Tesoro 2008 Annual Report Download

Download and view the complete annual report

Please find the complete 2008 Tesoro annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

Table of contents

  • Page 1

  • Page 2
    ... of margin that we capture in our business regions by purchasing less expensive crudes. We also plan to capture more margin as we optimize our transportation economics, increase crude ï¬,exibility, reduce energy and maintenance operating expenses, and optimize diesel and gasoline production. The...

  • Page 3
    TESORO CORP /NEW/ FORM 10-K (Annual Report) Filed 03/02/09 for the Period Ending 12/31/08 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 300 CONCORD PLAZA DRIVE SAN ANTONIO, TX 78216-6999 2108288484 0000050104 TSO 2911 - Petroleum Refining Oil & Gas Operations Energy 12/31 http...

  • Page 4
    Table of Contents

  • Page 5
    ... 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.) 300 Concord Plaza Drive San Antonio, Texas (Address of principal executive offices...

  • Page 6
    Statement no later than 120 days after the end of the fiscal year covered by this Form 10-K.

  • Page 7
    TESORO CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Items 1. and 2. Business and Properties Refining Retail Competition and Other Government Regulation and Legislation Employees Properties Glossary of Terms Executive Officers of the Registrant Board of Directors of the ...

  • Page 8
    1

  • Page 9
    ... ® and USA Gasoline TM brands. See Notes M and P in our consolidated financial statements in Item 8 for additional information on our operating segments and properties. Our principal executive offices are located at 300 Concord Plaza Drive, San Antonio, Texas 78216-6999 and our telephone number is...

  • Page 10
    ... rates of crude oil and other feedstocks by refinery are as follows: Tesoro Refinery Locations Refinery Crude Oil Capacity (bpd)(a) 2008 Throughput (bpd) 2007 2006 California Golden Eagle Los Angeles(b) Pacific Northwest Washington Alaska Mid-Pacific Hawaii Mid-Continent North Dakota Utah...

  • Page 11
    Table of Contents supplies in the spot market. Historically, our largest domestic and foreign crude oil sources have been Alaska North Slope and Canada, respectively. Sources of our crude oil purchases are as follows: Source 2008 2007 2006 Domestic Foreign Total 56% 52% 53% 44 48 47 100% 100% 100%...

  • Page 12
    ...liquefied petroleum gas, petroleum coke and asphalt. Our refining yield volumes by region are summarized below (in Mbpd): 2008 Volume % 2007 Volume % 2006 Volume % California (a) Gasoline and gasoline blendstocks Jet fuel Diesel fuel Heavy oils, residual products, internally produced fuel and other...

  • Page 13
    ..., Washington, Alaska, Hawaii, North Dakota, Utah and Idaho. We also distribute products through third-party terminals, truck racks and via rail cars, in our market areas and through purchases and exchange arrangements with other refining and marketing companies. California Refineries Golden Eagle...

  • Page 14
    ... gasoline and diesel fuel, and jet fuel. The refinery also produces heavy fuel oils, liquefied petroleum gas and petroleum coke. Transportation. Our Los Angeles refinery leases a marine terminal at the Port of Long Beach that enables us to receive crude oil and ship refined products. The refinery...

  • Page 15
    ... distribute refined products from our refinery to customers through third-party terminals in our market areas. Mid-Continent Refineries North Dakota Refining. Our 58 Mbpd North Dakota refinery is located on the Missouri River near Mandan on 960 acres. Our crude oil pipeline supplies our North Dakota...

  • Page 16
    ...fuel purchase and resale activity primarily on the U.S. West Coast. Our jet fuel activity primarily consists of supplying markets in Alaska, California, Washington, Hawaii and Utah. We also purchase for resale a lesser amount of gasoline and other refined products for sales outside of our refineries...

  • Page 17
    .... Our retail stations (summarized by type and brand) were located in the following states as of December 31, 2008: Type State CompanyOperated Jobber/ Dealer Total Tesoro ® Mirastar ® Brand Shell ® USA Gasoline TM Total California Alaska North Dakota Utah Washington Minnesota Hawaii Idaho Other...

  • Page 18
    ... gasoline and distillate customers in our market areas. Competition and concentrations specific to each of our refineries are as follows: • Our Golden Eagle, Los Angeles and Washington refineries compete with several refineries on the U.S. West Coast. In addition, products flow into the West Coast...

  • Page 19
    ... marketers, integrated oil companies and highvolume retailers. We sell gasoline in Alaska, California, Hawaii, North Dakota, Utah, Washington and other western and mid-continental states through a network of company-operated retail stations and branded and unbranded jobber/dealers. Competitive...

  • Page 20
    ... the storage, transportation and production of feedstocks and refined products. We conduct our retail business under the Tesoro ® , Tesoro Alaska ® , Mirastar ® , 2-Go Tesoro ® , Shell ® and USA Gasoline TM brands through a network of 879 retail stations, of which 389 are company-operated. See...

  • Page 21
    ...California Air Resources Board. Gasoline and diesel fuel sold in the state of California are regulated by CARB and require stricter quality and emissions reduction performance than required by other states. Cogeneration Plant - A plant that produces both steam and electricity for refinery operations...

  • Page 22
    ... gasoline. Retail Fuel Margin - The margin on fuel products sold through our retail segment calculated as revenues less costs of sales. Costs of sales in fuel margin are based on purchases from our refining segment and third parties using average bulk market prices adjusted for transportation...

  • Page 23
    ... 2005 and Senior Vice President, Supply and Distribution of Tesoro Refining and Marketing Company beginning in February 2004. Everett D. Lewis was named Executive Vice President, Chief Operating Officer in March 2008. Prior to that he served as Executive Vice President, Strategy and Asset Management...

  • Page 24
    ... of the Environmental, Health and Safety Committee of Tesoro Corporation; Retired Vice President of Texaco and President and Chief Executive Officer of Texaco Refining & Marketing, Inc. Retired Chairman, President and Chief Executive Officer of Baker Hughes, Inc.; Trustee of Fidelity Funds John...

  • Page 25
    ... profit margins and could have a significant impact on our refining and wholesale marketing operations, earnings and cash flow. Also, crude oil supply contracts generally have market-responsive pricing provisions. We purchase our refinery feedstocks weeks before manufacturing and selling the refined...

  • Page 26
    ... pipeline and refined product transportation operations are closely regulated by federal, state and local agencies and monitored by environmental interest groups. Our California, Mid-Pacific and Pacific Northwest refineries import crude oil and other feedstocks by tanker. Transportation of crude oil...

  • Page 27
    ... of its gasoline, diesel fuel and jet fuel through third-party pipelines and the balance through marine vessels. Our Hawaii and Alaska refineries receive most of their crude oil and transport a substantial portion of their refined products through ships and barges. Our Utah refinery receives...

  • Page 28
    ... and individual customers. We also face strong competition in the market for the sale of retail gasoline and merchandise. Our competitors include service stations operated by fully integrated major oil companies and other well-recognized national or regional retail outlets, often selling gasoline or...

  • Page 29
    ... position or results of operations. In June 2008, we received an offer from the Bay Area Air Quality Management District (the "District") to settle 44 NOVs for $740,000. The NOVs were issued from May 2006 to April 2008 and allege violations of air quality regulations at our Golden Eagle refinery. We...

  • Page 30
    ...of our common stock to the cumulative total return of the S&P 500 Composite Index and to a composite peer group of companies. The composite peer group (the "Peer Group") includes Alon USA Energy, Frontier Oil Corporation, Holly Corporation, Sunoco, Valero Energy Corporation and Western Refining. The...

  • Page 31
    ... the close of business on March 12, 2009 are entitled to notice of and to vote at the annual meeting. The following table summarizes, as of December 31, 2008, certain information regarding equity compensation to our employees, officers, directors and other persons under our equity compensation plans...

  • Page 32
    ... summary of all repurchases by Tesoro of its common stock during the three-month period ended December 31, 2008. Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs** Approximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs* Period Total...

  • Page 33
    .... Our financial results include the results of our Los Angeles refinery and Shell and USA Gasoline retail stations since they were acquired in May 2007. All share and per share amounts presented reflect our two-for-one stock split effected in the form of a stock dividend which was distributed in May...

  • Page 34
    ...common stock for $148 million in connection with our share repurchase program. We began paying a quarterly dividend in June 2005. Prior to 2005, we had not paid dividends since 1986. During 2007, we issued $500 million in senior notes primarily to fund the acquisition of the Los Angeles refinery and...

  • Page 35
    ...to benefit margins. Despite the overall decline in gasoline margins in 2008 as compared to 2007, diesel fuel margins were higher than 2007 levels due to continued strong global demand and low inventories. Strategy and Goals Our strategy is to create a value-added refining and marketing business that...

  • Page 36
    ... coker at the Golden Eagle refinery beginning in the second quarter; (ii) refining a greater percentage of lower cost, waterborne crude oils at the Los Angeles refinery; (iii) optimizing our diesel fuel and gasoline production to respond to market demand; (iv) adjusting our run rates and feedstock...

  • Page 37
    ...crude oil purchasing and shipping logistics as well as by maximizing the production of clean fuels for the California market. Our initiatives to improve profitability at our Los Angeles refinery in 2008 included optimizing our crude oil supply, increasing distillate production and reducing operating...

  • Page 38
    ... serve as the only criteria for predicting our future performance. Our results include the operations of our Los Angeles refinery and Shell and USA Gasoline retail stations since acquisition in May 2007. Summary Our net earnings for 2008 declined to $278 million ($2.00 per diluted share) from $566...

  • Page 39
    ...substantially lower industry refined product margins on the U.S. West Coast during the second half of the year as crude oil prices rose rapidly and product prices increased more gradually; • significantly lower gross refining margins at our Hawaii refinery; • higher operating expenses reflecting...

  • Page 40
    ... Gross refining margin per barrel is calculated by dividing gross refining margin by total refining throughput and may not be calculated similarly by other companies. Gross refining margin is calculated as revenues less costs of feedstocks, purchased refined products, transportation and distribution...

  • Page 41
    ... and purchased refined products. We experienced reduced throughput during scheduled turnarounds for the following refineries: the Golden Eagle and Washington refineries during 2008; the Los Angeles, Golden Eagle, and Utah refineries during 2007; and the Golden Eagle, Washington and Alaska refineries...

  • Page 42
    ... at our Alaska, Hawaii and Washington refineries due to the weak market environment. For information related to scheduled downtime for both periods see footnote (i) of the table above. Refined Product Sales. Revenues from sales of refined products increased 28% to $26.8 billion in 2008 primarily due...

  • Page 43
    ... Washington refinery during the 2007 third quarter resulting in reduced operating income of approximately $12 million. • In our Mid-Pacific region, gross refining margins declined 82% during 2007, reflecting the decline in U.S. West Coast industry margins during the second half of 2007. Crude oil...

  • Page 44
    ... 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 from...

  • Page 45
    ... Average Number of Retail Stations (during the year) Company-operated Branded jobber/dealer Total Average Retail Stations Segment Operating Income (Loss) Gross Margins Fuel(c) Merchandise and other non-fuel margin Total gross margins Expenses Operating expenses Selling, general and administrative...

  • Page 46
    ... decrease in crude oil prices during the last half of 2008. Our Shell and USA Gasoline stations contributed additional gross margins of $96 million and additional fuel sales of 266 million gallons during 2008 reflecting operation for a full year in 2008. Excluding the acquired stations, total gross...

  • Page 47
    ... 2008, we received refunds from TAPS in connection with rulings by the Regulatory Commission of Alaska concerning our protest of intrastate rates. We received net refunds totaling $50 million from TAPS concerning rates set between 1997 and 2003. In 2006, the sale of our leased corporate headquarters...

  • Page 48
    ... we will prevail in this lawsuit. TAPS Refunds In 1996, Tesoro Alaska Company filed a protest of the intrastate rates charged for the transportation of its crude oil through TAPS. Our protest asserted that the TAPS intrastate rates were excessive and should be reduced. The Regulatory Commission of...

  • Page 49
    ... facility at an annual rate of 0.25% as of December 31, 2008. Our credit agreement expires in May 2012. The credit agreement contains covenants and conditions that, among other things, limit our ability to pay cash dividends, incur indebtedness, create liens and make investments. Tesoro is also...

  • Page 50
    ...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 51
    ... budget). See "Business Strategy and Overview" and "Environmental Capital Expenditures" for additional information. Refinery Turnaround Spending During 2008, we spent $105 million for refinery turnarounds and catalyst, primarily at our Golden Eagle refinery and for turnarounds scheduled in 2009. In...

  • Page 52
    ... based on the performance of the assets in the plan, the discount rate used to determine the obligation, and other actuarial assumptions. See "Critical Accounting Policies" for further information related to our pension plan. We are unable to project benefit contributions beyond 2013. In addition to...

  • Page 53
    ... 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 and other federal, state and local requirements...

  • Page 54
    ...San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the Golden Eagle refinery. A reserve to investigate these conditions is included in the environmental accruals referenced above. In July 2008, we received a Notice of Violation ("NOV") from the EPA...

  • Page 55
    ... designed to meet flaring requirements of the South Coast Air Quality Management District. The new compressors were commissioned in December 2008. We spent $34 million in 2008 to install the flare gas recovery compressors. We are installing facilities at our Golden Eagle and North Dakota refineries...

  • Page 56
    ...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 air emissions. Based upon our current plans...

  • Page 57
    ...$5 million, net of contingent legal fees, for the period 2001 through June 2003. The rates paid from mid-June 2003 through June 2008 were also upheld. The $5 million refund is included as "Other income" in our statement of consolidated operations. In January of 2005, Tesoro Alaska Company intervened...

  • Page 58
    ... continue to do so. Changes in market conditions could result in impairment charges in the future. During 2008, we wrote-off goodwill of $3 million associated with our retail segment in connection with our annual assessment based upon forecasted discounted cash flows. Contingencies - We record an...

  • Page 59
    ... including discount rates, expected rate of return on plan assets, rates of compensation, health care cost trends, inflation, retirement rates and mortality rates. We must also assume a rate of return on funded pension plan assets in order to estimate our obligations under our defined benefit plans...

  • Page 60
    ... 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 crude oil feedstocks and refined products; • actions of customers and competitors...

  • Page 61
    ... and cash flows. In addition, the majority of our crude oil supply contracts are short-term agreements priced at market. Our financial results can be affected significantly by price level changes during the period between purchasing refinery feedstocks and selling the manufactured refined products...

  • Page 62
    ...and Golden Eagle refineries. A smaller percentage of the hedges covered West Coast intermediate and finished products. During the 2008 second quarter, we closed the majority of our crude oil derivative positions associated with our long-haul strategy that matched the price of long-haul crude oils to...

  • Page 63
    ... ended, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tesoro Corporation's internal control over financial reporting as of December 31, 2008, based on criteria...

  • Page 64
    ... Company changed its 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/ DELOITTE & TOUCHE LLP San Antonio, Texas February 28, 2008...

  • Page 65
    Table of Contents TESORO CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS Years Ended December 31, 2008 2007 2006 (In millions except per share amounts) REVENUES(a) COSTS AND EXPENSES: Costs of sales and operating expenses(a) Selling, general and administrative expenses Depreciation and ...

  • Page 66
    ... accounts Inventories Prepayments and other Total Current Assets PROPERTY, PLANT AND EQUIPMENT Refining Retail Corporate and other Less accumulated depreciation and amortization Net Property, Plant and Equipment OTHER NONCURRENT ASSETS Goodwill Acquired intangibles, net Other, net Total Other...

  • Page 67
    ...31, 2007 Net earnings Cash dividends Repurchases of common stock Shares issued for stock options and benefit plans Excess tax benefits from stock-based compensation arrangements Restricted stock grants and amortization Other comprehensive loss: Pension and other benefit liability adjustments (net of...

  • Page 68
    ... Changes in current assets and current liabilities: Receivables Inventories Prepayments and other Accounts payable and accrued liabilities Net cash from operating activities CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures Acquisitions Proceeds from asset sales Net cash used in...

  • Page 69
    ... products to wholesale and retail customers, as well as commercial end-users. Our retail business includes a network of 389 branded stations primarily operated by Tesoro under the Tesoro ® , Mirastar ® , Shell ® and USA Gasoline TM brands and 490 branded stations operated by independent dealers...

  • Page 70
    ... depreciation of property, plant and equipment using the straight-line method, based on the estimated useful life of each asset. The useful lives range from 6 to 28 years for refineries, 10 to 25 years for terminals, 5 to 16 years for retail stations, 6 to 22 years for transportation assets and 3 to...

  • Page 71
    ... annually or more frequently, if events or changes in business circumstances indicate the carrying values of the assets may not be recoverable. Acquired intangibles consist primarily of air emissions credits, customer agreements and contracts, the USA Gasoline trade name, and software, which...

  • Page 72
    ... on a net basis. Nonmonetary crude oil and refined product exchange 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 sale and purchase...

  • Page 73
    ... non-trading derivative arrangements primarily to manage exposure to commodity price risks associated with the purchase and/or sale of crude oil and finished products involving inventories above our target levels. These derivative arrangements typically involve exchange-traded futures and over-the...

  • Page 74
    ... reporting date. The provisions of SFAS No. 159 were effective for Tesoro as of January 1, 2008. We elected not to adopt the fair value option under this standard. SFAS No. 141(R) In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which requires that the assets acquired...

  • Page 75
    ... 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 California (collectively, the "Los Angeles Assets") from Shell Oil Products U.S. ("Shell"). The purchase price...

  • Page 76
    ...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 Gasoline TM brand name was paid in cash totaling $286 million...

  • Page 77
    ...December 31, 2008 Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount December 31, 2007 Accumulated Amortization Net Carrying Value Air emissions credits Customer agreements and contracts USA Gasoline tradename Software Refinery permits and plans Favorable leases...

  • Page 78
    ...): 2008 2007 Accrued Liabilities - Current: Taxes other than income taxes, primarily excise taxes Employee costs Environmental liabilities Liability for unrecognized tax benefits, including interest and penalties Income taxes payable Interest Casualty insurance payable Asset retirement obligations...

  • Page 79
    ... periodically adjusted borrowing base of approximately $620 million (based upon an Alaska North Slope crude oil price of $46 per barrel), consisting of Tesoro's eligible cash and cash equivalents, receivables and petroleum inventories, net of the standard reserve as defined, or the agreement's total...

  • Page 80
    ... credit rating assigned to the notes subsequently falls below investment grade. The notes are unsecured and are guaranteed by substantially all of Tesoro's active domestic subsidiaries. Junior Subordinated Notes Due 2012 In connection with our acquisition of the Golden Eagle refinery, Tesoro issued...

  • Page 81
    ... obligations primarily include obligations pertaining to certain lease agreements associated with our retail and terminal operations upon lease termination, a project at our Golden Eagle refinery to retire certain above-ground storage tanks primarily between 2009 and 2011 and asbestos removal...

  • Page 82
    ... liabilities Stock-based compensation Other Total Deferred Tax Assets Less: Valuation allowance Net Deferred Tax Assets Deferred Tax Liabilities: Accelerated depreciation and property related items Deferred maintenance costs, including refinery turnarounds Amortization of intangible assets Inventory...

  • Page 83
    ...interest and penalties associated with unrecognized tax benefits. For interest and penalties relating to income taxes we recognize accrued interest in interest and financing costs, and penalties in selling, general and administrative expenses in the statements of consolidated operations. The federal...

  • Page 84
    ... 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. Tesoro provides health care benefits to retirees who met certain service requirements and were participating in our group insurance...

  • Page 85
    ... benefit plans in connection with our acquisition of the Los Angeles Assets and USA Petroleum Assets. Changes in benefit obligations and plan assets and the funded status for our pension plans and other postretirement benefits as of December 31, 2008 and 2007, were (in millions): Pension Benefits...

  • Page 86
    ...in millions): Pension Benefits 2008 2007 2006 Other Postretirement Benefits 2008 2007 2006 Components of net periodic benefit expense: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss Special termination benefits Curtailments...

  • Page 87
    ... Benefits 2008 2007 2006 Projected Benefit Obligation: Assumed weighted average % as of December 31: Discount rate(a) Rate of compensation increase Net Periodic Pension Cost: Assumed weighted average % as of December 31: Discount rate(a) Rate of compensation increase Expected return on plan assets...

  • Page 88
    ... under the employee thrift plan due to salary deferral limits imposed 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...

  • Page 89
    ... Operating Leases Tesoro has various cancellable and noncancellable operating leases related to land, office and retail facilities, ship charters and equipment and other facilities used in the storage, transportation, production and sale of crude oil feedstocks and refined products. In general...

  • Page 90
    ... 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 and other federal, state and local requirements...

  • Page 91
    ...San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the Golden Eagle refinery. A reserve to investigate these conditions is included in the environmental accruals referenced above. In July 2008, we received a Notice of Violation ("NOV") from the EPA...

  • Page 92
    ... adverse effect on our financial position or results of operations. Claims Against Third-Parties 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...

  • 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...

  • Page 94
    ... unit awards. At December 31, 2008, we had 5,288,054 options and 142,036 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...

  • Page 95
    ... and employee termination within the valuation model. Expected dividend yield is based on annualized dividends at the date of grant. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Tesoro's weighted...

  • Page 96
    ...The 2006 Long-Term Stock Appreciation Rights 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...

  • Page 97
    ... oils and other refined products. We sell these refined products, together with refined products purchased from third parties, at wholesale through terminal facilities and other locations, primarily in Alaska, California, Nevada, Hawaii, Idaho, Minnesota, North Dakota, Utah, Oregon and Washington...

  • Page 98
    ... to management of the respective segment. Intersegment sales from refining to retail are made at prevailing market rates. Income taxes, other income, foreign currency exchange gain (loss) interest and financing costs, interest income, corporate depreciation and corporate general and administrative...

  • Page 99
    ... related to closing 42 Mirastar stations and the potential sale of 20 stations. (e) During 2008, we received net refunds totaling $50 million from the Trans Alaska Pipeline System for prior year's refinery transportation and distribution costs associated with our protest of intrastate rates between...

  • Page 100
    ... 31, 2008 (In millions) Tesoro Corporation Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated ASSETS CURRENT ASSETS Cash and cash equivalents Receivables, less allowance for doubtful accounts Inventories Prepayments and other Total Current Assets Net Property, Plant and...

  • Page 101
    ...Tesoro Corporation Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated ASSETS CURRENT ASSETS Cash and cash equivalents Receivables, less allowance for doubtful accounts Inventories Prepayments and other Total Current Assets Net Property, Plant...180 260 Long-Term Payables to ...

  • Page 102
    ... 2008 (In millions) Tesoro Corporation Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated REVENUES Costs and expenses OPERATING INCOME (LOSS) Equity in earnings (loss) of subsidiaries Other income (expense) EARNINGS BEFORE INCOME TAXES Income tax provision (benefit)(a) NET...

  • Page 103
    ... (In millions) Tesoro Corporation Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated REVENUES Costs and expenses OPERATING INCOME (LOSS) Equity in earnings of subsidiaries Other income (expense) EARNINGS BEFORE INCOME TAXES Income tax provision (benefit)(a) NET EARNINGS...

  • Page 104
    ... from asset sales Net cash from (used in) investing activities CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Borrowings under revolver Repayments under revolver Repurchase of common stock Dividend payments Repayments of debt Proceeds from stock options exercised Excess tax benefits from stock-based...

  • Page 105
    ... FROM (USED IN) OPERATING ACTIVITIES Net cash from (used in) operating activities CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Capital expenditures Acquisitions Intercompany notes, net Proceeds from asset sales Net cash used in investing activities CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES...

  • Page 106
    ... notes, net Proceeds from asset sales Net cash from (used in) investing activities CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Repurchase of common stock Dividend payments Repayments of debt Proceeds from stock options exercised Excess tax benefits from stock-based compensation arrangements Net...

  • Page 107
    ... Contents TESORO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE R -QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarters Second Third Fourth(a) (In millions except per share amounts) Total Year 2008 Revenues Costs of sales and operating expenses Operating Income (loss) Net...

  • Page 108
    ... 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 109
    ... accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight...

  • Page 110
    ... 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 111
    ... America Inc. and BP Pipelines (North America) Inc. (incorporated by reference herein to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, File No. 1-3473). 2.6 - Asset Purchase Agreement by and between the Company and Shell Oil Products...

  • Page 112
    ... Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 17, 2005, File No. 1-3473). 4.3 - Form of Indenture relating to the 61/2% Senior Notes due 2017, dated as of May 29, 2007, among Tesoro Corporation, certain subsidiary guarantors and U.S. Bank National Association, as Trustee...

  • Page 113
    ...2008, File No. 1-3473). †10.9 - Tesoro Corporation Restoration Retirement Plan effective January 1, 2009 (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed December 18, 2008, File No. 1-3473). †10.10 - Copy of the Company's Key Employee Stock Option Plan...

  • Page 114
    ... by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed December 18, 2008, File No. 1-3473). †10.33 - 2005 Director Compensation Plan (incorporated by reference herein to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 4, 2005...

  • Page 115
    ... 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). *21.1 - Subsidiaries of the Company. *23.1 - Consent of Independent Registered...

  • Page 116
    ..., thereunto duly authorized. TESORO CORPORATION By /s/ BRUCE A. SMITH Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer Dated: February 27, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 117
    Exhibit 21.1 SUBSIDIARIES OF THE COMPANY Tesoro Corporation is publicly held and has no parent. The subsidiaries listed ...end of the year ended December 31, 2008. Incorporated or Organized Under Laws of Name of Subsidiary Tesoro Alaska Company Tesoro Refining and Marketing Company Delaware Delaware

  • Page 118
    ... CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to...Tesoro Corporation, and the effectiveness of internal control over financial reporting of Tesoro Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2008. ERNST & YOUNG LLP San Antonio, Texas...

  • Page 119
    ... 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) appearing in the Annual Report on Form 10-K of Tesoro Corporation for the year ended December 31, 2008...

  • Page 120
    ..., 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 121
    ... 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 122
    ...OF 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2008 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 123
    ...OF 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2008 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...