure on refining margins. Our results for the 2002 Quarter include amounts from the Mid-Continent operations which we acquired in September 2001. Our gross refining margin decreased 36% from the 2001 Quarter to $105.2 million in the 2002 Quarter reflecting lower refining margins at all of our refineries partly offset by increased volumes from the Mid-Continent operations. Refining throughput at the Pacific Northwest refineries declined from the 2001 Quarter reflecting the effect of the scheduled turnaround at the Washington refinery during the 2002 Quarter and lower product demand. Due to the scheduled downtime at the Washington refinery, we were not able to process a higher percentage of lower cost heavy crude oil, which represented 36% of refining throughput in the 2002 Quarter, compared with 56% in the 2001 Quarter. We estimate that our refining margins would have been $20 million higher had the Washington refinery been fully operational during the 70-day turnaround, during which the heavy oil conversion project was completed. Revenues from sales of refined products decreased to $1,086.3 million in the 2002 Quarter, from $1,093.3 million in the 2001 Quarter, due to lower product prices substantially offset by increased sales volumes from the Mid-Continent refineries. Total product sales averaged 450,900 bpd in the 2002 Quarter, an increase of 36% from the 2001 Quarter, while average product prices dropped 27% to $26.77 per barrel. The increase in other revenues was primarily due to higher crude oil resales which totaled $90.5 million in the 2002 18 Quarter compared to $58.2 million in the 2001 Quarter. The increase in costs of sales was due to the increased throughput resulting from the Mid-Continent operations, largely offset by lower prices for feedstocks and product supply compared with the 2001 Quarter. Expenses, excluding depreciation, increased by 20% to $125.7 million in the 2002 Quarter, primarily due to additional operating expenses of $34.6 million from the Mid-Continent operations. Excluding these new operations, expenses decreased 13% from the 2001 Quarter as a result of lower throughput for the Pacific Northwest and Mid-Pacific refineries. Depreciation and amortization increased to $15.3 million, primarily due to depreciation of $5.9 million from the Mid-Continent operations. During the 2002 Quarter, we also had unscheduled downtime at the Washington and Utah refineries resulting in expenses of approximately $2.7 million. RETAIL SEGMENT
THREE MONTHS ENDED MARCH 31, ------------------------------- 2002 2001 ------------- ------------- (DOLLARS IN MILLIONS EXCEPT PER GALLON AMOUNTS) REVENUES Fuel ............................................... $ 167.9 $ 71.1 Merchandise and other .............................. 22.8 13.3 ------------- ------------- Total Revenues ............................... $ 190.7 $ 84.4 ============= ============= FUEL SALES (millions of gallons) ...................... 172.5 61.2 FUEL MARGIN ($/gallon) ................................ $ 0.09 $ 0.24 MERCHANDISE MARGIN (in millions) ...................... $ 5.7 $ 4.0 MERCHANDISE MARGIN % .................................. 26% 31% AVERAGE NUMBER OF STATIONS (during the period) ........ 679 277 SEGMENT OPERATING INCOME (LOSS) Gross Margins Fuel (a) ........................................ $ 16.3 $ 14.5 Merchandise and other non-fuel margin ........... 6.9 4.5 ------------- ------------- Total gross margins .......................... 23.2 19.0 Expenses ........................................... 29.5 14.2 Depreciation and amortization ...................... 3.4 2.8 ------------- ------------- Segment Operating Income (Loss) .............. $ (9.7) $ 2.0 ============= =============
- ---------- (a) Includes the effect of intersegment purchases from our Refining segment at prices which approximate market. THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2001. The operating loss for our Retail segment was $9.7 million in the 2002 Quarter, compared to operating income of $2.0 million in the 2001 Quarter. Total gross margins increased 22% to $23.2 million from $19.0 million during the 2002 Quarter reflecting increased sales volume, offset largely by lower fuel margins per gallon. Margins in the retail segment continued to be under strong competitive pressure during the 2002 Quarter leading to a decrease in fuel margin to $0.09 per gallon in the 2002 Quarter from $0.24 per gallon in the 2001 Quarter. Total gallons sold increased to 172.5 million, reflecting the increase in average station count. The average station count increased to 679 in the 2002 Quarter from 277 in the 2001 Quarter, primarily due to the Mid-Continent operations acquired in September 2001. Revenues on fuel sales grew to $167.9 million in the 2002 Quarter, from $71.1 million in the 2001 Quarter, while merchandise and other revenues increased by 71% to $22.8 million. Merchandise margin, however, as a percent of sales decreased. With our increased number of stations, expenses increased to $29.5 million and depreciation increased to $3.4 million in the 2002 Quarter. Expenses on a per-gallon basis, however, decreased in the 2002 Quarter as compared to the 2001 Quarter. 19 MARINE SERVICES SEGMENT
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- (DOLLARS IN MILLIONS) Revenues Fuels ..................................... $ 20.5 $ 39.1 Lubricants and other ...................... 3.5 3.8 Services .................................. 2.5 3.5 Other income (loss) ....................... (0.1) ------------- ------------- Total Revenues .......................... 26.4 46.4 Costs of Sales ............................... 18.8 35.3 ------------- ------------- Gross Profit ............................ 7.6 11.1 Expenses ..................................... 6.5 7.7 Depreciation and Amortization ................ 0.7 0.7 ------------- ------------- Segment Operating Income .................. $ 0.4 $ 2.7 ============= ============= Sales Volumes (millions of gallons) Fuels, primarily diesel ................... 31.6 42.3 Lubricants ................................ 0.5 0.5
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2001. Marine Services operating income decreased by $2.3 million during the 2002 Quarter from the 2001 Quarter. Lower sales volumes and service revenues contributed to this decrease. The Marine Services segment is largely dependent on the volume of oil and gas drilling, workover, construction and seismic activity in the U.S. Gulf of Mexico. The significant decline in industry drilling activity negatively impacted our Marine Services sales and operating income during the 2002 Quarter. Revenues decreased $20.0 million during 2001 reflecting lower fuel sales prices and fuel volumes. The decrease in costs of sales during the 2002 Quarter reflected the lower prices for fuel supply and lower volumes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses of $38.5 million during the 2002 Quarter increased from $23.5 million in the 2001 Quarter. This increase was partially due to higher expenses in the Refining and Retail segments associated with the Mid-Continent operations of $4 million and the acquisition of additional retail stations in the fourth quarter of 2001. Corporate expenses accounted for $6 million of the increase resulting from acquisition and integration costs in the 2002 Quarter, as well as higher employee costs and professional fees. INTEREST AND FINANCING COSTS Interest and financing costs, net of capitalized interest, were $30.3 million in the 2002 Quarter compared to $7.5 million in the 2001 Quarter. This increase was primarily due to the additional debt we incurred in 2001 related to the acquisition of the North Dakota and Utah refineries and costs of approximately $9 million related to bridge financing for the pending acquisition of the Golden Eagle Assets. INCOME TAX PROVISION (BENEFIT) The income tax benefit amounted to $37.2 million for the 2002 Quarter compared to the income tax provision of $14.6 million for the 2001 Quarter. The benefit reflected the pretax loss for the 2002 Quarter. The combined Federal and state effective income tax rate was approximately 40% in both the 2002 and 2001 Quarters. 20 CAPITAL RESOURCES AND LIQUIDITY We operate in an environment where our liquidity and capital resources are impacted by changes in the supply of and demand for crude oil and refined petroleum products, market uncertainty and a variety of additional factors beyond our control. These risks include, among others, the level of consumer product demand, weather conditions, fluctuations in seasonal demand, governmental regulations, the price and availability of alternative fuels and overall market and economic conditions. See "Forward-Looking Statements" on page 27 for further information related to risks and other factors. Our future capital expenditures, as well as borrowings under our senior secured credit facility and other sources of capital, will be affected by these conditions. OVERVIEW Our primary sources of liquidity are cash flows from operations and borrowing availability under revolving lines of credit. We expect our capital requirements to include non-discretionary capital expenditures, working capital and debt service. We believe available capital resources will be adequate to meet our capital requirements for existing operations. We have an effective universal shelf registration statement for debt or equity securities to be used for acquisitions or general corporate purposes. At March 31, 2002, the amount available under the shelf registration was approximately $85 million. We recently filed a second shelf registration statement for an additional $1 billion of debt or equity securities to be used for acquisitions, refinancing of existing indebtedness or general corporate purposes, which has not yet been declared effective. Currently we have no plans to issue additional debt or equity securities. CAPITALIZATION Our capital structure at March 31, 2002 was comprised of the following (in millions): Debt and other obligations, including current maturities: Senior Secured Credit Facility - Revolver......................................... $ 115 Senior Secured Credit Facility -- Term Loans...................................... 617 9-5/8% Senior Subordinated Notes due 2008......................................... 215 9% Senior Subordinated Notes due 2008............................................. 298 Other debt, primarily capital leases.............................................. 6 -------- Total debt and other obligations............................................. 1,251 Common stockholders' equity.......................................................... 948 -------- Total Capitalization......................................................... $ 2,199 ========
At March 31, 2002, our debt to capitalization ratio was 57% compared with 60% at year-end 2001, primarily reflecting the public equity offering of 23 million shares of common stock offset by additional borrowings under the revolving credit facility. Subsequent to March 31, 2002, we issued $450 million aggregate principal amount of 9-5/8% senior subordinated notes (see below). Had these notes been outstanding as of March 31, 2002, our debt to capitalization ratio would have been 64%. Our senior secured credit facility and senior subordinated notes impose various restrictions and covenants on us that could potentially limit our ability to respond to market conditions, to raise additional debt or equity capital, or to take advantage of business opportunities. Each of these obligations is guaranteed by substantially all of our active domestic subsidiaries. The indentures relating to our senior subordinated notes contain covenants that limit, among other things, our ability to: o pay dividends and other distributions with respect to our capital stock and purchase, redeem or retire our capital stock; 21 o incur additional indebtedness and issue preferred stock; o enter into asset sales; o enter into transactions with affiliates; o incur liens on assets to secure certain debt; o engage in certain business activities; and o engage in certain mergers or consolidations and transfers of assets. The indentures limit our subsidiaries' ability to create restrictions on making certain payments and distributions. In addition, our senior secured credit facility contains other and more restrictive covenants, including the prohibition on making voluntary or optional prepayments of certain of our indebtedness. Under our senior secured credit facility, we are required to comply with specified financial covenants, including maintaining specified levels of consolidated leverage and interest and fixed charge coverages and limiting our debt to capital ratio. These financial ratios become more restrictive over the life of our senior secured credit facility. For further information on our capital structure, see Note D of Notes to Condensed Consolidated Financial Statements in Part I, Item I. SENIOR SECURED CREDIT FACILITY As of March 31, 2002, our senior secured credit facility, as amended, consisted of a five-year $175 million revolving credit facility (with a $90 million sublimit for letters of credit), a five-year $175 million tranche A term loan and a six-year $450 million tranche B term loan. As of March 31, 2002, we had $115 million in borrowings and $3 million in letters of credit outstanding under the revolving credit facility. Total unused credit available under the revolving credit facility at March 31, 2002 was $57 million. On April 19, 2002, we exercised our right to increase the revolving credit facility from $175 million to $225 million. Our senior secured facility is guaranteed by substantially all of our active domestic subsidiaries and is secured by substantially all of our material present and future assets as well as all material present and future assets of our domestic subsidiaries. The senior secured credit facility requires us to maintain specified levels of interest and fixed charge coverage and sets limitations on our debt-to-capital and leverage ratios. As a result of the poor operating results for the 2002 Quarter, we did not meet the required ratio of total debt to earnings before interest, taxes, depreciation and amortization for the four quarters ended March 31, 2002. However, the lenders have waived compliance with this requirement. To partially fund the pending acquisition of the Golden Eagle Assets, we will amend the senior secured credit facility which will substantially increase borrowing levels and modify covenants. However, if we do not close on the pending acquisition of the Golden Eagle Assets and do not amend our senior secured credit facility, additional future waivers may be required if the poor margin environment that we have experienced during the first quarter and during the first half of the second quarter continues. The senior secured credit facility also contains other covenants and restrictions customary in credit arrangements of this kind. The terms allow for payment of cash dividends on our common stock and repurchase of shares of our common stock, not to exceed $15 million in any year. Borrowing rates under our senior secured credit facility are based on a pricing grid. Borrowings bear interest at either a base rate (4.75% at March 31, 2002) or a eurodollar rate (ranging from 1.88% to 1.91% at March 31, 2002), plus an applicable margin. The applicable margin at March 31, 2002 for the tranche A term loan and the revolving credit facility was 1.25% in the case of the base rate and 2.25% in the case of the eurodollar rate. The applicable margin for the tranche B term loan was 1.75% in the case of the base rate and 2.75% in the case of the eurodollar rate. Additionally, the tranche B eurodollar rate is deemed to be no less than 3.0%. These margins are the highest margins applicable to the respective base and eurodollar rates and will vary in relation to ratios of our consolidated total debt to consolidated EBITDA, as defined in our senior secured credit facility. In addition, at any time during which the senior secured credit facility is rated at least BBB- by Standard & Poor's Rating Services and Baa3 by Moody's Investors Service, Inc., each applicable margin, other than in one instance with respect to the tranche B term loan, will be reduced by 0.125%. We are also charged various fees and expenses in connection with the senior secured credit facility, including commitment fees and various letter of credit fees. 22 PROPOSED AMENDMENT TO SENIOR SECURED CREDIT FACILITY To partially fund the acquisition of the Golden Eagle Assets, scheduled to close on May 17, 2002, we have negotiated an amendment and restatement to our existing senior secured credit facility to substantially increase the borrowing levels thereunder, which will be entered into effective on the closing of the Golden Eagle Assets transaction. The amended facility, the terms of which are substantially similar to the existing senior secured credit facility, will consist of a $225 million revolving credit facility (with a $150 million sublimit for letters of credit) which will terminate on September 6, 2006, a $250 million tranche A term loan and an $800 million tranche B term loan. The amended facility will contain a new provision which will require us to consummate one or more transactions resulting in our receipt of net proceeds of at least $125 million by December 31, 2002 from the proceeds of the sale of assets or the sale of common stock, preferred stock mandatorily convertible into common stock within three years of the date of its issuance, or other equity acceptable to the majority of agent banks. Fifty percent of the net proceeds are required to be applied to prepay the term loans, and the remaining fifty percent of the net proceeds shall be applied, first to prepay any outstanding revolving credit facility loans, and second if any of such net proceeds remain after paying the outstanding revolving credit facility loans, such remaining amount shall be deposited in an account which shall be pledged to the banks to be used for our general corporate purposes, including but not limited to working capital and capital expenditures. The amended facility also limits our capital expenditures to no more than $275 million in 2002 and $302.5 million in 2003, and thereafter until the ratio of our debt to capitalization falls below 0.58:1.00. The amended facility will eliminate the total debt to EBITDA test and will substitute a new senior debt to EBITDA test. The amended facility will include interest and fixed charge coverage tests similar to the existing senior secured credit facility except that the new facility will provide that for purposes of determining compliance with the tests and the requirement, earnings before interest, taxes, depreciation and amortization attributable to the Golden Eagle Assets shall be based on the results of operations after the acquisition thereof. Management believes, however, that we will be able to comply with the new covenants or will be able to obtain additional waivers if required. No assurance can be given that we will be able to meet these tests if we continue to have the unusually low operating margin environment experienced during the first quarter and during the first half of the second quarter. However, the second quarter generally benefits from, and is expected to benefit from, seasonal improvements in refining margins. EQUITY OFFERING On March 6, 2002, we completed an underwritten public offering of 23 million shares of our common stock. The net proceeds from the stock offering of $244.9 million, after deducting underwriting fees and offering expenses, will be used to partially fund the pending acquisition of the Golden Eagle Assets. At March 31, 2002, the net proceeds were held in a cash collateral account. If we do not close the pending acquisition of the Golden Eagle Assets, the net proceeds will be used to pay down term loans. NEW SENIOR SUBORDINATED NOTES DUE 2012 On April 9, 2002, we issued $450 million aggregate principal amount of 9-5/8% Senior Subordinated Notes due April 1, 2012 ("2012 Notes") through a private offering eligible for Rule 144A. The 2012 Notes have a ten-year maturity with no sinking fund requirements and are subject to optional redemption by us after five years at declining premiums. For the first three years, we may redeem up to 35% of the aggregate principal amount at a redemption price of 109.625%. The indenture for the 2012 Notes contains covenants and restrictions which are customary for notes of this nature. The 2012 Notes are guaranteed by substantially all of our active domestic subsidiaries. The proceeds from the 2012 Notes and accrued interest are being held in escrow and will be used to partially fund the pending acquisition of the Golden Eagle Assets. If we do not close the pending acquisition of the Golden Eagle Assets, the proceeds and interest will be paid to the holders of the 2012 Notes. 23 CASH FLOW SUMMARY Components of our cash flows are set forth below (in millions):
Three Months Ended March 31, ------------------------------ 2002 2001 ------------- ------------- Cash Flows From (Used In): Operating Activities ............................... $ (47.9) $ (18.7) Investing Activities ............................... (352.7) (32.8) Financing Activities ............................... 348.9 38.9 ------------- ------------- Decrease in Cash and Cash Equivalents .................. $ (51.7) $ (12.6) ============= =============
Net cash used in operating activities during the 2002 Quarter totaled $48 million, compared to $19 million in the 2001 Quarter. The decrease was primarily due to lower earnings before depreciation and amortization and payments for a scheduled refinery turnaround. Net cash used in investing activities of $353 million in the 2002 Quarter included $300 million for a deposit and placement of the net proceeds from the common stock offering into a restricted account, pending the acquisition of the Golden Eagle Assets. In addition, capital expenditures totaled $53 million during the 2002 Quarter. Net cash from financing activities of $349 million in the 2002 Quarter included net borrowings of $115 million under the revolving credit facility and net proceeds of $245 million from our equity offering, partly offset by repayments of debt and financing costs of $11 million. Gross borrowings under revolving credit lines amounted to $288 million and repayments amounted to $173 million during the 2002 Quarter. Working capital totaled $302 million at March 31, 2002 compared to $340 million at year-end 2001. CAPITAL SPENDING We are in the process of revising our 2002 capital spending plans in response to the weaker refining and retail margin environment. While a review of our capital requirements is not yet complete, we have identified approximately $25 million in reductions from our original budget of $150 million. Approximately $14 million of the reduction reflects a slowdown in our retail capital spending. The remaining $11 million reduction is mainly from discretionary refining and corporate projects. Taking into account these reductions, partially offset by additional spending on our heavy oil conversion project incurred in the 2002 Quarter, we currently estimate our 2002 capital spending to total $140 million (before requirements from the pending Golden Eagle Assets acquisition). We expect to fund our capital program in 2002 with internally-generated cash flows from operations and, to a lesser extent, from borrowings under our senior secured credit facility. However, the volatility of certain commodities prices could reduce our cash flows from operations and may require us to further reduce discretionary capital expenditures. We completed a heavy oil conversion project at the Washington refinery at the end of the 2002 first quarter which enables us to process a larger proportion of lower-cost heavy crude oils, to manufacture a larger proportion of higher-value gasoline, and to reduce production of lower-value heavy products. The upgraded fluid catalytic cracking unit, the final major component of the heavy oil conversion project, was fully operational at the end of the first quarter of 2002. The total cost of the project was approximately $121 million (including capitalized interest), of which $21 million was spent in the three months ended March 31, 2002. During the 2002 Quarter, our capital expenditures totaled $53 million, which included $21 million for the completion of the heavy oil conversion project and $10 million for retail marketing programs. Other capital spending was primarily for refinery improvements. Assuming the consummation of the pending acquisition of the Golden Eagle Assets, we currently anticipate our capital spending for 2002 will increase by approximately $110 million, primarily for environmental, regulatory and safety matters including a project to meet the proposed CARB III gasoline production requirements and to address upcoming "clean fuels" requirements. The seller of the Golden Eagle Assets has agreed to spend through closing $47.5 million of the $122 million cost for the CARB III project. 24 MAJOR MAINTENANCE COSTS We completed our scheduled turnaround of certain processing units at our Washington refinery in the 2002 Quarter at a total cost of $25 million, of which $19 million was spent in the 2002 Quarter. Amortization of turnaround costs, other major maintenance projects and catalysts is projected to total approximately $25 million in 2002 of which $5 million was amortized in the 2002 Quarter. In conjunction with the pending acquisition of the Golden Eagle Assets, we expect that our turnaround and catalyst costs will increase by approximately $19 million and $3 million in 2002 and 2003, respectively. ENVIRONMENTAL AND OTHER Extensive federal, state and local environmental laws and regulations govern our operations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls, or make other modifications or changes in use for certain emission sources. We are currently involved in remedial responses and have incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of our own properties. At March 31, 2002, our accruals for environmental expenses totaled $37 million. Based on currently available information, including the participation of other parties or former owners in remediation actions, we believe these accruals are adequate. In February 2000, the EPA finalized new regulations pursuant to the Clean Air Act requiring a reduction in the sulfur content in gasoline by January 1, 2004. To meet the revised gasoline standard, we expect to make capital improvements of approximately $65 million in the aggregate through 2006 and $15 million in years after 2006. The EPA also promulgated new regulations in January 2001 pursuant to the Clean Air Act requiring a reduction in the sulfur content in diesel fuel manufactured for on-road consumption. In general, the new diesel fuel standards will become effective on June 1, 2006. We expect to spend approximately $35 million capital improvements through 2006 and $30 million in years after 2006 to meet the new diesel fuel standards. We expect to spend approximately $35 million in the aggregate for additional capital improvements at our refineries through 2006 to comply with the second phase of the Refinery MACT II regulations promulgated in April 2002. The Refinery MACT II regulations will require new emission controls at certain processing units at several of our refineries. We are currently evaluating a selection of control technologies to assure operations flexibility and compatibility with long-term air emission reduction goals. In connection with the 2001 acquisition of the North Dakota and Utah refineries, we assumed the sellers' obligations and liabilities under a consent decree among the United States, BP Exploration and Oil Co., Amoco Oil Company and Atlantic Richfield Company. BP entered into this consent decree for both the North Dakota and Utah refineries for various alleged violations. As the new owner of these refineries, we are required to address issues including leak detection and repair, flaring protection and sulfur recovery unit optimization. We currently estimate that we will spend an aggregate of $7 million to comply with this consent decree. In addition, we have agreed to indemnify the sellers for all losses of any kind incurred in connection with the consent decree. We anticipate that we will make additional environmental capital improvements of approximately $11 million in 2002, primarily for improvements to storage tanks, tank farm secondary containment and pipelines. During the 2002 Quarter, we spent approximately $1 million on environmental capital projects. Conditions that require additional expenditures may transpire for our various sites, including, but not limited to, our refineries, tank farms, retail gasoline stations (operating and closed locations) and petroleum product terminals, and for 25 compliance with the Clean Air Act and other state and federal requirements. We cannot currently determine the amount of these future expenditures. The Golden Eagle Assets will require substantial expenditures to address upcoming "clean fuels" requirements including California regulations to phase out the use of the oxygenate known as MTBE, by the end of 2003. The seller of the Golden Eagle Assets has begun construction of a project at the Golden Eagle refinery that we expect will enable it to comply with California's regulations to phase out MTBE and meet the proposed CARB III gasoline production requirements. Based upon a review by an independent engineering firm, management believes that this project will cost approximately $122 million, of which the seller has agreed to spend $47.5 million through closing. We expect that we will have to spend approximately $74.5 million in 2002 and 2003 to complete the CARB III project. Furthermore, we expect the project will be substantially complete by the end of 2002. We also expect to spend approximately $24 million by 2006 at the Golden Eagle refinery to meet the "ultra low sulfur diesel" standards. We anticipate that capital expenditures addressing environmental issues at the Golden Eagle refinery (including California's Bay Area Air Quality Management District's requirements for controlling emissions of nitrogen oxides, the Regional Water Quality Control Board's order requiring piping upgrades and requirements as a result of a settlement of a lawsuit by a citizens' group concerning coke dust emissions from the refinery's Pittsburg Dock loading facility) will total approximately $32 million during 2002. Although some portion of these costs are being and will continue to be incurred by the seller of the Golden Eagle Assets prior to the closing of the transaction, a substantial portion of the work will remain after the closing, the costs of which we will incur. We will need to spend additional amounts for capital expenditures at the Golden Eagle refinery in subsequent years and we may choose to spend additional discretionary amounts. In addition, soil and groundwater conditions at the Golden Eagle refinery (including the Amorco terminal and the coke terminal) may entail substantial expenditures over time. Although existing information is limited, our preliminary estimate of costs to address soil and groundwater conditions at the refinery in connection with various projects, including those required pursuant to orders by the California Regional Water Quality Control Board, is approximately $65 million, of which approximately $43 million is anticipated to be incurred through 2006 and the balance afterwards. Management believes that we will be entitled to indemnification, directly or indirectly, from former owners or operators of the refinery (or their successors) under two separate indemnification agreements, for approximately $59 million of such costs. Additionally, soil and groundwater conditions at approximately 50 of the 70 retail stations to be acquired through the pending acquisition of the Golden Eagle Assets may require expenditures of approximately $6 million in the aggregate, pursuant to orders and regulations set by the California Regional Water Quality Control Board or delegated local enforcement agencies. We also expect to spend approximately $5 million in the aggregate on capital improvements to meet new California vapor control equipment requirements at the retail facilities. SECOND QUARTER 2002 OUTLOOK Late March and early April industry margins improved from average first quarter 2002 levels; however, since early April, margins have again deteriorated. Gasoline demand appears stronger than last year at this time, but prices have been weak with high apparent production and imports. Jet fuel demand has almost returned to prior year's levels but distillate inventories remain somewhat high keeping prices down. At the same time, international tensions have been pushing crude prices up, further compressing margins. Most refineries in the U.S. are likely operating at very low or negative profitability in the current market environment. We believe this is not a long-term sustainable situation and the industry will respond, with the potential for improving margins by the end of the quarter. It appears unlikely at this point that margins for the quarter can reach trailing five-year average levels barring a substantial supply disruption. 26 Tesoro's refining capacity of 360,000 to 370,000 bpd is fully available with the completion of the turnaround at the Washington refinery and the repairs at the Utah refinery. Actual run rates in the quarter will be dependent on the margin environment as the quarter progresses. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to be recorded at fair value during the period incurred and an equal amount recorded as an increase in the value of the related long-lived asset. The capitalized cost is depreciated over the useful life of the asset and the obligation is accreted to its present value each period. SFAS No. 143 is effective for us beginning January 1, 2003 with earlier adoption encouraged. We are currently evaluating the impact the standard will have on its future results of operations and financial condition. Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the requirement to recognize an impairment loss only where the carrying value of a long-lived asset is not recoverable from its undiscounted cash flows and to measure such loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144, among other things, changes the criteria that have to be met to classify an asset as held-for-sale and requires that operating losses from discontinued operations be recognized in the period that the losses are incurred rather than as of the measurement date. The adoption of SFAS No. 144 did not have a significant impact on our financial condition or results of operations. The American Institute of Certified Public Accountants has issued an Exposure Draft for a Proposed Statement of Position, "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment" which would require major maintenance activities to be expensed as costs are incurred. If this proposed Statement of Position is adopted in its current form, we would be required to write off the unamortized carrying value of deferred major maintenance costs, primarily for refinery turnarounds, which totaled $59 million at March 31, 2002 and expense future costs as incurred. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are included throughout this Form 10-Q and relate to, among other things, projections of revenues, earnings, earnings per share, cash flows, capital expenditures or other financial items, throughput, expectations regarding the pending or completed acquisitions, discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We have used the words "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will" and similar terms and phrases to identify forward-looking statements in this Quarterly Report on Form 10-Q. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect the results of our operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to: o changes in general economic conditions; o the timing and extent of changes in commodity prices and underlying demand for our products; o the availability and costs of crude oil, other refinery feedstocks and refined products; o changes in our cash flow from operations, liquidity and capital requirements resulting from acquisitions; o our ability to (1) successfully integrate acquisitions, and (2) identify and complete future strategic acquisitions; 27 o fluctuations in our stock price; o adverse changes in the ratings assigned to our trade credit and debt instruments; o changes in credit terms; o increased interest rates and the condition of the capital markets; o the direct or indirect effects on our business resulting from terrorist incidents or acts of war; o political developments in foreign countries; o changes in our inventory levels and carrying costs; o changes in the cost or availability of third-party vessels, pipelines and other means of transporting feedstocks and products; o changes in fuel and utility costs for our facilities; o disruptions due to equipment interruption or failure at our or third-party facilities; o execution of planned capital projects; o state and federal environmental, economic, safety and other policies and regulations, any changes therein, and any legal or regulatory delays or other factors beyond our control; o adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any reserves; o actions of customers and competitors; o weather conditions affecting our operations or the areas in which our products are marketed and; o earthquakes or other natural disasters affecting operations. Many of these factors are described in greater detail in our filings with the SEC. All future written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the previous statements. We undertake no obligation to update any information contained herein or to publicly release the results of any revisions to any forward-looking statements that may be made to reflect events or circumstances that occur, or that we becomes aware of, after the date of this Quarterly Report on Form 10-Q. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in commodity prices and interest rates are our primary sources of market risk. We have a risk management committee responsible for overseeing energy risk management activities. COMMODITY PRICE RISKS Our earnings and cash flows from operations depend on the margin above fixed and variable expenses (including the costs of crude oil and other feedstocks) at which we are able to sell refined products. The prices of crude oil and refined products have fluctuated substantially in recent years. These prices depend on many factors, including the demand for crude oil, gasoline and other refined products, which in turn depend on, among other factors, changes in the economy, the level of foreign and domestic production of crude oil and refined products, worldwide political conditions, the availability of imports of crude oil and refined products, the marketing of alternative and competing fuels and the extent of government regulations. The prices we receive for refined products are also affected by local factors such as local market conditions and the level of operations of other refineries in our markets. The prices at which we sell our refined products are influenced by the commodity price of crude oil. Generally, an increase or decrease in the price of crude oil results in a corresponding increase or decrease in the price of gasoline and other refined products. The timing of the relative movement of the prices, however, can impact profit margins which could significantly affect our earnings and cash flows. In addition, crude oil supply contracts generally are short-term in nature with market-responsive pricing provisions. We normally purchase refinery feedstocks prior to selling the refined products manufactured. Our financial results can be affected significantly by price level changes during the period between purchasing refinery feedstocks and selling the manufactured refined products from such feedstocks. We also purchase refined products manufactured by others for resale to our customers. Our financial results can be affected significantly by price level changes during the periods between purchasing and selling such products. 28 We maintain inventories of crude oil, intermediate products and refined products, the values of which are subject to fluctuations in market prices. In our Refining and Retail segments, inventories of refinery feedstocks and refined products totaled 16.6 million and 17.2 million barrels at March 31, 2002 and December 31, 2001, respectively. During 2001, inventory levels increased 5.3 million barrels over the year-end 2000 levels at an average cost of $28.52 per barrel. Any sales that result in a reduction in inventories during 2002 could have a per barrel cost of sales in excess of the current cost of sales during 2002. The average cost of our refinery feedstocks and refined product as of March 31, 2002 was $23.96 per barrel. If market prices for refined products decline to a level below the average cost of these inventories, we may be required to write down the carrying value of our inventory. We periodically enter into derivative type arrangements on a limited basis, as part of our programs to acquire refinery feedstocks at reasonable costs and to manage margins on certain refined product sales. We also engage in limited non-hedging activities which are marked to market with changes in the fair value of the derivatives recognized in earnings. At March 31, 2002, we had open price swap transactions for an aggregate of 240,000 barrels of gasoline, naphtha and diesel fuel which settle in the second quarter of 2002. Recording the fair value of these swaps resulted in a mark-to-market loss of $1 million during the three months ended March 31, 2002. We believe that any potential impact from these activities will not result in a material adverse effect on our results of operations, financial position or cash flows. INTEREST RATE RISK At March 31, 2002, we had $732 million of outstanding floating-rate debt under the senior secured credit facility and $519 million of fixed-rate debt. The weighted average interest rate on the floating-rate debt was 5.3% at March 31, 2002. The impact on annual cash flow of a 10% change in the floating-rate for our senior secured credit facility (53 basis points) would be approximately $4 million. The fair market value of our fixed-rate debt at March 31, 2002 was approximately $4 million more than its book value of $519 million, based on recent transactions and bid quotes for our senior subordinated notes due 2008. On April 9, 2002, we issued $450 million aggregate principal amount of 9-5/8% senior subordinated notes maturing in 2012. The net proceeds will be used to partially fund the pending acquisition of the Golden Eagle Assets. 29 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In April 2002, the Company issued $450 million aggregate principal amount of 9-5/8% Senior Subordinated Notes due 2012. The indenture for the notes contains covenants and restrictions which are customary for notes of this nature. For further information related to these restrictions and covenants in the 9-5/8% Senior Subordinated Notes due 2012, see Note D of Notes to Condensed Consolidated Financial Statements in Part I, Item 1, and "Capital Resources and Liquidity" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2, contained herein. For information related to a proposed amendment to the Senior Secured Credit Facility, see "Capital Resources and Liquidity" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2, contained herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 Management Stability Agreement between the Company and G. Scott Spendlove dated January 24, 2002. 10.2 Copy of the Company's Amended and Restated 1995 Non-Employee Director Stock Option Plan, as amended through March 15, 2000. 10.3 Copy of the Company's Key Employee Stock Option Plan dated November 12, 1999. (b) Reports on Form 8-K. On February 4, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, information (1) updating certain supplemental financial and operational data for both the fourth quarter and the year ended December 31, 2001 through the Company's website and (2) regarding a press release issued on January 30, 2002 announcing the Company's earnings for the fourth quarter and year ended December 31, 2001 and its capital spending plans for 2002. The website data and press release were filed as Exhibits under Item 7 on this Form 8-K. On February 5, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, information that the Company had entered into an asset purchase agreement relating to the purchase of the Golden Eagle Assets from Valero Energy Corporation. A Press Release issued on February 5, 2002 and presentation data related to a conference call and webcast were filed as Exhibits under Item 7 of this Form 8-K. On February 21, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, that the Company had issued a press release containing its first quarter 2002 earnings update. The Press Release was filed as an Exhibit under Item 7 of this Form 8-K. On February 22, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, that the Company had entered into an amendment to the asset purchase agreement relating to the purchase agreement for the Golden Eagle Assets. The Press Release announcing the amendment was filed as an Exhibit under Item 7 of this Form 8-K. 30 On February 25, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, information (1) updating the pending Golden Eagle Assets purchase and (2) regarding a press release announcing that the Company intends to offer 20,000,000 newly issued shares of its common stock. Included under Item 7 of this Form 8-K were the following: (i) Audited Financial Statements of Golden Eagle Refining and Marketing Assets Business as of December 31, 2000 and 2001 and for the year ended December 31, 2001 and four months ended December 31, 2000; (ii) Unaudited Pro Forma Combined Condensed Financial Statements as of and for the year ended December 31, 2001; (iii) Consent of Arthur Andersen LLP; and (iv) the Press Release issued on February 22, 2002. On April 22, 2002, an Amendment No. 1 to Current Report on Form 8-K was filed restating in its entirety the Consent of Arthur Andersen LLP included under Item 7 of this Form 8-K. On March 5, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, that the Company had entered into an Underwriting Agreement to issue 20,000,000 shares of its common stock and had also granted the Underwriters an option to purchase up to an additional 3,000,000 shares of its common stock. Included under Item 7 of this Form 8-K were the following: (i) Underwriting Agreement; (ii) Opinion of Fulbright & Jaworski L.L.P.; (iii) Consent of Fulbright & Jaworski L.L.P.; and (iii) two Press Releases issued on March 1, 2002. On April 9, 2002, a Current Report on Form 8-K was filed reporting under Item 9, Regulation FD Disclosures, information related to a presentation concerning the pending acquisition of the Golden Eagle Assets. The presentation data was filed as an Exhibit under Item 7 of this Form 8-K. On May 9, 2002, a Current Report on Form 8-K was filed reporting under Item 5, Other Events, that the Company had entered into a second amendment to the asset purchase agreement relating to the purchase agreement for the Golden Eagle Assets. The Second Amendment and the Press Release were filed as Exhibits under Item 7 of this Form 8-K. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TESORO PETROLEUM CORPORATION REGISTRANT Date: May 15, 2002 /s/ BRUCE A. SMITH ------------------------------------------------- Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer Date: May 15, 2002 /s/ GREGORY A. WRIGHT ------------------------------------------------- Gregory A. Wright Senior Vice President and Chief Financial Officer (Principal Financial Officer) 32 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Management Stability Agreement between the Company and G. Scott Spendlove dated January 24, 2002. 10.2 Copy of the Company's Amended and Restated 1995 Non-Employee Director Stock Option Plan, as amended through March 15, 2000. 10.3 Copy of the Company's Key Employee Stock Option Plan dated November 12, 1999.
33 EX-10.1 3 d96862ex10-1.txt MANAGEMENT STABILITY AGREEMENT EXHIBIT 10.1 MANAGEMENT STABILITY AGREEMENT This Management Stability Agreement is dated January 24, 2002, between Tesoro Petroleum Corporation, a Delaware corporation (the "Company"), and G. Scott Spendlove ("Employee"). Recitals: WHEREAS, the Board of Directors of the Company has determined that it is in the best interest of the Company to reduce uncertainty to certain key employees of the Company in the event of certain fundamental events involving the control or existence of the Company; WHEREAS, the Board of Directors of the Company has determined that an agreement protecting certain interests of key employees of the Company in the event of certain fundamental events involving the control or existence of the Company is in the best interest of the Company because it will assist the Company in attracting and retaining key employees such as this Employee; and WHEREAS, the Employee is relying on this Agreement and the obligations of the Company hereunder in continuing to work for the Company. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Termination Following Change of Control. 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), 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 two times the base salary of the Employee at the then current rate; and (b) A lump-sum payment equal to (i) two 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 Page 1 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. The Company (or its successor) shall also provide continuing coverage and benefits comparable to all life, health and disability plans of the Company for a period of 24 months from the date of termination, and Employee shall receive 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. 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 of the surviving corporation are, and for a two year period after the merger continue to be, persons who were directors of the Company immediately prior to the merger or were elected as directors, or nominated for election as directors, by a vote of at least two-thirds of the directors then still in office who were directors of the Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, or (ii) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one year 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 Page 2 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 1, "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 immediately prior to the change of control, 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; (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 Page 3 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 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 higher of (a) Employee's aggregate investment in such residence or (b) the fair market value thereof as determined by a real estate appraiser 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 failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; 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 thereof. The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce the terms of this Paragraph 1. 2. Complete Agreement. Page 4 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. 3. 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. 4. 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. 5. 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. 6. 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 the Company may not assign any duties under this Agreement without the prior written consent of the Employee. 7. 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. 8. 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 Page 5 day after transmission of a telegram or facsimile, as the case may be, to the representative persons named below: If to the Company: Corporate Secretary Tesoro Petroleum Corporation 300 Concord Plaza Drive San Antonio, Texas 78216-6999 If to the Employee: G. Scott Spendlove 29523 Fairway Bluff Fair Oaks Ranch, Texas 78015 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/ G. SCOTT SPENDLOVE ---------------------------------------- G. Scott Spendlove Page 6 EX-10.2 4 d96862ex10-2.txt AMENDED/RESTATED 1995 NON-EMPLOYEE DIRECTOR STOCK EXHIBIT 10.2 TESORO PETROLEUM CORPORATION Amended and Restated 1995 Non-Employee Director Stock Option Plan 1. PURPOSE. This Amended and Restated 1995 Non-Employee Director Stock Option Plan (the "Plan") of Tesoro Petroleum Corporation, a Delaware corporation (the "Company"), modified, effective March 15, 2000, to increase the grant of options to non-employee directors after each annual meeting of the Company's stockholders from 1,000 shares of Common Stock to 3,000 shares of Common Stock. The Plan is adopted, subject to stockholder approval to the extent required by Paragraph 16 hereof, for the benefit of the directors of the Company who at the time of their service are not employees of the Company or any of its subsidiaries ("Non-Employee Directors"), and is intended to advance the interests of the Company by providing the Non-Employee Director with additional incentive to serve the Company by increasing their proprietary interest in the success of the Company through the issuance by the Company of non-qualified stock options. No incentive stock options will be granted under the Plan. 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). For the purposes of this Plan, a majority of the members of the Committee shall constitute a quorum for the transaction of business, and the vote of a majority of those members present at any meeting shall decide any question brought before that meeting. In addition, the Committee may take any action otherwise proper under the Plan by the affirmative vote, taken without a meeting, of a majority of its members. No member of the Committee shall be liable for any act or omission of any other member of the Committee or for any act or omission on his own part, including but not limited to the exercise of any power or discretion given to him under the Plan, except those resulting from his own gross negligence or willful misconduct. All question of interpretation and application of the Plan, or as to non-qualified options granted hereunder (the "Options"), shall be subject to the determination, which shall be final and binding, of a majority of the whole Committee. Notwithstanding the above, the selection of Non-Employee Directors to whom Options are to be granted, the number of shares subject to any Option, the exercise price of any Option and the term of any Option shall be as hereinafter provided and the Committee shall have no discretion as to such matters. 3. OPTION SHARES. The stock subject to the Options and other provisions of the Plan shall be shares of the Company's Common Stock, $.16-2/3 par value (or such other par value as may be designated by act of the Company's stockholders) (the "Common Stock"). In addition, for purposes of the Plan and Page 2 the Options, the term Common Stock shall also be deemed to include any rights to purchase ("Rights") the Participating Preferred Stock, no par value, of the Company that may then be trading with the Common Stock as provided in the Rights Agreement between the Company and Chemical Bank, N.A., relating to the Rights. The total amount of the Common Stock with respect to which Options may be granted shall not exceed in the aggregate 150,000 shares; provided, that the class and aggregate number of shares which may be subject to the options granted hereunder shall be subject to adjustment in accordance with the provisions of Paragraph 12 hereof. Such shares may be treasury shares or authorized but unissued shares. In the event that any outstanding Option for any reason shall expire or terminate by reason of the death of the optionee or the fact that the optionee ceases to be a director, the surrender of any such Option, or any other cause, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option under the Plan. 4. GRANT OF OPTIONS. Subject to the provisions of Paragraph 16 and the availability under the Plan of a sufficient number of shares of Common Stock that may be issuable upon the exercise of outstanding Options, there shall be granted under the Plan to each Non-Employee Director as of February 23, 1995, and any director elected after such date, an Option to purchase 5,000 shares of Common Stock at a price per share of Common Stock (the "Option Price") equal to the fair market value of the Common Stock (as defined in Paragraph 7 hereof) as of the date of grant. In addition, after March 15, 2000, each Non-Employee Director, while this Plan is in effect and shares are available for the grant of Options hereunder, shall be granted on the next day after each annual meeting of the Company's stockholders but no later than each June 1, if no annual meeting is held, an Option to purchase 3,000 shares of the Common Stock at an Option Price equal to the fair market value of the Common Stock as of such date, provided that if such date is not a date on which a closing price for the Common Stock is reported on the New York Stock Exchange, then the Option Price shall be the fair market value as of the first preceding date for which such a closing price is reported. 5. DURATION OF OPTIONS. Each Option granted under the Plan shall be exercisable for a term of ten years from the date of grant, subject to earlier termination as provided in Paragraph 9 hereof. 6. AMOUNT EXERCISABLE. Each Option may be exercised in whole or in part at any time commencing six months after the grant thereof. Page 3 7. EXERCISE OF OPTIONS. An optionee may exercise such optionee's Option by delivering to the Company a written notice stating (i) that such optionee wishes to exercise such Option on the date such notice is so delivered, (ii) the number of shares of stock with respect to which such Option is to be exercised and (iii) the address to which the certificate representing such shares of stock should be mailed. In order to be effective, such written notice shall be accompanied by (i) payment of the Option Price of such shares of stock and (ii) payment of an amount of money necessary to satisfy any withholding tax liability that may result from the exercise of such Option. Each such payment shall be made by cash or check made payable to the order of the Company in U.S. dollars. If, at the time of receipt by the Company of such written notice, (i) the Company has unrestricted surplus in an amount not less than the Option Price of such shares of stock, (ii) all accrued cumulative preferential dividends and other current preferential dividends on all outstanding shares of preferred stock of the Company have been fully paid, (iii) the acquisition by the Company of its own shares of stock for the purpose of enabling such optionee to exercise such Option is otherwise permitted by applicable law and without any vote or consent of any stockholder of the Company, and (iv) there shall have been adopted, and there shall be in full force and effect, a resolution of the Board of Directors of the Company authorizing the acquisition by the Company of its own shares of stock for such purpose, then such optionee may deliver to the Company, in payment of the Option Price of the shares of stock with respect to which such Option is exercised, (x) certificates registered in the name of such optionee that represent a number of shares of stock legally and beneficially owned by such optionee (free of all liens, claims and encumbrances of every kind) and having a fair market value on the date of receipt by the Company of such written notice that is not greater than the Option Price of the shares of stock with respect to which such Option is to be exercised, such certificates to be accompanied by stock powers duly endorsed in blank by the record holder of the shares of stock represented by such certificates, with the signature of such record holder guaranteed by a national banking association (or, in lieu of such certificates, other arrangements for the transfer of such shares to the Company which are satisfactory to the Company) and (y) if the Option Price of the shares of stock with respect to which such Options are to be exercised exceeds such fair market value, a cashier's check drawn on a national banking association and payable to the order of the Company in an amount, in U.S. dollars, equal to the amount of such excess plus the amount of money necessary to satisfy any withholding tax liability that may result from the exercise of such Option. Notwithstanding the provisions of the immediately preceding sentence, the Committee, in its sole discretion, may refuse to accept shares of stock in payment of the Option Price of the shares of stock with respect to which such Option is to be exercised and, in that event, any certificates representing shares of stock that were received by the Company with such written notice shall be returned to such optionee, together with notice by the Company to such optionee of the refusal of the Committee to accept such shares of stock. The Company, at its option, upon the request of the optionee, may retain shares of Common Stock which would otherwise be issued upon exercise of an Option to satisfy any withholding tax liability that may result from the exercise of such Option, which shares shall be valued for such purpose at their then fair market value. If, at the expiration of seven business days after the delivery to such optionee of such written notice from the Company, such optionee shall not have delivered to the Company a check payable to the order of the Company in an amount, in U.S. dollars, equal to the Option Price of the shares of stock with respect to which such Page 4 Option is to be exercised, such written notice from the optionee to the Company shall be ineffective to exercise such Option. As promptly as practicable after the receipt by the Company of (i) such written notice from the optionee, (ii) payment, in the form required by the foregoing provisions of this Paragraph 7, of the Option Price of the shares of stock with respect to which such Option is to be exercised, and (iii) payment, in the form required by the foregoing provisions of this Paragraph 7, of an amount necessary to satisfy any withholding tax liability that may result from the exercise of such Option, a certificate representing the number of shares of stock with respect to which such Option has been so exercised, reduced, to the extent applicable by the number of shares retained by the Company to pay any required withholding tax such certificate to be registered in the name of such optionee, provided that such delivery shall be considered to have been made when such certificate shall have been mailed, postage prepaid, to such optionee at the address specified for such purpose in such written notice from the optionee to the Company. For purposes of this Paragraph 7, the "fair market value" of a share of stock as of any particular date shall mean the closing price of a share of stock on that date as reported in the New York Stock Exchange Composite Transactions Listing, provided that if no closing price for the stock was so reported on that date or if, in the discretion of the Committee, another means of determining the fair market value of a share of stock at such date shall be necessary or advisable, the Committee may provide for another means for determining such fair market value. 8. TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the optionee otherwise than by will or under the laws of descent and distribution, and shall be exercisable, during his lifetime, only by him. Page 5 9. TERMINATION. Except as may be otherwise expressly provided herein, each Option, to the extent it shall not previously have been exercised, shall terminate on the earlier of the following: (a) On August 22, 1995, in the event that approval of the Plan by the stockholders of the Company is required by Paragraph 16 hereof and shall not have been obtained by such date; (b) Except as may be otherwise expressly provided herein, all Options shall terminate on the earlier of the date of the expiration of the Option or the date that is three months after the optionee ceases to be a member of the Company's Board of Directors, for any reason other than the death, permanent disability, or retirement of the optionee, during which period the optionee shall be entitled to exercise the Option in respect of the number of shares that the optionee would have been entitled to purchase had the optionee exercised the Option on the date the optionee ceased to be a member of the Company's Board of Directors. In the event the optionee ceases to be a member of the Company's Board of Directors because of his death, permanent disability or retirement from the Board of Directors of the Company, before the date of expiration of his Option, such Option shall continue fully in effect, including provisions providing for subsequent vesting of such Option, and shall terminate on the date of expiration of the Option notwithstanding any provision to the contrary in the optionee's option agreement. After the death of the optionee, his executors, administrators or any person or persons to whom his Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to the termination of the Option to exercise the Option, in respect to the number of shares that the optionee would have been entitled to exercise if he were still alive. For purposes of this Paragraph 9, an optionee will be treated as having retired from the Company's Board of Directors if the optionee shall, at the time the optionee ceases to be a member of the Board of Directors of the Company, have served for at least an aggregate of three full years (excluding service while a full-time employee of the Company). (c) Ten years after the date of grant of such Option. 10. REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any shares under any Option if the issuance of such shares shall constitute a violation by the optionee or the Company of any provisions of any law or regulation of any governmental authority. Each Option granted under the Plan Page 6 shall be subject to the requirements that, if at any time the Board of Directors of the Company or the Committee shall determine that the listing, registration or qualification of the shares subject thereto upon any securities exchange or under any state or federal law of the United States or of any other country or governmental subdivision thereof, or the consent or approval of any governmental regulatory body, or investment or other representations, are necessary or desirable in connection with the issue or purchase of shares subject thereto, no such Option may be exercised in whole or in part unless such listing, registration, qualification, consent, approval or representation shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. If required at any time by the Board of Directors or the Committee, an Option may not be exercised until the optionee has delivered an investment letter to the Company. In addition, specifically in connection with the Securities Act of 1933 (as now in effect or hereafter amended), upon exercise of any Option, the Company shall not be required to issue the underlying shares unless the Committee has received evidence satisfactory to it to the effect that the holder of such Option will not transfer such shares except pursuant to a registration statement in effect under such Act or unless an opinion of counsel satisfactory to the Company has been received by the Company to the effect that such registration is not required. Any determination in this connection by the Committee shall be final, binding and conclusive. In the event the shares issuable on exercise of an Option are not registered under the Securities Act of 1933, the Company may imprint on the certificate for such shares the following legend or any other legend which counsel for the Company considers necessary or advisable to comply with the Securities Act of 1933. "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon such registration or upon receipt by the Corporation of an opinion of counsel satisfactory, in form and substance to the Corporation, that registration is not required for such sale or transfer." The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) and, in the event any shares are so registered, the Company may remove any legend on certificates representing such shares. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority; provided however, that, if the Company shall decide to register Common Stock, the Company will use reasonable efforts to cause the Common Stock provided for in Paragraph 3 hereof to be so registered. Page 7 11. NO RIGHTS AS STOCKHOLDER. No optionee shall have rights as a stockholder with respect to shares covered by his Option until the date of issuance of a stock certificate for such shares; and, except as otherwise provided in Paragraph 16 hereof, no adjustment for dividends, or otherwise, shall be made if the record date therefor is prior to the date of issuance of such certificate. 12. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. If the Company shall effect a subdivision or consolidation of shares or other capital adjustment of, or the payment of a dividend in capital stock or other equity securities of the Company on, its Common Stock, or other increase or reduction of the number of shares of the Common Stock outstanding without receiving consideration therefor in money, services, or property, or the reclassification of its Common Stock, in whole or in part, into other equity securities of the Company, then (a) the number, class and per share price of shares of stock subject to outstanding Options hereunder shall be appropriately adjusted (or in the case of the issuance of other equity securities as a dividend on, or in a reclassification of, the Common Stock, the Options shall extend to such other securities) in such a manner as to entitle an optionee to receive, upon exercise of an Option, for the same aggregate cash compensation, the same total number and class or classes of shares (or in the case of a dividend of, or reclassification into, other equity securities, such other securities) he would have held after such adjustment if he had exercised his Option in full immediately prior to the event requiring the adjustment, or, if applicable, the record date for determining shareholders to be affected by such adjustment; and (b) the number and class of shares then reserved for issuance under the Plan (or in the case of a dividend of, or reclassification into, other equity securities, such other securities) shall be adjusted by substituting for the total number and class of shares of stock then received, the number and class or classes of shares of stock (or in the case of a dividend of, or reclassification into, other equity securities, such other securities) that would have been received by the owner of an equal number of outstanding shares of Common Stock as the result of the event requiring the adjustment. Comparable rights shall accrue to each optionee Page 8 in the event of successive subdivisions, consolidations, capital adjustment, dividends or reclassifications of the character described above. If the Company shall distribute to all holders of its shares of Common Stock (including any such distribution made to non-dissenting shareholders in connection with a consolidation or merger in which the Company is the surviving corporation and in which holders of shares of Common Stock continue to hold shares of Common Stock after such merger or consolidation) evidences of indebtedness or cash or other assets (other than cash dividends payable out of consolidated retained earnings not in excess of, in any one year period the greater of (a) $1.00 per share of Common Stock or (b) two times the aggregate amount of dividends per share paid during the preceding calendar year and dividends or distributions payable in shares of Common Stock or other equity securities of the Company described in the immediately preceding paragraph), then in each case the Option Price shall be adjusted by reducing the Option Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by the fair market value, as determined in good faith by the Board of Directors of the Company (whose determination shall be of an Option) of the portion of the evidence of indebtedness or cash or other assets so to be distributed applicable to one share of Common Stock; provided that in no event shall the Option Price be less than the par value of a share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of the distribution retroactive to the record date for the determination of the stockholders entitled to receive such distribution. Comparable adjustments shall be made in the event of successive distributions of the character described above. If the Company shall make a tender offer for, or grant to all of its holders of its shares of Common Stock the right to require the Company or any subsidiary of the Company to acquire from such stockholders shares, of Common Stock at a price in excess of the Current Market Price (a "Put Right") or the Company shall grant to all of its holders of its shares of Common Stock the right to acquire shares of Common Stock for less than the Current Market Price (a "Purchase Right") then, in the case of a Put Right, the Option Price shall Page 9 be adjusted by multiplying the Option Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such Put Right by a fraction, the numerator of which shall be the number of shares of Common Stock then outstanding minus the number of shares of Common Stock which could be purchased at the Current Market Price for the aggregate amount which would be paid if all Put Rights are exercised and the denominator of which is the number of shares of Common Stock which would be outstanding if all Put Rights are exercised; and, in the case of a Purchase Right, the Option Price shall be adjusted by multiplying the Option Price in effect immediately prior to the record date for the determination of the stockholders entitled to receive such Purchase Right by a fraction, the numerator of which shall be the number of shares of Common Stock then outstanding plus the number of shares of Common Stock which could be purchased at the Current Market Price for the aggregate amount which would be paid if all Purchase Rights are exercised and the denominator of which is the number of shares of Common Stock which would be outstanding if all Purchase Rights are exercised. In addition, the number of shares subject to the Option shall be increased by multiplying the number of shares then subject to the Option by a fraction which is the inverse of the fraction used to adjust the Option Price. Notwithstanding the foregoing if any such Put Rights or Purchase Rights shall terminate without being exercised, the Option Price and number of shares subject to Option shall be appropriately readjusted to reflect the Option Price and number of shares subject to the Option which would have been in effect if such unexercised Rights had never existed. Comparable adjustments shall be made in the event of successive transactions of the character described above. After the merger of one or more corporations into the Company, after any consolidation of the Company and one or more corporations, or after any other corporate transaction described in Section 425(a) of the Internal Revenue Code of 1986, as amended (the "Code"), in which the Company shall be the surviving corporation, each optionee, at no additional cost, shall be entitled to receive, upon any exercise of his Option, in lieu of the number of shares as to which the Option shall then be so exercised, the number and class of shares of stock or other equity securities to which the optionee would have been entitled pursuant to the terms of the agreement of merger or consolidation if at the time of such merger or consolidation such optionee had been a holder of a number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised and, if as a result of such merger, consolidation or other transaction, the holders of Common Stock are not entitled to receive any shares of Common Stock pursuant to the terms thereof, each optionee, at no additional cost shall be entitled to receive, upon exercise of his Option, such other assets and property, including cash, to which he would have been entitled if at the time of such merger, consolidation or other transaction he had been the holder of the number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised. Comparable rights shall accrue to each optionee in the event of successive mergers or consolidations of the character described above. After a merger of the Company into one or more corporations, after a consolidation of the Company and one or more corporations, or after any other corporate transaction described in Section 425(a) of the Code in which the Page 10 Company is not the surviving corporation, each optionee shall, at no additional cost, be entitled at the option of the surviving corporation (i) to have his then existing Option assumed or have a new option substituted for the existing Option by the surviving corporation to the transaction which is then employing him, or a parent or subsidiary of such corporation, on a basis where the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate Option Price of such option is equal to the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate Option Price of such shares, provided that the shares subject to the new option must be traded on the New York or American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotation System, or (ii) to receive, upon any exercise of his Option, in lieu of the number of shares as to which the Option shall then be so exercised, the securities, property and other assets, including cash, to which the optionee would have been entitled pursuant to the terms of the agreement of merger or consolidation or the agreement giving rise to the other corporate transaction if at the time of such merger, consolidation or other transaction such optionee had been the holder of the number of shares of Common Stock equal to the number of shares as to which the Option shall then be so exercised. If a corporate transaction described in Section 425(a) of the Code which involves the Company is to take place and there is to be no surviving corporation while an Option remains in whole or in part unexercised, it shall be canceled by the Board of Directors as of the effective date of any such corporate transaction but before that date each optionee shall be provided with a notice of such cancellation and each optionee shall have the right to exercise such Option in full (without regard to any limitations set forth in or imposed pursuant to Paragraph 9 of this Plan) to the extent it is then still unexercised during a 30-day period preceding the effective date of such corporate transaction. For purposes of this Paragraph 12, Current Market Price per share of Common Stock shall mean the last reported price for the Common Stock in the New York Stock Exchange Composite Transaction listing on the trading day immediately preceding the first trading day on which, as a result of the establishment of a record date or otherwise, the trading price reflects that an acquiror of Common Stock in the public market will not participate in or receive the payment of any applicable dividend or distribution. Except as hereinbefore expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the Page 11 exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. 13. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors may modify, revise or terminate this Plan at any time and from time to time; provided, however, that without the further approval of the holders of at least a majority of the outstanding shares of voting stock, or if the provisions of the corporate charter, by-laws or applicable state law prescribes a greater degree of stockholder approval for this action, without the degree of stockholder approval thus required, the Board of Directors may not (a) change the aggregate number of shares which may be issued under Options pursuant to the provisions of the Plan; (b) reduce the Option Price permitted for the options; or (c) extend the term during which an option may be exercised or the termination date of this Plan unless, in each such case, the Board of Directors of the Company shall have obtained an opinion of legal counsel to the effect that stockholder approval of the amendment is not required (i) by law, (ii) by the rules and regulations of, or any agreement with, the New York Stock Exchange or (iii) in order to make available to the optionee with respect to any option granted under the Plan, the benefits of Rule 16b-3 of the Rules and Regulations under the Securities Exchange Act of 1934, or any similar or successor rule. In addition, the terms of this Plan stating who may participate in the Plan, the number of shares of stock subject to an option which may be granted to any participant, the determination of the Option Price, the time for vesting and the term of an Option may not be amended more often than once every six months. 14. WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied in a written option agreement, which shall be subject to the terms and conditions prescribed above, and shall be signed by the optionee and by the appropriate officer of the Company for and in the name and on behalf of the Company. Such an option agreement shall contain such other provisions as the Committee in its discretion shall deem advisable. 15. INDEMNIFICATION OF COMMITTEE. The Company shall indemnify each present and future member of the Committee against, and each member of the Committee shall be entitled without further act on his part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee, Page 12 whether or not he continues to be such member of the Committee at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee (a) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee, or (b) in respect of any matter in which any settlement is effected, to an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further, that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and shall be in addition to all other rights to which such member of the Committee may be entitled to as a matter of law, contract, or otherwise. Nothing in this Section 15, shall be construed to limit or otherwise affect any right to indemnification, or payment of expense, or any provisions limiting the liability of any officer or director of the Company or any member of the Committee, provided by law, the Certificate of Incorporation of the Company or otherwise. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective and shall be deemed to have been adopted on February 23, 1995, if within one year of that date either (i) it shall have been approved by the holders of at least a majority of the outstanding shares of voting stock of the Company or if the provisions of the corporate charter, by-laws or applicable state law prescribes a greater degree of stockholder approval for this action, the approval by the holders of that percentage, at a meeting of stockholders or (ii) the Committee shall have received an opinion of legal counsel to the effect that such approval is not required (a) by law, (b) by the rules and regulations of, or any agreement with, the New York Stock Exchange or (c) in order to make available to the optionee with respect to the Option the benefits of Rule 16b-3 of the Rules and Regulations under the Securities Exchange Act of 1934. No Option shall be granted pursuant to the Plan after February 23, 2005. EX-10.3 5 d96862ex10-3.txt KEY EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.3 TESORO PETROLEUM CORPORATION KEY EMPLOYEE STOCK OPTION PLAN TESORO PETROLEUM CORPORATION KEY EMPLOYEE STOCK OPTION PLAN TABLE OF CONTENTS
Section ------- ARTICLE I - PURPOSE ARTICLE II - DEFINITIONS Affiliate ....................................................... 2.1 Board of Directors .............................................. 2.2 Code ............................................................ 2.3 Committee ....................................................... 2.4 Company ......................................................... 2.5 Disability ...................................................... 2.6 Employee ........................................................ 2.7 Fair Market Value ............................................... 2.8 Mature Shares ................................................... 2.9 Option .......................................................... 2.10 Option Agreement ................................................ 2.11 Optionee ........................................................ 2.12 Plan ............................................................ 2.13 Retire or Retirement ............................................ 2.14 Stock ........................................................... 2.15 ARTICLE III - ELIGIBILITY ARTICLE IV - GENERAL PROVISIONS RELATING TO ALL OPTIONS Authority to Grant Options ...................................... 4.1 Dedicated Shares ................................................ 4.2 Non-Transferability ............................................. 4.3 Requirements of Law ............................................. 4.4 Changes in the Company's Capital Structure ...................... 4.5 No Rights as Stockholder ........................................ 4.6 Written Agreement ............................................... 4.7 Forfeiture for Cause ............................................ 4.8 ARTICLE V - VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS Option Price .................................................... 5.1
Duration of Options ............................................. 5.2 Amount Exercisable .............................................. 5.3 Exercise of Options ............................................. 5.4 Substitution Options ............................................ 5.5 ARTICLE VI - ADMINISTRATION ARTICLE VII - AMENDMENT OR TERMINATION OF PLAN ARTICLE VIII - MISCELLANEOUS No Employment Obligation ........................................ 8.1 Tax Withholding ................................................. 8.2 Indemnification of the Committee and the Board of Directors ..... 8.3 Gender .......................................................... 8.4 Headings ........................................................ 8.5 Other Options ................................................... 8.6 Governing Law ................................................... 8.7 Effective Date .................................................. 8.8
ARTICLE 1 PURPOSE This Tesoro Petroleum Corporation Key Employee Stock Option Plan (the "Plan") (the "Company") is a plan for key employees of the Company and its Affiliates and is intended to advance the best interests of the Company, its Affiliates, and its stockholders by providing those persons who are not executive officers but have substantial responsibility for the management and growth of the Company and its Affiliates with additional incentives and an opportunity to obtain or increase their proprietary interest in the Company, thereby encouraging them to continue in the employ of the Company or any of its Affiliates. I-1 ARTICLE 2 DEFINITIONS The words and phrases defined in this Article shall have the meaning set out in these definitions throughout the Plan, unless the context in which any such word or phrase appears reasonably requires a broader, narrower, or different meaning. 2.1 "AFFILIATE" means any parent corporation and any subsidiary corporation, or any entity that is affiliated with the Company within the meaning of section 414 of the Code. The term "parent corporation" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the action or transaction, each of the corporations other than the Company owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. The term "subsidiary corporation" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2.2 "BOARD OF DIRECTORS" means the board of directors of the Company. 2.3 "CODE" means the Internal Revenue Code of 1986, as amended. 2.4 "COMMITTEE" means the committee designated by the Board of Directors. 2.5 "COMPANY" means Tesoro Petroleum Corporation, a Delaware corporation. 2.6 "DISABILITY" means a mental or physical disability which, in the opinion of a physician selected by the Committee, shall prevent the Employee from engaging in any substantial gainful activity and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months and which: (a) was not contracted, suffered or incurred while the Employee was engaged in, or did not result from having engaged in, a felonious criminal enterprise; (b) did not result from alcoholism or addiction to narcotics; and (c) did not result from an injury incurred while a member of the Armed Forces of the United States for which the Employee receives a military pension. 2.7 "EMPLOYEE" means a person employed by the Company or any Affiliate. 2.8 "FAIR MARKET VALUE" of the Stock as of any particular date means the average of the highest and lowest quoted sales prices of the Stock on that 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. II-1 2.9 "MATURE SHARES" means shares of Stock that have been legally and beneficially owned by the Option for at least six months. 2.10 "OPTION" means a nonqualified option granted under the Plan to purchase shares of Stock. 2.11 "OPTION AGREEMENT" means the written agreement that sets out the terms of an Option. 2.12 "OPTIONEE" means a person who is granted an Option under the Plan. 2.13 "PLAN" means the Tesoro Petroleum Corporation Key Employee Stock Option Plan, as set out in this document and as it may be amended from time to time. 2.14 "RETIRE" or "RETIREMENT" means retirement in good standing from the employ of the Company and all Affiliates for reason of age under then established policies of the Company and the Affiliates. 2.15 "STOCK" means the common stock of the Company, $.16 2/3 par value (or such other par value as may be designated by act of the Company's stockholders). II-2 ARTICLE 3 ELIGIBILITY The individuals who shall be eligible to receive Options shall be those key Employees, who are not executive officers of the Company or an Affiliate, as the Committee shall determine from time to time. III-1 ARTICLE 4 GENERAL PROVISIONS RELATING TO OPTIONS 4.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant Options to those individuals as it shall from time to time determine under the terms and conditions of the Plan. The number of shares of Stock to be covered by any Option shall be determined by the Committee. 4.2 DEDICATED SHARES. The total number of shares of Stock with respect to which Options may be granted under the Plan shall be 200,000 shares. The shares may be treasury shares or authorized but unissued shares. The number of shares stated in this Section 4.2 shall be subject to adjustment in accordance with the provisions of Section 4.5. If any outstanding Option expires or terminates for any reason or any Option is surrendered, the shares of Stock allocable to the unexercised portion of that Option may again be subject to an Option under the Plan. 4.3 NON-TRANSFERABILITY. Except as expressly provided otherwise in an Optionee's Option Agreement, Options shall not be transferable by the Optionee otherwise than by will or under the laws of descent and distribution, and shall be exercisable, during the Optionee's lifetime, only by him. 4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any Stock under any Option if issuing that Stock would constitute or result in a violation by the Optionee or the Company of any provision of any law, statute, or regulation of any governmental authority. Specifically, in connection with any applicable statute or regulation relating to the registration of securities, upon exercise of any Option, the Company shall not be required to issue any Stock unless the Committee has received evidence satisfactory to it to the effect that the holder of that Option will not transfer the Stock except in accordance with applicable law, including receipt of an opinion of counsel satisfactory to the Company to the effect that any proposed transfer complies with applicable law. The determination by the Committee on this matter shall be final, binding and conclusive. The Company may, but shall in no event be obligated to, register any Stock covered by the Plan pursuant to applicable securities laws of any country or any political subdivision. In the event the Stock issuable on exercise of an Option is not registered, the Company may imprint on the certificate evidencing the Stock any legend that counsel for the Company considers necessary or advisable to comply with applicable law. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option and the issuance of shares thereunder, to comply with any law or regulation of any governmental authority. 4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock or its rights, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. IV-1 If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Stock outstanding, without receiving compensation for it in money, services or property, then (a) the number, class, and per share price of shares of Stock subject to outstanding Options under the Plan shall be appropriately adjusted in such a manner as to entitle an Optionee to receive upon exercise of an Option, for the same aggregate cash consideration, the equivalent total number and class of shares he would have received had he exercised his Option in full immediately prior to the event requiring the adjustment; and (b) the number and class of shares of Stock then reserved to be issued under the Plan shall be adjusted by substituting for the total number and class of shares of Stock then reserved, that number and class of shares of Stock that would have been received by the owner of an equal number of outstanding shares of each class of Stock as the result of the event requiring the adjustment. If while unexercised Options remain outstanding under the Plan (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than an entity that was wholly-owned by the Company immediately prior to such merger, consolidation or other reorganization), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than an entity wholly-owned by the Company), (iii) the Company is to be dissolved, or (iv) the Company is a party to any other corporate transaction (as defined under section 424(a) of the Code and applicable Treasury Regulations) that is not described in clauses (i), (ii) or (iii) of this sentence (each such event is referred to herein as a "Corporate Change"), then (x) except as otherwise provided in an Option Agreement or as a result of the Board of Directors' effectuation of one or more of the alternatives described below, there shall be no acceleration of the time at which any Option then outstanding may be exercised, and (y) no later than ten days after the approval by the stockholders of the Company of such Corporate Change, the Board of Directors, acting in its sole and absolute discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which some or all of the Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Board of Directors, after which specified date all such Options that remain unexercised and all rights of Optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by all or selected Optionees of some or all of the then outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan or the Option Agreements evidencing such Options) as of a date, before or after such Corporate Change, specified by the Board of Directors, in which event the Board of Directors shall thereupon cancel such Options and the Company shall pay to each such Optionee an amount of cash per share equal to the excess, if any, of the per share price offered to stockholders of the Company in connection with such Corporate Change over the exercise price(s) under such Options for such shares, IV-2 (3) with respect to all or selected Optionees, have some or all of their then outstanding Options (whether vested or unvested) assumed or have a new Option substituted for some or all of their then outstanding Options (whether vested or unvested) by an entity which is a party to the transaction resulting in such Corporate Change and which is then employing him, or a parent or subsidiary of such entity, provided that (A) such assumption or substitution is on a basis where the excess of the aggregate fair market value of the shares subject to the Option immediately after the assumption or substitution over the aggregate exercise price of such shares is equal to the excess of the aggregate fair market value of all shares subject to the Option immediately before such assumption or substitution over the aggregate exercise price of such shares, and (B) the assumed rights under such existing Option or the substituted rights under such new Option as the case may be will have the same terms and conditions as the rights under the existing Option assumed or substituted for, as the case may be, (4) provide that the number and class of shares of Stock covered by an Option (whether vested or unvested) theretofore granted shall be adjusted so that such Option when exercised shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement and/or plan relating to such Corporate Change if, immediately prior to such Corporate Change, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option, or (5) make such adjustments to Options then outstanding as the Board of Directors deems appropriate to reflect such Corporate Change (provided, however, that the Board of Directors may determine in its sole and absolute discretion that no such adjustment is necessary). In effecting one or more of alternatives (3), (4) or (5) above, and except as otherwise may be provided in an Option Agreement, the Board of Directors, in its sole and absolute discretion and without the consent or approval of any Optionee, may accelerate the time at which some or all Options then outstanding may be exercised. In the event of changes in the outstanding Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Option and not otherwise provided for by this Section 4.5, any outstanding Options and any agreements evidencing such Options shall be subject to adjustment by the Board of Directors in its sole and absolute discretion as to the number and price of shares of stock or other consideration subject to such Options. In the event of any such change in the outstanding Stock, the aggregate number of shares available under the Plan may be appropriately adjusted by the Board of Directors, whose determination shall be conclusive. IV-3 The issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe for them, or upon conversion of shares or obligations of the Company convertible into shares or other securities, shall not affect, and no adjustment by reason of such issuance shall be made with respect to, the number, class, or price of shares of Stock then subject to outstanding Options. 4.6 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a stockholder with respect to Stock covered by his Option until the date a Stock certificate is issued for the Stock. 4.7 WRITTEN AGREEMENT. Each Option shall be embodied in a written Option Agreement which shall be subject to the terms and conditions of the Plan and shall be signed by the Optionee and by a member of the Committee on behalf of the Committee and the Company. Each Option Agreement shall state that the Option embodied therein is not intended to satisfy the requirements of section 422 of the Code. The Option Agreement may contain any other provisions that the Committee in its discretion shall deem advisable which are not inconsistent with the terms of the Plan. 4.8 FORFEITURE FOR CAUSE. Notwithstanding any other provision of the Plan, if the Committee finds by a majority vote, that the Optionee, before or after termination of his employment with the Company or any Affiliate (a) committed a fraud, embezzlement, theft, felony or an act of dishonesty in the course of his employment by the Company which conduct damaged the Company or (b) disclosed trade secrets of the Company, then any outstanding Options which have not been exercised by the individual and any Options which have not yet vested will be forfeited. The decision of the Committee as to the cause of an Optionee discharge, the damage done to the Company and the extent of the individual's competitive activity will be final. No decision of the Committee, however, will affect the finality of the discharge of the individual by the Company or Affiliate. If an Option would be forfeited pursuant to this Section 4.8 but for the fact that the Option has been exercised, the Optionee must, upon demand by the Company, which demand must be made within 90 days of the Company's discovery of the violation and within 24 months of the Optionee's termination of employment with the Company and all Affiliates, (1) sell to the Company, for the per share exercise price applicable under the Option, the shares of Stock purchased under the Option that have not yet been sold to another party and, (2) deliver to the Company cash in an amount equal to the proceeds the Optionee realized upon his sale of the Stock purchased under the Option, reduced by exercise price paid by the Optionee. IV-4 ARTICLE 5 VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS 5.1 OPTION PRICE. The price at which Stock may be purchased under an Option ("Option Price") shall be specified in an Optionee's Option Agreement. The Option Price under an Option shall not be less than the Fair Market Value of the Stock that may be purchased under the Option determined as of the date on which the Option is granted. 5.2 DURATION OF OPTIONS. An Option shall not be exercisable after the earlier of (1) the term of the Option specified in the Option Agreement (which shall not exceed ten years from the date the Option is granted) or (2) the period(s) of time specified in the Option Agreement that follows the Optionee's Retirement, Disability, death or other termination of employment with the Company and all Affiliates. (a) General Term of Option. Unless the Option Agreement specifies a shorter term, an Option shall expire on the tenth anniversary of the date the Option is granted. (b) Early Termination of Option Due to Termination of Employment (Other Than for Retirement, Death or Disability). Except as may be otherwise expressly provided in an Option Agreement, an Option shall terminate on the earlier of the date of the expiration of the general term of the Option or three months after the date of the termination of the employment relationship between the Optionee and the Company and all Affiliates for any reason other than the death, Disability or Retirement of the Optionee, during which period the Optionee shall be entitled to exercise the Option in respect of the number of shares that the Optionee would have been entitled to purchase had the Optionee exercised the Option on the date of such termination of employment. Whether authorized leave of absence, or absence on military or government service, shall constitute a termination of the employment relationship between the Company and the Optionee shall be determined by the Committee at the time thereof. (c) Early Termination of Option Due to Death. Unless the Option Agreement specifies otherwise, in the event of the death of an Optionee while in the employ of the Company or an Affiliate and before the date of expiration of the general term of the Option, his Option shall terminate on the earlier of the date of expiration of the general term of the Option or the first anniversary of the Optionee's termination of employment with the Company and all Affiliates due to death. V-1 (d) Early Termination of Option Due to Disability. Unless the Option Agreement specifies otherwise, in the event of the Disability of an Optionee while in the employ of the Company or an Affiliate and before the date of the expiration of the general term of the Option, his Option shall terminate on the earlier of the expiration of the general term of the Option or the first anniversary of the Optionee's termination of employment with the Company or an Affiliate due to Disability. Further, unless the Option Agreement specifies otherwise, if an Optionee terminates employment with the Company or an Affiliate due to Disability, and within the one-year period following the termination of employment he dies, his Option shall terminate on the earlier of (1) the expiration of the general term of the Option, or (2) the first anniversary of the date of his death. (e) Early Termination of Option Due to Retirement. Unless the Option Agreement specifies otherwise, if the Optionee terminates employment with the Company and all Affiliates by reason of Retirement, his Option shall terminate on the earlier of the expiration of the general term of the Option or the third anniversary of his termination of employment due to Retirement. Further, unless the Option Agreement specifies otherwise, if an Optionee terminates employment with the Company and all Affiliates due to Retirement, and within the one-year period following the termination of employment he dies, his Option shall terminate on the earlier of (1) the expiration of the general term of the Option, or (2) the latest of (a) the first anniversary of the date of his death or (b) the third anniversary of his termination of employment with the Company and all Affiliates due to Retirement. After the death of the Optionee, his executors, administrators or any person or persons to whom his Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to the termination of the Option to exercise the Option, in respect to the number of shares that the Optionee would have been entitled to exercise if he exercised the Option prior to his death. 5.3 AMOUNT EXERCISABLE. Each Option may be exercised from time to time, in whole or in part, in the manner and subject to the conditions the Committee, in its sole discretion, may provide in the Option Agreement, as long as the Option is valid and outstanding. Unless the Option Agreement expressly specifies otherwise an Option shall not continue to vest after the Optionee's termination of employment with the Company and all Affiliates for any reason. 5.4 EXERCISE OF OPTIONS. Each Option shall be exercised by the delivery of written notice to the Committee stating (a) that such Optionee wishes to exercise such Option on the date such notice is so delivered, (b) the number of shares of Stock with respect to which the Option is to be exercised and (c) the address to which the certificate representing such shares of Stock should be mailed. In order to be effective, such written notice shall be accompanied by (a) payment of the Option Price of such shares of Stock and (b) payment of an amount of money necessary to satisfy any withholding tax liability that may result from the exercise of such Option. Each such payment shall be made by (a) cashier's check drawn on a national banking association and payable to the order of the Company in United States dollars or V-2 (b) delivery of Mature Shares to the Company (as specified below), (c) a combination of (a) and (b), or (d) any other form of payment which is acceptable to the Committee. An Optionee may deliver to the Company, in payment of the Option Price of the shares of Stock with respect to which such Option is exercised, certificates registered in the name of such Optionee that represent a number of Mature Shares legally and beneficially owned by such Optionee (free of all liens, claims and encumbrances of every kind) and having a Fair Market Value on the date of receipt by the Company of such written notice that is not greater than the Option Price of the shares of Stock with respect to which such Option is to be exercised. Such certificates must be accompanied by stock powers duly endorsed in blank by the record holder of the shares of Stock represented by such certificates, with the signature of such record holder guaranteed by a national banking association. If the Option Price of the shares of Stock with respect to which such Option is to be exercised exceeds the Fair Market Value of the Mature Shares used to exercise the Option, the Optionee must also deliver to the Company a cashier's check drawn on a national banking association and payable to the order of the Company, in an amount equal to the amount of such excess. Notwithstanding any other provision of the Plan, the Committee shall have the authority to cause an Optionee to utilize a different method of exercise if the method selected by the Optionee could result in adverse accounting treatment for the Company. As promptly as practicable after receipt by the Company of (a) such written notification from the Optionee, (b) payment, in the form required by the foregoing provisions of this Section 5.4, of an amount necessary to satisfy any withholding tax liability that may result from the exercise of such Option, the Company shall deliver to the Optionee certificates for the number of shares with respect to which the Option has been exercised, issued in the Optionee's name. Delivery of the shares shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Optionee, at the address specified by the Optionee. 5.5 SUBSTITUTION OPTIONS. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become Employees of or affiliated with the Company or any Affiliate as the result of a merger or consolidation of the employing corporation with the Company or any Affiliate, or the acquisition by the Company or any Affiliate of the assets of the employing corporation, or the acquisition by the Company or any Affiliate of stock of the employing corporation as the result of which it becomes an Affiliate of the Company. The terms and conditions of the substitute Options granted may vary from the terms and conditions set out in the Plan to the extent the Committee, at the time of grant, may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. V-3 ARTICLE 6 ADMINISTRATION The Plan shall be administered by the Committee. All questions of interpretation and application of the Plan and Options shall be subject to the determination of the Committee. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be as effective as if it had been made by a majority vote at a meeting properly called and held. In carrying out its authority under the Plan, the Committee shall have full and final authority and discretion, including but not limited to the following rights, powers and authorities, to: (a) interpret and construe the terms of the Plan, (b) determine the persons to whom and the time or times at which Options will be made, (c) determine the number of shares and the purchase price of Stock covered in each Option, subject to the terms of the Plan, (d) determine the terms, provisions and conditions of each Option, which need not be identical, (e) accelerate the time at which any outstanding Option may be exercised, (f) define the effect, if any, on an Option of the death, Disability, or Retirement of the Optionee, (g) prescribe, amend and rescind rules and regulations relating to administration of the Plan, and (h) make all other determinations and take all other actions deemed necessary, appropriate, or advisable for the proper administration of the Plan. The actions of the Committee in exercising all of the rights, powers, and authorities set out in this Article and all other Articles of the Plan, when performed in good faith and in its sole judgment, shall be final, conclusive and binding on all parties. VI-1 ARTICLE 7 AMENDMENT OR TERMINATION OF PLAN The Board of Directors of the Company may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion. VII-1 ARTICLE 8 MISCELLANEOUS 8.1 NO EMPLOYMENT OBLIGATION. The granting of any Option shall not constitute an employment contract, express or implied, nor impose upon the Company or any Affiliate any obligation to employ or continue to employ any Optionee. The right of the Company or any Affiliate to terminate the employment of any person shall not be diminished or affected by reason of the fact that an Option has been granted to him. 8.2 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to deduct from other compensation payable to each Optionee any sums required by federal, state, or local tax law to be withheld with respect to the grant or exercise of an Option. In the alternative, the Company may require the Optionee (or other person exercising the Option) to pay the sum directly to the Company or an Affiliate. If the Optionee (or other person exercising the Option) is required to pay the sum directly, payment in cash or by check of such sums for taxes shall be made on the date of exercise. Notwithstanding the foregoing, an Optionee may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold whole shares of Stock having a Fair Market Value not in excess of the amount of the required withholding obligation. The Company shall have no obligation upon exercise of any Option until payment has been received, unless withholding as of or prior to the date of exercise is sufficient to cover all sums due with respect to that exercise. The Company and its Affiliates shall not be obligated to advise an Optionee of the existence of the tax or the amount which the Company or Affiliate will be required to withhold. 8.3 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With respect to administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further act on his part to indemnity from the Company for, all expenses (including attorney's fees, the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his being or having been a member of the Committee and/or the Board of Directors, whether or not he continues to be a member of the Committee and/or the Board of Directors at the time of incurring the expenses--including, without limitation, matters as to which he shall be finally adjudged in any action, suit or proceeding to have been found to have been negligent in the performance of his duty as a member of the Committee or of the Board of Directors. However, this indemnity shall not include any expenses incurred by any member of the Committee and/or the Board of Directors in respect of matters as to which he shall be finally adjudged in any action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as a member of the Committee or the Board of Directors. In addition, no right of indemnification under the Plan shall be available to or enforceable by any member of the Committee or the Board of Directors unless, within 60 days after institution of any action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at VIII-1 its own expense. This right of indemnification shall inure to the benefit of the heirs, executors or administrators of each member of the Committee and the Board of Directors and shall be in addition to all other rights to which a member of the Committee and the Board of Directors may be entitled as a matter of law, contract, or otherwise. 8.4 GENDER. If the context requires, words of one gender when used in the Plan shall include the other and words used in the singular or plural shall include the other. 8.5 HEADINGS. Headings of Articles and Sections are included for convenience of reference only and do not constitute part of the Plan and shall not be used in construing the terms of the Plan. 8.6 OTHER OPTIONS. The grant of an Option shall not confer upon an Optionee the right to receive any future or other Options under the Plan, whether or not Options may be granted to similarly situated Optionees, or the right to receive future Options upon the same terms or conditions as previously granted. 8.7 GOVERNING LAW. The provisions of the Plan shall be construed, administered, and governed under the laws of the State of Texas. 8.8 EFFECTIVE DATE. The Plan is effective November 12, 1999. VIII-2 -----END PRIVACY-ENHANCED MESSAGE-----