|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 1 – BASIS OF PRESENTATION
ORGANIZATION
As used in this report, the terms “Tesoro,” “we,” “us” or “our” may refer to Tesoro Corporation, one or more of its consolidated subsidiaries or all of them taken as a whole. The words “we,” “us” or “our” generally include Tesoro Logistics LP (“TLLP”) and its subsidiaries as consolidated subsidiaries of Tesoro Corporation with certain exceptions where there are transactions or obligations between TLLP and Tesoro Corporation or its other subsidiaries. When used in descriptions of agreements and transactions, “TLLP” or the “Partnership” refers to TLLP and its consolidated subsidiaries.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation and its subsidiaries have been prepared by management without audit according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and 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, unless otherwise disclosed. The consolidated balance sheet at
December 31, 2015
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 present the information fairly. The accompanying condensed consolidated financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2015
.
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 and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our estimates on an ongoing basis. 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. Certain prior year balances have been aggregated or disaggregated in order to conform to the current year presentation. For the
six
months ended
June 30, 2016
, accumulated other comprehensive income decreased
$10 million
, net of tax, due to the recognition of a settlement loss for one of our executive retirement plans and remeasurement of the pension liability. Due to there being no material impact to accumulated other comprehensive income for the
three and six
months ended
June 30, 2016
and
2015
, consolidated statements of comprehensive income have been omitted.
Certain reclassifications have been made to prior period presentations to conform to the current year. In
2016
, we revised the process by which we reclassify certain logistics costs, primarily recognized by TLLP, during consolidation from operating expenses and selling, general and administrative expense to costs of sales in order to best reflect distribution costs related to Tesoro’s sale of refined products during the ordinary course of business. This change in process did not impact current or prior segment operating results, rather we reclassified
$46 million
and
$121 million
from costs of sales and recognized
$23 million
and
$91 million
in operating expenses and
$23 million
and
$30 million
in selling, general and administrative expenses of the condensed statement of consolidated operations for the
three and six
months ended
June 30, 2015
, respectively, to conform to current period presentation.
TLLP.
Our condensed consolidated financial statements include TLLP, a variable interest entity. TLLP is a publicly traded limited partnership that was formed to own, operate, develop and acquire logistics assets. Its assets are integral to the success of Tesoro’s refining and marketing operations and are used to gather crude oil and natural gas, process natural gas, and distribute, transport and store crude oil and refined products. TLLP provides us with various terminal distribution, storage, pipeline transportation, natural gas liquids processing, trucking and petroleum-coke handling services under long-term, fee-based commercial agreements. Many of these agreements, with the exception of the storage and transportation services agreement, contain minimum volume commitments. We do not provide financial or equity support through any liquidity arrangements or financial guarantees to TLLP.
Tesoro Logistics GP, LLC (“TLGP”), our wholly-owned subsidiary, serves as the general partner of TLLP. We held an approximate
33%
and
36%
interest in TLLP at
June 30, 2016
and
December 31, 2015
, respectively, including the general partner interest (approximately
1.9%
and
2%
at
June 30, 2016
and
December 31, 2015
, respectively) and all of the incentive distribution rights. This interest at
June 30, 2016
includes
32,445,115
common units and
1,900,515
general partner units. As the general partner of TLLP, we have the sole ability to direct the activities of TLLP that most significantly impact its economic performance. We are also considered to be the primary beneficiary for accounting purposes and are TLLP’s primary customer. In the event TLLP incurs a loss, our operating results will reflect TLLP’s loss, net of intercompany eliminations. Under our various long-term, fee-based
6
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
commercial agreements with TLLP, transactions with us accounted for
57%
of TLLP’s total revenues for both the
three
and
six
months
ended
June 30, 2016
and
56%
of TLLP’s total revenues for both the
three
and
six
months
ended
June 30, 2015
.
DISCONTINUED OPERATIONS.
On
September 25, 2013
, we completed the sale of all of our interest in Tesoro Hawaii, LLC, which operated a
94 thousand
barrels per day Hawaii refinery, retail stations and associated logistics assets (the “Hawaii Business”). The results of operations for this business have been presented as discontinued operations in the condensed statements of consolidated operations for the
three and six
months ended
June 30, 2016
and
2015
. There were
no
revenues for either the
three and six
months ended
June 30, 2016
or
2015
. We recorded a
gain
for the
six
months ended
June 30, 2016
of
$17 million
and
$11 million
before and after tax, respectively, related to the calendar year 2015 earn-out owed to Tesoro. There was no gain or loss recorded for the
three
months ended
June 30, 2016
. There were
$6 million
and
$4 million
recorded
losses
before and after tax, respectively, for each of the
three and six
months ended
June 30, 2015
. Cash flows from discontinued operations were
$12 million
for the
six
months ended
June 30, 2016
. There were
no
cash flows for the
six
months ended
June 30, 2015
. Unless otherwise noted, the information in the notes to the condensed consolidated financial statements relates to our continuing operations.
NEW ACCOUNTING STANDARDS AND DISCLOSURES
REVENUE RECOGNITION.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides accounting guidance for all revenue arising from contracts to provide goods or services to customers. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 given the FASB’s recent deferral of ASU 2014-09’s effective date. Entities may choose to early adopt ASU 2014-09 as of the original effective date. The standard allows for either full retrospective adoption or modified retrospective adoption. We are currently evaluating the impact of the standard on our financial statements and related disclosures. Based on our initial evaluation, we believe that the standard could impact the amount and timing of revenues we recognize in our TLLP operating segment as certain revenue arrangements require TLLP to provide multiple services and may include variable consideration.
CONSOLIDATION.
In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. We adopted this guidance using the modified retrospective approach as of January 1, 2016 and performed the required reassessments outlined by the guidance. For further information on the results of the reassessments, refer to Note 4, Investments - Equity Method and Joint Ventures.
BUSINESS COMBINATIONS.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). The standard requires an acquirer to recognize the cumulative impact of adjustments to provisional purchase price amounts that are identified during the measurement period in the reporting period, in which the adjustment amounts are determined. The standard also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for interim and annual periods beginning after December 15, 2015 and must be applied prospectively to adjustments that occur after the effective date. We adopted this guidance as of January 1, 2016 with no impact to our financial statements.
LEASES.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which improves transparency and comparability among organizations by requiring lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. At this time, we are evaluating the potential impact of this standard on our financial statements.
SHARE-BASED COMPENSATION.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions including accounting for income taxes, cash flow presentation of tax impacts, forfeitures, and liability versus equity accounting due to statutory tax withholding requirements. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. As of January 1, 2016, we early adopted ASU 2016-09 and with respect to the guidance on forfeitures, we have elected to continue to estimate forfeitures on the date of grant to account for the estimated number of awards for which the requisite service period will not be rendered. The adoption of ASU 2016-09 had a
$13 million
impact for the three months ended March 31, 2016 resulting in a lower effective tax rate and immaterial changes to our cash flow presentation. During the three months ended June 30, 2016, we recognized an additional benefit of
$3 million
related to additional share vestings during the quarter.
Tesoro Corporation 2016
|
7
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 2 – INVENTORIES
COMPONENTS OF INVENTORIES (in millions)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Domestic crude oil and refined products
|
$
|
2,180
|
|
|
$
|
2,142
|
|
Foreign subsidiary crude oil
|
186
|
|
|
325
|
|
Materials and supplies
|
143
|
|
|
140
|
|
Oxygenates and by-products
|
56
|
|
|
54
|
|
Less: Lower of cost or market reserve
|
(143
|
)
|
|
(359
|
)
|
Total Inventories, net
|
$
|
2,422
|
|
|
$
|
2,302
|
|
We recorded a lower of cost or market reserve adjustment to cost of sales of
$143 million
and
$359 million
at
June 30, 2016
and
December 31, 2015
, respectively, for our crude oil, refined products, oxygenates and by-product inventories to adjust carrying value of our inventories to reflect replacement cost as of those reporting dates. We reverse any lower of cost or market reserve in the subsequent period because the inventories are sold or used and then perform a complete lower of cost or market assessment of ending inventories at the end of each reporting period to determine if a reserve is required.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT, AT COST BY SEGMENT (in millions)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Refining
|
$
|
8,105
|
|
|
$
|
7,504
|
|
TLLP
|
3,532
|
|
|
3,847
|
|
Marketing
|
917
|
|
|
915
|
|
Corporate
|
332
|
|
|
296
|
|
Property, Plant and Equipment, at Cost
|
12,886
|
|
|
12,562
|
|
Accumulated depreciation
|
(3,244
|
)
|
|
(3,021
|
)
|
Net Property, Plant and Equipment
|
$
|
9,642
|
|
|
$
|
9,541
|
|
We capitalize interest as part of the cost of major projects during the construction period. Capitalized interest totaled
$6 million
and
$9 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$12 million
and
$18 million
for the
six
months ended
June 30, 2016
and
2015
, respectively, and is recorded as a reduction to net interest and financing costs in our condensed statements of consolidated operations.
ACQUISITIONS
GREAT NORTHERN MIDSTREAM.
On
January 8, 2016
, we closed the acquisition of Great Northern Midstream LLC, a crude oil logistics provider which owns and operates a crude oil pipeline and gathering system, along with transportation, storage and rail loading facilities in the Williston Basin of North Dakota. The acquisition includes a
97-mile
crude oil pipeline, a proprietary
28-mile
gathering system in the core of the Bakken, and a facility that has capacity of
154
thousand barrels per day (“Mbpd”) for rail loading and
657,000
barrels of storage in Fryburg, North Dakota. This acquisition was immaterial to our condensed consolidated financial statements.
FLINT HILLS RESOURCES.
On
June 20, 2016
, we closed the acquisition of Flint Hills Resources’ (“FHR”) wholesale marketing and logistics assets in Anchorage and Fairbanks, Alaska. This acquisition includes all FHR’s wholesale fuel marketing contracts in Alaska and an Anchorage terminal with
580,000
barrels of storage capacity, a truck rack, and rail loading capability. In addition, the acquisition includes a Fairbanks airport terminal that includes
22,500
barrels of jet fuel storage and a truck rack, as well as a multi-year terminalling agreement at FHR’s North Pole terminal, which will provide efficient rail offload capabilities and provide access to Alaska’s interior. This acquisition was immaterial to our condensed consolidated financial statements.
8
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
DAKOTA PRAIRIE REFINING.
On
June 28, 2016
, we acquired Dakota Prairie Refining, LLC, which owns a refinery near Dickinson, North Dakota, with strategic access to advantaged Bakken crude oil and is located just 100 miles west of the Tesoro Mandan Refinery. This acquired refinery has a crude oil capacity of
20 thousand
barrels per day and produces ultra-low sulfur diesel, naphtha and atmospheric residuals. Tesoro plans to continue to market the ultra-low sulfur diesel to local customers and utilize the naphtha and atmospheric residuals in its integrated value chain system. This acquisition was immaterial to our condensed consolidated financial statements.
NOTE 4 – INVESTMENTS - EQUITY METHOD AND JOINT VENTURES
For each of the following investments, we have the ability to exercise significant influence over each of these investments through our participation in the management committees, which make all significant decisions. However, since we have equal or proportionate influence over each committee as a joint interest partner and all significant decisions require consent of the other investor(s) without regard to our economic interest, we have determined that these entities should not be consolidated and apply the equity method of accounting with respect to our investments in each entity.
|
|
•
|
WATSON COGENERATION COMPANY (“Watson”).
We own a
51%
interest in Watson, which produces steam and electricity at a facility located at our Los Angeles refinery. Our transactions with Watson, which do not have intra-entity profits requiring elimination, consist of sales of fuel gas and water, purchases of steam and electricity and charges for general and administrative support.
|
|
|
•
|
VANCOUVER ENERGY.
We own
50%
of a joint venture with Savage Companies to construct, own and operate a unit train unloading and marine loading terminal at Port of Vancouver, USA (the “Vancouver Energy” terminal) with a total capacity of 360 Mbpd allowing for the delivery of cost-advantaged North American crude oil to the U.S. West Coast.
|
|
|
•
|
RENDEZVOUS GAS SERVICES, L.L.C. (“RGS”).
TLLP has a
78%
interest in RGS, which owns and operates the infrastructure that transports gas from certain fields to several re-delivery points in southwestern Wyoming, including natural gas processing facilities that are owned by TLLP or a third party. Prior to 2016, Tesoro and TLLP consolidated RGS, however, upon the reassessment performed in conjunction with the adoption of ASU 2015-02 as of January 1, 2016, we determined RGS represents a variable interest entity to TLLP for which we are not the primary beneficiary. Under the limited liability company agreement, we do not have voting rights commensurate with our economic interest due to veto rights available to our partner in RGS. Certain business decisions, including, but not limited to, decisions with respect to significant expenditures or contractual commitments, annual budgets, material financings, dispositions of assets or amending the members’ gas servicing agreements, require unanimous approval of the members.
|
|
|
•
|
THREE RIVERS GATHERING, LLC (“TRG”).
TLLP owns a
50%
interest in TRG which operates natural gas gathering assets within the southeastern Uinta Basin and is primarily supported by long-term, fee-based gas gathering agreements with minimum volume commitments.
|
|
|
•
|
UINTAH BASIN FIELD SERVICES, L.L.C. (“UBFS”).
TLLP owns a
38%
interest in UBFS which owns and operates the natural gas gathering infrastructure located in the southeastern Uinta Basin and is supported by long-term, fee-based gas gathering agreements that contain firm throughput commitments, which generate fees whether or not the capacity is used, and is operated by TLLP.
|
EQUITY METHOD INVESTMENTS (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watson
|
|
Vancouver Energy
|
|
TLLP
|
|
|
|
|
|
RGS
|
|
TRG
|
|
UBFS
|
|
Total
|
Balance at December 31, 2015
|
$
|
92
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
16
|
|
|
$
|
159
|
|
Effect of deconsolidation (a)
|
—
|
|
|
—
|
|
|
295
|
|
|
—
|
|
|
—
|
|
|
295
|
|
Equity in earnings (loss)
|
(2
|
)
|
|
—
|
|
|
4
|
|
|
2
|
|
|
1
|
|
|
5
|
|
Distributions received
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(4
|
)
|
|
(1
|
)
|
|
(15
|
)
|
Balance at June 30, 2016
|
$
|
90
|
|
|
$
|
9
|
|
|
$
|
289
|
|
|
$
|
40
|
|
|
$
|
16
|
|
|
$
|
444
|
|
|
|
(a)
|
The reassessment of the investments performed by TLLP resulted in the deconsolidation of RGS and the reporting of RGS as an equity method investment. TLLP recognized an increase of
$295 million
to equity method investments as of
January 1, 2016
as a result of the deconsolidation in addition to a cumulative effect reduction to opening equity of
$2 million
related to the difference in earnings under the equity method of accounting in prior periods. The carrying amount of our investment in RGS exceeded the underlying equity in net assets by
$138 million
at
June 30, 2016
.
|
Tesoro Corporation 2016
|
9
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 5 – DERIVATIVE INSTRUMENTS
In the ordinary course of business, our profit margins, earnings and cash flows are impacted by the timing, direction and overall change in pricing for commodities used throughout our operations. We use non-trading derivative instruments to manage our exposure to the following:
|
|
•
|
price risks associated with the purchase or sale of feedstocks, refined products and energy supplies related to our refineries, terminals, marketing fuel inventory and customers;
|
|
|
•
|
price risks associated with inventories above or below our target levels;
|
|
|
•
|
future emission credit requirements; and
|
|
|
•
|
exchange rate fluctuations on our purchases of Canadian crude oil.
|
Our accounting for derivative instruments depends on whether the underlying commodity will be used or sold in the normal course of business. For contracts where the crude oil or refined products are expected to be used or sold in the normal course of business, we apply the normal purchase normal sale exception and follow the accrual method of accounting. All other derivative instruments are recorded at fair value using mark-to-market accounting.
Our derivative instruments include forward purchase and sale contracts (“Forward Contracts”), exchange-traded futures (“Futures Contracts”), over-the-counter swaps, including those cleared on an exchange (“Swap Contracts”), options (“Options”), and over-the-counter options (“OTC Option Contracts”). Forward Contracts are agreements to buy or sell the commodity at a predetermined price at a specified future date. Futures Contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Swap Contracts and OTC Option Contracts require cash settlement for the commodity based on the difference between a contracted fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral to be received or paid if our asset or liability position, respectively, exceeds specified thresholds. We believe that we have minimal credit risk with respect to our counterparties.
The following table presents the fair value of our derivative instruments as of
June 30, 2016
and
December 31, 2015
. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our condensed consolidated balance sheets.
10
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
DERIVATIVE ASSETS AND LIABILITIES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet Location
|
|
June 30,
2016
|
|
December 31,
2015
|
|
June 30,
2016
|
|
December 31,
2015
|
Commodity Futures Contracts
|
Prepayments and other current assets
|
|
$
|
630
|
|
|
$
|
711
|
|
|
$
|
661
|
|
|
$
|
673
|
|
Commodity Swap Contracts
|
Prepayments and other current assets
|
|
9
|
|
|
15
|
|
|
5
|
|
|
14
|
|
Commodity Swap Contracts
|
Receivables
|
|
4
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Commodity Options Contracts
|
Prepayments and other current assets
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Commodity Forward Contracts
|
Receivables
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Commodity Forward Contracts
|
Accounts payable
|
|
—
|
|
|
—
|
|
|
2
|
|
|
4
|
|
Total Gross Mark-to-Market Derivatives
|
|
644
|
|
|
735
|
|
|
669
|
|
|
691
|
|
Less: Counterparty Netting and Cash Collateral (a)
|
|
(555
|
)
|
|
(675
|
)
|
|
(635
|
)
|
|
(687
|
)
|
Total Net Fair Value of Derivatives
|
|
$
|
89
|
|
|
$
|
60
|
|
|
$
|
34
|
|
|
$
|
4
|
|
|
|
(a)
|
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of
June 30, 2016
and
December 31, 2015
, we had provided cash collateral amounts of
$80 million
and
$12 million
, respectively, related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
|
GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commodity Contracts
|
$
|
(82
|
)
|
|
$
|
(76
|
)
|
|
$
|
(44
|
)
|
|
$
|
(31
|
)
|
Foreign Currency Forward Contracts (a)
|
—
|
|
|
—
|
|
|
1
|
|
|
(2
|
)
|
Total Loss on Mark-to-Market Derivatives
|
$
|
(82
|
)
|
|
$
|
(76
|
)
|
|
(43
|
)
|
|
$
|
(33
|
)
|
|
|
(a)
|
Gain (losses) for our foreign currency forward contracts are located in other income, net in our condensed statements of consolidated operations.
|
INCOME STATEMENT LOCATION OF GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues
|
$
|
(20
|
)
|
|
$
|
(6
|
)
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
Cost of sales
|
(62
|
)
|
|
(70
|
)
|
|
(39
|
)
|
|
(29
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
1
|
|
|
(2
|
)
|
Total Loss on Mark-to-Market Derivatives
|
$
|
(82
|
)
|
|
$
|
(76
|
)
|
|
$
|
(43
|
)
|
|
$
|
(33
|
)
|
Tesoro Corporation 2016
|
11
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
OPEN LONG (SHORT) POSITIONS
OUTSTANDING COMMODITY AND OTHER CONTRACTS (units in thousands)
|
|
|
|
|
|
|
|
|
|
Contract Volumes by Year of Maturity
|
|
Unit of Measure
|
Mark-to-Market Derivative Instrument
|
2016
|
|
2017
|
|
2018
|
|
Crude oil, refined products and blending products:
|
|
|
|
|
|
|
|
Futures - short
|
(7,484)
|
|
—
|
|
(11)
|
|
Barrels
|
Futures - long
|
—
|
|
396
|
|
—
|
|
Barrels
|
Swaps - long
|
595
|
|
600
|
|
—
|
|
Barrels
|
Options - long
|
75
|
|
—
|
|
—
|
|
Barrels
|
Forwards - long
|
808
|
|
—
|
|
—
|
|
Barrels
|
Carbon emissions credits:
|
|
|
|
|
|
|
|
Futures - long
|
4,500
|
|
1,000
|
|
—
|
|
Tons
|
Corn:
|
|
|
|
|
|
|
|
Futures - short
|
(3,570)
|
|
—
|
|
—
|
|
Bushels
|
At
June 30, 2016
, we had open Forward Contracts to purchase CAD
$28 million
that were settled on
July 22, 2016
.
NOTE 6 – FAIR VALUE MEASUREMENTS
We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices, such as liquidity, that are observable for the asset or liability. Our level 2 instruments include derivatives valued using market quotations from independent price reporting agencies, third-party brokers and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. We do not have any financial assets or liabilities classified as level 3 at
June 30, 2016
or
December 31, 2015
.
Our financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. Additionally, our financial liabilities include obligations for Renewable Identification Numbers (“RINs”) and cap and trade emission credits for the state of California (together with RINs, our “Environmental Credit Obligations”). See Note 5 for further information on our derivative instruments. Our Environmental Credit Obligations represent the estimated fair value amount at each balance sheet date for which we do not have sufficient RINs and California cap and trade credits to satisfy our obligations to the U.S. Environmental Protection Agency (“EPA”) and the state of California, respectively. RINs are assigned to biofuels produced or imported into the U.S. as required by the EPA, which sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the U.S. As a producer of petroleum transportation fuels, we are required to blend biofuels into the products we produce at a rate that will meet the EPA’s quota. We must purchase RINs in the open market to satisfy the requirement if we are unable to blend at that rate. Our liability for cap and trade emission credits for the state of California represent the deficit of credits to satisfy emission reduction requirements mandated in California’s Assembly Bill 32 for each period which stationary or transportation fuel carbon emissions exceed the level allowed by the regulation.
12
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and Collateral (a)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
629
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(551
|
)
|
|
$
|
79
|
|
Commodity Swap Contracts
|
—
|
|
|
13
|
|
|
—
|
|
|
(4
|
)
|
|
9
|
|
Commodity Forward Contracts
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total Assets
|
$
|
629
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
(555
|
)
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
653
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
(631
|
)
|
|
$
|
30
|
|
Commodity Swap Contracts
|
—
|
|
|
5
|
|
|
—
|
|
|
(4
|
)
|
|
1
|
|
Commodity Options Contracts
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Commodity Forward Contracts
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Environmental Credit Obligations
|
—
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
46
|
|
Total Liabilities
|
$
|
654
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
(635
|
)
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and Collateral (a)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(660
|
)
|
|
$
|
51
|
|
Commodity Swap Contracts
|
—
|
|
|
22
|
|
|
—
|
|
|
(15
|
)
|
|
7
|
|
Commodity Forward Contracts
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total Assets
|
$
|
711
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(675
|
)
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
673
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(673
|
)
|
|
$
|
—
|
|
Commodity Swap Contracts
|
—
|
|
|
14
|
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
Commodity Forward Contracts
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Environmental Credit Obligations
|
—
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Total Liabilities
|
$
|
673
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
(687
|
)
|
|
$
|
44
|
|
|
|
(a)
|
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of
June 30, 2016
and
December 31, 2015
, we had provided cash collateral amounts of
$80 million
and
$12 million
, respectively, related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
|
We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected continued insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The borrowings under the Tesoro Corporation revolving credit facility (the “Revolving Credit Facility”), the TLLP senior secured revolving credit agreement (the “TLLP Revolving Credit Facility”) and the secured TLLP drop down credit facility (the “TLLP Dropdown Credit Facility”), which include variable interest rates, approximate fair value. The fair value of our fixed rate debt is based on prices from recent trade activity and is categorized in level 2 of the fair value hierarchy. The carrying values of our debt were approximately
$4.6 billion
and
$4.1 billion
at
June 30, 2016
and
December 31, 2015
, respectively, and the fair values of our debt were approximately
$4.8 billion
and
$4.1 billion
at
June 30, 2016
and
Tesoro Corporation 2016
|
13
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
December 31, 2015
, respectively. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt.
NOTE 7 – DEBT
DEBT BALANCE, NET OF UNAMORTIZED ISSUANCE COSTS (in millions)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Total debt (a)
|
$
|
4,594
|
|
|
$
|
4,147
|
|
Unamortized issuance costs (b)
|
(79
|
)
|
|
(74
|
)
|
Current maturities
|
(14
|
)
|
|
(6
|
)
|
Debt, Net of Current Maturities and Unamortized Issuance Costs
|
$
|
4,501
|
|
|
$
|
4,067
|
|
|
|
(a)
|
Total debt related to TLLP, which is non-recourse to Tesoro, except for TLGP, was
$3.3 billion
and
$2.9 billion
at
June 30, 2016
and
December 31, 2015
, respectively.
|
|
|
(b)
|
Includes unamortized premiums of
$4 million
associated with TLLP’s senior notes at both
June 30, 2016
and
December 31, 2015
.
|
REVOLVING CREDIT FACILITIES
AVAILABLE CAPACITY UNDER CREDIT FACILITIES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capacity
|
|
Amount Borrowed as of June 30, 2016
|
|
Outstanding
Letters of Credit
|
|
Available Capacity
|
|
Expiration
|
Tesoro Corporation Revolving
Credit Facility (a)
|
$
|
2,119
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
2,109
|
|
|
November 18, 2019
|
TLLP Revolving Credit Facility
|
600
|
|
|
—
|
|
|
—
|
|
|
600
|
|
|
January 29, 2021
|
TLLP Dropdown Credit Facility
|
1,000
|
|
|
239
|
|
|
—
|
|
|
761
|
|
|
January 29, 2021
|
Letter of Credit Facilities
|
1,595
|
|
|
—
|
|
|
24
|
|
|
1,571
|
|
|
|
Total Credit Facilities
|
$
|
5,314
|
|
|
$
|
239
|
|
|
$
|
34
|
|
|
$
|
5,041
|
|
|
|
|
|
(a)
|
Borrowing base is the lesser of the amount of the periodically adjusted borrowing base or the agreement’s total capacity of
$3.0 billion
.
|
TESORO CORPORATION REVOLVING CREDIT FACILITY.
Our Revolving Credit Facility provides for borrowings (including letters of credit) up to the lesser of the amount of a periodically adjusted borrowing base, which consists of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, net of the standard reserve as defined, or the Revolving Credit Facility’s total capacity of
$3.0 billion
. We had unused credit availability of approximately
100%
of the eligible borrowing base at
June 30, 2016
. Our Revolving Credit Facility is guaranteed by substantially all of Tesoro’s active domestic subsidiaries, excluding TLGP, TLLP and its subsidiaries, and certain foreign subsidiaries, and is secured by substantially all of Tesoro’s active domestic subsidiaries’ crude oil and refined product inventories, cash and receivables.
The Revolving Credit Facility allows us to obtain letters of credit under separate letter of credit agreements for foreign crude oil purchases. Our uncommitted letter of credit agreements had
$24 million
outstanding as of
June 30, 2016
. Letters of credit outstanding under these agreements incur fees ranging from
0.40%
to
0.90%
and are secured by the crude oil inventories for which they are issued. Capacity under these letter of credit agreements is available on an uncommitted basis and can be terminated by either party at any time.
TLLP REVOLVING CREDITY FACILITY AND DROPDOWN CREDIT FACILITY.
The TLLP secured Revolving Credit Facility provides for total loan availability of
$600 million
as of
June 30, 2016
. The TLLP secured Revolving Credit Facility is non-recourse to Tesoro, except for TLGP, and is guaranteed by all of TLLP’s subsidiaries, with the exception of certain non-wholly owned subsidiaries, and secured by substantially all of TLLP’s assets. Borrowings are available under the TLLP secured Revolving Credit Facility up to the total loan availability of the facility. TLLP had
no
borrowings outstanding under the TLLP secured Revolving Credit Facility, resulting in the full loan availability of the borrowing capacity as of June 30, 2016.
14
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
Additionally, the secured TLLP Dropdown Credit Facility provides for total loan availability of
$1.0 billion
as of
June 30, 2016
. The primary use of proceeds under this facility will be to fund its asset acquisitions. The terms, covenants and restrictions under this facility are substantially the same as the secured TLLP Revolving Credit Facility. There was
$239 million
of borrowings outstanding under the TLLP Dropdown Credit Facility, resulting in a total unused loan availability of
$761 million
or
76%
of the borrowing capacity, as of
June 30, 2016
. The weighted average interest rate for borrowings under the TLLP Dropdown Credit Facility was
4.51%
at
June 30, 2016
.
The total aggregate available facility limits for the secured TLLP Revolving Credit Facility and the secured TLLP Dropdown Credit Facility totaled
$1.6 billion
at
June 30, 2016
. TLLP is allowed to request the loan availability for both the secured TLLP Revolving Credit Facility and the secured TLLP Dropdown Credit Facility be increased up to an aggregate of
$2.1 billion
, subject to receiving increased commitments from the lenders. The secured TLLP Revolving Credit Facility and the secured TLLP Dropdown Credit Facility ratably share collateral comprised primarily of TLLP property, plant, and equipment and both facilities mature on
January 29, 2021
. In addition, upon an upgrade of TLLP’s corporate family rating to investment grade, certain covenants and restrictions under each facility will automatically and permanently be eliminated or improved.
TLLP SENIOR NOTES ISSUANCE.
On
May 9, 2016
, TLLP completed a registered offering of
$250 million
aggregate principal amount of
6.125% Senior Notes due 2021
(“2021 Notes”) and
$450 million
aggregate principal amount of
6.375% Senior Notes due 2024
(“2024 Notes”). TLLP used the proceeds of the offering of the 2021 Notes to repay amounts then outstanding under the TLLP Dropdown Credit Facility and the proceeds of the offering of the 2024 Notes to repay amounts outstanding under the TLLP Revolving Credit Facility and for general partnership purposes.
The 2021 Notes were issued under the same indenture governing the existing
$550 million
of TLLP’s
6.125% Senior Notes due 2021
issued in August 2013 and have the same terms as those senior notes. The 2021 Notes have no sinking fund requirements. TLLP may redeem some or all of the 2021 Notes, prior to October 15, 2016, at a make-whole price plus accrued and unpaid interest, if any. On or after October 15, 2016, the 2021 Notes may be redeemed at premiums equal to
4.594%
through October 15, 2017;
3.063%
from October 15, 2017 through October 15, 2018;
1.531%
from October 15, 2018 through October 15, 2019; and at
par
thereafter, plus accrued and unpaid interest. TLLP will have the right to redeem up to
35%
of the aggregate principal amount at
106.125%
of face value with proceeds from certain equity issuances through October 15, 2016. The 2021 Notes are unsecured and guaranteed by all of TLLP’s subsidiaries, except Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Tesoro, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
The 2024 Notes have no sinking fund requirements. TLLP may redeem some or all of the 2024 Notes, prior to May 1, 2019, at a make-whole price plus accrued and unpaid interest, if any. On or after May 1, 2019, the 2024 Notes may be redeemed at premiums equal to
4.781%
through May 1, 2020;
3.188%
from May 1, 2020 through May 1, 2021;
1.594%
from May 1, 2021 through May 1, 2022; and at
par
thereafter, plus accrued and unpaid interest. TLLP will have the right to redeem up to
35%
of the aggregate principal amount at
106.375%
of face value with proceeds from certain equity issuances through May 1, 2019. The 2024 Notes are unsecured and guaranteed by all of TLLP’s subsidiaries, except Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Tesoro, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
TLLP REPAYMENTS.
On
February 3, 2016
, TLLP repaid the full amount of its unsecured term loan facility (“TLLP Unsecured Term Loan Facility”), including accrued interest, with proceeds drawn from the TLLP Dropdown Credit Facility. All commitments under the TLLP Unsecured Term Loan Facility were terminated effective with the repayment.
TLLP SENIOR NOTES EXCHANGE.
On
February 26, 2016
, TLLP commenced an offer to exchange (the “Exchange”) its existing unregistered
5.50%
Senior Notes due
2019
(“2019 Notes”) and
6.25%
Senior Notes due
2022
(“2022 Notes”) (together, “Unregistered Notes”) for an equal principal amount of
5.50%
Senior Notes due
2019
and
6.25%
Senior Notes due
2022
(the “Exchange Notes”), respectively, that were registered under the Securities Act of 1933, as amended. On
April 14, 2016
, the Exchange was completed for all of the 2019 Notes and substantially all of the 2022 Notes. The terms of the Exchange Notes are identical in all material respects (including principal amount, interest rate, maturity and redemption rights) to the Unregistered Notes for which they were exchanged, except that the Exchange Notes generally are not subject to transfer restrictions. The Exchange fulfills all of the requirements of the registration rights agreements for the Unregistered Notes.
Tesoro Corporation 2016
|
15
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 8 – BENEFIT PLANS
Tesoro sponsors
four
defined benefit pension plans, including
one
funded qualified employee retirement plan and
three
unfunded nonqualified executive plans. Our funded employee retirement plan fully meets all funding requirements under applicable laws and regulations. We have
voluntarily contributed
$20 million
to the retirement plan during the
six
months ended
June 30, 2016
, to improve the funded status of the plan. Tesoro also provides other postretirement health care benefits to retirees who met certain service requirements and were participating in our group health insurance program at retirement.
COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE (INCOME) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
23
|
|
|
$
|
23
|
|
Interest cost
|
7
|
|
|
7
|
|
|
15
|
|
|
15
|
|
Expected return on plan assets
|
(7
|
)
|
|
(6
|
)
|
|
(14
|
)
|
|
(13
|
)
|
Recognized net actuarial loss
|
5
|
|
|
6
|
|
|
10
|
|
|
12
|
|
Recognized curtailment loss and settlement cost
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Net Periodic Benefit Expense
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
39
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Amortization of prior service credit
|
(9
|
)
|
|
(8
|
)
|
|
(18
|
)
|
|
(17
|
)
|
Recognized net actuarial loss
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Net Periodic Benefit Income
|
$
|
(7
|
)
|
|
$
|
(6
|
)
|
|
$
|
(13
|
)
|
|
$
|
(12
|
)
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL LIABILITIES
We are incurring and expect to continue to incur expenses for environmental remediation liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail station properties. We have accrued liabilities for these expenses and believe these accruals are adequate based on current information and projections that can be reasonably estimated. Additionally, we have recognized environmental remediation liabilities assumed in past acquisitions from the prior owners that include amounts estimated for site cleanup and monitoring activities arising from operations at refineries, certain terminals and pipelines, and retail stations prior to the dates of our acquisitions. Our environmental accruals are based on estimates including engineering assessments, and it is possible that our projections will change and that additional costs will be recorded as more information becomes available.
Our accruals for environmental expenditures totaled
$232 million
and
$255 million
at
June 30, 2016
and
December 31, 2015
, respectively, including
$24 million
and
$33 million
for TLLP, respectively. These accruals include
$177 million
and
$192 million
at
June 30, 2016
and
December 31, 2015
, respectively, related to amounts estimated for site cleanup activities arising from operations at our Martinez refinery and operations of assets acquired from BP’s integrated Southern California refining, marketing and logistics business (“Los Angeles Acquisition”) prior to their respective acquisition dates. We cannot reasonably determine the full extent of remedial activities that may be required at the Martinez refinery and for assets acquired in the Los Angeles Acquisition and it is possible that we will identify additional investigation and remediation costs for site cleanup activities as more information becomes available. The environmental remediation liabilities assumed in the Los Angeles Acquisition include amounts estimated for site cleanup activities and monitoring activities arising from operations at the Carson refinery, certain terminals and pipelines, and retail stations prior to our acquisition on
June 1, 2013
. These estimates for environmental liabilities are based
16
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
on third-party assessments and available information. Our estimates for site cleanup activities reflect amounts for which we are responsible under applicable cost-sharing arrangements.
On
July 10, 2015
, a federal court issued an order denying coverage pursuant to insurance policies for environmental remediation liabilities at our Martinez refinery and those liabilities are included in our accruals above. The insurer had filed a declaratory relief action challenging coverage of the primary policy assigned to us when we acquired the refinery. The policies provide for coverage up to
$190 million
for expenditures in excess of
$50 million
in self-insurance. We have not recognized possible insurance recoveries under the policies and have appealed the order.
OTHER CONTINGENCIES
On
July 18, 2016
, the U.S. Department of Justice on behalf of the EPA lodged a complaint along with a Consent Decree with the Western District Court of Texas (the “Court”). Subject to a 30-day public comment period, the Consent Decree is the final settlement of the EPA’s allegations that we violated certain Clean Air Act regulations at our Alaska, Washington, Martinez, Mandan and Utah refineries as well as the notices of violations received from the EPA between 2005 and 2011 alleging violations of various provisions of the Clean Air Act at our refineries. The settlement also resolves similar allegations relating to our former Hawaii refinery, which we sold in September 2013, and have recognized
$46 million
as expense associated with discontinued operations prior to 2016 specifically related to the projects required at our former Hawaii refinery. Upon final approval by the Court, terms of the Consent Decree require Tesoro to spend material capital expenditures. Prior to 2016 and for the
six
months ended
June 30, 2016
, we have capitalized approximately
$210 million
and
$33 million
, respectively, for capital projects to satisfy requirements of the Consent Decree, including amounts capitalized for interest and labor. These expenditures have not been material to our financial position or liquidity in any previous year. The remaining capital expenditures will be primarily spent in 2016 and 2017 with additional amounts through 2019. Additionally, the Consent Decree imposes a fine, which is not material to our financial statements and for which we have previously accrued, and certain funding of community projects that will be expensed as incurred in future periods. All remaining expenditures associated with the Consent Decree will not have a material impact on our liquidity, financial position or results of operations.
OTHER MATTERS
In the ordinary course of business, we become party to 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. We have not established accruals for these types of matters unless a loss is probable, and the amount of loss is currently estimable.
TAX
.
We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased expenditures in the future. We are also subject to audits by federal, state and foreign taxing authorities in the normal course of business. It is possible that tax audits could result in claims against us in excess of recorded liabilities. However, we believe that resolution of any such claim(s) would not have a material impact on our liquidity, financial position, or results of operations.
Tesoro Corporation 2016
|
17
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 10 – STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
CHANGES TO EQUITY (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro
Corporation
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total Equity
|
Balance at December 31, 2015 (a)
|
$
|
5,213
|
|
|
$
|
2,527
|
|
|
$
|
7,740
|
|
Net earnings
|
487
|
|
|
71
|
|
|
558
|
|
Purchases of common stock
|
(100
|
)
|
|
—
|
|
|
(100
|
)
|
Dividend payments
|
(121
|
)
|
|
—
|
|
|
(121
|
)
|
Net effect of amounts related to equity-based compensation (b)
|
21
|
|
|
2
|
|
|
23
|
|
Effect of deconsolidation of RGS (c)
|
(2
|
)
|
|
(84
|
)
|
|
(86
|
)
|
Taxes paid related to net share settlement of equity awards
|
(24
|
)
|
|
—
|
|
|
(24
|
)
|
Net proceeds from issuance of Tesoro Logistics LP common units (d)
|
—
|
|
|
334
|
|
|
334
|
|
Distributions to noncontrolling interest
|
—
|
|
|
(98
|
)
|
|
(98
|
)
|
Pension liability adjustment, net of tax
|
10
|
|
|
—
|
|
|
10
|
|
Transfers to (from) Tesoro paid-in capital related to:
|
|
|
|
|
|
TLLP’s issuance of common units
|
53
|
|
|
(88
|
)
|
|
(35
|
)
|
Other
|
1
|
|
|
—
|
|
|
1
|
|
Balance at June 30, 2016 (a)
|
$
|
5,538
|
|
|
$
|
2,664
|
|
|
$
|
8,202
|
|
|
|
(a)
|
We have
5.0 million
shares of preferred stock authorized with
no
par value per share.
No
shares of preferred stock were outstanding as of
June 30, 2016
and
December 31, 2015
.
|
|
|
(b)
|
We issued less than
0.1 million
and approximately
0.3 million
shares during the
six
months ended
June 30, 2016
and
2015
, respectively, for proceeds of
$1 million
and
$10 million
, respectively, primarily for stock option exercises under our equity-based compensation plans. See Note 11 for more information on stock-based compensation.
|
|
|
(c)
|
As a result of the reassessment performed in conjunction with the adoption of ASU 2015-02, we deconsolidated RGS, causing the derecognition of noncontrolling interest for the reporting of RGS as an equity method investment.
|
|
|
(d)
|
Includes the closing of TLLP’s registered public offering of
6,325,000
common units representing limited partner interests at a public offering price of
$47.13
per unit on
June 10, 2016
as well as common units issued under TLLP’s continuous offering program during the
six
months ended
June 30, 2016
.
|
EARNINGS PER SHARE
We compute basic earnings per share by dividing net earnings attributable to Tesoro Corporation stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares outstanding during the period.
SHARES OUTSTANDING (in millions)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average common shares outstanding
|
119.5
|
|
125.2
|
|
119.5
|
|
125.2
|
Common stock equivalents
|
1.1
|
|
1.1
|
|
1.3
|
|
1.4
|
Total Diluted Shares
|
120.6
|
|
126.3
|
|
120.8
|
|
126.6
|
18
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share if the effect of including such securities in the calculation would have been anti-dilutive. Anti-dilutive securities were
0.4 million
and
0.6 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
0.3 million
and
0.4 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
SHARE REPURCHASES
We are authorized by our Board of Directors (the “Board”) to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can also be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. During the
six
months ended
June 30, 2016
and
2015
, we purchased approximately
1.3 million
and
3.1 million
shares of our common stock for approximately
$100 million
and
$269 million
, respectively.
CASH DIVIDENDS
We paid cash dividends totaling
$61 million
and
$121 million
for the
three and six
months ended
June 30, 2016
, respectively, based on a
$0.50
per share quarterly cash dividend on common stock. We paid cash dividends totaling
$53 million
and
$107 million
for the
three and six
months ended
June 30, 2015
, respectively, based on a
$0.425
per share quarterly cash dividend on common stock. On
August 3, 2016
, our Board declared a cash dividend of
$0.55
per share payable on
September 15, 2016
to shareholders of record on
August 31, 2016
.
NOTE 11 – STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION EXPENSE (BENEFIT) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock appreciation rights (a)
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
$
|
(15
|
)
|
|
$
|
10
|
|
Performance share awards (b)
|
2
|
|
|
2
|
|
|
4
|
|
|
6
|
|
Market stock units (c)
|
7
|
|
|
7
|
|
|
14
|
|
|
12
|
|
Other stock-based awards (d)
|
4
|
|
|
3
|
|
|
5
|
|
|
7
|
|
Total Stock-Based Compensation Expense
|
$
|
11
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
35
|
|
|
|
(a)
|
We had
$6 million
and
$41 million
recorded in accrued liabilities associated with our stock appreciation rights (“SARs”) awards at
June 30, 2016
and
December 31, 2015
, respectively. We paid cash of
$20 million
to settle
0.3 million
SARs that were exercised during the
six
months ended
June 30, 2016
and
$22 million
to settle
0.4 million
SARs that were exercised during the
six
months ended
June 30, 2015
.
|
|
|
(b)
|
We granted
0.1 million
market condition performance share awards at a weighted average grant date fair value of
$87.90
per share under the amended and restated 2011 Long-Term Incentive Plan (“2011 Plan”) during the
six
months ended
June 30, 2016
.
|
|
|
(c)
|
We granted
0.3 million
market stock units at a weighted average grant date fair value of
$84.84
per unit under the 2011 Plan during the
six
months ended
June 30, 2016
.
|
|
|
(d)
|
We have aggregated expenses for certain award types as they are not considered significant.
|
The income tax effect recognized in the income statement for stock-based compensation was
a benefit
of
$6 million
and
$3 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
a benefit
of
$18 million
and
$14 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. Included in the tax benefit of
$6 million
and
$18 million
for the
three
and
six
months ended
June 30, 2016
, respectively, was
$3 million
and
$16 million
, respectively, of tax benefit attributable to excess tax benefits from exercises and vestings that occurred during the period, the effects of which are recorded to the income statement pursuant to ASU 2016-09. The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled
$6 million
and
$9 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$36 million
and
$63 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Tesoro Corporation 2016
|
19
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 12 – OPERATING SEGMENTS
Our refining segment owns and operates
seven
petroleum refineries located in California, Washington, Alaska, North Dakota and Utah that manufacture gasoline and gasoline blendstocks, jet fuel, diesel fuel, residual fuel oil and other refined products. We sell these refined products, together with refined products purchased from third parties, to our marketing segment through terminal facilities and other locations and opportunistically export refined products to foreign markets. TLLP’s assets and operations include certain crude oil gathering assets, natural gas gathering and processing assets and crude oil and refined products terminalling and transportation assets acquired from Tesoro and other third parties. Revenues from the TLLP segment are generated by charging fees for gathering crude oil and natural gas, for processing natural gas, and for terminalling, transporting and storing crude oil, and refined products. Tesoro’s marketing business supplies gasoline and diesel across
16
states through both branded and unbranded marketing channels. We utilize various operating models in the operation of our retail stations. Since we do not have significant operations in foreign countries, revenue generated and long-lived assets located in foreign countries are not material to our operations.
We evaluate the performance of our segments based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. TLLP and marketing revenues include intersegment transactions with our refining segment. Corporate depreciation and corporate general and administrative expenses are excluded from segment operating income.
20
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
SEGMENT INFORMATION RELATED TO CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In millions)
|
Revenues
|
|
|
|
|
|
|
|
Refining:
|
|
|
|
|
|
|
|
Refined products
|
$
|
5,508
|
|
|
$
|
7,357
|
|
|
$
|
9,793
|
|
|
$
|
13,050
|
|
Crude oil resales and other
|
242
|
|
|
309
|
|
|
453
|
|
|
608
|
|
TLLP:
|
|
|
|
|
|
|
|
Gathering
|
82
|
|
|
89
|
|
|
173
|
|
|
166
|
|
Processing
|
68
|
|
|
67
|
|
|
139
|
|
|
134
|
|
Terminalling and transportation
|
143
|
|
|
119
|
|
|
281
|
|
|
238
|
|
Marketing:
|
|
|
|
|
|
|
|
Fuel (a)
|
4,077
|
|
|
5,051
|
|
|
7,375
|
|
|
8,999
|
|
Other non-fuel
|
22
|
|
|
16
|
|
|
42
|
|
|
32
|
|
Intersegment sales
|
(3,857
|
)
|
|
(4,776
|
)
|
|
(6,870
|
)
|
|
(8,532
|
)
|
Total Revenues
|
$
|
6,285
|
|
|
$
|
8,232
|
|
|
$
|
11,386
|
|
|
$
|
14,695
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
Refining
|
$
|
520
|
|
|
$
|
757
|
|
|
$
|
420
|
|
|
$
|
942
|
|
TLLP (b)
|
125
|
|
|
104
|
|
|
251
|
|
|
208
|
|
Marketing
|
161
|
|
|
212
|
|
|
388
|
|
|
345
|
|
Total Segment Operating Income
|
806
|
|
|
1,073
|
|
|
1,059
|
|
|
1,495
|
|
Corporate and unallocated costs (b)
|
(88
|
)
|
|
(64
|
)
|
|
(162
|
)
|
|
(146
|
)
|
Operating Income
|
718
|
|
|
1,009
|
|
|
897
|
|
|
1,349
|
|
Interest and financing costs, net
|
(60
|
)
|
|
(54
|
)
|
|
(120
|
)
|
|
(109
|
)
|
Equity in earnings of equity method investments
|
3
|
|
|
2
|
|
|
5
|
|
|
3
|
|
Other income (expense), net
|
25
|
|
|
1
|
|
|
32
|
|
|
(1
|
)
|
Earnings Before Income Taxes
|
$
|
686
|
|
|
$
|
958
|
|
|
$
|
814
|
|
|
$
|
1,242
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
Refining
|
$
|
148
|
|
|
$
|
121
|
|
|
$
|
298
|
|
|
$
|
240
|
|
TLLP
|
44
|
|
|
44
|
|
|
88
|
|
|
88
|
|
Marketing
|
12
|
|
|
11
|
|
|
24
|
|
|
23
|
|
Corporate
|
6
|
|
|
6
|
|
|
12
|
|
|
10
|
|
Total Depreciation and Amortization Expense
|
$
|
210
|
|
|
$
|
182
|
|
|
$
|
422
|
|
|
$
|
361
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
Refining
|
$
|
137
|
|
|
$
|
148
|
|
|
$
|
256
|
|
|
$
|
331
|
|
TLLP
|
42
|
|
|
77
|
|
|
83
|
|
|
144
|
|
Marketing
|
6
|
|
|
8
|
|
|
19
|
|
|
12
|
|
Corporate
|
24
|
|
|
4
|
|
|
39
|
|
|
10
|
|
Total Capital Expenditures
|
$
|
209
|
|
|
$
|
237
|
|
|
$
|
397
|
|
|
$
|
497
|
|
|
|
(a)
|
Federal and state motor fuel excise taxes on sales by our marketing segment at retail sites where we own the inventory are included in both revenues and cost of sales in our condensed statements of consolidated operations. These taxes totaled
$148 million
and
$146 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$290 million
and
$286 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
|
|
|
(b)
|
We present TLLP’s segment operating income net of general and administrative expenses totaling
$13 million
and
$15 million
representing TLLP’s corporate costs for the
three
months ended
June 30, 2016
and
2015
, respectively, and
$25 million
and
$27 million
for the
six
months ended
June 30, 2016
and
2015
, respectively, which are not allocated by TLLP to its operating segments.
|
Tesoro Corporation 2016
|
21
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
NOTE 13 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Separate condensed consolidating financial information of Tesoro Corporation (the “Parent”), subsidiary guarantors and non-guarantors is presented below. At
June 30, 2016
, Tesoro and certain subsidiary guarantors have fully and unconditionally guaranteed our
4.250%
Senior Notes due
2017
,
5.375%
Senior Notes due
2022
, and
5.125%
Senior Notes due
2024
. TLLP, in which we had a
33%
ownership interest as of
June 30, 2016
, and other subsidiaries have not guaranteed these obligations. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information, which should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. This information is provided as an alternative to providing separate financial statements for guarantor subsidiaries. Separate financial statements of Tesoro’s subsidiary guarantors are not included because the guarantees are full and unconditional and these subsidiary guarantors are
100%
owned and are jointly and severally liable for Tesoro’s outstanding senior notes. The information is presented using the equity method of accounting for investments in subsidiaries. Certain intercompany and intracompany transactions between subsidiaries are presented gross and eliminated in the consolidating adjustments column. Additionally, the results of operations of the Hawaii Business have been reported as discontinued operations in these condensed consolidating statements of operations and comprehensive income for the
six
months ended
June 30, 2016
and
three and six
months end
June 30, 2015
.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
THREE MONTHS ENDED
JUNE 30, 2016
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Revenues
|
$
|
—
|
|
$
|
7,043
|
|
$
|
802
|
|
$
|
(1,560
|
)
|
$
|
6,285
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)
|
—
|
|
5,995
|
|
506
|
|
(1,482
|
)
|
5,019
|
|
Lower of cost or market inventory valuation adjustment
|
—
|
|
(364
|
)
|
1
|
|
—
|
|
(363
|
)
|
Operating, selling, general and administrative expenses
|
3
|
|
647
|
|
128
|
|
(78
|
)
|
700
|
|
Depreciation and amortization expense
|
—
|
|
164
|
|
46
|
|
—
|
|
210
|
|
Loss on asset disposals and impairments
|
—
|
|
—
|
|
1
|
|
—
|
|
1
|
|
Operating Income (Loss)
|
(3
|
)
|
601
|
|
120
|
|
—
|
|
718
|
|
Interest and financing costs, net
|
(13
|
)
|
(16
|
)
|
(31
|
)
|
—
|
|
(60
|
)
|
Equity in earnings of subsidiaries
|
430
|
|
53
|
|
—
|
|
(483
|
)
|
—
|
|
Equity in earnings of equity method investments
|
—
|
|
—
|
|
3
|
|
—
|
|
3
|
|
Other income, net
|
2
|
|
23
|
|
—
|
|
—
|
|
25
|
|
Earnings Before Income Taxes
|
416
|
|
661
|
|
92
|
|
(483
|
)
|
686
|
|
Income tax expense (benefit) (a)
|
(2
|
)
|
222
|
|
17
|
|
—
|
|
237
|
|
Net Earnings
|
418
|
|
439
|
|
75
|
|
(483
|
)
|
449
|
|
Less: Net earnings from continuing operations attributable to noncontrolling interest
|
—
|
|
—
|
|
31
|
|
—
|
|
31
|
|
Net Earnings Attributable to Tesoro Corporation
|
$
|
418
|
|
$
|
439
|
|
$
|
44
|
|
$
|
(483
|
)
|
$
|
418
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
Total comprehensive income
|
$
|
418
|
|
$
|
439
|
|
$
|
75
|
|
$
|
(483
|
)
|
$
|
449
|
|
Less: Noncontrolling interest in comprehensive income
|
—
|
|
—
|
|
31
|
|
—
|
|
31
|
|
Comprehensive Income Attributable to Tesoro Corporation
|
$
|
418
|
|
$
|
439
|
|
$
|
44
|
|
$
|
(483
|
)
|
$
|
418
|
|
|
|
(a)
|
The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from corporate subsidiaries, but does include the tax effect of the corporate partners’ share of partnership income.
|
22
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
THREE MONTHS ENDED
JUNE 30, 2015
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Revenues
|
$
|
—
|
|
$
|
9,000
|
|
$
|
750
|
|
$
|
(1,518
|
)
|
$
|
8,232
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)
|
—
|
|
7,336
|
|
465
|
|
(1,449
|
)
|
6,352
|
|
Operating, selling, general and administrative expenses
|
2
|
|
617
|
|
135
|
|
(69
|
)
|
685
|
|
Depreciation and amortization expense
|
—
|
|
136
|
|
46
|
|
—
|
|
182
|
|
Loss on asset disposals and impairments
|
—
|
|
4
|
|
—
|
|
—
|
|
4
|
|
Operating Income (Loss)
|
(2
|
)
|
907
|
|
104
|
|
—
|
|
1,009
|
|
Interest and financing costs, net
|
(10
|
)
|
(17
|
)
|
(27
|
)
|
—
|
|
(54
|
)
|
Equity in earnings of subsidiaries
|
594
|
|
48
|
|
—
|
|
(642
|
)
|
—
|
|
Equity in earnings of equity method investments
|
—
|
|
1
|
|
1
|
|
—
|
|
2
|
|
Other expense, net
|
1
|
|
—
|
|
—
|
|
—
|
|
1
|
|
Earnings Before Income Taxes
|
583
|
|
939
|
|
78
|
|
(642
|
)
|
958
|
|
Income tax expense (benefit) (a)
|
(3
|
)
|
325
|
|
12
|
|
—
|
|
334
|
|
Net Earnings from Continuing Operations
|
586
|
|
614
|
|
66
|
|
(642
|
)
|
624
|
|
Loss from discontinued operations, net of tax
|
(4
|
)
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
Net Earnings
|
582
|
|
614
|
|
66
|
|
(642
|
)
|
620
|
|
Less: Net earnings from continuing operations attributable to noncontrolling interest
|
—
|
|
—
|
|
38
|
|
—
|
|
38
|
|
Net Earnings Attributable to Tesoro Corporation
|
$
|
582
|
|
$
|
614
|
|
$
|
28
|
|
$
|
(642
|
)
|
$
|
582
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
Total comprehensive income
|
$
|
582
|
|
$
|
614
|
|
$
|
66
|
|
$
|
(642
|
)
|
$
|
620
|
|
Less: Noncontrolling interest in comprehensive income
|
—
|
|
—
|
|
38
|
|
—
|
|
38
|
|
Comprehensive Income Attributable to Tesoro Corporation
|
$
|
582
|
|
$
|
614
|
|
$
|
28
|
|
$
|
(642
|
)
|
$
|
582
|
|
|
|
(a)
|
The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from corporate subsidiaries, but does include the tax effect of the corporate partners’ share of partnership income.
|
Tesoro Corporation 2016
|
23
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
SIX MONTHS ENDED
JUNE 30, 2016
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Revenues
|
$
|
—
|
|
$
|
12,528
|
|
$
|
1,551
|
|
$
|
(2,693
|
)
|
$
|
11,386
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)
|
—
|
|
10,420
|
|
995
|
|
(2,535
|
)
|
8,880
|
|
Lower of cost or market inventory valuation adjustment
|
—
|
|
(217
|
)
|
1
|
|
—
|
|
(216
|
)
|
Operating, selling, general and administrative expenses
|
4
|
|
1,291
|
|
261
|
|
(158
|
)
|
1,398
|
|
Depreciation and amortization expense
|
—
|
|
331
|
|
91
|
|
—
|
|
422
|
|
Loss on asset disposals and impairments
|
—
|
|
3
|
|
2
|
|
—
|
|
5
|
|
Operating Income (Loss)
|
(4
|
)
|
700
|
|
201
|
|
—
|
|
897
|
|
Interest and financing costs, net
|
(27
|
)
|
(32
|
)
|
(61
|
)
|
—
|
|
(120
|
)
|
Equity in earnings of subsidiaries
|
501
|
|
106
|
|
—
|
|
(607
|
)
|
—
|
|
Equity in earnings (loss) of equity method investments
|
—
|
|
(2
|
)
|
7
|
|
—
|
|
5
|
|
Other income, net
|
2
|
|
24
|
|
6
|
|
—
|
|
32
|
|
Earnings Before Income Taxes
|
472
|
|
796
|
|
153
|
|
(607
|
)
|
814
|
|
Income tax expense (benefit) (a)
|
(4
|
)
|
253
|
|
18
|
|
—
|
|
267
|
|
Net Earnings from Continuing Operations
|
476
|
|
543
|
|
135
|
|
(607
|
)
|
547
|
|
Earnings from discontinued operations, net of tax
|
11
|
|
—
|
|
—
|
|
—
|
|
11
|
|
Net Earnings
|
487
|
|
543
|
|
135
|
|
(607
|
)
|
558
|
|
Less: Net earnings from continuing operations attributable to noncontrolling interest
|
—
|
|
—
|
|
71
|
|
—
|
|
71
|
|
Net Earnings Attributable to Tesoro Corporation
|
$
|
487
|
|
$
|
543
|
|
$
|
64
|
|
$
|
(607
|
)
|
$
|
487
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
Total comprehensive income
|
$
|
477
|
|
$
|
543
|
|
$
|
135
|
|
$
|
(607
|
)
|
$
|
548
|
|
Less: Noncontrolling interest in comprehensive income
|
—
|
|
—
|
|
71
|
|
—
|
|
71
|
|
Comprehensive Income Attributable to Tesoro Corporation
|
$
|
477
|
|
$
|
543
|
|
$
|
64
|
|
$
|
(607
|
)
|
$
|
477
|
|
|
|
(a)
|
The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from corporate subsidiaries, but does include the tax effect of the corporate partners’ share of partnership income.
|
24
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE
SIX MONTHS ENDED
JUNE 30, 2015
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Revenues
|
$
|
—
|
|
$
|
15,999
|
|
$
|
1,664
|
|
$
|
(2,968
|
)
|
$
|
14,695
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)
|
—
|
|
13,371
|
|
1,126
|
|
(2,838
|
)
|
11,659
|
|
Lower of cost or market inventory valuation adjustment
|
—
|
|
(42
|
)
|
—
|
|
—
|
|
(42
|
)
|
Operating, selling, general and administrative expenses
|
6
|
|
1,226
|
|
258
|
|
(130
|
)
|
1,360
|
|
Depreciation and amortization expense
|
—
|
|
270
|
|
91
|
|
—
|
|
361
|
|
Loss on asset disposals and impairments
|
—
|
|
8
|
|
—
|
|
—
|
|
8
|
|
Operating Income (Loss)
|
(6
|
)
|
1,166
|
|
189
|
|
—
|
|
1,349
|
|
Interest and financing costs, net
|
(21
|
)
|
(35
|
)
|
(53
|
)
|
—
|
|
(109
|
)
|
Equity in earnings of subsidiaries
|
751
|
|
64
|
|
—
|
|
(815
|
)
|
—
|
|
Equity in earnings (loss) of equity method investments
|
—
|
|
(1
|
)
|
4
|
|
—
|
|
3
|
|
Other income (expense), net
|
1
|
|
(2
|
)
|
—
|
|
—
|
|
(1
|
)
|
Earnings Before Income Taxes
|
725
|
|
1,192
|
|
140
|
|
(815
|
)
|
1,242
|
|
Income tax expense (benefit) (a)
|
(6
|
)
|
420
|
|
16
|
|
—
|
|
430
|
|
Net Earnings from Continuing Operations
|
731
|
|
772
|
|
124
|
|
(815
|
)
|
812
|
|
Loss from discontinued operations, net of tax
|
(4
|
)
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
Net Earnings
|
727
|
|
772
|
|
124
|
|
(815
|
)
|
808
|
|
Less: Net earnings from continuing operations attributable to noncontrolling interest
|
—
|
|
—
|
|
81
|
|
—
|
|
81
|
|
Net Earnings Attributable to Tesoro Corporation
|
$
|
727
|
|
$
|
772
|
|
$
|
43
|
|
$
|
(815
|
)
|
$
|
727
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
Total comprehensive income
|
$
|
727
|
|
$
|
772
|
|
$
|
124
|
|
$
|
(815
|
)
|
$
|
808
|
|
Less: Noncontrolling interest in comprehensive income
|
—
|
|
—
|
|
81
|
|
—
|
|
81
|
|
Comprehensive Income Attributable to Tesoro Corporation
|
$
|
727
|
|
$
|
772
|
|
$
|
43
|
|
$
|
(815
|
)
|
$
|
727
|
|
|
|
(a)
|
The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from corporate subsidiaries, but does include the tax effect of the corporate partners’ share of partnership income.
|
Tesoro Corporation 2016
|
25
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF
JUNE 30, 2016
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
ASSETS
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
410
|
|
$
|
711
|
|
$
|
—
|
|
$
|
1,121
|
|
Receivables, net of allowance for doubtful accounts
|
—
|
|
898
|
|
167
|
|
—
|
|
1,065
|
|
Short-term receivables from affiliates
|
—
|
|
108
|
|
27
|
|
(135
|
)
|
—
|
|
Inventories, net
|
—
|
|
2,214
|
|
208
|
|
—
|
|
2,422
|
|
Prepayments and other current assets
|
53
|
|
169
|
|
42
|
|
(1
|
)
|
263
|
|
Total Current Assets
|
53
|
|
3,799
|
|
1,155
|
|
(136
|
)
|
4,871
|
|
Net Property, Plant and Equipment
|
—
|
|
6,415
|
|
3,227
|
|
—
|
|
9,642
|
|
Investment in Subsidiaries
|
8,967
|
|
604
|
|
—
|
|
(9,571
|
)
|
—
|
|
Long-Term Receivables from Affiliates
|
1,212
|
|
—
|
|
—
|
|
(1,212
|
)
|
—
|
|
Long-Term Intercompany Note Receivable
|
—
|
|
—
|
|
1,626
|
|
(1,626
|
)
|
—
|
|
Acquired intangibles, net
|
—
|
|
282
|
|
1,000
|
|
—
|
|
1,282
|
|
Other noncurrent assets, net
|
43
|
|
1,269
|
|
510
|
|
(5
|
)
|
1,817
|
|
Total Assets
|
$
|
10,275
|
|
$
|
12,369
|
|
$
|
7,518
|
|
$
|
(12,550
|
)
|
$
|
17,612
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
$
|
1,602
|
|
$
|
161
|
|
$
|
—
|
|
$
|
1,763
|
|
Short-term payables to affiliates
|
—
|
|
27
|
|
108
|
|
(135
|
)
|
—
|
|
Other current liabilities
|
128
|
|
658
|
|
119
|
|
(1
|
)
|
904
|
|
Total Current Liabilities
|
128
|
|
2,287
|
|
388
|
|
(136
|
)
|
2,667
|
|
Long-Term Payables to Affiliates
|
—
|
|
1,025
|
|
187
|
|
(1,212
|
)
|
—
|
|
Deferred Income Taxes
|
1,358
|
|
—
|
|
—
|
|
(5
|
)
|
1,353
|
|
Other Noncurrent Liabilities
|
430
|
|
409
|
|
50
|
|
—
|
|
889
|
|
Debt, net of unamortized issuance costs
|
1,195
|
|
30
|
|
3,276
|
|
—
|
|
4,501
|
|
Long-Term Intercompany Note Payable
|
1,626
|
|
—
|
|
—
|
|
(1,626
|
)
|
—
|
|
Equity-Tesoro Corporation
|
5,538
|
|
8,618
|
|
953
|
|
(9,571
|
)
|
5,538
|
|
Equity-Noncontrolling Interest
|
—
|
|
—
|
|
2,664
|
|
—
|
|
2,664
|
|
Total Liabilities and Equity
|
$
|
10,275
|
|
$
|
12,369
|
|
$
|
7,518
|
|
$
|
(12,550
|
)
|
$
|
17,612
|
|
26
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF
DECEMBER 31, 2015
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
ASSETS
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
895
|
|
$
|
47
|
|
$
|
—
|
|
$
|
942
|
|
Receivables, net of allowance for doubtful accounts
|
—
|
|
626
|
|
166
|
|
—
|
|
792
|
|
Short-term receivables from affiliates
|
—
|
|
197
|
|
—
|
|
(197
|
)
|
—
|
|
Inventories, net
|
—
|
|
1,971
|
|
331
|
|
—
|
|
2,302
|
|
Prepayments and other current assets
|
116
|
|
140
|
|
16
|
|
(1
|
)
|
271
|
|
Total Current Assets
|
116
|
|
3,829
|
|
560
|
|
(198
|
)
|
4,307
|
|
Net Property, Plant and Equipment
|
—
|
|
6,027
|
|
3,514
|
|
—
|
|
9,541
|
|
Investment in Subsidiaries
|
8,133
|
|
493
|
|
—
|
|
(8,626
|
)
|
—
|
|
Long-Term Receivables from Affiliates
|
1,517
|
|
—
|
|
—
|
|
(1,517
|
)
|
—
|
|
Long-Term Intercompany Note Receivable
|
—
|
|
—
|
|
1,626
|
|
(1,626
|
)
|
—
|
|
Acquired intangibles, net
|
—
|
|
234
|
|
977
|
|
—
|
|
1,211
|
|
Other noncurrent assets, net
|
33
|
|
1,026
|
|
219
|
|
(5
|
)
|
1,273
|
|
Total Assets
|
$
|
9,799
|
|
$
|
11,609
|
|
$
|
6,896
|
|
$
|
(11,972
|
)
|
$
|
16,332
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
$
|
1,413
|
|
$
|
155
|
|
$
|
—
|
|
$
|
1,568
|
|
Short-term payables to affiliates
|
—
|
|
—
|
|
197
|
|
(197
|
)
|
—
|
|
Other current liabilities
|
91
|
|
764
|
|
108
|
|
(1
|
)
|
962
|
|
Total Current Liabilities
|
91
|
|
2,177
|
|
460
|
|
(198
|
)
|
2,530
|
|
Long-Term Payables to Affiliates
|
—
|
|
1,375
|
|
142
|
|
(1,517
|
)
|
—
|
|
Deferred Income Taxes
|
1,227
|
|
—
|
|
—
|
|
(5
|
)
|
1,222
|
|
Other Noncurrent Liabilities
|
452
|
|
271
|
|
50
|
|
—
|
|
773
|
|
Debt, net of unamortized issuance costs
|
1,190
|
|
33
|
|
2,844
|
|
—
|
|
4,067
|
|
Long-Term Intercompany Note Payable
|
1,626
|
|
—
|
|
—
|
|
(1,626
|
)
|
—
|
|
Equity-Tesoro Corporation
|
5,213
|
|
7,753
|
|
873
|
|
(8,626
|
)
|
5,213
|
|
Equity-Noncontrolling Interest
|
—
|
|
—
|
|
2,527
|
|
—
|
|
2,527
|
|
Total Liabilities and Equity
|
$
|
9,799
|
|
$
|
11,609
|
|
$
|
6,896
|
|
$
|
(11,972
|
)
|
$
|
16,332
|
|
Tesoro Corporation 2016
|
27
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE
SIX MONTHS ENDED
JUNE 30, 2016
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Cash Flows From (Used In) Operating Activities
|
|
|
|
|
|
Net cash from (used in) operating activities
|
$
|
(31
|
)
|
$
|
281
|
|
$
|
378
|
|
$
|
—
|
|
$
|
628
|
|
Cash Flows From (Used In) Investing Activities
|
|
|
|
|
|
Capital expenditures
|
—
|
|
(327
|
)
|
(99
|
)
|
—
|
|
(426
|
)
|
Acquisition, net of cash
|
—
|
|
(317
|
)
|
(77
|
)
|
—
|
|
(394
|
)
|
Proceeds from asset sales
|
17
|
|
1
|
|
—
|
|
—
|
|
18
|
|
Intercompany notes, net
|
552
|
|
—
|
|
—
|
|
(552
|
)
|
—
|
|
Investment in subsidiaries
|
(319
|
)
|
(94
|
)
|
—
|
|
413
|
|
—
|
|
Other investing activities
|
—
|
|
—
|
|
(4
|
)
|
—
|
|
(4
|
)
|
Net cash from (used in) investing activities
|
250
|
|
(737
|
)
|
(180
|
)
|
(139
|
)
|
(806
|
)
|
Cash Flows From (Used In) Financing Activities
|
|
|
|
|
|
Borrowings under revolving credit agreements
|
—
|
|
—
|
|
600
|
|
—
|
|
600
|
|
Repayments on revolving credit agreements
|
—
|
|
—
|
|
(666
|
)
|
—
|
|
(666
|
)
|
Proceeds from debt offering
|
—
|
|
—
|
|
701
|
|
—
|
|
701
|
|
Repayments of debt
|
—
|
|
(3
|
)
|
(250
|
)
|
—
|
|
(253
|
)
|
Dividend payments
|
(121
|
)
|
—
|
|
—
|
|
—
|
|
(121
|
)
|
Net proceeds from issuance of Tesoro Logistics LP common units
|
—
|
|
—
|
|
334
|
|
—
|
|
334
|
|
Distributions to noncontrolling interest
|
—
|
|
—
|
|
(98
|
)
|
—
|
|
(98
|
)
|
Purchases of common stock
|
(100
|
)
|
—
|
|
—
|
|
—
|
|
(100
|
)
|
Taxes paid related to net share settlement of equity awards
|
(24
|
)
|
—
|
|
—
|
|
—
|
|
(24
|
)
|
Net intercompany repayments
|
—
|
|
(359
|
)
|
(193
|
)
|
552
|
|
—
|
|
Contribution by parent
|
—
|
|
319
|
|
94
|
|
(413
|
)
|
—
|
|
Distributions to TLLP unitholders and general partner
|
25
|
|
14
|
|
(39
|
)
|
—
|
|
—
|
|
Other financing activities
|
1
|
|
—
|
|
(17
|
)
|
—
|
|
(16
|
)
|
Net cash from (used in) financing activities
|
(219
|
)
|
(29
|
)
|
466
|
|
139
|
|
357
|
|
Increase (Decrease) in Cash And Cash Equivalents
|
—
|
|
(485
|
)
|
664
|
|
—
|
|
179
|
|
Cash and Cash Equivalents, Beginning of Period
|
—
|
|
895
|
|
47
|
|
—
|
|
942
|
|
Cash and Cash Equivalents, End of Period
|
$
|
—
|
|
$
|
410
|
|
$
|
711
|
|
$
|
—
|
|
$
|
1,121
|
|
28
|
Tesoro Corporation 2016
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE
SIX MONTHS ENDED
JUNE 30, 2015
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantors
|
Consolidating Adjustments
|
Consolidated
|
Cash Flows From (Used In) Operating Activities
|
|
|
|
|
|
Net cash from (used in) operating activities
|
$
|
(30
|
)
|
$
|
667
|
|
$
|
270
|
|
$
|
—
|
|
$
|
907
|
|
Cash Flows From (Used In) Investing Activities
|
|
|
|
|
|
Capital expenditures
|
—
|
|
(383
|
)
|
(157
|
)
|
—
|
|
(540
|
)
|
Acquisitions
|
—
|
|
—
|
|
(6
|
)
|
—
|
|
(6
|
)
|
Intercompany notes, net
|
419
|
|
—
|
|
—
|
|
(419
|
)
|
—
|
|
Other investing activities
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
Net cash from (used in) investing activities
|
419
|
|
(385
|
)
|
(163
|
)
|
(419
|
)
|
(548
|
)
|
Cash Flows From (Used In) Financing Activities
|
|
|
|
|
|
Borrowings under revolving credit agreements
|
—
|
|
—
|
|
262
|
|
—
|
|
262
|
|
Repayments on revolving credit agreements
|
—
|
|
—
|
|
(223
|
)
|
—
|
|
(223
|
)
|
Repayments of debt
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
(3
|
)
|
Dividend payments
|
(107
|
)
|
—
|
|
—
|
|
—
|
|
(107
|
)
|
Net proceeds from issuance of Tesoro Logistics LP common units
|
—
|
|
—
|
|
45
|
|
—
|
|
45
|
|
Distributions to noncontrolling interest
|
—
|
|
—
|
|
(90
|
)
|
—
|
|
(90
|
)
|
Purchases of common stock
|
(269
|
)
|
—
|
|
—
|
|
—
|
|
(269
|
)
|
Taxes paid related to net share settlement of equity awards
|
(44
|
)
|
—
|
|
—
|
|
—
|
|
(44
|
)
|
Net intercompany repayments
|
—
|
|
(329
|
)
|
(90
|
)
|
419
|
|
—
|
|
Distributions to TLLP unitholders and general partner
|
21
|
|
12
|
|
(33
|
)
|
—
|
|
—
|
|
Other financing activities
|
10
|
|
37
|
|
1
|
|
—
|
|
48
|
|
Net cash used in financing activities
|
(389
|
)
|
(283
|
)
|
(128
|
)
|
419
|
|
(381
|
)
|
Decrease in Cash And Cash Equivalents
|
—
|
|
(1
|
)
|
(21
|
)
|
—
|
|
(22
|
)
|
Cash and Cash Equivalents, Beginning of Period
|
—
|
|
943
|
|
57
|
|
—
|
|
1,000
|
|
Cash and Cash Equivalents, End of Period
|
$
|
—
|
|
$
|
942
|
|
$
|
36
|
|
$
|
—
|
|
$
|
978
|
|
Tesoro Corporation 2016
|
29