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ANNUAL REPORT
2007
WWW.TSOCORP.COM

Table of contents

  • Page 1
    ANNUAL REPORT WWW.TSOCORP.COM 2007

  • Page 2
    ... the purchase of the Los Angeles refinery and 250 related Shell gas stations. On the same day, we announced that we had agreed to acquire 138 USA Gasoline stations in a separate transaction. The addition of retail outlets in California and a Los Angeles refinery completed the West Coast refining...

  • Page 3
    ... low sulfur diesel needs by producing 10,000 barrels per day. At Salt Lake City, a $20 million project revamped our fluid cat cracker, which is expected to improve reliability, increase run length and allow us to process more cost advantaged local crude oil. Finally, at our Golden Eagle refinery, we...

  • Page 4
    ... File Number 1-3473 TESORO CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 95-0862768 (I.R.S. Employer Identification No.) 78216-6999 (Zip Code) 300 Concord Plaza Drive San Antonio, Texas (Address...

  • Page 5
    TESORO CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Items 1. and 2. Business and Properties...Acquisitions ...Refining ...Retail ...Competition and Other ...Government Regulation and Legislation...Employees ...Properties ...Glossary of Terms ...Executive Officers of the ...

  • Page 6
    ... New York Stock Exchange Listed Company Manual. ACQUISITIONS In May 2007, we acquired a 100,000 barrels per day ("bpd") refinery and a 42,000 bpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell» branded retail stations (128 are company-operated...

  • Page 7
    ... operate the largest refineries in Hawaii and Utah, the second largest refineries in northern California and Alaska, and the only refinery in North Dakota. Crude oil capacity and throughput rates of crude oil and other feedstocks by refinery are as follows: Refinery Crude Oil Capacity (bpd)(a) 2007...

  • Page 8
    ...% 18% 82 100% 96% 4 100% 17% 79 4 100% (a) Since acquisition, throughput at the Los Angeles refinery averaged 68 Mbpd over 2007. Throughput averaged over the 235 days of operation was 106 Mbpd. (b) In 2007, we redefined heavy crude oil as crude oil with an American Petroleum Institute gravity of 24...

  • Page 9
    ... liquefied petroleum gas, petroleum coke and asphalt. Our refining yield, in volumes, is summarized below (in Mbpd): 2007 Volume % 2006 Volume % 2005 Volume % California(a) Gasoline and gasoline blendstocks ...Jet fuel...Diesel fuel ...Heavy oils, residual products, internally produced fuel and...

  • Page 10
    ... locations in California, Washington, Alaska, Hawaii, North Dakota, Utah and Idaho. We also distribute products through third-party terminals, truck racks and rail cars, which are supplied by our refineries and through purchases and exchange agreements with other refining and marketing companies...

  • Page 11
    ...at Anacortes, Port Angeles and Vancouver, Washington, supplied primarily by our refining system. We also distribute refined products through third-party terminals in our market areas, supplied by our refinery and through purchases and exchange arrangements with other refining and marketing companies...

  • Page 12
    ... North Dakota and Minnesota. We distribute refined products from our refinery to customers primarily through these third-party terminals. Utah Refining. Our 60 Mbpd Utah refinery is located in Salt Lake City on 145 acres. Our Utah refinery processes crude oils primarily from Utah, Colorado, Wyoming...

  • Page 13
    ... locations in our markets. Jet Fuel. We supply jet fuel to passenger and cargo airlines at airports in Alaska, Hawaii, California, Washington, Utah and other western states. We also supply jet fuel to the U.S. military from our refineries in Alaska, Hawaii, Washington, Utah, and North Dakota. Diesel...

  • Page 14
    ... our gasoline and diesel fuel purchase and resale activity primarily on the U.S. West Coast. Our jet fuel activity primarily consists of supplying markets in Alaska, California and Hawaii. We also purchase a lesser amount of gasoline and other refined products that are sold outside of our refineries...

  • Page 15
    .... Our retail stations (summarized by type and brand) were located in the following states as of December 31, 2007: CompanyOperated Type Jobber/ Dealer Brand Total Tesoro» Mirastar» Shell» USA GasolineTM Total State California ...Alaska ...North Dakota ...Utah ...Washington...Minnesota...Hawaii...

  • Page 16
    ...customers in Portland, Oregon; Los Angeles, San Francisco and San Diego, California; Las Vegas and Reno, Nevada; and Phoenix, Arizona. Other suppliers compete for sales at all of these airports. • Our Alaska refinery competes with other refineries in Alaska and on the U.S. West Coast. Our refining...

  • Page 17
    .... We sell gasoline in Alaska, California, Hawaii, North Dakota, Utah, Washington and other western and midcontinental states through a network of company-operated retail stations and branded and unbranded jobber/ dealers. From time-to-time we also sell refined product to other refiners. Competitive...

  • Page 18
    ... in Alaska and (2) Clean Islands Council for response services throughout the State of Hawaii. For larger spill contingency capabilities, we have entered into contracts with Marine Spill Response Corporation for Hawaii, the San Francisco Bay, Puget Sound and the Ports of Los Angeles and Long Beach...

  • Page 19
    ... improve octane values. CARB - California Air Resources Board. Gasoline and diesel sold in the state of California requires stricter quality and emissions reduction performance than other states. Cogeneration Plant - A plant designed to produce both steam and electricity used to operate the refinery...

  • Page 20
    ... feedstocks and higher octane stocks suitable for blending into finished gasoline. Retail Fuel Margin - The margin on fuel products sold through our retail segment is calculated as revenues less costs of sales. Costs of sales in fuel margin are based on purchases from our refining segment and third...

  • Page 21
    ... Asset Management Executive Vice President and Chief Administrative Officer Senior Vice President, Government Affairs Senior Vice President, Strategy Senior Vice President, Strategy Development Senior Vice President, Supply and Optimization Senior Vice President, Business Development and Logistics...

  • Page 22
    ..., Crude Oil and Logistics of Tesoro Refining and Marketing Company. Prior to joining Tesoro, Mr. Finnerty served as Vice President, Trading North America Crude, for ChevronTexaco from October 2001 to November 2003. Everett D. Lewis was named Executive Vice President, Strategy and Asset Management in...

  • Page 23
    ... Northwest Region of Tesoro Refining and Marketing Company and Anacortes Refinery Manager from June 2002 to April 2005. Lynn D. Westfall was named Senior Vice President, External Affairs and Chief Economist in January 2007. Prior to that, he served as Senior Vice President, Chief Economist beginning...

  • Page 24
    ... Texaco and President and Chief Executive Officer of Texaco Refining & Marketing, Inc. Retired Chairman, President and Chief Executive Officer of Baker Hughes, Inc.; Advisory Board of Fidelity Funds ITEM 1A. RISK FACTORS The volatility of crude oil prices, refined product prices and natural gas and...

  • Page 25
    ... Northwest refineries import crude oil and other feedstocks by tanker. Transportation of crude oil and refined products over water involves inherent risk and subjects us to the provisions of the Federal Oil Pollution Act of 1990 and state laws in California, Hawaii, Washington and Alaska. Among...

  • Page 26
    ... result of our reliance on third-party transportation of crude oil and refined products. Our Washington refinery receives all of its Canadian crude oil and delivers a high proportion of its gasoline, diesel and jet fuel through third-party pipelines and the balance through marine vessels. Our Hawaii...

  • Page 27
    ... the delivery of supplies and raw materials to us, delays in our delivery of refined products, decreased sales of our refined products and extension of time for payment of accounts receivable from our customers. Strategic targets such as energy-related assets (which could include refineries such as...

  • Page 28
    ... or results of operations. On March 2, 2007, we settled our dispute with Tosco Corporation ("Tosco") concerning soil and groundwater conditions at the Golden Eagle refinery. We received $58.5 million from ConocoPhillips as successor in interest to Tosco and Phillips Petroleum, both former owners and...

  • Page 29
    ... in common stock and each index was $100 on December 31, 2002, and that all dividends were reinvested. Investment is weighted on the basis of market capitalization. 2,500 TSO 2,000 S&P 500 Peer Group DOLLARS 1,500 1,000 500 0 2002 2003 2004 2005 2006 2007 Note: The stock price performance...

  • Page 30
    ... Street, San Antonio, Texas. Holders of common stock of record at the close of business on March 14, 2008 are entitled to notice of and to vote at the annual meeting. The following table summarizes, as of December 31, 2007, certain information regarding equity compensation to our employees, officers...

  • Page 31
    ...financial and operating results include the results of the acquisitions of our Los Angeles Assets and USA Petroleum Assets since May 2007. All share and per share amounts presented reflect the effect of our two-for-one stock split effected in the form of a stock dividend which was distributed on May...

  • Page 32
    ...day)(f) California Golden Eagle ...Los Angeles ...Pacific Northwest Washington ...Alaska ...Mid-Pacific Hawaii ...Mid-Continent North Dakota ...Utah ...Total Refining Throughput ...Refining Yield (thousand barrels per day)(f) Gasoline and gasoline blendstocks ...Jet fuel ...Diesel fuel ...Heavy oils...

  • Page 33
    ... further described below under "Results of Operations" and "Capital Resources & Liquidity": • We acquired and fully integrated the Los Angeles refinery and retail networks of 276 Shell» branded and 138 USA GasolineTM branded retail stations. • Prior to completing the acquisitions, we set a year...

  • Page 34
    .... Acquisitions Los Angeles Assets On May 10, 2007 we acquired a 100 thousand barrels per day ("Mbpd") refinery and a 42 Mbpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell» branded retail stations (128 are company-operated) located throughout...

  • Page 35
    ...). This acquisition, along with the acquired 276 Shell branded retail stations, provides us with retail stations near our Golden Eagle and Los Angeles refineries that will allow us to optimize production, invest in refinery improvements and deliver more clean products into the California market. In...

  • Page 36
    ... access at our Port of Long Beach terminal. We are also studying energy efficiency projects at all of our refineries. These projects are preliminary and are subject to further review and analysis. Hawaii Refinery Initiatives During 2007, gross refining margins at our Hawaii refinery declined by $164...

  • Page 37
    ... of $17 million related to the termination of a delayed coker project at our Washington refinery. For 2005, net earnings included after-tax charges for debt refinancing and prepayment costs of $58 million and executive termination and retirement costs of $6 million. Refining Segment 2007 2006 2005...

  • Page 38
    ... and gasoline blendstocks ...Jet fuel ...Diesel fuel...Heavy oils, residual products and other...Total Refined Product Sales ...Refined Product Sales Margin ($/barrel)(g) Average sales price ...Average costs of sales ...Refined Product Sales Margin ...Refining Data by Region California (Golden Eagle...

  • Page 39
    ...be calculated similarly by other companies. Gross refining margin is calculated as revenues less costs of feedstocks, purchased refined products, transportation and distribution. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations. Manufacturing costs per...

  • Page 40
    ... reduced throughput during scheduled turnarounds for the following refineries: the Los Angeles, Golden Eagle, and Utah refineries during 2007; the Golden Eagle, Washington and Alaska refineries during 2006; and the Golden Eagle, Washington and Hawaii refineries during 2005. 2007 Compared to 2006...

  • Page 41
    ...in 2007 at our Golden Eagle, Washington and Hawaii refineries as described above. During 2006, we experienced unscheduled downtime at our Alaska refinery as a result of the grounding of our time-chartered vessel which impacted the supply of feedstocks to the refinery. Refined Product Sales. Revenues...

  • Page 42
    ... to Canadian production constraints and a depressed market in the Salt Lake City area due to record high first quarter production in PADD IV. • In our Pacific Northwest region, gross refining margins increased 19% year-over-year despite a scheduled turnaround at our Washington refinery during the...

  • Page 43
    ... $10 million in 2005, primarily due to pretax charges of $28 million related to the termination of a delayed coker project at our Washington refinery. Retail Segment 2007 2006 2005 (Dollars in millions except per gallon amounts) Revenues Fuel ...$2,946 Merchandise and other(a)...221 Total Revenues...

  • Page 44
    ... Shell» and USA GasolineTM sites acquired in May 2007 contributed gross margins of $118 million and fuel sales of 643 million gallons. The remaining increase in gross margins of $2 million and fuel sales of 21 million gallons reflects an increase in our Tesoro-branded jobber/dealer retail stations...

  • Page 45
    ...to meet our capital expenditures, working capital and debt service requirements. Acquisitions On May 10, 2007, we acquired the Los Angeles Assets for $1.82 billion (which includes $257 million for petroleum inventories and direct costs of $16 million). To fund the acquisition, we issued $500 million...

  • Page 46
    ... former owner of the refinery. Upon settlement, the $58.5 million settlement was included in our environmental reserves. See "Environmental and Other" below for further information. Cash Dividends On January 30, 2008, our Board of Directors declared a quarterly cash dividend on common stock of $0.10...

  • Page 47
    ... term loan, which was used to partially fund the acquisition of the Los Angeles Assets. On May 29, 2007, we repaid and terminated this loan, using the net proceeds from the 61⁄2% senior notes offering and cash on hand. 61⁄2% Senior Notes Due 2017 On May 29, 2007, we issued $500 million aggregate...

  • Page 48
    ...to: • pay dividends and other distributions with respect to our capital stock and purchase, redeem or retire our capital stock; • incur additional indebtedness and issue preferred stock; • sell assets unless the proceeds from those sales are used to repay debt or are reinvested in our business...

  • Page 49
    ... systems modernization (Golden Eagle); $18 million for the wharf expansion project (Golden Eagle); $28 million for a diesel desulfurizer unit (Alaska); and $19 million for sulfur handling projects (Washington). At our Los Angeles refinery we spent $41 million since acquisition during 2007. Our 2008...

  • Page 50
    ... affected by scheduled turnarounds at our Golden Eagle and Washington refineries during the first quarter and our Los Angeles refinery during the fourth quarter. Long-Term Commitments Contractual Commitments We have numerous contractual commitments for purchases associated with the operation of our...

  • Page 51
    .... Conditions may develop that cause increases or decreases in future expenditures for our various sites, including, but not limited to, our refineries, tank farms, pipelines, retail stations (operating and closed locations) and refined products terminals, and for compliance with the Clean Air Act...

  • Page 52
    ... position or results of operations. Environmental Capital Expenditures EPA regulations related to the Clean Air Act require reductions in the sulfur content in gasoline. We are installing a gasoline hydrotreater at our Utah refinery to satisfy the requirements of the regulations. During 2007, we...

  • Page 53
    ... at our North Dakota, Utah and Hawaii refineries. Our Golden Eagle, Los Angeles, Washington and Alaska refineries will not require additional capital spending to meet the new diesel fuel standards. In February 2007, the EPA issued regulations for the reduction of benzene in gasoline. We are...

  • Page 54
    ... 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 to reduce...

  • Page 55
    ... TAPS Carriers have requested that the FERC reverse the presiding judge. We cannot give assurances of when or whether we will prevail in this proceeding. 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...

  • Page 56
    ...is usually much less than current market value, however, a significant decline in market values of crude oil and refined products could impair the carrying values of these inventories. We had 29 million barrels of crude oil and refined product inventories at December 31, 2007 with an average cost of...

  • Page 57
    ... our refineries, pipelines and certain terminals and retail stations, because the related assets have indeterminate useful lives which preclude development of assumptions about the potential timing of settlement dates. Such obligations will be recognized in the period in which sufficient information...

  • Page 58
    ...cash flow from operations; • changes in the cost or availability of third-party vessels, pipelines and other means of transporting crude oil feedstocks and refined products; • actions of customers and competitors; • direct or indirect effects on our business resulting from actual or threatened...

  • Page 59
    ... change in refined 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...

  • Page 60
    ...open positions, which resulted in an unrealized loss position of $39 million at December 31, 2007, for an unrealized mark-to-market net loss during 2007 of $51 million. During 2006, we settled derivative positions of approximately 138 million barrels of crude oil and refined products, which resulted...

  • Page 61
    ... of accounting for refined product sales and purchases transactions with the same counterparty that have been entered into in contemplation of one another, and for its pension and other postretirement plans. We have also audited, in accordance with the standards of the Public Company Accounting...

  • Page 62
    TESORO CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS Years ended December 31, 2007 2006 2005 (In millions except per share amounts) REVENUES(1) ...COSTS AND EXPENSES: Costs of sales and operating expenses(1) ...Selling, general and administrative expenses ...Depreciation and amortization ......

  • Page 63
    ..., less allowance for doubtful accounts ...1,243 Inventories ...1,200 Prepayments and other ...134 Total Current Assets ...PROPERTY, PLANT AND EQUIPMENT Refining...Retail...Corporate and other ...Less accumulated depreciation and amortization ...Net Property, Plant and Equipment ...OTHER NONCURRENT...

  • Page 64
    ... dividends ...Repurchases of common stock ...Shares issued for stock options and benefit plans ...Excess tax benefits from stock-based compensation arrangements exercised . . Restricted stock grants and amortization . . Other comprehensive loss: Minimum pension liability adjustment (net of related...

  • Page 65
    ... tax benefits from stock-based compensation arrangements ...Other changes in non-current assets and liabilities ...Changes in current assets and current liabilities: Receivables...Inventories ...Prepayments and other ...Accounts payable and accrued liabilities ...Net cash from operating activities...

  • Page 66
    ... We market refined products to wholesale and retail customers, as well as commercial end-users. Our retail business includes a network of 449 branded stations operated by Tesoro under the Tesoro», Mirastar», Shell» and USA GasolineTM brands and 462 branded stations operated by independent dealers...

  • Page 67
    ...-line method, based on the estimated useful life of each asset. The weighted average lives range from 23 to 28 years for refineries, 9 to 16 years for terminals, 11 to 16 years for retail stations, 4 to 27 years for transportation assets and 4 to 16 years for corporate assets. We record property...

  • Page 68
    ... transactions, which are entered into primarily to optimize our refinery supply requirements, are included in costs of sales and operating expenses on a net basis. We enter into a limited number of refined product sales and purchases transactions with the same counterparty that have been entered...

  • Page 69
    ... operations. Federal excise and state motor fuel taxes, which are remitted to governmental agencies through our refining segment and collected from customers in our retail segment, are included in both revenues and costs of sales. These taxes, primarily related to sales of gasoline and diesel fuel...

  • Page 70
    ...resulted in an unrealized loss position of $39 million at December 31, 2007 for an unrealized mark-to-market net loss of $51 million, as compared to an unrealized mark-to-market net gain totaling $10 million during 2006. Our unrealized mark-to-market net gain during 2005 was nominal. New Accounting...

  • Page 71
    ... ...$ 4.06 NOTE C - ACQUISITIONS Los Angeles Assets On May 10, 2007 we acquired a 100 Mbpd refinery and a 42 Mbpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell» branded retail stations (128 are company-operated) located throughout Southern...

  • Page 72
    ...The Los Angeles Assets complement our operations on the Pacific Rim and enable us to realize synergies through our crude oil purchasing and unique shipping logistics as well as optimizing the output of our refineries to maximize the production of clean fuels for the California market. Shell, subject...

  • Page 73
    TESORO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) USA Petroleum Retail Stations On May 1, 2007, we acquired 138 retail stations located primarily in California from USA Petroleum (the "USA Petroleum Assets"). The purchase price of the assets and the USA GasolineTM brand ...

  • Page 74
    ...The weighted average estimated lives of acquired intangible assets are: air emission credits - 23 years; refinery permits and plans - 20 years; customer agreements and contracts - 12 years; USA GasolineTM tradename - 20 years; software - 3 years; favorable retail station leases - 18 years; and other...

  • Page 75
    ... two non-interest bearing notes due from an employee who subsequently became an executive officer. These notes, assumed in connection with the acquisition of our Golden Eagle refinery in May 2002, totaled approximately $1 million at December 31, 2006. During 2007 one of these notes was paid in full...

  • Page 76
    ...partially fund the acquisition of the Los Angeles Assets. The...pay cash dividends, incur indebtedness, create liens and make investments. Tesoro is also required to maintain a certain level of available borrowing capacity and specified levels of tangible net worth. For the year ended December 31, 2007...

  • Page 77
    .... 364-Day Term Loan On May 11, 2007, we entered into a $700 million 364-day term loan, which was used to partially fund the acquisition of the Los Angeles Assets. On May 29, 2007, we repaid and terminated this loan, using the net proceeds from the 61⁄2% senior notes offering and cash on-hand. 61...

  • Page 78
    ...principal balance of our 95⁄8% senior subordinated notes at a redemption price of 104.8%. At December 31, 2006, the notes were included in current maturities of debt. Junior Subordinated Notes Due 2012 In connection with our acquisition of the Golden Eagle refinery, Tesoro issued to the seller two...

  • Page 79
    ... with our retail and terminal operations which generally require that we remove certain improvements, primarily underground storage tanks, upon lease termination. In connection with the acquisitions of the Los Angeles Assets and USA Petroleum Assets, we recorded asset retirement obligations for...

  • Page 80
    ... retirement obligations ...32 Stock-based compensation ...23 Other accrued employee costs ...10 Accrued environmental remediation liabilities ...14 Other accrued liabilities ...35 Other ...38 Total Deferred Tax Assets...$ 283 Deferred Tax Liabilities: Accelerated depreciation and property related...

  • Page 81
    ... related to current year tax positions ...$44 ...1 ...(4) ...3 Balance at December 31, 2007 ...$44 NOTE L - BENEFIT PLANS Pension and Other Postretirement Benefits Tesoro sponsors four defined benefit pension plans, including a funded employee retirement plan, an unfunded executive security plan...

  • Page 82
    ...Revenue Code on our funded employee retirement plan. During 2007, we voluntarily contributed $5 million to the plan for payment of current retiree obligations. Tesoro provides to retirees who met certain service requirements and were participating in our group insurance program at retirement, health...

  • Page 83
    TESORO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other Postretirement Benefits 2007 2006 Pension Benefits 2007 2006 Change in plan assets: Fair value of plan assets at beginning of year ...Actual return on plan assets ...Employer contributions ...Benefits paid ...Fair ...

  • Page 84
    ... Tesoro's pension and other postretirement benefits obligations were: Pension Benefits 2007 2006 2005 Other Postretirement Benefits 2007 2006 2005 Projected Benefit Obligation: Assumed weighted average % as of December 31: Discount rate(a) ...Rate of compensation increase ...Net Periodic Pension...

  • Page 85
    ... plan that provides for contributions, subject to certain limitations, by eligible employees into designated investment funds with a matching contribution by Tesoro. Employees may elect tax-deferred treatment in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Tesoro...

  • Page 86
    ...by the Internal Revenue Code. Retail Savings Plan Tesoro sponsors a savings plan, in lieu of the thrift plan, for eligible retail employees who have completed one year of service and have worked at least 1,000 hours within that time. Eligible employees receive a mandatory employer contribution equal...

  • Page 87
    ... provision. The lease term will commence upon occupancy of the office campus. The lease agreement will be accounted for as an operating lease. Tesoro's minimum annual lease payments as of December 31, 2007, for operating leases having initial or remaining noncancellable lease terms in excess of...

  • Page 88
    .... Conditions may develop that cause increases or decreases in future expenditures for our various sites, including, but not limited to, our refineries, tank farms, pipelines, retail stations (operating and closed locations) and refined products terminals, and for compliance with the Clean Air Act...

  • Page 89
    ... Board that names us as well as two previous owners of the Golden Eagle refinery. A reserve for this matter is included in the environmental accruals referenced above. In March 2007, we received an offer from the Bay Area Air Quality Management District (the "District") to settle 77 Notices of...

  • Page 90
    ... at our North Dakota, Utah and Hawaii refineries. Our Golden Eagle, Los Angeles, Washington and Alaska refineries will not require additional capital spending to meet the new diesel fuel standards. In February 2007, the EPA issued regulations for the reduction of benzene in gasoline. We are...

  • Page 91
    ... a marine oil wharf at the Golden Eagle refinery to meet engineering and maintenance standards issued by the State of California in February 2006. This cost estimate is preliminary and subject to further review. In connection with our 2001 acquisition of our North Dakota and Utah refineries, Tesoro...

  • Page 92
    ... an amount defined in each of the debt agreements. We do not believe that the limitations will restrict our ability to pay dividends or repurchase stock under our current programs. See Note O for information relating to stock-based compensation and common stock reserved for exercise of options. 88

  • Page 93
    TESORO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Stock Split On May 1, 2007, our Board of Directors approved a two-for-one stock split effected in the form of a stock dividend, which was distributed on May 29, 2007 to shareholders of record at the close of business on May ...

  • Page 94
    ... of the 2006 Plan. At December 31, 2007, we had 6,022,472 options and 850,144 restricted shares outstanding under this plan. The Key Employee Stock Option Plan provided stock option grants to eligible employees who were not executive officers of Tesoro. We granted stock options to purchase 1,594,000...

  • Page 95
    ... straight-line method. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination within the valuation model. The expected life of options granted is based on historical data and represents the period of time...

  • Page 96
    ... 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...

  • Page 97
    ... in the consolidated balance sheets totaled $9 million. NOTE P - OPERATING SEGMENTS The Company's revenues are derived from our two operating segments, refining and retail. Our refining segment owns and operates seven petroleum refineries located in California, Washington, Alaska, Hawaii, North 93

  • Page 98
    ...Alaska, California, Nevada, Hawaii, Idaho, Minnesota, North Dakota, Utah, Oregon and Washington. Our refining segment also sells refined products to unbranded marketers and occasionally exports refined products to other markets in the Asia/Pacific area. Our retail segment sells gasoline, diesel fuel...

  • Page 99
    ... ended December 31, 2007, 2006 and 2005, respectively. (c) Refining operating income for 2006 includes a pretax charge of $28 million related to the termination of a delayed coker project at our Washington refinery in July 2006. The charge is included in loss on asset disposals and impairments in...

  • Page 100
    ... We, as management of Tesoro Corporation and its subsidiaries (the "Company"), are responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Securities Exchange Act of 1934, Rule 13a-15(f). The Company's internal control system is designed to...

  • Page 101
    ... paragraph relating to a change in the Company's method of accounting for refined product sales and purchases transactions with the same counterparty that have been entered into in contemplation of one another, and for its pension and other postretirement plans. /s/ San Antonio, Texas February...

  • Page 102
    ... code of business conduct and ethics for senior financial executives on our website at www.tsocorp.com, and you may receive a copy, free of charge by writing to Tesoro Corporation, Attention: Investor Relations, 300 Concord Plaza Drive, San Antonio, Texas 78216-6999. ITEM 11. EXECUTIVE COMPENSATION...

  • Page 103
    ...30, 2001, File No. 1-3473). Sale and Purchase Agreement for Golden Eagle Refining and Marketing Assets, dated February 4, 2002, by and among Ultramar Inc. and Tesoro Refining and Marketing Company, including First Amendment dated February 20, 2002 and related Purchaser Parent Guaranty dated February...

  • Page 104
    ... Exhibit 2.2 to the Company's Current Report on Form 8-K filed on February 1, 2007, File No. 1-3473). - Purchase and Sale Agreement and Joint Escrow Instructions by and among the Company and USA Petroleum Corporation, USA Gasoline Corporation, Palisades Gas and Wash, Inc. and USA San Diego LLC dated...

  • Page 105
    ...reference herein to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 4, 2007, File No. 1-3473). Form of Registration Rights Agreement relating to the 61⁄2% Senior Notes due 2017, dated as of May 29, 2007, among Tesoro Corporation, certain subsidiary guarantors, Lehman Brothers...

  • Page 106
    ... to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 13, 2007, File No. 1-3473). Management Stability Agreement between the Company and W. Eugene Burden dated November 8, 2002 (incorporated by reference herein to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the...

  • Page 107
    ...). - Tesoro Corporation 2006 Executive Deferred Compensation Plan dated November 2, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2006, File No. 1-3473). - Copy of the Company's Key Employee Stock Option Plan...

  • Page 108
    ...- Code of Business Conduct and Ethics for Senior Financial Executives (incorporated by reference herein to Exhibit 14.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, File No. 1-3473). - Subsidiaries of the Company. - Consent of Independent Registered Public...

  • Page 109
    ...authorized. TESORO CORPORATION By /s/ BRUCE A. SMITH Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer Dated: February 28, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 110
    Exhibit 21.1 SUBSIDIARIES OF THE COMPANY Tesoro Corporation is publicly held and has no parent. The subsidiaries listed below are ... ended December 31, 2007. Incorporated or Organized Under Laws of Name of Subsidiary Tesoro Alaska Company Tesoro Refining and Marketing Company Delaware Delaware

  • Page 111
    ...and for its pension and other postretirement plans) and management's report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Tesoro Corporation for the year ended December 31, 2007. Deloitte & Touche LLP San Antonio, Texas February 28...

  • Page 112
    ..., 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. /s/ BRUCE A. SMITH Bruce A. Smith Chief Executive Officer Date: February...

  • Page 113
    ... 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...

  • Page 114
    ...OF 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2007 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...

  • Page 115
    ... 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Otto C. Schwethelm, Chief Financial Officer of the Company, certify, pursuant...