10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o 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 CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	95-0862768
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 þ     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No þ

There were 67,299,896 shares of the registrant’s Common Stock outstanding at November 1, 2006.

TESORO CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – September 30, 2006 and December 31, 2005		3
Condensed Statements of Consolidated Operations – Three Months and Nine Months Ended September 30, 2006 and 2005		4
Condensed Statements of Consolidated Cash Flows — Nine Months Ended September 30, 2006 and 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 5. Other Information		35
Item 6. Exhibits		35
SIGNATURES		36
EXHIBIT INDEX		37
Executive Deferred Compensation Plan
Second Amendment to Amended and Restated Employment Agreement
Agreement Between the Company and Bruce A. Smith
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TESORO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions except per share amounts)

	September 30,			December 31,
	2006			2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	886		$	440
Receivables, less allowance for doubtful accounts		927			718
Inventories		1,000			953
Prepayments and other		137			104
Total Current Assets		2,950			2,215
PROPERTY, PLANT AND EQUIPMENT
Refining		3,055			2,850
Retail		210			223
Corporate and other		138			107
		3,403			3,180
Less accumulated depreciation and amortization		(833	)		(713	)
Net Property, Plant and Equipment		2,570			2,467
OTHER NONCURRENT ASSETS
Goodwill		89			89
Acquired intangibles, net		113			119
Other, net		224			207
Total Other Noncurrent Assets		426			415
Total Assets	$	5,946		$	5,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,428		$	1,171
Accrued liabilities		284			328
Current maturities of debt		2			3
Total Current Liabilities		1,714			1,502
DEFERRED INCOME TAXES		467			389
OTHER LIABILITIES		298			275
DEBT		1,042			1,044
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.162/3; authorized 200,000,000 shares; 71,692,285 shares issued (70,850,681 in 2005)		12			12
Additional paid-in capital		839			794
Retained earnings		1,724			1,102
Treasury stock, 3,602,920 common shares (1,548,568 in 2005), at cost		(148	)		(19	)
Accumulated other comprehensive loss		(2	)		(2	)
Total Stockholders’ Equity		2,425			1,887
Total Liabilities and Stockholders’ Equity	$	5,946		$	5,097

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

TESORO CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS

(Unaudited)

(In millions except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
REVENUES	$	5,278		$	5,017		$	14,084		$	12,221
COSTS AND EXPENSES:
Costs of sales and operating expenses		4,697			4,536			12,662			11,134
Selling, general and administrative expenses		41			41			126			143
Depreciation and amortization		63			44			183			128
Loss on asset disposals and impairments		31			4			43			9
OPERATING INCOME		446			392			1,070			807
Interest and financing costs		(19	)		(30	)		(60	)		(94	)
Interest income and other		15			5			32			6
EARNINGS BEFORE INCOME TAXES		442			367			1,042			719
Income tax provision		168			141			399			281
NET EARNINGS	$	274		$	226		$	643		$	438
NET EARNINGS PER SHARE:
Basic	$	4.02		$	3.29		$	9.43		$	6.45
Diluted	$	3.92		$	3.20		$	9.17		$	6.23
WEIGHTED AVERAGE COMMON SHARES:
Basic		68.1			68.7			68.2			67.9
Diluted		69.9			70.7			70.1			70.3
DIVIDENDS PER SHARE	$	0.10		$	0.05		$	0.30		$	0.10

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

TESORO CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In millions)

	Nine Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings	$	643		$	438
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization		183			128
Amortization of debt issuance costs and discounts		11			13
Write-off of unamortized debt issuance costs		—			2
Loss on asset disposals and impairments		43			9
Stock-based compensation		16			24
Deferred income taxes		78			68
Excess tax benefits from stock-based compensation arrangements		(18	)		(24	)
Other changes in non-current assets and liabilities		(34	)		(37	)
Changes in current assets and current liabilities:
Receivables		(208	)		(303	)
Inventories		(47	)		(260	)
Prepayments and other		(28	)		(53	)
Accounts payable and accrued liabilities		239			689
Net cash from operating activities		878			694
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		(296	)		(170	)
Other		5			3
Net cash used in investing activities		(291	)		(167	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Repurchase of common stock		(137	)		—
Dividend payments		(21	)		(7	)
Repayments of debt		(11	)		(99	)
Proceeds from stock options exercised		12			30
Excess tax benefits from stock-based compensation arrangements		18			24
Financing costs and other		(2	)		(3	)
Net cash used in financing activities		(141	)		(55	)
INCREASE IN CASH AND CASH EQUIVALENTS		446			472
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		440			185
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	886		$	657
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest	$	22		$	47
Income taxes paid	$	310		$	180

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE A – BASIS OF PRESENTATION

The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation (“Tesoro”) and its subsidiaries have been prepared by management without audit according to the rules and regulations of the SEC. 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, 2005 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. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2005.

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which 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. We review our estimates on an ongoing basis, based on currently available information. Changes in facts and circumstances may result in revised estimates and 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 PER SHARE

We compute basic earnings per share by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares, principally common stock options and unvested restricted stock outstanding during the period. Earnings per share calculations are presented below (in millions except per share amounts):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Basic:
Net earnings	$	274	$	226	$	643	$	438
Weighted average common shares outstanding		68.1		68.7		68.2		67.9
Basic Earnings Per Share	$	4.02	$	3.29	$	9.43	$	6.45
Diluted:
Net earnings	$	274	$	226	$	643	$	438
Weighted average common shares outstanding		68.1		68.7		68.2		67.9
Dilutive effect of stock options and unvested restricted stock		1.8		2.0		1.9		2.4
Total diluted shares		69.9		70.7		70.1		70.3
Diluted Earnings Per Share	$	3.92	$	3.20	$	9.17	$	6.23

6

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE C – OPERATING SEGMENTS

We are an independent refiner and marketer of petroleum products and derive revenues from two operating segments, refining and retail. We evaluate the performance of our segments and allocate 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 from refining to retail are made at prevailing market rates. Income taxes, interest and financing costs, interest income and other, and corporate general and administrative expenses are excluded from segment operating income. Identifiable assets are those assets utilized by the segment. Corporate and unallocated costs are principally general and administrative expenses. Corporate assets are principally cash and other assets that are not associated with a specific operating segment. Segment information is as follows (in millions):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues
Refining:
Refined products	$	5,018		$	4,775		$	13,548		$	11,552
Crude oil resales and other (a)		195			187			374			518
Retail:
Fuel		316			285			824			720
Merchandise and other		39			40			110			107
Intersegment Sales from Refining to Retail		(290	)		(270	)		(772	)		(676	)
Total Revenues	$	5,278		$	5,017		$	14,084		$	12,221
Segment Operating Income (Loss)
Refining (b)	$	474		$	434		$	1,192		$	947
Retail (c)		3			(10	)		(21	)		(30	)
Total Segment Operating Income		477			424			1,171			917
Corporate and Unallocated Costs		(31	)		(32	)		(101	)		(110	)
Operating Income		446			392			1,070			807
Interest and Financing Costs		(19	)		(30	)		(60	)		(94	)
Interest Income and Other		15			5			32			6
Earnings Before Income Taxes	$	442		$	367		$	1,042		$	719
Depreciation and Amortization
Refining	$	56		$	37		$	164		$	109
Retail		4			5			12			13
Corporate		3			2			7			6
Total Depreciation and Amortization	$	63		$	44		$	183		$	128
Capital Expenditures (d)
Refining	$	99		$	49		$	242		$	134
Retail		3			2			4			3
Corporate		32			3			40			33
Total Capital Expenditures	$	134		$	54		$	286		$	170

7

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

	September 30,		December 31,
	2006		2005
Identifiable Assets
Refining	$	4,586	$	4,204
Retail		211		222
Corporate		1,149		671
Total Assets	$	5,946	$	5,097

(a)	To balance or optimize our refinery supply requirements, we sell certain crude oil that we purchase under our supply contracts.
(b)	Refining operating income for the three months and nine months ended September 30, 2006 includes a charge of $27 million related to the termination of the delayed coker project at our Washington refinery. In July 2006, we cancelled a 25,000 barrel-per-day delayed coker unit project at our Washington refinery. The project had experienced significant cost escalations in engineering, materials and labor, and no longer met our rate of return objectives. The charge of $27 million is included in loss on asset disposals and impairments in the condensed statements of consolidated operations.
(c)	Retail operating loss for the nine months ended September 30, 2006 includes an impairment charge during the first quarter of $4 million related to the sale of 13 retail sites in August 2006.
(d)	Capital expenditures do not include refinery turnaround and other maintenance costs of $8 million and $4 million for the three months ended September 30, 2006 and 2005, respectively, and $59 million and $51 million for the nine months ended September 30, 2006 and 2005, respectively.

NOTE D – DEBT

8% Senior Secured Notes Due 2008

In April 2006, we voluntarily prepaid the remaining $9 million outstanding principal balance of our 8% senior secured notes at a prepayment premium of 4%.

Credit Agreement

In July 2006, we amended our credit agreement to extend the term by one year to June 2009 and reduce letters of credit fees and revolver borrowing interest by 0.25%. Our credit agreement currently provides for borrowings (including letters of credit) up to the lesser of the agreement’s total capacity, $750 million as amended, or the amount of a periodically adjusted borrowing base ($1.7 billion as of September 30, 2006), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, as defined. As of September 30, 2006, we had no borrowings and $193 million in letters of credit outstanding under the revolving credit facility, resulting in total unused credit availability of $557 million or 74% of the eligible borrowing base. Borrowings under the revolving credit facility bear interest at either a base rate (8.25% at September 30, 2006) or a eurodollar rate (5.32% at September 30, 2006), plus an applicable margin. The applicable margin at September 30, 2006 was 1.25% in the case of the eurodollar rate, but varies based upon our credit facility availability and credit ratings. Letters of credit outstanding under the revolving credit facility incur fees at an annual rate tied to the eurodollar rate applicable margin (1.25% at September 30, 2006). We also incur commitment fees for the unused portion of the revolving credit facility at an annual rate of 0.25% as of September 30, 2006.

We also have a separate letters of credit agreement for the purchase of foreign petroleum inventories. In July 2006, we increased the capacity under the separate letters of credit agreement to $250 million from $165 million. The agreement is secured by our petroleum inventories supported by letters of credit issued under the agreement and will remain in effect until terminated by either party. Letters of credit outstanding under this agreement incur fees at an annual rate of 1.25% to 1.38%. As of September 30, 2006, we had $110 million in letters of credit outstanding under this agreement, resulting in total unused credit availability of $140 million or 56% of total capacity under this credit agreement.

8

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Capitalized Interest

We capitalize interest as part of the cost of major projects during extended construction periods. Capitalized interest, which is a reduction to interest and financing costs in the condensed statements of consolidated operations, totaled $3 million and $2 million for the three months ended September 30, 2006 and 2005, respectively, and $7 million and $6 million for the nine months ended September 30, 2006 and 2005, respectively.

NOTE E – STOCKHOLDERS’ EQUITY

Common Stock Repurchase Program

In November 2005, our Board of Directors authorized a $200 million share repurchase program. Under the program, we repurchase our common stock from time to time in the open market. Purchases will depend on price, market conditions and other factors. During the nine months ended September 30, 2006, we repurchased 2.1 million shares of common stock for $135 million under the program, or an average cost per share of $62.84. As of September 30, 2006, approximately $51 million remained available for future repurchases under the program.

Cash Dividends

On November 1, 2006, our Board of Directors declared a quarterly cash dividend on common stock of $0.10 per share, payable on December 15, 2006 to shareholders of record on December 1, 2006. In March, June and September 2006, we paid a quarterly cash dividend on common stock of $0.10 per share.

Authorized Shares of Common Stock

On May 3, 2006 at our 2006 Annual Meeting, our shareholders approved an increase in the number of authorized shares of common stock from 100 million to 200 million. The additional 100 million authorized shares of common stock have the same rights and privileges as the shares previously authorized.

NOTE F – INVENTORIES

Components of inventories were as follows (in millions):

	September 30,		December 31,
	2006		2005
Crude oil and refined products, at LIFO cost	$	929	$	882
Oxygenates and by-products, at the lower of FIFO cost or market		14		14
Merchandise		8		9
Materials and supplies		49		48
Total Inventories	$	1,000	$	953

Inventories valued at LIFO cost were less than replacement cost by approximately $851 million and $687 million, at September 30, 2006 and December 31, 2005, respectively.

9

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE G – PENSION AND OTHER POSTRETIREMENT BENEFITS

Tesoro sponsors defined benefit pension plans, including a funded employee retirement plan, an unfunded executive security plan, an unfunded non-employee director retirement plan and an unfunded restoration retirement plan. The unfunded restoration retirement plan, which became effective July 1, 2006, provides for the restoration of retirement benefits to certain executives and other senior employees of Tesoro that are not available due to the limits imposed by the Internal Revenue Code on our funded employee retirement plan. For 2006, Tesoro has no minimum required contribution obligation to its funded employee retirement plan under applicable laws and regulations. However, during the three and nine months ended September 30, 2006, we voluntarily contributed $6 million and $19 million, respectively, to improve the funded status of the plan. The components of pension benefit expense included in the condensed statements of consolidated operations were (in millions):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Service Cost	$	6		$	5		$	16		$	14
Interest Cost		4			3			11			9
Expected return on plan assets		(5	)		(3	)		(14	)		(8	)
Amortization of prior service cost		—			—			1			1
Recognized net actuarial loss		2			2			4			3
Curtailments and settlements		—			—			—			3
Net Periodic Benefit Expense	$	7		$	7		$	18		$	22

The components of other postretirement benefit expense, primarily for health insurance, included in the condensed statements of consolidated operations were (in millions):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Service Cost	$	3	$	3	$	8	$	7
Interest Cost		3		2		8		6
Recognized net actuarial loss		—		—		1		—
Net Periodic Benefit Expense	$	6	$	5	$	17	$	13

NOTE H – STOCK-BASED COMPENSATION

Tesoro follows the fair value method of accounting for stock-based compensation prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment.” Stock-based compensation expense, included in the condensed statements of consolidated operations, for our stock-based compensation plans was as follows (in millions):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006			2005		2006			2005
Stock options	$	4		$	3	$	11		$	12
Restricted stock		2			1		4			3
Stock appreciation rights		—			—		2			—
Phantom stock		(4	)		5		(1	)		9
Total Stock-Based Compensation	$	2		$	9	$	16		$	24

10

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The nine months ended September 30, 2005 included stock-based compensation totaling $5 million associated with the termination and retirement of certain executive officers. The excess income tax benefits realized from tax deductions associated with option exercises totaled $18 million and $24 million for the nine months ended September 30, 2006 and 2005, respectively.

Stock Options

We amortize the estimated fair value of our stock options granted over the vesting period using the straight-line method. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model. During the nine months ended September 30, 2006, we granted 557,260 options with a weighted-average exercise price of $67.35. These options generally become exercisable after one year in 33% annual increments and expire ten years from the date of grant. Total unrecognized compensation cost related to non-vested stock options totaled $22 million as of September 30, 2006, which is expected to be recognized over a weighted-average period of 1.9 years. A summary of our outstanding and exercisable options as of September 30, 2006 is presented below:

					Weighted-Average
			Weighted-Average		Remaining	Intrinsic Value
	Shares		Exercise Price		Contractual Term	(In Millions)
Options Outstanding		3,752,842	$	25.65	6.4 years	$	121
Options Exercisable		2,505,247	$	14.66	5.2 years	$	109

Restricted Stock

We amortize the estimated fair value of our restricted stock granted over the vesting period using the straight-line method. The fair value of each restricted share on the date of grant is equal to its fair market price. During the nine months ended September 30, 2006, we issued 63,050 shares of restricted stock with a weighted-average grant-date fair value of $66.61. These restricted shares vest in annual increments ratably over three years, assuming continued employment at the vesting dates. Total unrecognized compensation cost related to non-vested restricted stock totaled $9 million as of September 30, 2006, which is expected to be recognized over a weighted-average period of 1.6 years. As of September 30, 2006 we had 563,404 shares of restricted stock outstanding at a weighted-average grant-date fair value of $25.13.

2006 Long-Term Stock Appreciation Rights Plan

In February 2006, our Board of Directors approved the 2006 Long-Term Stock Appreciation Rights Plan (the “SAR Plan”). The SAR Plan permits the grant of stock appreciation rights (“SARs”) to key managers and other employees of Tesoro. A SAR granted under the SAR Plan entitles an employee to receive cash in an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price of the SAR. Unless otherwise specified, all SARs under the SAR Plan vest ratably during a three-year period following the date of grant. The term of a SAR granted under the SAR Plan shall be determined by the Compensation Committee provided that no SAR shall be exercisable on or after the tenth anniversary date of its grant. During the nine months ended September 30, 2006, we granted 328,610 SARs at 100% of the fair value of Tesoro’s common stock with a weighted-average grant-date fair value of $66.61. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model.

11

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE I – COMMITMENTS AND CONTINGENCIES

We are a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. Where required, we have made accruals in accordance with SFAS No. 5, “Accounting for Contingencies,” in order to provide for these matters. We cannot predict the ultimate effects of these matters with certainty, and we have made related accruals based on our best estimates, subject to future developments. We believe that the outcome of these matters will not result in a material adverse effect on our liquidity and consolidated financial position, although the resolution of certain of these matters could have a material adverse impact on interim or annual results of operations.

Tesoro is subject to audits by federal, state and local taxing authorities in the normal course of business. It is possible that tax audits could result in claims against Tesoro in excess of recorded liabilities. We believe, however, that when these matters are resolved, they will not materially affect Tesoro’s consolidated financial position or results of operations.

Tesoro 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 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.

Environmental Liabilities

We are currently involved in remedial responses and have incurred and expect to continue to incur cleanup expenditures associated with environmental matters at a number of sites, including certain of our previously owned properties. At September 30, 2006, our accruals for environmental expenses totaled $28 million. Our accruals for environmental expenses include retained liabilities for previously owned or operated properties, refining, pipeline and terminal operations and retail service stations. We believe these accruals are adequate, based on currently available information, including the participation of other parties or former owners in remediation action.

We have completed an investigation of environmental conditions at certain active wastewater treatment units at our California refinery. This investigation was driven by an order from the San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the California refinery. We are evaluating and implementing certain improvements to the wastewater treatment units as a result of this investigation. A reserve for this matter is included in the environmental accruals referenced above.

On October 24, 2005, we received a Notice of Violation (“NOV”) from the United States Environmental Protection Agency (“EPA”). The EPA alleges certain modifications made to the fluid catalytic cracking unit at our Washington refinery prior to our acquisition of the refinery were made in violation of the Clean Air Act. We have investigated the allegations and believe the ultimate resolution of the NOV will not have a material adverse effect on our financial position or results of operations. A reserve for our response to the NOV is included in the environmental accruals referenced above.

In September 2006, we reached an agreement with the Bay Area Air Quality Management District (the “District”) to settle 28 NOVs issued to Tesoro from January 2004 to September 2004 alleging violations of various air quality requirements at the California refinery. The settlement agreement was executed on October 11, 2006. Pursuant to the terms of the settlement agreement, Tesoro will make a cash payment of $200,000 to the District during the fourth quarter of 2006 and undertake a supplemental project valued at approximately $100,000, both of which have been included in the environmental accruals referenced above.

Other Environmental Matters

In the ordinary course of business, we become party to or otherwise involved in lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large and sometimes unspecified damages or penalties may be sought from us in some matters for which the likelihood of loss may be reasonably possible but the amount of loss is not currently estimable, and some matters may require years for us to

12

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

resolve. As a result, we have not established reserves for these matters. On the basis of existing information, we believe that the resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. However, we cannot provide assurance that an adverse resolution of one or more of the matters described below during a future reporting period will not have a material adverse effect on our financial position or results of operations in future periods.

We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. The defendants are being sued for having manufactured MTBE and having manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs, all in California, are generally water providers, governmental authorities and private well owners alleging, in part, the defendants are liable for manufacturing or distributing a defective product. The suits generally seek individual, unquantified compensatory and punitive damages and attorney’s fees, but we cannot estimate the amount or the likelihood of the ultimate resolution of these matters at this time, and accordingly have not established a reserve for these cases. We believe we have defenses to these claims and intend to vigorously defend the lawsuits.

Soil and groundwater conditions at our California refinery may require substantial expenditures over time. In connection with our acquisition of the California refinery from Ultramar, Inc. in May 2002, Ultramar assigned certain of its rights and obligations that Ultramar had acquired from Tosco Corporation in August of 2000. Tosco assumed responsibility and contractually indemnified us for up to $50 million for certain environmental liabilities arising from operations at the refinery prior to August of 2000, which are identified prior to August 31, 2010 (“Pre-Acquisition Operations”). Based on existing information, we currently estimate that the known environmental liabilities arising from Pre-Acquisition Operations including soil and groundwater conditions at the refinery will exceed the $50 million indemnity. We expect to be reimbursed for excess liabilities under certain environmental insurance policies that provide $140 million of coverage in excess of the $50 million indemnity. Because of Tosco’s indemnification and the environmental insurance policies, we have not established a reserve for these defined environmental liabilities arising out of the Pre-Acquisition Operations.

In November 2003, we filed suit in Contra Costa County Superior Court against Tosco alleging that Tosco misrepresented, concealed and failed to disclose certain additional environmental conditions at our California refinery related to the soil and groundwater conditions referenced above. The court granted Tosco’s motion to compel arbitration of our claims for these certain additional environmental conditions. In the arbitration proceedings we initiated against Tosco in December 2003, we are also seeking a determination that Tosco is liable for investigation and remediation of these certain additional environmental conditions, the amount of which is currently unknown and therefore a reserve has not been established, and which may not be covered by the $50 million indemnity for the defined environmental liabilities arising from Pre-Acquisition Operations. In response to our arbitration claims, Tosco filed counterclaims in the Contra Costa County Superior Court action alleging that we are contractually responsible for additional environmental liabilities at our California refinery, including the defined environmental liabilities arising from Pre-Acquisition Operations. In February 2005, the parties agreed to stay the arbitration proceedings to pursue settlement discussions. In June 2006, the parties terminated settlement discussions and agreed to proceed with the arbitration. We intend to vigorously prosecute our claims against Tosco and to oppose Tosco’s claims against us, and although we cannot provide assurance that we will prevail, we believe that the resolution of the arbitration will not have a material adverse effect on our financial position or results of operations.

Environmental Capital Expenditures

EPA regulations related to the Clean Air Act require reductions in the sulfur content in gasoline. Our California, Washington, Hawaii, Alaska and North Dakota refineries will not require additional capital spending to meet the low sulfur gasoline standards. We are currently evaluating alternative projects that will satisfy the requirements to meet the regulations at our Utah refinery.

EPA regulations related to the Clean Air Act also require reductions in the sulfur content in diesel fuel manufactured for on-road consumption. In general, the new on-road diesel fuel standards became effective on June 1, 2006. In May 2004, the EPA issued a rule regarding the sulfur content of non-road diesel fuel. The requirements to reduce non-road diesel sulfur content will become effective in phases between 2007 and 2010. Based on our latest engineering estimates, to meet the revised diesel fuel standards, we expect to spend approximately $74 million in capital

13

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

improvements through 2007, $39 million of which was spent during the first nine months of 2006. Included in the estimate are capital projects to manufacture additional ultra-low sulfur diesel at our Alaska refinery, for which we expect to spend approximately $54 million through 2007. We spent $23 million during the first nine months of 2006. These cost estimates are subject to further review and analysis. Our California, Washington and North Dakota refineries will not require additional capital spending to meet the new diesel fuel standards.

In connection with our 2001 acquisition of our North Dakota and Utah refineries, Tesoro assumed the seller’s obligations and liabilities under a consent decree among the United States, BP Exploration and Oil Co. (“BP”), 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 owner of these refineries, Tesoro is required to address issues that include leak detection and repair, flaring protection, and sulfur recovery unit optimization. We currently estimate we will spend $10 million through 2009 to comply with this consent decree, $1 million of which was spent during the first nine months of 2006. We also agreed to indemnify the sellers for all losses of any kind incurred in connection with the consent decree.

In connection with the 2002 acquisition of our California refinery, subject to certain conditions, we assumed the seller’s obligations pursuant to 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 retains. In November 2005, the Consent Decree was entered by the District Court for the Western District of Texas in which we agreed to undertake projects at our California refinery to reduce air emissions. We currently estimate to satisfy the requirements of the Consent Decree that we will make additional capital improvements of approximately $31 million through 2010, $1 million of which was spent during the first nine months of 2006. This cost estimate is subject to further review and analysis.

During the fourth quarter of 2005, we received approval by the Hearing Board for the Bay Area Air Quality Management District to modify our existing fluid coker unit to a delayed coker at our California refinery which is designed to lower emissions while also enhancing the refinery’s capabilities in terms of reliability, lengthening turnaround cycles and reducing operating costs. We negotiated the terms and conditions of the Second Conditional Abatement Order with the District in response to the January 2005 mechanical failure of the fluid coker boiler at the California refinery. We previously estimated that we would spend approximately $275 million through the fourth quarter of 2007 for this project. However, given current trends in engineering, labor and material costs on similar projects within the industry, we now anticipate to spend approximately $475 million to $525 million for this project. The project is currently scheduled to be substantially completed during the first quarter of 2008, with spending through the first half of 2008. We spent $76 million in the first nine months of 2006 and $3 million in 2005. This cost estimate is subject to further review and analysis.

We will spend additional capital at the California refinery for reconfiguring and replacing above-ground storage tank systems and upgrading piping within the refinery. We currently estimate that we will spend approximately $121 million through 2011, $16 million of which was spent during the first nine months of 2006. This cost estimate is subject to further review and analysis.

Conditions may develop that cause increases or decreases in future expenditures 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 compliance with the Clean Air Act and other federal, state and local requirements. We cannot currently determine the amounts of such future expenditures.

14

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Claims Against Third-Parties

Beginning in the early 1980s, Tesoro Hawaii Corporation, Tesoro Alaska Company and other fuel suppliers entered into a series of long-term, fixed-price fuel supply contracts with the U.S. Defense Energy Support Center (“DESC”). The Federal Acquisition Regulations (“FAR”) control those contracting practices, and we and many other suppliers filed separate suits in the Court of Federal Claims seeking recovery of substantial amounts for past price adjustments, based upon prior decisions by the Court of Federal Claims interpreting specific technical requirements of the FAR. The Court of Federal Claims originally granted partial summary judgment in our favor upholding that interpretation, but the Court of Appeals for the Federal Circuit reversed that holding. We then filed amended pleadings asserting other grounds to challenge the DESC contract pricing formulas. In October 2006, the Court of Federal Claims dismissed our action for all those claims. Similar rulings have been made for virtually identical claims raised by other suppliers. We are evaluating a possible appeal of this dismissal, but we will have no further claims under these contracts unless they should ultimately be reinstated upon appeal.

In 1996, Tesoro Alaska Company filed a protest of the intrastate rates charged for the transportation of its crude oil through the Trans Alaska Pipeline System (“TAPS”). Our protest asserted that the TAPS intrastate rates were excessive and should be reduced. The Regulatory Commission of Alaska (“RCA”) considered our protest of the intrastate rates for the years 1997 through 2000. The RCA set just and reasonable final rates for the years 1997 through 2000, and held that we are entitled to receive approximately $52 million in refunds, including interest through the expected conclusion of appeals in December 2007. The RCA’s ruling is currently on appeal in the Alaska courts, and we cannot give any assurances of when or whether we will prevail in the appeal.

In 2002, the RCA rejected the TAPS Carriers’ proposed intrastate rate increases for 2001-2003 and maintained the permanent rate of $1.96 to the Valdez Marine Terminal. That ruling is currently on appeal to the Alaska Superior Court, and the TAPS Carriers did not move to prevent the rate decrease. The rate decrease has been in effect since June 2003. If the RCA’s decision is upheld on appeal, we could be entitled to refunds resulting from our shipments from January 2001 through mid-June 2003. If the RCA’s decision is not upheld on appeal, we could have to pay additional shipping charges resulting from our shipments from mid-June 2003 through September 2006. We cannot give any assurances of when or whether we will prevail in the appeal. We also believe that, should we not prevail on appeal, the amount of additional shipping charges cannot reasonably be estimated since it is not possible to estimate the permanent rate which the RCA could set, and the appellate courts approve, for each year. In addition, depending upon the level of such rates, there is a reasonable possibility that any refunds for the period January 2001 through mid-June 2003 could offset some or all of any repayments due for the period mid-June 2003 through September 2006.

In July 2005, the TAPS Carriers filed a proceeding at the Federal Energy Regulatory Commission (“FERC”), seeking to have the FERC assume jurisdiction over future rates for intrastate transportation on TAPS. We have filed a protest in that proceeding, which has now been consolidated with another FERC proceeding seeking to set just and reasonable rates for future interstate transportation on TAPS. If the TAPS carriers should prevail, then the rates charged for all shipments of Alaska North Slope crude oil on TAPS could be revised by the FERC, but any FERC changes to rates for intrastate transportation of crude oil supplies for our Alaska refinery should be prospective only and should not affect prior intrastate rates, refunds or repayments.

NOTE J – NEW ACCOUNTING STANDARDS

EITF Issue No. 04-13

In September 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” EITF Issue No. 04-13 requires that two or more exchange transactions involving inventory with the same counterparty entered into in contemplation of one another should be reported net in the statement of operations. The provisions of this EITF issue also require the exchange of refined products for feedstocks or blendstocks within the same line of business to be accounted for at fair value if the fair value is determinable within reasonable limits and the transaction has commercial substance as described in SFAS No. 153. Tesoro has historically not exchanged refined products for feedstocks and blendstocks. In 2006, we adopted the provisions of EITF Issue No. 04-13 for new arrangements entered into and modifications or renewals of existing arrangements on or after January 1, 2006. The adoption of EITF Issue No. 04-13 did not have a

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TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

material impact on our financial position or results of operations. Prior to our adoption of EITF Issue No. 04-13, we had entered into a limited number of refined product purchases and sales transactions with the same counterparty which were reported in 2005 on a gross basis in revenues and costs of sales in the condensed statements of consolidated operations. Refined product sales associated with these arrangements reported on a gross basis totaled $140 million and $474 million for the three months and nine months ended September 30, 2005, respectively. Related purchases of refined products, reported on a gross basis, totaled $151 million and $469 million for the three months and nine months ended September 30, 2005, respectively.

SFAS No. 154

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires retrospective application of a voluntary change in accounting principle, unless it is impracticable to do so. This statement carries forward without change the guidance in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 became effective for changes in accounting principle made in fiscal years beginning after December 15, 2005. We adopted the provisions of SFAS No. 154 as of January 1, 2006, which had no impact on our financial position or results of operations.

FIN No. 48

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for Tesoro beginning January 1, 2007. We are currently evaluating the impact this standard will have on our financial position and results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective beginning January 1, 2008. We are currently evaluating the impact this standard will have on our financial position and results of operations.

SFAS No. 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106 and 132 (R).” SFAS No. 158 requires the recognition of an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the statement of financial position, measurement of the funded status of a plan as of the date of its year-end statement of financial position and recognition for changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as a component of other comprehensive income. Tesoro already measures the funded status of its defined benefit plans as of the end of the year. The provisions of SFAS No. 158 will be effective for Tesoro as of December 31, 2006. We are currently evaluating the impact this standard will have on our financial position and results of operations.

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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 31 for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.

BUSINESS STRATEGY AND OVERVIEW

Our strategy is to create a value-added refining and marketing business that has (i) economies of scale, (ii) a low-cost structure, (iii) effective management information systems and (iv) outstanding employees focused on business excellence in a global market, that can provide stockholders with competitive returns in any economic environment.

Our goals are focused on: (i) operating our facilities in a safe, reliable, and environmentally responsible way; (ii) improving cash flow by achieving greater operational and administrative efficiencies; and (iii) using excess cash flows from operations in a balanced way to create further shareholder value.

Significant Capital Projects

In July 2006, we decided to no longer proceed with the installation of a 25,000 barrels per day (“bpd”) delayed coker unit at our Washington refinery, which was designed to process a larger portion of lower-cost heavy crude oils or manufacture a larger percentage of higher-value products. The project, originally estimated to cost approximately $250 million, had experienced significant cost escalations in engineering, materials and labor and no longer met our rate of return objectives. The cost escalations were similar to those that had been announced on other projects both within and outside the energy sector. Our decision to terminate the project is consistent with our commitment to high return projects. The termination of the delayed coker project resulted in charges of $27 million in the 2006 third quarter.

We plan to continue with projects designed to increase the Washington refinery’s sulfur handling capabilities, increase utilization and maintain environmental compliance. These projects were included in the overall delayed coker project scope and continue to meet our rate of return objectives. With the ability to process a greater percentage of sour crude oils beginning in 2008, we estimate the Washington refinery will be able to capture up to 15% of the original benefit of the delayed coker. We currently estimate the projects will cost approximately $34 million and are expected to be completed in the second half of 2007.

We will continue with the modification of our existing fluid coker unit to a delayed coker unit at our California refinery which will enable us to comply with the terms of an abatement order to lower emissions while also enhancing the refinery’s capabilities in terms of reliability, lengthening turnaround cycles and reducing operating costs. The benefits include extending the typical coker turnaround cycle from 2.5 years to 5 years and significantly reducing the duration of coker turnarounds. We originally expected to spend approximately $275 million through the fourth quarter of 2007 for this project. However, given current trends in engineering, labor and material costs on similar projects within the industry, we now expect the project cost to be approximately $475 million to $525 million. We would expect this project to generate approximately $100 million in annual EBITDA assuming a $15 per barrel WTI to Maya crude differential. The project is currently scheduled to be substantially completed during the first quarter of 2008, with spending through the first half of 2008. We spent $76 million during the first nine months of 2006 and $3 million in 2005.

Our capital spending plan includes the 10,000 bpd diesel desulfurizer unit at our Alaska refinery which will allow us to manufacture ultra-low sulfur diesel. The project is currently scheduled to be substantially completed during the second quarter of 2007. The total cost of the project is estimated to be $55 million through the 2007 third quarter, of which we have spent $22 million through the 2006 third quarter.

All cost estimates are subject to further review and analysis. Total capital spending for 2006 is now expected to be approximately $550 million to $575 million (including refinery turnarounds and other maintenance costs of approximately $100 million), which is $95 million below our original 2006 budget. The revisions to our 2006 capital spending projections include the cancellation of the delayed coker project at our Washington refinery of $71 million. Our 2007 capital budget is currently under development but we expect spending to be in the range of $550 million to $650 million, including refinery turnarounds and other maintenance costs of approximately $90 million to $100 million.

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Share Repurchase Program

In November 2005, our Board of Directors authorized a $200 million share repurchase program. During the first nine months of 2006, we repurchased 2.1 million shares of common stock for $135 million. From the inception of the program through September 30, 2006, we have repurchased 2.4 million shares of common stock for $149 million.

Industry Overview

The fundamentals of the refining industry remained strong on both a worldwide and a domestic level during most of the third quarter of 2006. However, crude oil prices and U.S. refining margins fell during the second half of the third quarter. Continued demand growth in developing areas such as India and China, coupled with reduced surplus production capacity within OPEC, and political concerns involving Iran, North Korea, Nigeria and Venezuela continued to support high prices for crude and petroleum products. In the U.S., refining margins remained strong, in part due to the continued high gasoline demand, limited production capacity, a stronger reliance on gasoline imports and the continuing impacts from the introduction of new lower sulfur requirements for gasoline in January 2006 and diesel in June 2006. However, several factors negatively impacted U.S. refining margins late in the third quarter, including lower seasonal demand for gasoline, an easing of concerns over hurricanes in the U.S. Gulf Coast, increasing distillate inventories and a forecasted mild winter.

Industry margins in the U.S. and for the U.S. West Coast in particular have improved in October compared to September levels due to the impact of significant refinery maintenance downtime in October that is expected to extend into the first quarter of next year. Further, the impacts from more stringent sulfur standards for gasoline and diesel and the removal of MTBE as a blendstock nationwide are expected to continue in 2007. These factors should provide support for a strong margin environment in 2007.

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

Summary

Our net earnings were $274 million ($3.92 per diluted share) for the three months ended September 30, 2006 (“2006 Quarter”), compared with net earnings of $226 million ($3.20 per share) for the three months ended September 30, 2005 (“2005 Quarter”). For the year-to-date periods, our net earnings were $643 million ($9.17 per diluted share) for the nine months ended September 30, 2006 (“2006 Period”), compared with net earnings of $438 million ($6.23 per share) for the nine months ended September 30, 2005 (“2005 Period”). Net earnings increased during the 2006 Quarter due to higher throughput and achieving higher total gross refining margins despite lower average industry margins as described below. The increase in net earnings during the 2006 Period was primarily due to higher refined product margins and increased throughput levels. In both the 2006 Quarter and 2006 Period, we experienced lower interest expense as a result of debt reduction and refinancing in 2005. Net earnings for the 2006 Quarter and 2006 Period included an aftertax charge of $17 million ($0.24 per share) related to the termination of the delayed coker project at our Washington refinery. Net earnings for the 2005 Period included charges for executive termination and retirement costs of $6 million aftertax ($0.08 per share) and aftertax debt prepayment costs totaling $2 million ($0.03 per share). A discussion and analysis of the factors contributing to our results of operations is presented below. The accompanying condensed consolidated financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.

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Refining Segment

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in millions except per barrel amounts)	2006			2005			2006			2005
Revenues
Refined products (a)	$	5,018		$	4,775		$	13,548		$	11,552
Crude oil resales and other		195			187			374			518
Total Revenues	$	5,213		$	4,962		$	13,922		$	12,070
Refining Throughput (thousand barrels per day) (b)
California		173			169			164			163
Pacific Northwest
Washington		125			123			119			109
Alaska		68			64			56			61
Mid-Pacific
Hawaii		89			87			87			80
Mid-Continent
North Dakota		61			59			56			58
Utah		58			57			56			55
Total Refining Throughput		574			559			538			526
% Heavy Crude Oil of Total Refinery Throughput (c)		48	%		46	%		50	%		50	%
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks		262			260			251			247
Jet fuel		75			73			70			68
Diesel fuel		139			129			123			116
Heavy oils, residual products, internally produced fuel and other		117			116			115			114
Total Yield		593			578			559			545
Refining Margin ($/throughput barrel) (d)
California
Gross refining margin	$	19.65		$	20.51		$	19.98		$	18.88
Manufacturing cost before depreciation and amortization	$	5.23		$	5.33		$	5.59		$	5.39
Pacific Northwest
Gross refining margin	$	12.15		$	12.87		$	11.94		$	10.33
Manufacturing cost before depreciation and amortization	$	2.56		$	2.52		$	2.69		$	2.67
Mid-Pacific
Gross refining margin	$	9.31		$	5.60		$	6.67		$	5.39
Manufacturing cost before depreciation and amortization	$	1.85		$	1.75		$	1.73		$	1.94
Mid-Continent
Gross refining margin	$	17.84		$	11.98		$	14.69		$	9.26
Manufacturing cost before depreciation and amortization	$	2.90		$	2.55		$	2.93		$	2.57
Total
Gross refining margin	$	15.25		$	13.87		$	14.09		$	12.02
Manufacturing cost before depreciation and amortization	$	3.32		$	3.25		$	3.47		$	3.38

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Segment Operating Income
Gross refining margin (after inventory changes) (e)	$	786	$	696	$	2,039	$	1,703
Expenses
Manufacturing costs		175		167		510		485
Other operating expenses		45		49		122		136
Selling, general and administrative		6		7		16		21
Depreciation and amortization (f)		56		37		164		109
Loss on asset disposals and impairments		30		2		35		5
Segment Operating Income	$	474	$	434	$	1,192	$	947
Product Sales (thousand barrels per day) (a) (g)
Gasoline and gasoline blendstocks		301		310		284		295
Jet fuel		96		106		92		101
Diesel fuel		136		154		131		140
Heavy oils, residual products and other		93		80		86		75
Total Product Sales		626		650		593		611
Product Sales Margin ($/barrel) (g)
Average sales price	$	87.33	$	79.98	$	83.94	$	69.30
Average costs of sales		74.95		67.79		71.82		58.88
Product Sales Margin	$	12.38	$	12.19	$	12.12	$	10.42

(a)	Includes intersegment sales to our retail segment at prices which approximate market of $290 million and $270 million for the three months ended September 30, 2006 and 2005, respectively, and $772 million and $676 million for the nine months ended September 30, 2006 and 2005, respectively.
(b)	We experienced reduced throughput due to scheduled maintenance turnarounds at the Alaska refinery during the 2006 second quarter and the California refinery during the 2006 first quarter, and unscheduled downtime at the North Dakota refinery during the 2006 second quarter. During the 2005 second quarter, we experienced reduced throughput at the Hawaii refinery due to a scheduled maintenance turnaround. In the 2005 first quarter we experienced reduced throughput at the California and Washington refineries, primarily as a result of scheduled major maintenance turnarounds and unscheduled downtime.
(c)	We define “heavy” crude oil as Alaska North Slope or crude oil with an American Petroleum Institute specific gravity of 32 or less.
(d)	Management uses gross refining margin per barrel to evaluate performance, allocate resources and compare profitability to other companies in the industry. Gross refining margin per barrel is calculated by dividing gross refining margin before inventory changes by total refining throughput and may not be calculated similarly by other companies. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations and allocate resources. Manufacturing costs per barrel may not be comparable to similarly titled measures used by other companies. Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America.
(e)	Gross refining margin is calculated as revenues less costs of feedstocks, purchased products, transportation and distribution. Gross refining margin approximates total refining segment throughput times gross refining margin per barrel, adjusted for changes in refined product inventory due to selling a volume and mix of product that is different than actual volumes manufactured. Gross refining margin also includes the effect of intersegment sales to the retail segment at prices which approximate market.
(f)	Includes manufacturing depreciation and amortization per throughput barrel of approximately $0.97 and $0.64 for the three months ended September 30, 2006 and 2005, respectively, and $1.03 and $0.68 for the nine months ended September 30, 2006 and 2005, respectively.

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(g) Sources of total product sales included products manufactured at the refineries and products purchased from third parties. Total product sales margin includes margins on sales of manufactured and purchased products and the effects of inventory changes. Total product sales were reduced by 33 thousand barrels per day (“Mbpd”) and 25 Mbpd in the 2006 Quarter and 2006 Period, respectively, as a result of recording certain purchases and sales transactions with the same counterparty on a net basis beginning in the 2006 first quarter upon adoption of EITF Issue No. 04-13 (see Note J of the condensed consolidated financial statements in Item 1 for further information.)

Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005. Operating income from our refining segment was $474 million in the 2006 Quarter compared to $434 million for the 2005 Quarter. The $40 million increase in our operating income was primarily due to higher gross refining margins and increased throughput, partly offset by higher depreciation expense. The 2006 Quarter included charges of $27 million related to the termination of the delayed coker project at our Washington refinery. Total gross refining margins increased 10% to $15.25 per barrel in the 2006 Quarter compared to $13.87 per barrel in the 2005 Quarter. Industry margins during the 2006 Quarter were lower as compared to the 2005 Quarter, reflecting production and supply disruptions on the U.S. Gulf Coast caused by hurricanes Katrina and Rita in 2005. Our gross refining margins increased despite lower average industry margins during the 2006 Quarter as compared to the 2005 Quarter, reflecting higher capture rates and stronger wholesale margins given the more stable margin environment in the 2006 Quarter.

On an aggregate basis total gross refining margins increased to $786 million during the 2006 Quarter from $696 million in the 2005 Quarter, reflecting significantly higher per barrel gross refining margins in our Mid-Pacific and Mid-Continent regions and increased throughput at all of our refineries. In our Mid-Continent region, gross refining margins increased almost 50% to $17.84 per barrel during the 2006 Quarter from $11.98 per barrel in the 2005 Quarter, reflecting lower feedstock costs due to higher local crude production and strong diesel demand. Mid-Pacific gross refining margins increased over 65% to $9.31 per barrel during the 2006 Quarter from $5.60 per barrel, reflecting lower feedstock costs due to processing a higher percentage of heavier and more sour crude to meet increased asphalt demand. Total refining throughput averaged 574 Mbpd in the 2006 Quarter compared to 559 Mbpd during the 2005 Quarter. During the 2006 Quarter, we achieved record high total quarterly refining throughput, which reflects improved reliability and operating efficiencies due to recent scheduled maintenance turnarounds at our California, Washington, Alaska and Hawaii refineries. In addition, our on-going process controls modernization programs at our California and Washington refineries contributed to higher throughput in the 2006 Quarter.

Revenues from sales of refined products increased 4% to $5.0 billion in the 2006 Quarter, from $4.8 billion in the 2005 Quarter, primarily due to higher average product sales prices partially offset by lower product sales volumes. Our average product prices increased 9% to $87.33 per barrel, reflecting the continued strength in market fundamentals. Total product sales averaged 626 Mbpd in the 2006 Quarter, a decrease of 24 Mbpd from the 2005 Quarter, reflecting recording certain purchases and sales transactions on a net basis as described in note (g) in the table above. Our average costs of sales increased 11% to $74.95 per barrel during the 2006 Quarter reflecting higher average feedstock prices. Expenses, excluding depreciation and amortization, increased to $256 million in the 2006 Quarter, compared with $225 million in the 2005 Quarter, reflecting charges of $27 million related to the termination of the delayed coker project, increased employee costs of $4 million and higher expenses of $4 million for refinery maintenance and chemical and catalyst supplies. The increase was partially offset by reclassifying certain pipeline and terminal costs of $7 million from other operating costs to costs of sales. Depreciation and amortization increased to $56 million in the 2006 Quarter, compared to $37 million in the 2005 Quarter. During the fourth quarter of 2005, we shortened the estimated lives of the fluid coker unit and certain tanks at our California refinery and recorded asset retirement obligations. The fluid coker unit is being modified to a delayed coker unit. The shortened asset lives and recorded asset retirement obligations resulted in additional depreciation of $11 million during the 2006 Quarter and will increase depreciation in 2006 by approximately $45 million. The increase in depreciation and amortization also reflects increasing capital expenditures.

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Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005. Operating income from our refining segment was $1.2 billion in the 2006 Period compared to $947 million for the 2005 Period. The $245 million increase in our operating income was primarily due to increased gross refining margins and higher throughput levels, partly offset by higher depreciation expense. The 2006 Period included charges of $27 million related to the termination of the Washington delayed coker project. Total gross refining margins increased to $14.09 per barrel in the 2006 Period compared to $12.02 per barrel in the 2005 Period due to higher industry margins in all of our regions, reflecting the same industry trends noted above. Further, increased turnaround activity in the first quarter and early second quarter of 2006 tightened supplies, following the postponement of scheduled turnarounds industry-wide late in 2005 as a result of hurricanes Katrina and Rita. Despite strong market fundamentals during the 2006 Period, industry margins during September declined year-over-year as a result of the industry trends described above, including the impact of hurricanes Katrina and Rita during 2005.

During the 2006 Period, we achieved higher gross refining margins on a per-barrel-basis in all of our regions because of strong industry fundamentals as described above. While industry margins were impacted during the 2005 Quarter due to the active hurricane season, several factors negatively impacted our gross refining margins in the first six months of 2005. Our gross refining margins in our Pacific Northwest region were negatively impacted during the 2005 first quarter as our Washington refinery completed a scheduled maintenance turnaround of the crude and naphtha reforming units and incurred unscheduled downtime due to outages of certain processing equipment. In addition, our gross refining margins in our Pacific Northwest region during the first half of 2005 were negatively impacted as the increased differential between light and heavy crude oil depressed the margins for heavy fuel oils. Scheduled maintenance and unscheduled downtime at our California refinery during the 2005 first quarter and a scheduled maintenance turnaround at our Hawaii refinery during the 2005 second quarter negatively impacted gross refining margins. In our Mid-Continent region, our Utah refinery was negatively impacted by certain factors primarily during the 2005 first quarter, including higher crude oil costs due to Canadian production constraints and depressed market fundamentals in the Salt Lake City area due to record high first quarter production in PADD IV.

On an aggregate basis, total gross refining margins increased to $2.0 billion during the 2006 Period from $1.7 billion in the 2005 Period, reflecting increased throughput and higher per barrel gross refining margins as described above. Total refining throughput averaged 538 Mbpd in the 2006 Period, an increase of 12 Mbpd from the 2005 Period, primarily as a result of experiencing less scheduled and unscheduled downtime during the 2006 Period and our on-going process controls modernization programs at our California and Washington refineries. During the 2006 Period, we experienced scheduled refinery turnarounds at our California and Alaska refineries and unscheduled downtime at our North Dakota refinery. We also experienced reduced throughput at our Alaska refinery during the 2006 first quarter as a result of the grounding of our time-chartered vessel which impacted our supply of feedstocks to the refinery. As described above, during the 2005 Period, we experienced scheduled refinery turnarounds at our California, Washington and Hawaii refineries and other unscheduled downtime.

Revenues from sales of refined products increased 16% to $13.5 billion in the 2006 Period, from $11.6 billion in the 2005 Period, primarily due to significantly higher average product sales prices, partially offset by slightly lower product sales volumes. Our average product prices increased 21% to $83.94 per barrel reflecting the continued strength in market fundamentals. Total product sales averaged 593 Mbpd in the 2006 Period, a decrease of 18 Mbpd from the 2005 Period, reflecting recording certain purchases and sales transactions on a net basis as described in note (g) in the table above. Our average costs of sales increased 22% to $71.82 per barrel during the 2006 Period, reflecting significantly higher average feedstock prices. Expenses, excluding depreciation and amortization, increased to $683 million in the 2006 Period, compared with $647 million in the 2005 Period, primarily due to charges of $27 million related to the termination of the delayed coker project. We also incurred higher utility costs of $12 million, increased employee costs of $11 million and higher contractor expenses of $3 million, which were primarily offset by reclassifying certain pipeline and terminal costs of $23 million from other operating costs to costs of sales. Depreciation and amortization increased to $164 million in the 2006 Period, compared to $109 million in the 2005 Period primarily due to shortening the estimated lives and recording asset retirement obligations of certain assets at our California refinery, as described above, resulting in additional depreciation of $34 million during the 2006 Period. The increase in depreciation and amortization also reflects increasing capital expenditures.

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Retail Segment

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in millions except per gallon amounts)	2006			2005			2006			2005
Revenues
Fuel	$	316		$	285		$	824		$	720
Merchandise and other		39			40			110			107
Total Revenues	$	355		$	325		$	934		$	827
Fuel Sales (millions of gallons)		117			121			327			349
Fuel Margin ($/gallon) (a)	$	0.22		$	0.12		$	0.16		$	0.13
Merchandise Margin	$	11		$	10		$	29		$	27
Merchandise Margin (percent of sales)		29	%		26	%		27	%		26	%
Average Number of Stations (during the period)
Company-operated		202			212			207			213
Branded jobber/dealer		260			278			260			285
Total Average Retail Stations		462			490			467			498
Segment Operating Income (Loss)
Gross Margins
Fuel (b)	$	26		$	15		$	52		$	45
Merchandise and other non-fuel margin		11			11			31			29
Total gross margins		37			26			83			74
Expenses
Operating expenses		22			24			67			68
Selling, general and administrative		7			5			19			19
Depreciation and amortization		4			5			12			13
Loss on asset disposals and impairments		1			2			6			4
Segment Operating Income (Loss)	$	3		$	(10	)	$	(21	)	$	(30	)

(a)

Management uses fuel margin per gallon to compare profitability to other companies in the industry. Fuel margin per gallon is calculated by dividing fuel gross margin by fuel sales volume and may not be calculated similarly by other companies. Investors and analysts use fuel margin per gallon to help analyze and compare companies in the industry on the basis of operating performance. This financial measure should not be considered as an alternative to segment operating income and revenues or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America.

(b)

Includes the effect of intersegment purchases from our refining segment at prices which approximate market.

Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005. Operating income for our retail segment was $3 million in the 2006 Quarter, compared to an operating loss of $10 million in the 2005 Quarter. Total gross margins increased to $37 million during the 2006 Quarter from $26 million in the 2005 Quarter reflecting higher fuel margins per gallon, partly offset by lower sales volumes. Fuel margin increased to $0.22 per gallon in the 2006 Quarter compared to $0.12 per gallon in the 2005 Quarter as retail prices lagged falling wholesale prices. Total gallons sold decreased to 117 million from 121 million, reflecting the decrease in average station count to 462 in the 2006 Quarter from 490 in the 2005 Quarter. The decrease in average station count reflects our continued rationalization of retail assets, including the sale of 13 company-operated sites in August 2006.

Revenues on fuel sales increased to $316 million in the 2006 Quarter, from $285 million in the 2005 Quarter, reflecting increased sales prices, partly offset by lower sales volumes. Costs of sales increased in the 2006 Quarter due to higher average prices of purchased fuel, partly offset by lower sales volumes.

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Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005. Operating loss for our retail segment was $21 million in the 2006 Period, compared to an operating loss of $30 million in the 2005 Period. The 2006 first quarter included an impairment of $4 million related to the sale of 13 retail sites located in the Pacific Northwest in August 2006. Total gross margins increased to $83 million during the 2006 Period from $74 million in the 2005 Period reflecting higher fuel margins, partly offset by lower sales volumes. Fuel margin increased to $0.16 per gallon in the 2006 Period compared to $0.13 per gallon in the 2005 Period, reflecting the substantial increase in fuel margin during the 2006 third quarter described above. Total gallons sold decreased to 327 million from 349 million, reflecting the decrease in average station count to 467 in the 2006 Period from 498 in the 2005 Period. The decrease in average station count reflects our continued rationalization of retail assets, including the sale of 13 company-operated sites in August 2006.

Revenues on fuel sales increased to $824 million in the 2006 Period, from $720 million in the 2005 Period, reflecting higher sales prices, partly offset by lower sales volumes. Costs of sales increased in the 2006 Period due to higher average prices of purchased fuel, partly offset by lower sales volumes.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $41 million and $126 million for the 2006 Quarter and 2006 Period, respectively, compared to $41 million and $143 million in the 2005 Quarter and 2005 Period, respectively. The decrease during the 2006 Period was primarily due to charges totaling $11 million for the termination and retirement of certain executive officers during the 2005 Period and lower contract labor expenses of $12 million, partially offset by higher employee expenses of $9 million.

Interest and Financing Costs

Interest and financing costs decreased by $11 million and $34 million in the 2006 Quarter and 2006 Period, respectively. The decreases were primarily due to lower interest expense associated with debt reduction during 2005 totaling $191 million and the refinancing of our 8% senior secured notes and 9⁵/₈% senior subordinated notes. The 2005 Period included prepayment charges of $3 million in connection with the voluntary prepayment of our senior secured term loans.

Interest Income and Other

Interest income and other increased by $10 million and $26 million for the 2006 Quarter and 2006 Period, respectively. The increases reflect a significant increase in invested cash balances along with higher interest rates. In addition, during the 2006 Period we recorded a gain of $5 million associated with the sale of our leased corporate headquarters by a limited partnership in which we were a 50% partner.

Income Tax Provision

The income tax provision totaled $168 million and $399 million for the 2006 Quarter and 2006 Period, respectively, compared to $141 million and $281 million for the 2005 Quarter and 2005 Period, respectively, reflecting higher earnings before income taxes. The combined federal and state effective income tax rate was 38% and 39% for the 2006 and 2005 Periods, respectively.

CAPITAL RESOURCES AND LIQUIDITY

Overview

We operate in an environment where our capital resources and liquidity are impacted by changes in the price of crude oil and refined petroleum products, availability of trade credit, 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, geopolitical conditions and overall market and economic conditions. See “Forward-Looking Statements” on page 31 for further information related to risks and other factors.

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Future capital expenditures, as well as borrowings under our credit agreement and other sources of capital, may be affected by these conditions.

Our primary sources of liquidity have been cash flows from operations and borrowing availability under revolving lines of credit. We ended the third quarter of 2006 with $886 million of cash and cash equivalents, no revolver borrowings, and $557 million in available borrowing capacity under our $750 million credit agreement after $193 million in outstanding letters of credit. We also have a separate letters of credit agreement of which we had $140 million available after $110 million in outstanding letters of credit as of September 30, 2006. We believe available capital resources will be adequate to meet our capital expenditures, working capital and debt service requirements.

Capitalization

Our capital structure at September 30, 2006 was comprised of the following (in millions):

Debt, including current maturities:
Credit Agreement — Revolving Credit Facility	$	—
61/4% Senior Notes Due 2012		450
65/8% Senior Notes Due 2015		450
95/8% Senior Subordinated Notes Due 2012		14
Junior subordinated notes due 2012		101
Capital lease obligations and other		29
Total debt		1,044
Stockholders’ equity		2,425
Total Capitalization	$	3,469

At September 30, 2006, our debt to capitalization ratio was 30% compared with 36% at year-end 2005, reflecting an increase in retained earnings primarily due to net earnings of $643 million during the 2006 Period.

Our credit agreement and senior notes impose various restrictions and covenants on us that could potentially limit our ability to respond to market conditions, raise additional debt or equity capital, or take advantage of business opportunities.

Credit Agreement

In July 2006, we amended our credit agreement to extend the term by one year to June 2009 and reduce letters of credit fees and revolver borrowing interest by 0.25%. Our credit agreement currently provides for borrowings (including letters of credit) up to the lesser of the agreement’s total capacity, $750 million as amended, or the amount of a periodically adjusted borrowing base ($1.7 billion as of September 30, 2006), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, as defined. As of September 30, 2006, we had no borrowings and $193 million in letters of credit outstanding under the revolving credit facility, resulting in total unused credit availability of $557 million or 74% of the eligible borrowing base. Borrowings under the revolving credit facility bear interest at either a base rate (8.25% at September 30, 2006) or a eurodollar rate (5.32% at September 30, 2006), plus an applicable margin. The applicable margin at September 30, 2006 was 1.25% in the case of the eurodollar rate, but varies based upon our credit facility availability and credit ratings. Letters of credit outstanding under the revolving credit facility incur fees at an annual rate tied to the eurodollar rate applicable margin (1.25% at September 30, 2006). We also incur commitment fees for the unused portion of the revolving credit facility at an annual rate of 0.25% as of September 30, 2006.

We also have a separate letters of credit agreement for the purchase of foreign petroleum inventories. In July 2006, we increased the capacity under the separate letters of credit agreement to $250 million from $165 million. The agreement is secured by our petroleum inventories supported by letters of credit issued under the agreement and will remain in effect until terminated by either party. Letters of credit outstanding under this agreement incur fees at an annual rate of 1.25% to 1.38%. As of September 30, 2006, we had $110 million in letters of credit outstanding under this agreement, resulting in total unused credit availability of $140 million or 56% of total capacity under this credit agreement.

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8% Senior Secured Notes Due 2008

On April 17, 2006, we voluntarily prepaid the remaining $9 million outstanding principal balance of our 8% senior secured notes at a prepayment premium of 4%.

Common Stock Repurchase Program

In November 2005, our Board of Directors authorized a $200 million share repurchase program. Under the program, we repurchase our common stock from time to time in the open market. Purchases will depend on price, market conditions and other factors. During the 2006 Period, we repurchased 2.1 million shares of common stock under the program for $135 million or an average cost per share of $62.84. As of September 30, 2006, $51 million remained available for future repurchases under the program, which we expect to complete by the end of the year.

Cash Flow Summary

Components of our cash flows are set forth below (in millions):

	Nine Months Ended
	September 30,
	2006			2005
Cash Flows From (Used In):
Operating Activities	$	878		$	694
Investing Activities		(291	)		(167	)
Financing Activities		(141	)		(55	)
Increase in Cash and Cash Equivalents	$	446		$	472

Net cash from operating activities during the 2006 Period totaled $878 million, compared to $694 million in the 2005 Period. The increase was primarily due to increased cash earnings, partly offset by higher working capital requirements. Net cash used in investing activities of $291 million in the 2006 Period was primarily for capital expenditures, excluding turnarounds. Net cash used in financing activities primarily reflects repurchases under our common stock repurchase program totaling $135 million.

During the 2006 Quarter, we did not borrow or make repayments under the revolving credit facility. Working capital was $1.2 billion at September 30, 2006 compared to $713 million at year-end 2005, as a result of the increase in cash and cash equivalents, higher receivables and inventory values, partially offset by increases in accounts payable, attributable to higher crude and product prices.

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Historical EBITDA

EBITDA represents earnings before interest and financing costs, interest income, income taxes, and depreciation and amortization. We present EBITDA because we believe some investors and analysts use EBITDA to help analyze our cash flow including our ability to satisfy interest obligations with respect to our indebtedness and to use cash for other purposes, including capital expenditures. EBITDA is also used by some investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is also used by management for internal analysis and as a component of the fixed charge coverage financial covenant in our credit agreement. EBITDA should not be considered as an alternative to net earnings, earnings before income taxes, cash flows from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America. EBITDA may not be comparable to similarly titled measures used by other entities. Our historical EBITDA reconciled to net cash from operating activities was (in millions):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Net Cash From Operating Activities	$	469		$	609		$	878		$	694
Changes in Assets and Liabilities		(63	)		(308	)		78			(36	)
Excess Tax Benefits from Stock-Based Compensation Arrangements		3			4			18			24
Deferred Income Taxes		(35	)		(18	)		(78	)		(68	)
Stock-Based Compensation		(2	)		(9	)		(16	)		(24	)
Loss on Asset Disposals and Impairments		(31	)		(4	)		(43	)		(9	)
Amortization and Write-off of Debt Issuance Costs and Discounts		(4	)		(4	)		(11	)		(15	)
Depreciation and Amortization		(63	)		(44	)		(183	)		(128	)
Net Earnings		274			226			643			438
Add Income Tax Provision		168			141			399			281
Less Interest Income and Other		(15	)		(5	)		(32	)		(6	)
Add Interest and Financing Costs		19			30			60			94
Operating Income		446			392			1,070			807
Add Depreciation and Amortization		63			44			183			128
Add Gain on Partnership Sale		¾			¾			5			¾
EBITDA	$	509		$	436		$	1,258		$	935

Historical EBITDA as presented above differs from EBITDA as defined under our credit agreement. The primary differences are non-cash postretirement benefit costs and loss on asset disposals and impairments, which are added to net earnings under the credit agreement EBITDA calculations.

Capital Expenditures and Refinery Turnaround Spending

Total capital spending for 2006, including refinery turnarounds and other maintenance spending of $100 million, is now expected to be $550 million to $575 million, which is $95 million below our original 2006 capital budget. The revisions to our 2006 capital spending projections include the cancellation of the delayed coker project at our Washington refinery of $71 million with the remainder delayed until 2007.

We plan to continue with certain projects included in the overall delayed coker project scope at the Washington refinery which are designed to increase sulfur handling capabilities, improve utilization and maintain environmental compliance. The projects will cost an estimated $34 million and are expected to be completed in the second half of 2007. In addition, we will continue with the modification of our existing fluid coker unit to a delayed coker unit at our California refinery. During the design phase for this project, we decided to utilize a different delayed coker technology and given current trends in engineering, labor and material costs on similar projects within the industry, we now expect costs for the project to total approximately $475 million to $525 million. We originally expected to spend approximately $275 million for this project through the fourth quarter of 2007. The project is currently scheduled to be

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substantially completed during the first quarter of 2008, with spending through the first half of 2008. These cost estimates are subject to further review and analysis.

During the 2006 Period, our capital expenditures, including refinery turnaround and other maintenance costs of $59 million and accruals, totaled $345 million. Our capital expenditures included $76 million for the delayed coker modification at our California refinery, $22 million for the diesel desulfurizer unit at our Alaska refinery, $29 million for other refinery improvements at our California refinery, $51 million for other clean air, clean fuels and environmental projects, and $25 million for the cancelled delayed coker unit at our Washington refinery. Refinery turnaround and other maintenance costs consisted primarily of the scheduled turnaround at our California refinery during the 2006 first quarter and our Alaska refinery during the 2006 second quarter.

We expect our capital expenditures for the remainder of 2006, including refinery turnaround and other maintenance costs of $41 million, to approximate $205 million to $230 million. Our estimated capital expenditures for the remainder of 2006 includes $62 million for the delayed coker modification project at our California refinery, $11 million for the diesel desulfurizer unit at our Alaska refinery, $31 million for other clean air, clean fuels and environmental projects and $26 million for other refinery improvements at our California refinery. The refinery turnaround and other maintenance costs primarily include the planned scheduled maintenance turnaround at the Washington refinery during the fourth quarter of 2006. Our 2007 capital budget is currently under development but we expect spending to be in the range of $550 million to $650 million, including refinery turnarounds and other maintenance costs of approximately $90 million to $100 million.

Environmental and Other

Tesoro 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 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.

Environmental Liabilities

We are currently involved in remedial responses and have incurred and expect to continue to incur cleanup expenditures associated with environmental matters at a number of sites, including certain of our previously owned properties. At September 30, 2006, our accruals for environmental expenses totaled $28 million. Our accruals for environmental expenses include retained liabilities for previously owned or operated properties, refining, pipeline and terminal operations and retail service stations. We believe these accruals are adequate, based on currently available information, including the participation of other parties or former owners in remediation action.

We have completed an investigation of environmental conditions at certain active wastewater treatment units at our California refinery. This investigation was driven by an order from the San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the California refinery. We are evaluating and implementing certain improvements to the wastewater treatment units as a result of this investigation. A reserve for this matter is included in the environmental accruals referenced above.

On October 24, 2005, we received a Notice of Violation (“NOV”) from the United States Environmental Protection Agency (“EPA”). The EPA alleges certain modifications made to the fluid catalytic cracking unit at our Washington refinery prior to our acquisition of the refinery were made in violation of the Clean Air Act. We have investigated the allegations and believe the ultimate resolution of the NOV will not have a material adverse effect on our financial position or results of operations. A reserve for our response to the NOV is included in the environmental accruals referenced above.

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In September 2006, we reached an agreement with the Bay Area Air Quality Management District (the “District”) to settle 28 NOVs issued to Tesoro from January 2004 to September 2004 alleging violations of various air quality requirements at the California refinery. The settlement agreement was executed on October 11, 2006. Pursuant to the terms of the settlement agreement, Tesoro will make a cash payment of $200,000 to the District during the fourth quarter of 2006 and undertake a supplemental project valued at approximately $100,000, both of which have been included in the environmental accruals referenced above.

Other Environmental Matters

In the ordinary course of business, we become party to or otherwise involved in lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large and sometimes unspecified damages or penalties may be sought from us in some matters for which the likelihood of loss may be reasonably possible but the amount of loss is not currently estimable, and some matters may require years for us to resolve. As a result, we have not established reserves for these matters. On the basis of existing information, we believe that the resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. However, we cannot provide assurance that an adverse resolution of one or more of the matters described below during a future reporting period will not have a material adverse effect on our financial position or results of operations in future periods.

We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. The defendants are being sued for having manufactured MTBE and having manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs, all in California, are generally water providers, governmental authorities and private well owners alleging, in part, the defendants are liable for manufacturing or distributing a defective product. The suits generally seek individual, unquantified compensatory and punitive damages and attorney’s fees, but we cannot estimate the amount or the likelihood of the ultimate resolution of these matters at this time, and accordingly have not established a reserve for these cases. We believe we have defenses to these claims and intend to vigorously defend the lawsuits.

Soil and groundwater conditions at our California refinery may require substantial expenditures over time. In connection with our acquisition of the California refinery from Ultramar, Inc. in May 2002, Ultramar assigned certain of its rights and obligations that Ultramar had acquired from Tosco Corporation in August of 2000. Tosco assumed responsibility and contractually indemnified us for up to $50 million for certain environmental liabilities arising from operations at the refinery prior to August of 2000, which are identified prior to August 31, 2010 (“Pre-Acquisition Operations”). Based on existing information, we currently estimate that the known environmental liabilities arising from Pre-Acquisition Operations including soil and groundwater conditions at the refinery will exceed the $50 million indemnity. We expect to be reimbursed for excess liabilities under certain environmental insurance policies that provide $140 million of coverage in excess of the $50 million indemnity. Because of Tosco’s indemnification and the environmental insurance policies, we have not established a reserve for these defined environmental liabilities arising out of the Pre-Acquisition Operations.

In November 2003, we filed suit in Contra Costa County Superior Court against Tosco alleging that Tosco misrepresented, concealed and failed to disclose certain additional environmental conditions at our California refinery related to the soil and groundwater conditions referenced above. The court granted Tosco’s motion to compel arbitration of our claims for these certain additional environmental conditions. In the arbitration proceedings we initiated against Tosco in December 2003, we are also seeking a determination that Tosco is liable for investigation and remediation of these certain additional environmental conditions, the amount of which is currently unknown and therefore a reserve has not been established, and which may not be covered by the $50 million indemnity for the defined environmental liabilities arising from Pre-Acquisition Operations. In response to our arbitration claims, Tosco filed counterclaims in the Contra Costa County Superior Court action alleging that we are contractually responsible for additional environmental liabilities at our California refinery, including the defined environmental liabilities arising from Pre-Acquisition Operations. In February 2005, the parties agreed to stay the arbitration proceedings to pursue settlement discussions. In June 2006, the parties terminated settlement discussions and agreed to proceed with the arbitration. We intend to vigorously prosecute our claims against Tosco and to oppose Tosco’s claims against us, and although we cannot provide assurance that we will prevail, we believe that the resolution of the arbitration will not have a material adverse effect on our financial position or results of operations.

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Environmental Capital Expenditures

EPA regulations related to the Clean Air Act require reductions in the sulfur content in gasoline. Our California, Washington, Hawaii, Alaska and North Dakota refineries will not require additional capital spending to meet the low sulfur gasoline standards. We are currently evaluating alternative projects that will satisfy the requirements to meet the regulations at our Utah refinery.

EPA regulations related to the Clean Air Act also require reductions in the sulfur content in diesel fuel manufactured for on-road consumption. In general, the new on-road diesel fuel standards became effective on June 1, 2006. In May 2004, the EPA issued a rule regarding the sulfur content of non-road diesel fuel. The requirements to reduce non-road diesel sulfur content will become effective in phases between 2007 and 2010. Based on our latest engineering estimates, to meet the revised diesel fuel standards, we expect to spend approximately $74 million in capital improvements through 2007, $39 million of which was spent during the first nine months of 2006. Included in the estimate are capital projects to manufacture additional ultra-low sulfur diesel at our Alaska refinery, for which we expect to spend approximately $54 million through 2007. We spent $23 million during the first nine months of 2006. These cost estimates are subject to further review and analysis. Our California, Washington and North Dakota refineries will not require additional capital spending to meet the new diesel fuel standards.

In connection with our 2001 acquisition of our North Dakota and Utah refineries, Tesoro assumed the seller’s obligations and liabilities under a consent decree among the United States, BP Exploration and Oil Co. (“BP”), 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 owner of these refineries, Tesoro is required to address issues that include leak detection and repair, flaring protection, and sulfur recovery unit optimization. We currently estimate we will spend $10 million through 2009 to comply with this consent decree, $1 million of which was spent during the first nine months of 2006. We also agreed to indemnify the sellers for all losses of any kind incurred in connection with the consent decree.

In connection with the 2002 acquisition of our California refinery, subject to certain conditions, we assumed the seller’s obligations pursuant to 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 retains. In November 2005, the Consent Decree was entered by the District Court for the Western District of Texas in which we agreed to undertake projects at our California refinery to reduce air emissions. We currently estimate to satisfy the requirements of the Consent Decree that we will make additional capital improvements of approximately $31 million through 2010, $1 million of which was spent during the first nine months of 2006. This cost estimate is subject to further review and analysis.

During the fourth quarter of 2005, we received approval by the Hearing Board for the Bay Area Air Quality Management District to modify our existing fluid coker unit to a delayed coker at our California refinery which is designed to lower emissions while also enhancing the refinery’s capabilities in terms of reliability, lengthening turnaround cycles and reducing operating costs. We negotiated the terms and conditions of the Second Conditional Abatement Order with the District in response to the January 2005 mechanical failure of the fluid coker boiler at the California refinery. We previously estimated that we would spend approximately $275 million through the fourth quarter of 2007 for this project. However, given current trends in engineering, labor and material costs on similar projects within the industry, we now anticipate to spend approximately $475 million to $525 million for this project. The project is currently scheduled to be substantially completed during the first quarter of 2008, with spending through the first half of 2008. We spent $76 million in the first nine months of 2006 and $3 million in 2005. This cost estimate is subject to further review and analysis.

We will spend additional capital at the California refinery for reconfiguring and replacing above-ground storage tank systems and upgrading piping within the refinery. We currently estimate that we will spend approximately $121 million through 2011, $16 million of which was spent during the first nine months of 2006. This cost estimate is subject to further review and analysis.

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Conditions may develop that cause increases or decreases in future expenditures 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 compliance with the Clean Air Act and other federal, state and local requirements. We cannot currently determine the amounts of such future expenditures.

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, expectations regarding refining margins, revenues, cash flows, capital expenditures, turnaround expenses and other financial items. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins and profitability. 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 our results of operations and whether the forward-looking statements ultimately prove to be correct.

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors including, but not limited to:

• changes in general economic conditions;

• the timing and extent of changes in commodity prices and underlying demand for our products;

• the availability and costs of crude oil, other refinery feedstocks and refined products;

• changes in our cash flow from operations;

• changes in the cost or availability of third-party vessels, pipelines and other means of transporting feedstocks and products;

• disruptions due to equipment interruption or failure at our facilities or third-party facilities;

• actions of customers and competitors;

• changes in capital requirements or in execution of planned capital projects;

• direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;

• political developments in foreign countries;

• changes in our inventory levels and carrying costs;

• seasonal variations in demand for refined products;

• changes in fuel and utility costs for our facilities;

• 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;

• adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any reserves;

• weather conditions affecting operations or the areas in which our products are marketed; and

• 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 become aware of, after the date of this Quarterly Report on Form 10-Q.

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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 managing risks arising from transactions and commitments related to the sale and purchase of energy commodities and making recommendations to executive management.

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) and the margin above those expenses 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 global economy, the level of foreign and domestic production of crude oil and refined products, worldwide geo-political conditions, the availability of imports of crude oil and refined products, the marketing of alternative and competing fuels and the impact 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. However, the prices for crude oil and prices for our refined products can fluctuate in different directions based on worldwide market conditions. In addition, the timing of the relative movement of the prices, as well as the overall change in product prices, can reduce profit margins and could have a significant impact on our earnings and cash flows. In addition, the majority of our crude oil supply contracts are short-term in nature with market-responsive pricing provisions. 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. Assuming all other factors remained constant, a $1.00 per barrel change in average gross refining margins, based on our 2006 year-to-date average throughput of 538,000 bpd, would change annualized pretax operating income by approximately $196 million.

We maintain inventories of crude oil, intermediate products and refined products, the values of which are subject to fluctuations in market prices. Our inventories of refinery feedstocks and refined products totaled 29 million barrels and 28 million barrels at September 30, 2006 and December 31, 2005, respectively. The average cost of our refinery feedstocks and refined products at September 30, 2006 was approximately $34 per barrel on a LIFO basis, compared to market prices of approximately $67 per barrel. If market prices decline to a level below the average cost of these inventories, we would be required to write down the carrying value of our inventory.

Tesoro periodically enters into non-trading derivative arrangements primarily to manage exposure to commodity price risks associated with the purchase of feedstocks and blendstocks and the purchase and sale of manufactured and purchased refined products. To manage these risks, we typically enter into exchange-traded futures and over-the-counter swaps, generally with durations of one year or less. We mark to market our non-hedging derivative instruments and recognize the changes in their fair values in earnings. We include the carrying amounts of our derivatives in other current assets or accrued liabilities in the consolidated balance sheets. We did not designate or account for any derivative instruments as hedges during the first nine months of 2006. Accordingly, no change in the value of the related underlying physical asset is recorded. During the third quarter of 2006, we settled derivative positions of approximately 31 million barrels of crude oil and refined products, which resulted in gains of $5 million. At September 30, 2006, we had open derivative positions of approximately 8 million barrels, which will expire at various times during 2006 and 2007. We recorded the fair value of our open positions, which resulted in an unrealized mark-to-market gain of $32 million at September 30, 2006.

We prepared a sensitivity analysis to estimate our exposure to market risk associated with our derivative instruments. This analysis may differ from actual results. The fair value of each derivative instrument was based on quoted market prices. Based on our open net short positions of 8 million barrels as of September 30, 2006, a $1.00 per-barrel change

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in quoted market prices of our derivative instruments, assuming all other factors remain constant, would change the fair value of our derivative instruments and pretax operating income by $8 million. As of December 31, 2005 a $1.00 per-barrel change in quoted market prices for our derivative instruments, assuming all other factors remain constant, would have changed the fair value of our derivative instruments and pretax operating income by $7 million.

Interest Rate Risk

At September 30, 2006 all of our outstanding debt was at fixed rates and we had no borrowings under our revolving credit facility, which bears interest at variable rates. The fair market value of our senior notes, which is based on transactions and bid quotes, was approximately $36 million less than its carrying value at September 30, 2006. The fair market values of our junior subordinated notes and capital lease obligations approximate their carrying values.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company and required to be included in our periodic filings under the Exchange Act. During the quarter ended September 30, 2006, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. The defendants are being sued for having manufactured MTBE and having manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs, all in California, are generally water providers, governmental authorities and private well owners alleging, in part, the defendants are liable for manufacturing or distributing a defective product. The suits generally seek individual, unquantified compensatory and punitive damages and attorney’s fees, but we cannot estimate the amount or the likelihood of the ultimate resolution of these matters at this time, and accordingly have not established a reserve for these cases. We believe we have defenses to these claims and intend to vigorously defend the lawsuits.

Soil and groundwater conditions at our California refinery may require substantial expenditures over time. In connection with our acquisition of the California refinery from Ultramar, Inc. in May 2002, Ultramar assigned certain of its rights and obligations that Ultramar had acquired from Tosco Corporation in August of 2000. Tosco assumed responsibility and contractually indemnified us for up to $50 million for certain environmental liabilities arising from operations at the refinery prior to August of 2000, which are identified prior to August 31, 2010 (“Pre-Acquisition Operations”). Based on existing information, we currently estimate that the known environmental liabilities arising from Pre-Acquisition Operations including soil and groundwater conditions at the refinery will exceed the $50 million indemnity. We expect to be reimbursed for excess liabilities under certain environmental insurance policies that provide $140 million of coverage in excess of the $50 million indemnity. Because of Tosco’s indemnification and the environmental insurance policies, we have not established a reserve for these defined environmental liabilities arising out of the Pre-Acquisition Operations.

In November 2003, we filed suit in Contra Costa County Superior Court against Tosco alleging that Tosco misrepresented, concealed and failed to disclose certain additional environmental conditions at our California refinery related to the soil and groundwater conditions referenced above. The court granted Tosco’s motion to compel arbitration of our claims for these certain additional environmental conditions. In the arbitration proceedings we initiated against Tosco in December 2003, we are also seeking a determination that Tosco is liable for investigation and remediation of these certain additional environmental conditions, the amount of which is currently unknown and therefore a reserve has not been established, and which may not be covered by the $50 million indemnity for the defined environmental liabilities arising from pre-acquisition operations. In response to our arbitration claims, Tosco filed counterclaims in the Contra Costa County Superior Court action alleging that we are contractually responsible for additional environmental liabilities at our California refinery, including the defined environmental liabilities arising from Pre-Acquisition Operations. In February 2005, the parties agreed to stay the arbitration proceedings to pursue settlement discussions. In June 2006, the parties terminated settlement discussions and agreed to proceed with the arbitration. We intend to vigorously prosecute our claims against Tosco and to oppose Tosco’s claims against us, and although we cannot provide assurance that we will prevail, we believe that the resolution of the arbitration will not have a material adverse effect on our financial position or results of operations.

In September 2006, we reached an agreement with the Bay Area Air Quality Management District (the “District”) to settle 28 Notices of Violation (“NOVs”) issued to Tesoro from January 2004 to September 2004 alleging violations of various air quality requirements at the California refinery. The settlement agreement was executed on October 11, 2006. Pursuant to the terms of the settlement agreement, Tesoro will make a cash payment of $200,000 to the District during the fourth quarter of 2006 and undertake a supplemental project valued at approximately $100,000.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below provides a summary of all repurchases by Tesoro of its common stock during the three-month period ended September 30, 2006.

							Approximate Dollar
					Total Number of		Value of Shares That
					Shares Purchased as		May Yet Be
	Total Number		Average Price		Part of Publicly		Purchased Under the
	of Shares		Paid Per		Announced Plans or		Plans or
Period	Purchased*		Share		Programs**		Programs*
July 2006		11,323	$	70.19		—	$	102 million
August 2006		210,353	$	68.28		210,000	$	87 million
September 2006		605,000	$	59.36		605,000	$	51 million
Total		826,676	$	61.78		815,000

*	All of the shares repurchased during the three-month period ended September 30, 2006 were acquired pursuant to the stock repurchase program (see below), except for 11,676 shares acquired in July and August 2006, which were surrendered to Tesoro to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to certain executive officers.
**	Tesoro’s existing stock repurchase program was publicly announced on November 3, 2005. The program authorizes Tesoro to purchase up to $200 million aggregate purchase price of shares of Tesoro’s common stock.

ITEM 5. OTHER INFORMATION

On November 2, 2006, Tesoro approved the Tesoro Corporation Executive Deferred Compensation Plan (the “Plan”) effective January 1, 2007. The Plan provides for the restoration of retirement benefits to certain executives and other employees that are not available due to the salary and deferred limits imposed by the Internal Revenue Code on our Thrift Plan. The Plan is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

On November 1, 2006, Tesoro entered into the Second Amendment to the Amended and Restated Agreement (the “Agreement”) with Bruce A. Smith, President and Chief Executive Officer. The Agreement extends the term of the Amended and Restated Agreement from December 3, 2008 to December 31, 2010 and entitles Mr. Smith to participate in the Executive Security Plan pursuant to certain terms and conditions as described in the Agreement. The Agreement is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

On November 1, 2006, Tesoro entered into the Agreement with Bruce A. Smith. The Agreement provides Mr. Smith the option to purchase certain art and artifacts used at Tesoro’s corporate headquarters at the Company’s cost plus any applicable sales tax pursuant to certain terms and conditions as described in the Agreement. The Agreement is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM 6. EXHIBITS

(a) Exhibits

10.1	Tesoro Corporation Executive Deferred Compensation Plan.
10.2	Second Amendment to the Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated as of November 1, 2006.
10.3	Agreement between the Company and Bruce A. Smith dated as of November 1, 2006.
31.1	Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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 CORPORATION
Date: November 2, 2006	/s/	BRUCE A. SMITH
		Bruce A. Smith
		Chairman of the Board of Directors,
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 2, 2006	/s/	GREGORY A. WRIGHT
		Gregory A. Wright
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number
10.1	Tesoro Corporation Executive Deferred Compensation Plan.
10.2	Second Amendment to the Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated as of November 1, 2006.
10.3	Agreement between the Company and Bruce A. Smith dated as of November 1, 2006.
31.1	Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

TESORO CORPORATION

2006

EXECUTIVE DEFERRED COMPENSATION PLAN

ARTICLE 1. General Provisions

     1.1 Establishment and Purpose.

     Tesoro Corporation hereby establishes the Tesoro Corporation Executive Deferred Compensation Plan (the “Plan”) on the terms and conditions hereinafter set forth. The Plan is designed primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries so as to provide benefits comparable to those not provided under the Tesoro Corporation Thrift Plan due to salary and deferral limitations imposed under the Internal Revenue Code and is intended to qualify as a “top hat” plan under Sections 201(2), 301(a)(3) and 401(a)(l) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

     1.2 Definitions.

     “Bonus Compensation” means, as determined in the sole discretion of the Committee, such annual bonus or other bonus Compensation paid to a Participant including executive bonus but excluding special compensation or bonuses paid because of service overseas, expense allowances and all other extraordinary compensation.

     “Beneficiary” means the person or persons designated by a Participant as his beneficiary hereunder in accordance with the provisions of Article 5.

     “Board” means the Board of Directors of the Company.

     “Corporate Change in Control” means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company’s Common Stock would be converted into cash, securities or other property, other than a merger of Company where a majority of the Board of Directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of 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 Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Act), other than Company or a Subsidiary thereof or any employee benefit plan sponsored by Company or a Subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13(d)(3) under the Securities Act) of securities of Company representing 35 percent or more of the combined voting power of 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

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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 Company shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board of Directors for election by Company’s shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.

     “Code” means the Internal Revenue Code of 1986, as amended, and any successor code or law.

     “Committee” means the Employee Benefits Committee appointed by the Board of Directors, or such other committee designated by the Board to discharge the duties of the Committee hereunder.

     “Company” means Tesoro Corporation, a Delaware Corporation, or any successor thereto.

     “Company Matching Contribution” means the employer matching contributions contributed to the Participant’s account under the Thrift Plan for the Plan Year.

     “Compensation” shall, unless otherwise determined by the Committee, for purposes of Sections 2.1 and 2.2 of the Plan, have the meaning assigned thereto in the Thrift Plan (determined without regard to any limits imposed on Compensation by the Internal Revenue Code and amounts voluntarily deferred under the terms of this Plan to the extent necessary to carry out the terms and intent of this Plan), excluding any 401(k) deferrals under the Thrift Plan.

     “Deferral Account” means the bookkeeping account(s) established on behalf of a Participant to track the Participant’s deferred compensation benefits under Sections 2.1 through 2.4 of the Plan but shall exclude 401(k) deferrals under the Thrift Plan.

     “Deferral Election” means an election by a Participant to defer Compensation in accordance with the provisions of Section 2.1 of the Plan.

     “Deferrals” shall have the meaning ascribed thereto in Section 2.1(b) hereof.

     “Disability” means disability as determined under the Retirement Plan.

     “Disability Date” means the date on which a Participant’s employment terminates due to Disability.

     “Distribution Date” means the date on which a distribution to a Participant is to commence. Distribution Dates are determined according to each Participant’s Deferral Account elections or as otherwise provided under the terms of the Plan.

     “Distribution Option” means the form in which a payment to a Plan Participant is to be paid. Distribution Options are determined according to each Participant’s Deferral Elections for each Plan year or as otherwise provided under the terms of the Plan.

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     “Earnings” shall have the meaning ascribed thereto in Section 2.3(b) of the Plan.

     “Insolvency” means, with respect to the Company: (1) an adjudication of bankruptcy; (2) the assignment for the benefit of creditors of or by the Company; (3) a material part or all of the property of the Company becomes subject to the control and direction of a receiver, which receivership is not dismissed within sixty (60) days of such receiver’s appointment; or (4) the filing by the Company of a petition for relief under any federal or other bankruptcy or other insolvency law or for an arrangement with creditors.

     “Participant” means any employee who has satisfied the eligibility requirements set forth in Section 1.4 of the Plan and has a balance in or election to defer to the Plan.

     “Person” means any individual, corporation, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

     “Plan Year” means the twelve-month period beginning each January 1.

     “Retirement” means a Participant’s termination of employment with the Company as a retiree as determined under the provisions of the Retirement Plan.

     “Retirement Plan” means the Tesoro Corporation Retirement Plan, as amended.

     “Subsidiary” means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.

     “Supplemental Match” means the contribution allocated to the Participant’s Deferral Account pursuant to Section 2.2.

     “Thrift Plan” means the Tesoro Corporation Thrift Plan, as amended.

     “Unforeseeable Emergency” means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as determined under Section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

     1.3 Administration.

          (a) The Committee shall administer the Plan and have sole and absolute authority and discretion to decide all matters relating to the administration of the Plan, including, without limitation, determining the rights and status of Participants or their beneficiaries under the Plan. The Committee is authorized to interpret the Plan, to adopt administrative rules, regulations, and guidelines for the Plan, and may correct any defect, supply any omission or reconcile any inconsistency or conflict in the Plan. The Committee’s determinations under the Plan need not be uniform among all Participants, or classes or categories of Participants, and

-3-

           may be applied to such Participants, or classes or categories of Participants, as the Committee, in its sole and absolute discretion, considers necessary, appropriate or desirable. All determinations by the Committee shall be final, conclusive and binding on the Company, the Participant and any and all interested parties.

          (b) The Committee may delegate such of its powers and authority under the Plan to the Company’s officers or such other person(s) as it deems necessary or appropriate. In the event of such delegation, all references to the Committee in this Plan shall be deemed references to such officers or such other person(s) as it relates to those aspects of the Plan that have been delegated.

          (c) Any action taken by the Committee with respect to the rights or benefits under the Plan of any Participant shall be subject to correction by the Committee as to payments not yet made to such person, and acceptance of any deferred compensation benefits under the Plan constitutes acceptance of and agreement to the Committee’s or the Company’s making any appropriate adjustments in future payments to such person (or to recover from such person) any excess payment or underpayment previously made to him.

          (d) Notwithstanding any provision of the Plan to the contrary, if any benefit provided under this Plan is subject to the provisions of Section 409A of the Code and the regulations issued thereunder, the provisions of the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A and the regulations issued thereunder (or disregarded to the extent such provision cannot be so administered, interpreted or construed).

     1.4 Eligibility and Participation.

          (a) Participation in the Plan is limited to those individuals who are eligible to participate in the Thrift plan and are within the category of a select group of management and highly compensated employees as referred to in Sections 201(2), 301(a)(3) and 401(a)(l) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and who are within those classifications of officers and key management employees of the Company and its Subsidiaries which are nominated by the Chief Executive Officer and approved by the Compensation Committee of the Board as eligible to participate in the Plan. Those employee classifications initially selected for participation in the Plan are set forth on Exhibit 1 attached hereto. This Exhibit may be modified from time-to-time as recommended by the Chief Executive Officer and approved by the Compensation Committee of the Board to include or exclude certain employee classifications as deemed appropriate. Plan Participation shall commence as of the first day of the Plan Year or the first day of the 7^th month of the Plan Year as determined by the Compensation Committee of the Board. Employees hired, promoted or reclassified to a category of officer and key management employees of the Company and/or its Subsidiaries eligible for participation shall become eligible as of the first day of the next semi-annual entry date as determined by the Compensation Committee of the Board. A newly eligible Participant shall make his or her Deferral Elections within the designated time periods as set forth in Section 2.1 hereof.

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          (b) A Participant shall cease to be a Participant upon receiving payment for the full amount of benefits to which the Participant is entitled under the Plan. A Participant shall become an ineligible Participant when he becomes ineligible to participate based on eligibility status as determined in Section 1.4(a) of this Plan. Once a Participant is no longer eligible to actively participate in the Plan, he shall not be entitled to defer Compensation pursuant to Section 2.1 or receive an allocation of the Supplemental Match under Section 2.2.

ARTICLE 2. Supplemental Benefits

     2.1 Supplemental Deferral Elections.

          (a) Each Participant shall be eligible to elect to defer Compensation under the Plan with respect to a Plan Year in accordance with the terms of the Plan and the rules and procedures established by the Committee. Deferral Elections under the Plan are entirely voluntary and to the Plan Year for which they relate, following the end of the election period established under Section 2.1(b), are irrevocable.

          (b) A Participant may make a Deferral Election by filing a written or electronic election with the Committee or its designee directing the Company to reduce the Participant’s Compensation and/or Bonus Compensation and to credit the amount of any such reduction (the “Deferrals”) to the Deferral Account established and maintained for such Participant pursuant to Section 2.4 of the Plan. Deferral Elections hereunder shall be made in accordance with the terms of the Plan and the rules established by the Committee, and must be filed not later than December 31 of the calendar year preceding the Plan Year to which the election relates (or at such other times as may be established by the Committee). With regard to Bonus Compensation, such Deferral Elections must be made on or before June 30 of the Plan Year preceding the Plan Year in which the bonus, if any, would otherwise be paid to the Participant, all as may be required in accordance with Section 409A of the Code and the Regulations promulgated thereunder. Provided, further, that a Participant may revoke or modify such election up until the end of the election period established by the Committee under this Section 2.1(b). Notwithstanding the preceding, for the first Plan Year in which a Participant is eligible to participate in the Plan, a Participant’s initial Deferral Election may be made within thirty (30) days after the date the Participant becomes eligible to participate in the Plan and shall apply only to Compensation paid subsequent to Plan Participation, as defined in Section 1.4(a). Unless otherwise determined by the Committee, a Deferral Election must be filed each Plan Year, and will not carry over from Plan Year to Plan Year.

          (c) Deferrals shall be credited to each Participant’s Deferral Account as of such time or times determined by the Committee; provided, however, that Deferrals shall be credited to each Participant’s Deferral Account not later than thirty (30) days after the date on which such Compensation would have otherwise been paid, without regard to whether or not the Participant has reached the limit on elective Deferrals under the Thrift Plan. Deferrals shall be deemed to be invested in accordance with a Participant’s investment designations as permitted under Section 2.4(b).

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          (d) Unless otherwise determined by the Committee, a Participant may elect to defer up to 50% of Compensation (exclusive of Bonus Compensation) and up to 100% of Bonus Compensation payable to the Participant.

          (e) Notwithstanding the foregoing and unless otherwise determined by the Committee, a Deferral Election shall automatically terminate on the earliest to occur of: (1) the end of the Plan Year to which the Deferral Election applies; (2) the termination of a Participant’s employment for any reason; (3) the Insolvency of the Company; (4) the Committee’s determination that the Participant is no longer eligible to participate in the Plan; or (5) the termination or discontinuance of the Plan.

          (f) Each Participant shall at all times be vested in the Deferrals portion of his Deferral Account.

     2.2 Supplemental Company Matching Awards.

          (a) With respect to each Plan Year and to the extent provided under this Section 2.2, the Company shall credit a supplemental matching contribution (“Supplemental Match”) to each eligible Participant’s Deferral Account. Provided, however, with respect to those Participants eligible to participate in the Company’s Executive Security Plan, or who, through the terms of an individual employment agreement have an entitlement to supplemental retirement benefits, in that event such Participant shall not be eligible to participate in the Supplemental Match. In the event a Participant subsequently loses eligibility to participate in the Executive Security Plan or his employment agreement is amended to eliminate supplemental retirement benefits, such Participant shall regain eligibility to share in the Supplemental Match for such portion of the Plan Year following such Participant’s loss of eligibility to participate in the Executive Security Plan or elimination of supplemental retirement benefits as set forth herein. Participants becoming eligible for participation in the Executive Security Plan, or who are granted supplemental retirement benefits through an individual employment agreement will be allowed to retain the Supplemental Match contributed up to such eligibility, subject to the normal vesting provisions in Section 2.2(d).

          (b) The amount of the Supplemental Match shall be applied only to Compensation in excess of the limitations imposed under Section 401(a)(17) of the Code and shall be in such percentage of the Participant’s Compensation in excess of the Compensation exceeding the Section 401(a)(17) limits as shall be determined by the Compensation Committee of the Board in its sole discretion from year to year.

          (c) The Supplemental Match will be allocated to the Participant’s Deferral Account and shall be deemed invested in the same manner in which the Participant’s Deferral Account is deemed to be invested under Section 2.4(b) and shall be credited to the Participant’s Deferral Account within thirty (30) days of the Deferral to which the Supplemental Match relates (recognizing that the Supplemental Match relates only to Deferrals of Compensation exceeding the statutory limits set forth in Section 2.2(b) above).

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          (d) The Participant shall vest in the Supplemental Match portion of his Deferral Account upon the completion of three (3) years of service creditable under the Thrift Plan for vesting purposes.

     2.3 Change in Control.

     In the event of a Corporate Change in Control, any Supplemental Match portion of a Participant’s Deferral Account shall become fully vested. A Corporate Change in Control is not an event which triggers an automatic distribution of benefits, unless it is accompanied by one of the events and/or elections made in accordance with Article 3.

     2.4 Deferral Accounts/Earnings.

          (a) Unless otherwise determined by the Committee, the Company shall maintain on behalf of each Participant a separate Deferral Account.

          (b) The Participant’s Deferral Account shall be adjusted by an amount equal to the amount that would have been earned (or lost) if the amounts deferred under this Plan had been invested in hypothetical investments designated by the Participant from time-to-time, based on a list of hypothetical investments provided by the Committee from time-to-time (such hypothetical earnings or losses shall be referred to as “Earnings”). Provided, however, in no event shall the common stock of the Company or any Subsidiary ever constitute a hypothetical investment maintained under the Plan. The Participant shall designate the investments used to measure Earnings from the list of authorized investments provided by the Committee by completing the appropriate form (or electronically via the Plan’s website) or in such other manner as the Committee may designate from time-to-time. The Participant may change such designations at such times as are permitted by the Committee, provided that the Participant shall be entitled to change such designations at least quarterly. Earnings shall be credited to the Participant’s Deferral Accounts at least annually (or more frequently at the discretion of the Company). Earnings shall be credited to Deferral Accounts until all payments with respect to such account have been made under this Plan. Neither the Company nor the Committee shall act as a guarantor, or be liable or otherwise responsible for the investment performance of the designated investments (including any losses sustained by a Participant) with respect to a Participant’s Deferral Account.

          (c) Each Participant shall be vested in both (i) his Earnings and (ii) the Supplemental Match portion of the Deferral Account balances in accordance with the vesting designated in Sections 2.1(f), 2.2(d) and 2.3.

ARTICLE 3. Distributions

     3.1 Distribution Dates.

     Distribution Dates for the Participant’s Deferral Account shall be established and determined in accordance with the Participant’s Deferral Account elections. Such Deferral Account elections shall be made in accordance with Section 3.2. Unless otherwise specified in the Deferral Account election, except in the event of death or Disability, distribution payments

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will commence on or about the first day of the seventh month following the earlier of a Participant’s Retirement or termination of employment.

     3.2 Distribution Option/Manner of Payment.

     The Distribution Option for Deferral Accounts shall be determined in accordance with such election procedures as are established by the Committee and distributions shall, at the Participant’s option, be paid in the form of a lump sum or in installments over a period of 2-to-15 years; provided, however, that the Distribution Option must be established at the time of annual deferral and must be in a form acceptable to the Committee as determined from time-to-time. Such Distribution Option may include a lump sum distribution to be paid, while actively employed by the Company (“In-service Withdrawal”), in a future year that is at least two years beyond the beginning of the Plan Year to which the distribution election relates. Notwithstanding the preceding provisions of this Section 3.2, if the Participant fails to designate a form of distribution, or if the balance in the Participant’s Deferral Account is less than $100,000, the distribution will be paid in the form of a lump sum regardless of the Participant’s Deferral Election. All payments under the Plan shall be made in cash.

     3.3 Modification of Distribution Elections.

     A Participant has the right to change any Distribution Date or Distribution Option associated with the Deferral Account previously designated by the Participant in one or more Deferral Elections pursuant to this Article 3; provided, however, that: (1) the Participant must file an election designating the new Distribution Date and Distribution Option at least one year prior to the Distribution Date previously designated; (2) the new Distribution Option may extend, but not accelerate, payments; and (3) the new election must also provide that the new Distribution Date be a minimum of five years later than the existing Distribution Date. Any such election shall be made in accordance with such rules and procedures as are established by the Committee and shall not take effect for at least twelve (12) months after the date on which such election is made.

     3.4 Termination.

     Notwithstanding the foregoing provisions, in the event a Participant’s employment terminates for any reason (other than death or Disability) prior to the Participant reaching Retirement eligibility, the Participant will receive a payment of all vested amounts credited to the Participant’s Deferral Account as elected by the Participant pursuant to Section 3.2 and subject to any modifications elected by the Participant pursuant to Section 3.3. Any unvested amount of the Supplemental Match portion the Deferral Account shall be forfeited by the Participant should he or she fail to satisfy the vesting conditions of Sections 2.2(d) or 2.3. Such forfeited amount shall revert to the Company and shall remain a general corporate asset to be used for any purpose determined by the Company.

     3.5 Death.

     The Beneficiary or Beneficiaries of a Participant shall be entitled to receive the full unpaid balance of the Participant’s Deferral Accounts to which the Participant was entitled at his death. Any unvested amounts remaining in the Participant’s Deferral Accounts shall

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immediately become fully vested upon the Participant’s death. The value of the Participant’s Deferral Accounts will be paid to the Participant’s Beneficiary, or the Participant’s estate if designated as the Beneficiary, in a lump sum as soon as administratively practicable following death. The Participant shall designate his Beneficiary in accordance with the provisions of Article 5.

     3.6 Disability.

     Notwithstanding the foregoing provisions, in the event of Disability, a Participant shall continue to accrue vesting service until fully vested in his Deferral Account or until his employment is terminated, after which the Participant will receive a payment of all vested amounts credited to the Participant’s Deferral Account on his Disability Date, in the manner provided in his Deferral Election, or the date(s) selected in his Deferral Election, if earlier.

     3.7 Unforeseeable Emergency.

     The Committee may, upon request of the Participant, cause to be paid to such Participant an amount equal to all or any part of the amounts credited to such Participant’s Deferral Account if the Committee determines, in its absolute discretion based on such reasonable evidence that it shall require, that such a payment or payments is necessary for the purpose of alleviating the consequences of an Unforeseeable Emergency occurring with respect to the Participant. The amounts distributed with respect to an Unforeseeable Emergency may not exceed the amount necessary to satisfy the emergency plus amounts necessary to pay taxes on the distribution, after taking into account the extent to which the hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent liquidation would not itself cause severe financial hardship). Any such distribution upon Unforeseeable Emergency shall result in the Participant being suspended for a period of six months from the distribution on account of an Unforeseeable Emergency.

ARTICLE 4. Funding

     4.1 Unsecured Obligation of Company.

          (a) Any benefit payable pursuant to this Plan shall be paid from the general assets of the Company. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create a trust of any kind or a fiduciary relationship between any Participant (or any other interested person) and the Company or the Committee, or require the Company to maintain or set aside any specific funds for the purpose of paying any benefit hereunder. To the extent that a Participant or any other person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.

          (b) If the Company maintains a separate fund or makes specific investments, including the purchase of insurance on the life of the a Participant, to assure its ability to pay any benefits due under this Plan, neither the Participant nor the Participant’s Beneficiary shall have any legal or equitable ownership interest in, or lien on, such fund, policy, investment or any other asset of the Company. The Company, in its sole discretion, may determine the exact nature and method of informal funding (if any) of the obligations under this Plan. If the Company elects to

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maintain a separate fund or makes specific investments to fund its obligations under this Plan, the Company reserves the right, in its sole discretion, to terminate such method of funding at any time, in whole or in part. In addition, the Company may, in its sole and absolute discretion, set aside or earmark funds in an amount, determined by the Committee, equal to the total amounts necessary to provide benefits under the Plan. The Committee may, at its discretion direct the Company to establish one or more grantor trusts to provide for the ultimate payment of the Company’s obligations under this Plan, but the trust instrument for any such trust must specifically provide that its assets are subject to the claims of the Company’s creditors. Such grantor trust may require that the Company fully fund said trust with respect to benefits accrued through the date of Change in Control following such a Change in Control.

     4.2 Cooperation of Participant.

     If the Company, in its sole discretion, elects to invest in a life insurance, disability or annuity policy on the life of a Participant to assist with the informal funding of its obligations under this Plan, the Participant shall assist the Company, from time-to-time, promptly upon the request of the Company, in obtaining such insurance policy by supplying any information necessary to obtain such policy as well as submitting to any physical examinations required therefore. The Company shall be responsible for the payment of all premiums with respect to any whole life, variable, or universal life insurance policy purchased in connection with this Plan unless otherwise expressly agreed.

ARTICLE 5. Beneficiaries

     5.1 Beneficiary Designations.

     A designation of a Beneficiary hereunder may be made only by an instrument (in form acceptable to the Committee) signed by the Participant and filed with the Committee prior to the Participant’s death. In the absence of such a designation and at any other time when there is no existing Beneficiary designated hereunder, the unpaid value of the Participant‘s Deferral Accounts to which the Participant was entitled at his death shall be distributed to the Participant’s estate. A Beneficiary who dies or which ceases to exist shall not be entitled to any part of any payment thereafter to be made to the Participant’s Beneficiary unless the Participant’s designation specifically provides to the contrary. If two or more persons designated as a Participant’s Beneficiary are in existence with respect to a single deferred compensation benefit, the amount of any payment to the Beneficiary under this Plan shall be divided equally among such persons, unless the Participant’s designation specifically provides to the contrary.

     5.2 Change in Beneficiary.

     A Participant may, at any time and from time-to-time, change a Beneficiary designation hereunder without the consent of any existing Beneficiary or any other person. Any change in Beneficiary shall be made only by an instrument (in form acceptable to the Committee) signed by the Participant, and any change shall be effective only if received by the Committee prior to the death of the Participant.

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ARTICLE 6. Claims Procedures

     6.1 Claims for Benefits.

     The Committee shall determine the rights of any Participant to any deferred compensation benefits hereunder. Any Participant who believes that he has not received the deferred compensation benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period of 90 days if required for processing, provided that notice of the extension of time is given to the claimant with the first 90-day period), either allow or deny the claim in writing.

     A denial of a claim by the Committee, wholly or partially, shall be written in a manner intended to be understood by the claimant and shall include:

          (a) the specific reasons for the denial;

          (b) specific reference to pertinent Plan provisions on which the denial is based;

          (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

          (d) an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA.

     6.2 Appeal Provisions.

     A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period the Company (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant’s authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.

     The Company shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner intended to be understood by the claimant, shall state the specific reasons for the decision and the specific Plan

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provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons.

ARTICLE 7. Miscellaneous

     7.1 Withholding.

     The Company shall be required to withhold from any distribution payable under the Plan an amount sufficient to satisfy all federal, state and local tax withholding requirements.

     7.2 No Guarantee of Employment.

     Nothing in this Plan shall be construed as guaranteeing future employment to any Participant. Without limiting the generality of the preceding sentence, except as otherwise set forth in a written agreement, a Participant continues to be an employee of the Company solely at the will of the Company subject to discharge at any time, with or without cause. The benefits provided for herein for a Participant shall not be deemed to modify, affect or limit any salary or salary increases, bonuses, profit sharing or any other type of compensation of a Participant in any manner whatsoever. Nothing contained in this Plan shall affect the right of a Participant to participate in or be covered by or under any qualified or nonqualified pension, profit sharing, group, bonus or other supplemental compensation, retirement or fringe benefit Plan constituting any part of the Company’s compensation structure whether now or hereinafter existing.

     7.3 Payment to Guardian.

     If a benefit payable hereunder is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require such proof of incompetency, minority, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.

     7.4 Assignment.

     No right or interest under this Plan of any Participant or Beneficiary shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of the Participant or Beneficiary.

     7.5 Severability.

     If any provision of this Plan or the application thereof to any circumstance(s) or person(s) is held to be invalid by a court of competent jurisdiction, the remainder of the Plan and the application of such provision to other circumstances or persons shall not be affected thereby.

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     7.6 Amendment and Termination.

     The Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan; provided, however, that no modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan without the consent of such Participant. Notwithstanding the foregoing or any provision of the Plan to the contrary, the Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan. Any such amendment or termination of the Plan shall be at the direction of the Compensation Committee of the Board.

     7.7 Exculpation and Indemnification.

     The Company shall indemnify and hold harmless the members of the Committee from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act, or omission to act, in connection with the performance of such person’s duties, responsibilities and obligations under the Plan, other than such liabilities, costs and expenses as may result from the gross negligence, willful misconduct, and/or criminal acts of such persons.

     7.8 Confidentiality.

     In further consideration of the benefits available to each Participant under this Plan, each Participant shall agree that, except as such may be disclosed in financial statements and tax returns, or in connection with estate planning, all terms and provisions of this Plan, and any agreement between the Company and the Participant entered into pursuant this Plan, are and shall forever remain confidential until the death of Participant; and the Participant shall not reveal the terms and conditions contained in this Plan or any such agreement at any time to any person or entity, other than his respective financial and professional advisors unless required to do so by a court of competent jurisdiction or as otherwise may be required by law.

     7.9 Leave of Absence.

     The Company may, in its sole discretion, permit a Participant to take a leave of absence for a period not to exceed one year. Any such leave of absence must be approved by the Company. During this time, the Participant will still be considered to be in the employ of the Company for purposes of this Plan.

     7.10 Gender and Number.

     For purposes of interpreting the provisions of this Plan, the masculine gender shall be deemed to include the feminine, the feminine gender shall be deemed to include the masculine, and the singular shall include the plural unless otherwise clearly required by the context.

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     7.11 Governing Law.

     Except as otherwise preempted by the laws of the United States, this Plan shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its conflict of law provisions.

     7.12 Effective Date.

     Executed this 2nd day of November, 2006, to be effective January 1, 2007 or as soon thereafter that the Plan can be established for the receipt of elective Deferrals by the Participants and Supplemental Match by the Company.

TESORO CORPORATION
By:	/s/ Susan A. Lerette
	Name:	Susan A. Lerette
	Title:	Vice President, Human Resources

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TESORO CORPORATION

EXECUTIVE DEFERRED COMPENSATION PLAN

Exhibit 1

Effective as of November 15, 2006, the following are the classifications of officers and key management employees of the Company eligible to participate in the Tesoro Corporation Executive Deferred Compensation Plan:

Employees eligible for the Tesoro Corporation Thrift Plan classified as being included in salary grades 43 and above with a base salary of $170,000 per year or more.

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EX-10.2

EXHIBIT 10.2

SECOND AMENDMENT TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     This Second Amendment (the “Amendment”) is entered into as of November 1, 2006 (the “Effective Date”) as an amendment to the Amended and Restated Employment Agreement entered into by and between Tesoro Corporation (the “Company”) and Bruce A. Smith (the “Executive”) as of December 3, 2003, as previously amended by the First Amendment thereof (the “Employment Agreement”),

WITNESSETH:

     WHEREAS, the Company and Executive have previously entered into the Employment Agreement; and

     WHEREAS, the Company and Executive wish to amend the Employment Agreement by entering into this Amendment;

     NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions set forth herein, including but not limited to Executive’s employment and the payments and benefits described herein, the sufficiency of which is hereby acknowledged, the Company and the Executive hereby agree as follows:

     1. Section 2 of the Agreement is hereby amended by deleting the first sentence thereof and substituting the following in its stead:

The term of this Agreement shall begin on the Effective Date and end on December 31, 2010.

     2. Section 4 of the Agreement is hereby amended by substituting the following for the first sentence of subsection (a) thereof:

During the Employment Period, the Executive shall receive an annual base salary (the “Annual Base Salary”) at an annual rate of $1,200,000 less applicable taxes, or such higher rate as may be determined from time to time by the Compensation Committee (the “Compensation Committee”) of the Board of Directors of the Company (the “Board”).

     3. Section 4 of the Agreement is hereby amended by deleting subsection (b) and substituting the following in its place:

ANNUAL BONUS. In addition to the Annual Base Salary, during the Employment Period, Executive will be entitled to participate in an annual incentive compensation plan of the Company. The Executive’s target annual bonus will be equal to 100%, or such higher rate as may be determined from time to time by the Compensation Committee, of his Base Salary as in effect for such year (the “Target Bonus”), and his actual annual bonus may range from 0% to 250%, or such higher maximum percentage of his Base Salary for such year as may be determined by the Compensation Committee, (the “Maximum Bonus”) and will be determined based upon achievement of performance goals established by the Compensation Committee pursuant to such plan.

     4. Section 4 of the Agreement is hereby amended by deleting subsection (f) thereof and substituting the following in its stead:

SUPPLEMENTAL ANNUAL RETIREMENT BENEFIT. Subject to the following sentence, Executive shall be entitled to participate in the Company’s Amended and Restated Executive Security Plan as currently in effect or as amended hereafter, but excluding any such amendment which would reduce Executive’s benefits thereunder, and shall receive a benefit upon his termination of employment for any reason in an amount determined under such plan and payable in the form of a life annuity with a 50% right of survivorship payable to his current spouse, Gail H. Smith if she survives Executive; provided, however, that if such termination (i) is a termination by the Company other than for Cause, (ii) is a termination by Executive for Good Reason or (iii) occurs after a Change in Control (as defined in Section 7(c) below), such benefit shall be calculated as if Executive had 20 years of “Service” under such plan. In the event that Executive voluntarily terminates employment without Good Reason prior to the earlier of December 31, 2010 or the date of a Change in Control, Executive shall not be entitled to a benefit under the Company’s Amended and Restated Executive Security Plan, but shall be entitled to the supplemental annual retirement benefit payable by the Company set forth below (the “Supplemental Annual Retirement Benefit”). The first applicable Supplemental Annual Retirement Benefit shall become payable upon the termination of Executive’s employment with the Company, and such Supplemental Annual Retirement Benefit shall be payable each year to Executive through the remainder of his life in quarterly calendar installments (with a prorated initial installment if necessary), with a 50% right of survivorship to his current spouse, Gail H. Smith if she survives him. The Supplemental Annual Retirement Benefit shall be (with proration between specified dates based on the number of three-month periods in which he was employed compared to 4):

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Date of Employment Termination	Supplemental Annual Retirement Benefit
On or after December 3, 2008 and before December 31, 2010	$	700,000
On or after December 3, 2007 and before December 3, 2008	$	500,000
On or after December 3, 2006 and before December 3, 2007	$	300,000
Before December 3, 2006	$	200,000

     5. Section 6(e)(vi) of the Agreement is hereby amended by adding the following sentence after the first sentence thereof:

Notwithstanding the foregoing, Executive shall immediately vest in any restricted stock award to the extent that such award becomes taxable to Executive after the termination of his employment under this Section 6(e) and prior to the date such awards would otherwise vest in accordance with this Section.

     6. Section 7 of the Agreement is hereby amended by deleting that portion of subsection (a) preceding clause (i) thereof and substituting the following in its stead:

(a) PAYMENTS FOLLOWING A CHANGE IN CONTROL. In the event a “Change in Control” occurs and either (i) the Executive elects, at any time following the one-year period after such Change in Control, and before the end of the second year after such Change in Control, to terminate employment for any reason; or (ii) Executive’s employment is terminated within two years following such Change in Control by the Company for any reason other than Cause, or by Executive for Good Reason, the Company shall pay the following amounts to Executive:

     7. Section 7 of the Agreement is hereby amended by deleting paragraph 7(a)(i) thereof and substituting the following in its stead:

(i) An amount equal to three times the sum of (x) Executive’s Base Salary as in effect immediately prior to his termination of employment (his “Current Salary”) plus (y) his Current Salary multiplied by the greater of his Target Bonus percentage for the year in which his employment terminates or the average of the actual bonus percentages earned for the Bonuses paid or payable for the three years ending on the last day of the year prior to the year in which his employment terminates. Such amount shall be payable in a lump sum six (6) months following termination of employment. If the Executive’s employment with the company is terminated for any reason other than Cause on or after the date of the Change in Control, then (A) the amount provided in this Section 7(a)(i) shall be in lieu of any amounts otherwise due to the Executive under Section 6(e)(iii), and (B) benefits shall be continued for the period provided in Section 6(e)(iv), or for three years following the Change in Control, whichever provides the longer continuation period.

8. Section 7 of the Agreement is hereby amended by deleting subsection (d) thereof.

9. All references in the Employment Agreement to “Tesoro Petroleum Corporation” shall be changed to “Tesoro Corporation.”

3

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

	TESORO CORPORATION
Date: November 1, 2006	/s/ STEVEN H. GRAPSTEIN
	By: Steven H. Grapstein
	Title: Lead Director, Chairman Audit Committee
	/s/ A. MAURICE MYERS
	By: A. Maurice Myers, Chairman
	Compensation Committee
	/s/ WILLIAM J. JOHNSON
	By: William J. Johnson, Chairman
	Governance Committee
Date: November 1, 2006
	/s/ BRUCE A. SMITH
	Bruce A. Smith, Executive

EX-10.3

Exhibit 10.3

AGREEMENT

     THIS AGREEMENT dated this 1st day of November, 2006, is between Tesoro Corporation, a Delaware corporation, whose address is 300 Concord Plaza Drive, San Antonio, Texas 78216 (hereinafter “Tesoro”) and Bruce A. Smith, whose address is 400 Elizabeth Road, San Antonio, Texas 78209 (hereinafter “Smith”).

     WHEREAS, Smith has been instrumental in selecting and coordinating the purchase of the art and artifacts used at Tesoro’s corporate headquarters (the “Art”). The Art, subject to this Agreement is attached hereto as Exhibit “A” and incorporated herein for all purposes, has been purchased for the benefit of guests and employees at the Tesoro corporate headquarters, reflecting Smith’s taste and experience.

     AND WHEREAS, Tesoro would like to grant Smith the option to purchase the Art pursuant to the terms and conditions of this Agreement.

     NOW THEREFORE, in order to accomplish the purposes of the Parties as set forth herein, the Parties agree as follows.

1.

If Tesoro decides to sell any of the Art while Smith is still employed by Tesoro, prior to offering any of the Art for sale, Tesoro shall notify Smith in writing of Tesoro’s intention to sell, and Smith shall have ten (10) days after receipt of such notice in which to elect to purchase the Art offered for sale for the Purchase Price reflected on Exhibit “A” for the specific piece of Art. If Smith elects to purchase any of the Art, he shall notify Tesoro in writing on or before the expiration of the 10th day after receipt of such notice and pay the Purchase Price as reflected, together with any applicable sales tax, to Tesoro. Upon receipt of the Purchase Price, Tesoro shall deliver the Art to Smith. If Smith does not elect to purchase such Art, Tesoro is free of any obligation to Smith and may sell or dispose of such Art as it sees fit.

2.

If Smith’s employment with Tesoro terminates for any reason, Smith shall have the option for a period of thirty (30) days following his termination, in which to elect to purchase any or all of the Art at the Purchase Price(s) reflected on Exhibit “A” for the specific pieces of Art that Smith elects to purchase. If Smith elects to purchase any or all of the Art, Smith shall notify Tesoro in writing of his election to purchase such Art on or before the expiration of the 30th day following his termination and pay to Tesoro the Purchase Price(s) reflected on Exhibit “A” for the specific pieces of Art that Smith elects to purchase, together with any applicable sales tax. Upon receipt of the Purchase Price, Tesoro shall deliver such Art to Smith. If Smith does not elect to purchase a specific piece of Art, Tesoro is free of any obligation to Smith and may sell or dispose of such Art as it sees fit.

	In addition, in consideration of Smith’s many and valuable contributions to Tesoro and its shareholders, Smith shall have the option to acquire for Zero Dollars ($0.00) full ownership of three soapstone sculptures of Inuit subject matter currently at Tesoro’s corporate headquarters.
3.	Tesoro is under no obligation to preserve or maintain the Art, nor shall Tesoro be liable to Smith for any risk of loss or damage to the Art.
4.	This Agreement comprises the full and complete agreement of the parties with respect to the matters set forth herein, and supersedes and cancels all prior communications, understandings and agreements between the parties hereto, whether written or oral, expressed or implied.
5.	In the event of any ambiguity in the interpretation of any of the terms or conditions of this Agreement, such ambiguity shall not be resolved for or against any party on the basis that such party did or did not author the same.
6.	This Agreement shall be governed by and construed in accordance with the laws of the State of Texas.

     UNDERSTOOD AND AGREED to this 1st day of November, 2006.

TESORO CORPORATION
By:	/s/ Charles S. Parrish
	Charles S. Parrish
	Senior Vice President,
	General Counsel and Secretary
	/s/ Bruce A. Smith
	Bruce A. Smith

2

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Bruce A. Smith, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tesoro Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d)	Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2006	/s/	BRUCE A. SMITH
		Bruce A. Smith
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Gregory A. Wright, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tesoro Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d)	Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2006	/s/	GREGORY A. WRIGHT
		Gregory A. Wright
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tesoro Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce A. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ BRUCE A. SMITH Bruce A. Smith

Chief Executive Officer

November 2, 2006

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tesoro Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory A. Wright, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ GREGORY A. WRIGHT Gregory A. Wright

Chief Financial Officer

November 2, 2006

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.