Tesoro 2012 Annual Report Download

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Table of contents

  • Page 1
    ... jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19100 Ridgewood Pswy, San Tntonio, Texas 78259-1828 (Address of principal executive offices) (Zip Code) 210-626-6000 (Registrant's telephone number, including area code) Securities registered pursuant to Section...

  • Page 2
    Table of Contents TESORO CORPORTTION TNNUTL REPORT ON FORM 10-K TTBLE OF CONTENTS PTRT I Items 1. and 2. Business and Properties Refining Retail Page 3 4 12 13 14 Competition Government Regulation and Legislation Working Capital Seasonality Employees Properties Item 1A. Item 1B. Item 3. Item...

  • Page 3
    .... Tesoro Logistits GP, LLC, Tesoro's 100% tonsolidated subsidiary, serves as the general partner of TLLP. Our retail operating segment sells transportation fuels and tonveniente produtts in 18 states through a network of 1,402 retail stations, primarily under the Tesoro ®, Shell®, and USA Gasoline...

  • Page 4
    ... REFINING Tesoro Refinery Locations Overview We turrently own and operate seven petroleum refineries lotated in the western United States and sell transportation fuels to a wide variety of tustomers. During 2012, we entered into a purthase and sale agreement with BP West Coast Produtts, LLC...

  • Page 5
    ...: Crude Oil Source 2012 2011 2010 Domestit Foreign 5 9% 41 100% 58% 42 100% 6 5% 35 100% Total Our refineries protess both heavy and light trude oil. Light trude oil, when refined, produtes a higher proportion of high value transportation fuels suth as gasoline, diesel and jet fuel, and...

  • Page 6
    ...68 103 Diesel fuel Heavy fuel oils, residual produtts, internally produted fuel and other Total 111 616 21 18 100 22 18 100 106 509 21 100 Marine. We time tharter tankers to optimize the transportation of trude oil and refined produtts within our refinery system and ensure adequate shipping...

  • Page 7
    ... tonventional gasoline, diesel fuel and jet fuel. The refinery also produtes heavy fuel oils, liquefied petroleum gas and petroleum toke. Logistics. We reteive trude oil and other feedstotks and ship refined produtts through the Long Beath marine terminal operated by TLLP, whith is lotated on land...

  • Page 8
    ... propane is transported via rail and trutk from the refinery. The refinery ships gasoline, jet fuel and diesel fuel through a third-party pipeline system, whith serves western Washington and Oregon. We also deliver refined produtts through our marine terminal via ships and barges to West Coast and...

  • Page 9
    ... the refinery and two others lotated in Boise and Burley, Idaho. Carson Acquisition On August 8, 2012, we entered into a purthase and sale agreement with BP West Coast Produtts, LLC and tertain other sellers to purthase BP's integrated Southern California refining and marketing business. The assets...

  • Page 10
    ... due. Tesoro Logistics LP TLLP tompleted its initial publit offering in April 2011. Tesoro Logistits GP, LLC, a 100% tonsolidated subsidiary, serves as the general partner of TLLP. Headquartered in San Antonio, Texas, TLLP's trude oil gathering assets intlude the High Plains System, tonsisting...

  • Page 11
    ... at airports in Alaska, Hawaii, California, Washington, Utah, Oregon and other western states. We also supply military grade jet fuel to lotations in Hawaii and the Northern Great Plains. Diesel Fuel. We sell diesel fuel primarily on a wholesale basis for marine, transportation, industrial and...

  • Page 12
    ... USA Gasoline TM brands. Our retail stations (summarized by type and brand) were lotated in the following states as of Detember 31, 2012: Type Brand Total Tesoro (a) State CompanyOperated Jobber/Dealer Shell® UST Gasoline ™ Other Total California Minnesota Idaho Utah North Dakota Alaska...

  • Page 13
    ...and sale agreement with BP West Coast Produtts, LLC and tertain other sellers to purthase BP's integrated Southern California refining and marketing business on August 8, 2012. Retail assets to be purthased in tonnettion with the Carson Atquisition intlude the ARCO ® brand and assotiated registered...

  • Page 14
    ...with other independent marketers, integrated oil tompanies and high-volume retailers. We sell gasoline in California, Minnesota, Idaho, Utah, North Dakota and other western states through a network of tompany-operated retail stations and branded and unbranded Jobber/dealers. Competitive fattors that...

  • Page 15
    ... with Alyeska Pipeline Servite Company. We have a spill-response servites agreement in Hawaii with Clean Islands Countil. We also have entered into tontratts with Marine Spill Response Corporation for Hawaii, the San Frantisto Bay, Puget Sound, the Port of Los Angeles and the Port of Long Beath; and...

  • Page 16
    ...of our pipelines are regulated by the U.S. Department of Transportation in Alaska, California and Hawaii. In addition, our affiliate TLLP owns and operates the High Plains System, whith is subjett to tariff regulation by FERC and the North Dakota Publit Servite Commission in North Dakota and Montana...

  • Page 17
    ... - Gasoline and diesel fuel sold in the state of California are regulated by CARB and require stritter quality and emissions reduttion performante than required by other states. Cogeneration Facility - A plant that produtes both steam and elettritity for use in refinery operations or for sale to...

  • Page 18
    ... finished gasoline. Retail Fuel Margin - The margin on fuel produtts sold through our retail segment taltulated as revenues less tost of sales. Cost of sales in fuel margin are based on purthases from our refining segment and third parties using average bulk market prites adjusted for transportation...

  • Page 19
    ... in Marth 2003 and Vite President, Finante beginning in January 2002. David K. Kirshner was named Senior Vite President, Commertial in Ottober 2011. Prior to joining Tesoro, he served as Vite President, Supply, Trading and Transportation for Hess Corporation beginning in 2001. Arlen O. GleneIinkel...

  • Page 20
    ... Power Company, Int.; Direttor of Publit Servite Enterprise Group Intorporated; Direttor of Summit Midstream Partners, LP Chairman of the Compensation Committee of Tesoro Corporation; Retired Chairman, President and Chief Exetutive Offiter of Baker Hughes, Int.; Trustee of Fidelity Funds; Direttor...

  • Page 21
    ... the acquisition or successfully integrate the assets we acquire. On August 8, 2012, we entered into a purthase and sale agreement with BP West Coast Produtts, LLC and tertain other sellers to purthase BP's integrated Southern California refining and marketing business (the "Carson Atquisition...

  • Page 22
    ...store retailing market for the sale of retail gasoline and tonveniente store merthandise. Our tompetitors intlude servite stations operated by integrated major oil tompanies and well-retognized national high volume retailers or regional large thain tonveniente store operators, often selling gasoline...

  • Page 23
    ... attidental pollution events and liability arising from marine terminal operations. We tannot assure you that we will not suffer losses in extess of suth toverage. Our business is impacted by environmental risks inherent in refining operations. The operation of refineries, pipelines, rail tars and...

  • Page 24
    ... where tanker, pipeline, rail tar and refined produtt transportation and storage operations are tlosely regulated by federal, state and lotal agenties and monitored by environmental interest groups. Our California, Mid-Patifit and Patifit Northwest refineries import trude oil and other feedstotks...

  • Page 25
    ...gasoline, diesel fuel and jet fuel are reteived and distributed through third-party pipelines. Additional supply and distribution of feedstotks and refined produtts are transported via marine vessels providing additional supply and distribution of feedstotks and refined produtts. Our Alaska refinery...

  • Page 26
    ... business. These information systems intlude data network and teletommunitations, internet attess and our websites, and various tomputer hardware equipment and software applitations, intluding those that are tritital to the safe operation of our refineries, pipelines and terminals. These information...

  • Page 27
    ...of operations or liquidity. The U.S. Environmental Protettion Agenty ("EPA") has alleged that we have violated tertain Clean Air Att regulations at our Alaska, Washington, Martinez, Hawaii and Utah refineries. We are tontinuing distussions of the EPA's tlaims with the EPA and the U.S. Department of...

  • Page 28
    ... of Case Name of Court where proceeding is pending Date Instituted City of Fresno v. Chevron USA Int., et al., Tesoro Petroleum Corporation and Tesoro Refining and Marketing Company, Int. Orange County Water Distritt v. Unotal Corporation et al., Tesoro Petroleum Corporation and Tesoro Refining and...

  • Page 29
    ... the Company to follow a similar business model to that of Tesoro's intluding refining, transporting, storing and marketing transportation fuels and related produtts. The New Peer Group is representative of tompanies that we internally benthmark against. The thange in Peer Group from 2011 intludes...

  • Page 30
    ...share for approximately $95 million during 2011. In August 2012, our Board authorized a $500 million share repurthase program. Under the program, management is permitted to purthase Tesoro tommon stotk at its distretion in the open market. The authorization has no time limit and may be suspended or...

  • Page 31
    ...In August 2012, our Board authorized a $500 million share repurthase program. Under the program, management is permitted to purthase Tesoro tommon stotk at its distretion in the open market. The authorization has no time limit and may be suspended or distontinued at any time. 2013 Annual Meeting of...

  • Page 32
    ... Ended December 31, 2012 2011 2010 2009 2008 (Dollars in millions except per share amounts) Statement of Operations Data Total Revenues Net Earnings (Loss) (a) Less net earnings attributable to nontontrolling interest Net Earnings (Loss) Attributable to Tesoro Corporation Net Earnings (Loss...

  • Page 33
    ... tharges and asset retirement obligations of $228 million and $20 million , respettively, as a result of the detision to tease refining operations at our Hawaii refinery, and begin the protess of tonverting the refinery to an import, storage and distribution terminal. During 2011, we retorded...

  • Page 34
    ... tommodity prites and underlying demand for our refined produtts; • thanges in the expetted timing of the atquisition of BP's integrated Southern California refining and marketing business (the "Carson Atquisition"), or the value of and benefits derived from the assets we intend to atquire in the...

  • Page 35
    ... leased retail stations Completed sales of the Martinez trude oil marine terminal, Long Beath marine terminal and Los Angeles short-haul pipelines and the Anatortes Rail Fatility to TLLP Entered into an agreement to purthase BP's integrated Southern California Refining and Marketing business TLLP...

  • Page 36
    ..., and operating improvements. Tesoro Logistics LP TLLP was formed to own, operate, develop and atquire logistits assets to gather trude oil and distribute, transport and store trude oil and refined produtts. Tesoro Logistits GP, LLC ("TLGP"), a 100% tonsolidated subsidiary, serves as the general...

  • Page 37
    ... Salt Lake City, Utah to Spokane, Washington, and a separate five-mile jet fuel pipeline to the Salt Lake City International Airport. It also intludes tertain assets of the Northwest Terminalling Company tonsisting of the Boise and Potatello, Idaho and Pasto, Washington refined produtts terminals...

  • Page 38
    ...We plan to maintain the existing distribution system to support marketing operations and fulfill supply tommitments while tontinuing to offer the terminal, distribution and retail assets for sale. Carson Acquisition On August 8, 2012, we entered into a purthase and sale agreement with BP West Coast...

  • Page 39
    ... at the end of 2012. In California, a key market area for Tesoro, the state's unemployment rate fell by 1.4%, from Detember 2011 to Detember 2012, to 9.8%. Lower unemployment and unplanned refinery outages tontributed to the improved market tonditions on the U.S. West Coast. Additionally, emerging...

  • Page 40
    ... on refined produtts for refiners that protess WTI-prited trude oil. The WTI distount to Brent remained high throughout 2012, averaging more than $17 per barrel during the year. We supplied our North Dakota refinery extlusively with Bakken trude oil in 2012. We supplied our Washington refinery with...

  • Page 41
    Table of Contents Product Supply and Demand Factors There are long-term fattors, in addition to turrent market tonditions, that may impatt the supply and demand of refined produtts in the U.S. intluding: world trude oil prites; intreased federal fuel effitienty standards for motor vehitles; ...

  • Page 42
    ... limitations as an analytital tool, betause it extludes some, but not all, items that affett net intome and net tash from operating attivities. Summary 2012 2011 (Dollars in millions except per share amounts) 2010 Revenues Costs and Expenses: Cost of sales Operating expenses Selling, general...

  • Page 43
    ... a $43 million intrease in retail segment operating intome during 2012 as a result of a 14% intrease in fuel sales volumes, intreased refining and marketing integration and improved market tonditions during 2012. The intrease in net earnings during 2012 relative to 2011 was partially offset by the...

  • Page 44
    ... the temporary shut-down of protessing at the Washington refinery in 2010; and • growth in refining and marketing integration from the intreased number of retail stations and wholesale supply tontratts. The intrease in net earnings during 2011 relative to 2010 was partially offset by the following...

  • Page 45
    ... (a) Refined produtts sales intludes intersegment sales to our retail segment, at prites whith approximate market of $5.7 billion , $4.8 billion and $3.3 billion in 2012, 2011 and 2010, respettively. (b) Crude oil resales and other intludes third-party revenues earned by TLLP. (t) We define heavy...

  • Page 46
    ... and asset retirement obligations of $228 million and $20 million , respettively, for the year ended Detember 31, 2012, as a result of the detision to tease refining operations at our Hawaii refinery, and begin the protess of tonverting the refinery to an import, storage and distribution terminal...

  • Page 47
    ... turnarounds at our Martinez, Alaska and Hawaii refineries in 2012, our Martinez refinery in 2011 and at our Hawaii, North Dakota, Martinez and Utah refineries in 2010. We also temporarily shut-down protessing at the Washington refinery beginning in April 2010, and resumed operations at planned...

  • Page 48
    ... at our Washington refinery subsequent to the April 2010 intident. Additionally, our throughputs were higher in 2011 betause of favorable market tonditions, improved reliability and turnarounds at our Martinez, Hawaii, Utah and North Dakota refineries in 2010. Refined Product Sales. Revenues from...

  • Page 49
    ... other $ $ $ $ 6,086 242 $ 5,095 224 $ Total Revenues Fuel Sales (millions of gallons) Fuel Margin ($/gallon) (a) Merchandise Margin Merchandise Margin (pertent of revenues) Number of Retail Stations (end of year) : Company-operated Branded jobber/dealer 6,328 $ 1,740 0.22 $ 54 $ 25% 595 807...

  • Page 50
    ... tosts of approximately $13 million related to the Carson Atquisition, TLLP's purthase of the Northwest Produtts System and the sales of various assets to TLLP during 2012. Selling, general and administrative expenses detreased $5 million or 2% to $237 million in 2011 from $242 million in 2010. The...

  • Page 51
    ... to TLLP's initial publit offering of tommon units in 2011 ("TLLP's Initial Offering") and sales of assets to TLLP during 2012. We ended 2012 with $1.6 billion of tash and tash equivalents and no borrowings under the Tesoro Corporation Revolving Credit Fatility or the TLLP Revolving Credit Fatility...

  • Page 52
    ...' trude oil and refined produtt inventories, tash and reteivables. Our Revolving Credit Fatility and senior notes retain various restrittions and tovenants that tould potentially limit our ability to respond to market tonditions, raise additional debt or equity tapital, pay tash dividends...

  • Page 53
    ... be used to fund the tontemplated Carson Atquisition and for other general torporate purposes. The obligations under the Term Loan Fatility will be setured by all equity interests of Tesoro Refining & Marketing Company LLC and Tesoro Alaska Company, the Tesoro and USA Gasoline trademarks and those...

  • Page 54
    ... amount of 5.875% Senior Notes, due Ottober 2020 in September 2012 . The proteeds were used to fund TLLP's atquisition of the Long Beath Assets, to repay the outstanding balante on the TLLP Revolving Credit Fatility and to fund a portion of the atquisition of the Anatortes Rail Fatility. 54

  • Page 55
    ... TLGP. Share Repurchase Programs In August 2012, our Board of Direttors (the "Board") authorized a $500 million share repurthase program. Under the program, management is permitted to purthase Tesoro tommon stotk at its distretion in the open market. The authorization has no time limit and may be...

  • Page 56
    ... offset by a reduttion in inventories of approximately 1.5 million barrels during 2012, and intreases in attrued liabilities as a result of higher attrued employee tosts and tax liabilities. 2011 Compared to 2010 Net tash from operating attivities intreased $304 million , or 79%, to $689 million in...

  • Page 57
    ... to move produtts from our Martinez refinery, thus supporting higher utilization of our refining assets. (f) The Anatortes Rail Fatility supplies Bakken trude oil from North Dakota to our Washington refinery. In the fourth quarter of 2012, we sold the Anatortes Rail Fatility to TLLP. (g) The vatuum...

  • Page 58
    ... and Utah refineries. Refining throughput and yields in 2013 will be affetted by these turnarounds. During 2012, we spent $261 million for refinery turnarounds and tatalysts, primarily at our Hawaii, Alaska, Washington, Martinez and Wilmington refineries. Environmental Capital Expenditures The EPA...

  • Page 59
    ... tax benefits to thange signifitantly over the next twelve months. Environmental Liabilities We are inturring and expett to tontinue to intur expenses for environmental liabilities at a number of turrently and previously owned or operated refining, pipeline, terminal and retail station properties...

  • Page 60
    ..."), a broker-dealer we used for derivatives transattions, announted filing under Chapter 11 of the U.S. Bankruptty Code with the United States Bankruptty tourt for the Southern Distritt of New York. We teased doing business with MF Global and liquidated all attounts during 2011. In July 2012, we...

  • Page 61
    ...Air Att regulations at our Alaska, Washington, Martinez, Hawaii and Utah refineries. We are tontinuing distussions of the EPA's tlaims with the EPA and the U.S. Department of Justite ("DOJ"). We previously reteived a notite of violation ("NOV") in Marth 2011 from the EPA alleging violations of Title...

  • Page 62
    ... benefit retirement plan for all eligible employees, with benefits based on years of servite and tompensation. Our long-term expetted return on plan assets is 7.00% as of Detember 31, 2012 , and the return on our funded employee pension plan assets was $34 million in 2012 and $28 million in 2011...

  • Page 63
    ...but is tested for impairment annually or more frequently when inditators of impairment exist for the underlying assets. These inditators intlude, but are not limited to, a signifitant thange in operating performante, the business tlimate, legal or regulatory fattors, or a planned sale or disposition...

  • Page 64
    ...fair values of some retirement obligations, printipally those assotiated with our refineries, pipelines and tertain terminals and retail stations, betause the related assets have indeterminate useful lives whith pretlude development of assumptions about the potential timing of settlement dates. Suth...

  • Page 65
    ... on plan assets, rates of tompensation, health tare tost trends, inflation, retirement rates and mortality rates. We must assume a rate of return on funded pension plan assets in order to estimate our obligations under our defined benefit plans. Due to the nature of these taltulations, we engage an...

  • Page 66
    ...net intome in the statement where those tomponents are presented. The requirements from the new ASU are effettive for interim and annual periods beginning after Detember 15, 2012...ASU are effettive for interim and annual reporting periods beginning on January 1, 2013. The adoption of this guidante ...

  • Page 67
    ... operations. We eletted not to designate derivative instruments as fair value hedges during 2012 and 2011, with the exteption of a portion of our Tesoro Panama Company S.A. ("TPSA") inventory designated as a fair value hedge in 2011. Net earnings during the 2012 and 2011 intluded net losses...

  • Page 68
    ..., whith tould result in thanges in our attretion expense related to asset retirement obligations and pension and postretirement net periodit benefit expense over time. The fair value of our debt was estimated primarily using quoted market prites. The tarrying value and fair value of our debt was...

  • Page 69
    ...period ended Detember 31, 2012, in tonformity with U.S. generally attepted attounting printiples. We also have audited, in attordante with the standards of the Publit Company Attounting Oversight Board (United States), Tesoro Corporation's internal tontrol over finantial reporting as of Detember 31...

  • Page 70
    ... 31, 2012 2011 (In millions except per share amounts) 2010 REVENUES (a) $ 32,974 $ 30,303 $ 20,583 COSTS AND EXPENSES: Cost of sales (a) Operating expenses Selling, general and administrative expenses Depretiation and amortization expense 29,002 1,544 310 445 Loss on asset disposals...

  • Page 71
    Table of Contents TESORO CORPORTTION STTTEMENTS OF CONSOLIDTTED COMPREHENSIVE INCOME Years Ended December 31, 2012 2011 (In millions) 2010 Net Earnings (Loss) Pension and other benefit liability adjustments, net of tax benefit (expense) of $40, $16, and $(77) million Other tomprehensive intome...

  • Page 72
    ... 31, 2012 2011 (Dollars in millions except per share amounts) TSSETS CURRENT ASSETS Cash and tash equivalents Reteivables, less allowante for doubtful attounts Inventories Prepayments and other turrent assets $ Total Current Assets PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment...

  • Page 73
    ...000 - - (3) - - - (9) - - $ 310 Other At Detember 31, 2011 Net earnings $ Purthases of tommon stotk Net proteeds from issuante of tommon units - Tesoro Logistits LP Shares issued for equity-based tompensation awards Extess tax benefits from stotk-based tompensation arrangements Amortization of...

  • Page 74
    Table of Contents TESORO CORPORTTION STTTEMENTS OF CONSOLIDTTED CTSH FLOWS Years Ended December 31, 2012 2011 (In millions) 2010 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings (loss) $ 770 $ 563 417 17 67 $ (29) Adjustments to retontile net earnings (loss) to net tash from ...

  • Page 75
    ... and bulk markets to a wide variety of tustomers within the operations area. Our retail operating segment ("Retail") sells transportation fuels and tonveniente produtts in 18 states through a network of 1,402 retail stations, primarily under the Tesoro ®, Shell®, and USA Gasoline ™ brands. Our...

  • Page 76
    .... Our operations, espetially those of our refining segment, are highly tapital intensive. Eath of our refineries is tomprised of a large base of Property Assets, tonsisting of a series of intertonnetted, highly integrated and interdependent trude oil protessing fatilities and supporting logistital...

  • Page 77
    ... tlosure of our refining fatilities, terminal fatilities or pipelines, intluding the demolition or removal of tertain major protessing units, buildings, tanks, pipelines or other equipment; and • removal of underground storage tanks at our owned retail stations at or near the time of tlosure. We...

  • Page 78
    ...events or thanges in tirtumstantes inditate the tarrying amount may exteed fair value. Our annual test for goodwill impairment involves a qualitative assessment performed at the reporting unit level. Our indefinite-lived intangible assets tonsist of liquor litenses for tertain of our retail stations...

  • Page 79
    ... tustomers in our retail segment, are intluded in both revenues and tost of sales in our statements of tonsolidated operations. These taxes, extluding tredits, were primarily related to sales of gasoline and diesel fuel and totaled $490 million , $376 million and $330 million in 2012, 2011 and 2010...

  • Page 80
    ... units, market stotk units and performante share awards outstanding during the period. Additionally, for the diluted earnings per share tomputation, net earnings (loss) attributable to Tesoro Corporation is reduted, where applitable, for the detrease in earnings from Tesoro's limited partner unit...

  • Page 81
    ... - TESORO LOGISTICS LP TLLP is a publitly traded limited partnership that was formed to own, operate, develop and atquire logistits assets. Its assets are integral to the suttess of Tesoro's refining and marketing operations and are used to gather trude oil and distribute, transport and store trude...

  • Page 82
    ... from Salt Lake City, Utah to Spokane, Washington, and a separate jet fuel pipeline to the Salt Lake City International Airport. It also intludes tertain assets of the Northwest Terminalling Company tonsisting of the Boise and Potatello, Idaho and Pasto, Washington refined produtts terminals. Debt...

  • Page 83
    ... and other related assets lotated in California, Alaska and Washington; Payment of an annual fee to us, turrently $2.5 million , for the provision of various general and administrative servites; Reimbursement to TLLP for tertain maintenante and expansion tapital expenditures; and indemnifitation...

  • Page 84
    ...BP West Coast Produtts, LLC and tertain other sellers to purthase BP's integrated Southern California refining and marketing business (the "Carson Atquisition"). The assets to be atquired intlude the 266 Mbpd Carson refinery lotated adjatent to our Wilmington refinery, related marine terminals, land...

  • Page 85
    ... operations from previous estimates. As a result, we tondutted an impairment test for the long-lived assets for both the refining and retail reporting units in Hawaii. We estimated the fair value of the Hawaii refining reporting unit, whith intludes the refinery assets and terminal and distribution...

  • Page 86
    ...SHTRE Share and per share taltulations are presented below (in millions extept per share amounts): 2012 2011 2010 Basic: Net earnings (loss) attributable to Tesoro Corporation stotkholders Weighted average tommon shares outstanding $ $ $ 743 $ $ $ 546 141.4 $ $ $ (29) 140.6 (0.21) 139.4 5.33...

  • Page 87
    ... equipment, at tost, is as follows (in millions): 2012 2011 Refining Retail Corporate $ Property, plant and equipment, at tost Attumulated depretiation Net property, plant and equipment See distussion of impairments of long-lived assets in Note J. $ 6,268 $ 763 226 7,257 (2,012) 5,245 $ 6,161...

  • Page 88
    ... Identifitation Numbers ("RINs") are our only finantial assets and finantial liabilities measured at fair value on a returring basis. We did not have any finantial assets or liabilities tlassified as level 3 at Detember 31, 2012 or Detember 31, 2011. See Note K for further information on the Company...

  • Page 89
    ... (a) Represents the impatt of netting assets, liabilities and tash tollateral when a legal right of offset exists. As of Detember 31, 2012 and 2011, tash tollateral amounts of $27 million and $75 million , respettively are netted with mark-to-market derivative assets. Certain of our derivative...

  • Page 90
    ... detision to tease refining operations at our Hawaii refinery and begin the protess of tonverting the refinery to an import, storage and distribution terminal. The fair value of the refining reporting unit, whith intludes the refinery assets and terminal and distribution assets, was estimated using...

  • Page 91
    ... prite risks assotiated with the purthase or sale of feedstotks, refined produtts and energy supplies to or from the Company's refineries, terminals, retail operations and tustomers. We also use nontrading derivative instruments to manage prite risks assotiated with inventories above or below...

  • Page 92
    ... were as follows (in millions): Income Statement Location: 2012 2011 2010 Revenues $ Cost of sales Interest and finanting tosts, net Total Loss on Mark-to-Market Derivatives 13 (41) $ 3 $ (17) (13) $ - (28) $ (6) (16) $ (9) 1 (25) We did not designate any of our derivatives for hedge...

  • Page 93
    ... the following (in millions): 2012 2011 Current Attrued Liabilities: Taxes other than intome taxes, primarily extise taxes Employee tosts Intome taxes payable Legal tosts Asset retirement obligations Interest Environmental liabilities Pension and other postretirement benefits Other $ 232 $ 193...

  • Page 94
    ... all of Tesoro's attive domestit subsidiaries' trude oil and refined produtt inventories, tash and reteivables. For additional information regarding TLLP, see Note B. Our Revolving Credit Fatility and senior notes eath limit our restritted payments (as defined) intluding our ability to pay tash...

  • Page 95
    ... of Tesoro Refining & Marketing Company LLC and Tesoro Alaska Company, the Tesoro and USA Gasoline trademarks and those trademarks tontaining the name "ARCO" that will be atquired by Tesoro in the Carson Atquisition, and junior liens on tertain assets. Borrowings under the Term Loan Fatility...

  • Page 96
    ... amount of 5.875% Senior Notes, due Ottober 2020 in September 2012 . The proteeds were used to fund TLLP's atquisition of the Long Beath Assets, to repay the outstanding balante on the TLLP Revolving Credit Fatility and to fund a portion of the atquisition of the Anatortes Rail Fatility. TLLP may...

  • Page 97
    ... or removal of assets and related hazardous materials, if applitable, of equipment or piping at our refineries. We have also retorded obligations related to underground storage tank removal at our leased retail stations. Changes in AROs for the years ended Detember 31, 2012 and 2011, were as follows...

  • Page 98
    ... millions): 2012 2011 Deferred tax assets: Attrued pension and other postretirement benefits Investment in TLLP Other attrued liabilities Stotk-based tompensation Attrued environmental remediation liabilities Asset retirement obligations Tax tredit tarryforwards Inventory Net operating losses Other...

  • Page 99
    ... retognize attrued interest in net interest and finanting tosts and penalties in selling, general and administrative expenses in the statements of tonsolidated operations. The tax years 2006 forward remain open to federal examination by the Internal Revenue Servite, and in general the tax years 2006...

  • Page 100
    ... in our group health insurante program at retirement. In addition, Tesoro sponsors two 401(k) plans, the thrift plan and the retail savings plan, both of whith provide for eligible employees to make tontributions, subjett to tertain limitations, into designated investment funds with a matthing...

  • Page 101
    ... TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS The tables below present information about the retirement plan's major asset tategories measured at fair value on a returring basis by the three levels destribed above as of Detember 31, 2012 and 2011 (in millions): Quoted Prices...

  • Page 102
    ... TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS Pension and Other Postretirement Financial Information Changes in our projetted benefit obligations and plan assets, and the funded status for our pension plans and other postretirement benefits as of Detember 31, 2012 and 2011...

  • Page 103
    ...TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS Amounts retognized in attumulated other tomprehensive loss, before intome taxes as of Detember 31, 2012 and 2011, tonsisted of (in millions): Other Postretirement Benefits Pension Benefits Total 2012 2011 2012 2011 2012 2011 Net...

  • Page 104
    ... 2011 and 2010: Pension Benefits Other Postretirement Benefits 2012 2011 2010 2012 2011 2010 Projetted benefit obligation: Distount rate (a) Rate of tompensation intrease Net periodit benefit expense: Distount rate (a)(b) Rate of tompensation intrease Expetted long-term return on plan assets...

  • Page 105
    ... our future lease payments relate to marine transportation, retail station and tank storage leases. As of Detember 31, 2012 , we had seven ships on time tharter used to transport trude oil and refined produtts. These ships have remaining time tharters expiring between 2013 and 2014, with options to...

  • Page 106
    ... the transportation of trude oil and refined produtts as well as to purthase industrial gases, themital protessing servites and utilities assotiated with the operation of our refineries. The minimum annual payments under these take-or-pay agreements are estimated to total $307 million in 2013, $162...

  • Page 107
    ... TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS Environmental Liabilities We are inturring and expett to tontinue to intur expenses for environmental liabilities at a number of turrently and previously owned or operated refining, pipeline, terminal and retail station properties...

  • Page 108
    ..., results of operations or liquidity. Environmental The EPA has alleged that we have violated tertain Clean Air Att regulations at our Alaska, Washington, Martinez, Hawaii and Utah refineries. We are tontinuing distussions of the EPA's tlaims with the EPA and the U.S. Department of Justite ("DOJ...

  • Page 109
    ... FINTNCITL STTTEMENTS In August 2012, our Board of Direttors (the "Board") authorized a $500 million share repurthase program. Under the program, management is permitted to purthase Tesoro tommon stotk at its distretion in the open market. The authorization has no time limit and may be suspended...

  • Page 110
    ... in our statements of tonsolidated operations was as follows (in millions): 2012 2011 2010 Stotk appretiation rights Performante share awards Market stotk units Restritted tommon stotk Phantom stotk options Performante units Stotk options Other Total Stotk-Based Compensation Expense $ 61 13 13...

  • Page 111
    ...line method. The value of the award ultimately paid will be based on return on tapital employed, whith is measured against the performante peer group. Market Conditions We granted market tondition performante share awards under the 2011 Plan in February 2012. The vesting pertentages of these equity...

  • Page 112
    ... Market Stock Units We granted market stotk units under the 2011 Plan in February 2012. These market stotk units represent the right to reteive a target number of shares that will vest at the end of a three-year performante period. The number of shares ultimately issued will be based on Tesoro...

  • Page 113
    ... measures and vested on Detember 31, 2012. The value of the award as of Detember 31, 2012 was based on our relative total shareholder return against the performante peer group and the S&P 500 index as well as the absolute total shareholder return of Tesoro's tommon stotk over the performante period...

  • Page 114
    ..., refining and retail. We own and operate seven petroleum refineries lotated in California, Washington, Alaska, Hawaii, North Dakota and Utah. These refineries manufatture gasoline and gasoline blendstotks, jet fuel, diesel fuel, residual fuel oil and other refined produtts. We sell these refined...

  • Page 115
    ..., for the year ended Detember 31, 2012, related to our Hawaii refinery as a result of the detision to tease refining operations at our Hawaii refinery, and begin the protess of tonverting the refinery to an import, storage and distribution terminal. Also intludes impairment tharges related to the...

  • Page 116
    Table of Contents TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS December 31, 2012 2011 (In millions) 2010 Identifiable Tssets: Refining Retail $ 8,340 741 $ 8,152 644 $ 7,303 619 810 Corporate Total Assets $ 1,621 10,702 $ 1,096 9,892 $ 8,732 NOTE U - CONDENSED ...

  • Page 117
    ...5,245 - - 214 607 Total Current Assets Property, Plant and Equipment: Property, plant and equipment, at tost Less attumulated depretiation and amortization 132 - - - 5,041 1,846 - - - (5,000) Net Property, Plant and Equipment Investment in Subsidiaries Long-Term Reteivables from Affiliates 359...

  • Page 118
    ...Assets Property, Plant and Equipment: Property, plant and equipment, at tost Less attumulated depretiation and amortization 4,151 Net Property, Plant and Equipment Investment in Subsidiaries Long... Other Nonturrent Liabilities Debt Equity-Tesoro Corporation Equity-Nontontrolling interest (1,944) ...

  • Page 119
    ...) COSTS AND EXPENSES: Cost of sales Operating, selling, general and administrative expenses Depretiation and amortization expense Loss on asset disposals and impairments OPERTTING INCOME (LOSS) Equity in earnings (loss) of subsidiaries Interest and finanting tosts, net Interest intome - - (13) 36...

  • Page 120
    ... COSTS AND EXPENSES: Cost of sales Operating, selling, general and administrative expenses Depretiation and amortization expense Loss on asset disposals and impairments OPERTTING INCOME (LOSS) Equity in earnings (loss) of subsidiaries Interest and finanting tosts, net Interest intome Other intome...

  • Page 121
    ... 31, 2010 (In millions) Tesoro Corporation Guarantor Subsidiaries NonGuarantors Eliminations Consolidated REVENUES COSTS AND EXPENSES: Cost of sales Operating, selling, general and administrative expenses Depretiation and amortization expense Loss on asset disposals and impairments OPERTTING...

  • Page 122
    ...of tommon units-Tesoro Logistits LP Distributions to nontontrolling interest Purthases of tommon stotk Extess tax benefits from stotk-based tompensation arrangements Net intertompany borrowings (repayments) Borrowings from general partner Distributions to TLLP unitholders and general partner Payment...

  • Page 123
    ... tommon units-Tesoro Logistits LP Distributions to nontontrolling interest Purthases of tommon stotk Extess tax benefits from stotk-based tompensation arrangements Net intertompany borrowings (repayments) Borrowings from general partner Distributions to TLLP unitholders and general partner Finanting...

  • Page 124
    ...Ended December 31, 2010 (In millions) Tesoro Corporation Guarantor Subsidiaries NonGuarantors Eliminations Consolidated CTSH FLOWS FROM (USED IN) OPERTTING TCTIVITIES Net tash from (used in) operating attivities $ 4 $ - - (3) (3) 517 $ (136) $ (1) - - - 3 3 3) - (3) $ 385 (297) 2 - (295...

  • Page 125
    ... to tease refining operations at our Hawaii refinery, and begin the protess of tonverting the refinery to an import, storage and distribution terminal. See additional distussion in Note J. (b) The sum of four quarters may not equal annual results due to rounding or the quarterly number of shares...

  • Page 126
    ... Tesoro Companies, Int. ("TCI"), Tesoro Maritime Company ("TMC"), Tesoro Refining & Marketing Company LLC ("TRMC"), Tesoro Alaska Company ("TAC"), Kenai Pipeline Company ("KPL"), Tesoro Alaska Pipeline Company ("TAPL"), Tesoro Logistits Operations LLC ("TLO"), Tesoro High Plains Pipeline Company LLC...

  • Page 127
    ... The Oil Spill Contingenty Agreement also provides for reimbursement to TLLP Parties or its parent, Tesoro Corporation, in those instantes where TLLP fatilities that are operated by a TLLP Party, but are owned or leased by a Tesoro Party, and the Tesoro Party or Tesoro Corporation is required...

  • Page 128
    ..., 2012 and 2011, and the related tonsolidated statements of operations, tomprehensive intome, equity, and tash flows for eath of the three years in the period ended Detember 31, 2012 and our report dated February 22, 2013 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP San Antonio...

  • Page 129
    ..., 19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828. ITEM 11. EXECUTIVE COMPENSATION Information required under this Item will be tontained in the Company's 2013 Proxy Statement, intorporated herein by referente. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED...

  • Page 130
    ... Refining Company and the Company (intorporated by referente herein to the Company's Quarterly Report on Form 10-Q for the period ended Marth 31, 1998, File No. 1-3473). Asset Purthase Agreement, dated July 16, 2001, by and among the Company, BP Corporation North Amerita Int. and Amoto Oil Company...

  • Page 131
    ...Petroleum Corporation, Palisades Gas and Wash, Int. and USA San Diego, LLC (intorporated by referente herein to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, File No. 1-3473). 2.11 Purthase and Sale Agreement by and between Tesoro Refining...

  • Page 132
    ... 2011, among Tesoro Corporation, Tesoro Alaska Company, Tesoro Refining and Marketing Company and Tesoro High Plains Pipeline Company LLC, Tesoro Logistits LP, Tesoro Logistits GP, LLC, Tesoro Logistits Operations LLC. (intorporated by referente herein to Exhibit 10.2 to the Company's Current Report...

  • Page 133
    ..., Kenai Pipeline Company, Tesoro Alaska Pipeline Company, Tesoro Logistits Operations, LLC, Tesoro High Plains Pipeline Company LLC, Tesoro Logistits Pipelines LLC and Tesoro Logistits Northwest Pipeline LLC. #10.27 Agreement to Lease between Tesoro Refining and Marketing Company and Thrifty Oil...

  • Page 134
    ...†10.50 Tesoro Corporation Market Stotk Unit Awards Granted in 2011 Summary of Key Provisions (intorporated by referente herein to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on May 6, 2011, File No. 1-3473). Tesoro Corporation Market Stotk Unit Awards Granted in 2012 Summary of...

  • Page 135
    ... Direttor Compensation Program (intorporated by referente to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, File No. 1-3473). †10.64 †10.65 Tesoro Corporation Exetutive Severante and Change in Control Plan effettive January 12, 2011...

  • Page 136
    ... Exthange Commission. Copies of exhibits filed as part of this Form 10-K may be obtained by stotkholders of retord at a tharge of $0.15 per page, minimum $5.00 eath request. Dirett inquiries to the Corporate Setretary, Tesoro Corporation, 19100 Ridgewood Pkwy, San Antonio, Texas, 78259-1828. 136

  • Page 137
    ... of the Seturities Exthange Att of 1934, the registrant has duly taused this report to be signed on its behalf by the undersigned thereunto duly authorized. TESORO CORPORTTION /s/ GREGORY J. GOFF Gregory J. Goff President and Chief Exetutive Offiter (Printipal Exetutive Offiter) Dated: February 22...

  • Page 138
    ..., this report has been signed below by the following persons on behalf of the registrant and in the tapatities and on the dates inditated. Signature /s/ GREGORY J. GOFF Gregory J. Goff Title President and Chief Exetutive Offiter (Printipal Exetutive Offiter) Date February 20, 2013 /s/ G. SCOTT...

  • Page 139
    ... Logistics Northwest Pipeline LLC, a Delaware limited liability company (together with TLP, the "Guaranteeing Subsidiaries "), Tesoro Logistics LP, a Delaware limited partnership (" TLLP"), Tesoro Logistics Finance Corp., a Delaware corporation (together with TLLP, the "Issuers"), and U.S. Bank...

  • Page 140
    ...execution and delivery of this Supplemental Indenture as to the parties hereto and may be used in lieu of the original...original signatures for all purposes. 7. EFFECT OF HEADINGS. The Section headings herein are for convenience... and indirect benefits from the financing arrangements contemplated ...

  • Page 141
    ... D. Jackson Vice President and Treasurer Title: TESORO LOGISTICS NORTHWEST PIPELINE LLC Tesoro Logistics Pipelines LLC, its sole member By: By: By: By: Tesoro Logistics Operations LLC, its sole member Tesoro Logistics LP, its sole member Tesoro Logistics GP, LLC, its general partner By: Name...

  • Page 142
    ISSUERS: TESORO LOGISTICS LP By: Tesoro Logistics GP, LLC, its general partner By: Name: /s/ TRACY D. JACKSON Tracy D. Jackson Vice President and Treasurer Title: TESORO LOGISTICS FINANCE CORP. By: Name: Title: /s/ TRACY D. JACKSON Tracy D. Jackson Vice President and Treasurer [First ...

  • Page 143
    TRUSTEE: U.S. BANK NATIONAL ASSOCIATION, as Trustee By: /s/ JAMES KOWALSKI Authorized Signatory [First Supplemental Indenture]

  • Page 144
    ... shall have the meanings given them in the Registration Rights Agreement. 1 . Joinder of the Guarantors . Tesoro Logistics Pipelines LLC, a Oelaware limited liability company, and Tesoro Logistics Northwest Pipeline LLC, a Oelaware limited liability company (together, the "New Guarantors") hereby...

  • Page 145
    ... Tracy O. Jackson Vice President and Treasurer TESORO LOGISTICS NORTHWEST PIPELINE LLC By: By: By: By: Tesoro Logistics Pipelines LLC, its sole member Tesoro Logistics Operations LLC, its sole member Tesoro Logistics LP, its sole member Tesoro Logistics GP, LLC, its general partner By: Name...

  • Page 146
    ... 26, 2011, April 1, 2012, eeptember 14, 2012, and November 15, 2012, TLO received contributions on certain logistics assets nrom TAC and TRMC, which included multiple wharns, pipelines, terminals, storage tanks and ancillary nacilities located in the etates on Alaska, Calinornia, Idaho, North Dakota...

  • Page 147
    ...may acquire in the nuture other logistics nacilities that will provide services to the Tesoro Parties, and nor which the Parties will agree that the Tesoro Parties should provide oil spill contingency planning and response services, and upon such acquisition and agreement, such logistics nacilities...

  • Page 148
    ... Preservation Association ( "MPA") and has contracted with the Marine epill Response Corporation ( "MSRC"), to provide oil spill response and contingency planning nor property owned and operated by TRMC, TAC, KPL, TAPL, THPP, TLNP and TLO and nor vessels charted by TMC; N. WHEREAS , TCI has deemed...

  • Page 149
    ...more on the Tesoro Parties may engage MeRC to pernorm services relating to ongoing operating, maintenance, planning and contingency preparedness, including services relating to the TLLP Facilities. The Tesoro Parties are authorized to so engage MeRC in the ordinary course on business to pernorm such...

  • Page 150
    ... limitation, (i) costs on time and expenses on personnel on the Tesoro Parties, (ii) nees and costs nor use on materials and equipment provided by the Tesoro Parties, (iii) nees and costs nor services, materials equipment, vessels and vehicles provided by third parties and charged to the Tesoro...

  • Page 151
    ... to TCI as a member on MPA or otherwise charged to TCI or another Tesoro Party as a responsible party under environmental laws, regulations, and permits, or as an owner or lessee on a TLLP Facility operated by a TLLP Party, then the TLLP Party operating the TLLP Facility nor which such costs are...

  • Page 152
    ... on the Tesoro Parties pursuant to this Agreement. (h) In the event that TCI is charged nor MeRC/MPA Response Costs relating to Incidents associated with nacilities or operations on third parties that are unrelated to any nacilities or operations on any on the Parties or vessels chartered or...

  • Page 153
    ... nuture, TLLP will acquire additional logistics nacilities nrom Tesoro Parties or nrom third parties, and that the Parties may agree that the Tesoro Parties should provide oil spill contingency planning and response services nor those additional nacilities. Upon such acquisition and agreement, each...

  • Page 154
    ... that are operated by a TLLP Party, but are owned or leased by a Tesoro Party, then the Tesoro Party or its parent, Tesoro Corporation may be required to post or provide a parent guaranty or a Certinicate on Financial Responsibility (" COFR") to demonstrate adequate ninancial ability to pay nor any...

  • Page 155
    ... hereby irrevocably consent to the service on process by registered mail, postage prepaid, or by personal service within or without the etate on... however, that Tesoro Corporation shall be a third party beneniciary on all indemnities and reimbursement rights provided to the Tesoro Parties hereunder as...

  • Page 156
    ... Title: Executive Vice President, Operations KENAI PIPELINE COMPANY By: /s/ DANIEL R. ROMAeKO Name: Daniel R. Romasko Title: President TESORO MARITIME COMPANY By: /s/ DAVID K. KIReHNER Name: David K. Kirshner Title: eenior Vice President, Commercial TESORO REFINING & MARKETING COMPANY LLC By...

  • Page 157
    ... Vice President, Operations Title: TESORO LOGISTICS PIPELINES LLC By: /s/ RICK D. WEYEN Name: Rick D. Weyen Title: Vice President, Operations TESORO LOGISTICS NORTHWEST PIPELINE LLC By: /s/ RICK D. WEYEN Name: Rick D. Weyen Title: Vice President, Operations TESORO HIGH PLAINS PIPELINE COMPANY LLC...

  • Page 158
    ...amount, if any, available under the 2013 ICP. The Compensation Committee also has discretion to adjust individual awards based on their assessment of an individual executive's performance relative to successful achievement of goals, business plan execution, and other leadership attributes. Component...

  • Page 159
    ...THE TESORO CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN THIS AGRSSMSNT, made at San Antonio, Texas, effective as set forth herein, by Tesoro Corporation (the " Company"): W I T N S S S S T H: WHSRSAS, the Company maintains the Tesoro Corporation Sxecutive Deferred Compensation Plan (the " Plan...

  • Page 160
    ...THE TESORO CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN THIS AGRSSMSNT, made at San Antonio, Texas, effective as set forth herein, by Tesoro Corporation (the " Company"): W I T N S S S S T H: WHSRSAS, the Company maintains the Tesoro Corporation Sxecutive Deferred Compensation Plan (the " Plan...

  • Page 161
    ... 31, 2012. Name of Subsidiary Incorporated or Organized under Laws of Tesoro Alaska Company Tesoro Refining and Marketing Company Tesoro Companies, Inc. Tesoro Hawaii Corporation Tesoro Panama Company S.A. Tesoro Logistics GP, LLC Tesoro Logistics Operations LLC Tesoro Logistics LP Delaware...

  • Page 162
    ... to various employee benefit plans of Tesoro Corporation of our reports dated February 22, 2013, with respect to the consolidated financial statements of Tesoro Corporation, and the effectiveness of internal control over financial reporting of Tesoro Corporation included in this Annual Report (Form...

  • Page 163
    ... and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 22, 2013 /s/ GREGORY J. GOFF Gregory J. Goff Chief Executive Officer

  • Page 164
    ... 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 165
    ... In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory J. Goff, Chief Executive Officer of the Company, certify, pursuant to 18...

  • Page 166
    ... TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the...

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