Tesoro 2011 Annual Report Download

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Table of Contents





R
For the fiscal year ended December 31, 2011
or
¨
For the transition period from______________to __________


(Exact name of registrant as specified in its charter)
 









 
Common Stock, $0.16 2/3 par value New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes R No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes R No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes R No ¨
Indicate by check mark whether if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer RAccelerated filer oNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No R
At June 30, 2011, the aggregate market value of common limited partner units held by non-affiliates of the registrant was approximately $3.3 billion based upon the closing
price of its common units on the New York Stock Exchange Composite tape. At February 16, 2012, there were 140,800,815 shares of the registrant's common stock
outstanding.

Portions of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A pertaining to the 2011 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof. The Company intends to file such Proxy Statement no later than 120 days after the end of the fiscal year covered by this Form 10-K.

Table of contents

  • Page 1
    ...-1828 (Address of principal executive offices) (Zip Code) 210-626-6000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Tct: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $0.16 2/3 par value New York Stock...

  • Page 2
    ... Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PTRT III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and...

  • Page 3
    ...wholesale and bulk markets to a wide variety of customers within the operations area. Our retail operating segment ("retail") sells transportation fuels and convenience products in 18 states through a network of 1,175 retail stations, primarily under the Tesoro®, Shell®, and USA Gasoline TM brands...

  • Page 4
    ...Refinery Crude Oil Capacity (Mbpd) (a) 2011 2010 2009 California Martinez Los Angeles Pacific Northwest Washington (b) 166 97 120 140 124 141 100 101 99 39 54 64 50 50 480 Alaska Mid-Pacific Hawaii Mid-Continent North Dakota 72 94 58 58 665 98 55 71 59 55 579 84 51 68 54 51 549 Utah...

  • Page 5
    ... agreements priced at market. We purchase domestic crude oils produced primarily in California, Alaska, North Dakota, Colorado and Utah. We purchase foreign crude oils produced primarily in South America, Russia and Canada. Sources of our crude oil purchases were as follows: Crude Oil Source 2011...

  • Page 6
    ... refining yield by region is summarized below (in Mbpd): 2011 Volume 2010 2009 % Volume % Volume % California Gasoline and gasoline blendstocks Jet fuel 134 20 51 8 24 124 Diesel fuel Heavy fuel oils, residual products, internally produced fuel and other Total Pacific Northwest Gasoline...

  • Page 7
    ...in our market areas and through purchase and exchange arrangements with other refining and marketing companies. TLLP operates eight refined products terminals in California, Utah, Alaska, North Dakota, Washington and Idaho, which provide storage and truck loading services to Tesoro, its subsidiaries...

  • Page 8
    ...well as conventional gasoline, diesel fuel and jet fuel. The refinery also produces heavy fuel oils, liquefied petroleum gas and petroleum coke. Transportation. Our Los Angeles refinery leases a marine terminal at the Port of Long Beach that enables us to receive crude oil and ship refined products...

  • Page 9
    ...and West Coast markets. The assets for sale include the Kapolei refinery, 32 retail stations and the associated logistical assets. Refining. Our 94 Mbpd Hawaii refinery is located in Kapolei on approximately 130 acres about 20 miles west of Honolulu. We supply the refinery with crude oil from South...

  • Page 10
    ... can be shipped through that pipeline system to third-party terminals. Terminals. We distribute our refined products through TLLP's terminal at our North Dakota refinery and through third-party terminals in our market area. Etah Refining. Our 58 Mbpd Utah refinery is located in Salt Lake City on...

  • Page 11
    ... transactions are principally on the West Coast. Our primary jet fuel resale activity consists of supplying markets in Alaska, California, Washington, Hawaii and Utah. We also purchase for resale a lesser amount of gasoline and other refined products for sales outside of our refineries' markets. 11

  • Page 12
    ...transportation fuels produced by our refineries. Many of our company-operated retail stations include convenience stores that sell a wide variety of merchandise items. As of December 31, 2011, our retail segment included a network of 1,175 branded retail stations under the Tesoro ®, Shell® and USA...

  • Page 13
    ... our marketing business. We entered into an agreement with SUPERVALU, Inc. in September 2011, to acquire approximately 50 retail stations located primarily in Washington, Oregon, California, Nevada, Idaho, Utah and Wyoming. In January 2012, we completed the acquisition for a total purchase price of...

  • Page 14
    ... companies and high-volume retailers. We sell gasoline in California, Minnesota, Idaho, Utah, North Dakota and other western states through a network of company-operated retail stations and branded and unbranded jobber/dealers. Competitive factors that affect retail marketing include product price...

  • Page 15
    ... with Alyeska Pipeline Service Company. We have a spill-response services agreement in Hawaii with Clean Islands Council. We also have entered into contracts with Marine Spill Response Corporation for Hawaii, the San Francisco Bay, Puget Sound, the Port of Los Angeles and the Port of Long Beach; and...

  • Page 16
    ..., ship charters, barges and equipment used in the storage, transportation and production of feedstocks and refined products. We conduct our retail business under the Tesoro®, Shell® and USA Gasoline TM brands through a network of 1,175 retail stations, of which 376 are company-operated. See...

  • Page 17
    ..., purchased refined products, transportation and distribution. Heavy Crude Oil - Crude oil with an API gravity of 24 degrees or less. Heavy crude oils are generally sold at a discount to lighter crude oils. Heavy Fuel Oils, Residual Products, Internally Produced Fuel and Other - Products other...

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

  • Page 19
    ..., pipeline, supply and trading, and global specialty products and built extensive experience in refining, including most recently serving as Operations Manager for the Borger, Texas refinery from April 2004 to July 2007. Charles S. Parrish was named Executive Vice President, General Counsel and...

  • Page 20
    ... of BPL Global, Ltd. Chairman of the Compensation Committee of Tesoro Corporation; Retired Chairman, President and Chief Executive Officer of Baker Hughes, Inc.; Trustee of Fidelity Funds; Director of Bill Barrett Corporation Head of Global Technical Operations for F. Hoffman-La Roche Ltd. 20

  • Page 21
    ... products, and bankruptcy of customers. Any of these events may adversely affect our cash flow, profitability and financial condition. Competition from integrated oil companies that produce their own supply of feedstocks and from high volume retailers and large convenience store retailing operators...

  • Page 22
    ...store retailing market for the sale of retail gasoline and convenience store merchandise. Our competitors include service stations operated by integrated major oil companies and well-recognized national high volume retailers or regional large chain convenience store operators, often selling gasoline...

  • Page 23
    ... of oil from an above ground storage tank adjacent to water (a "worst case discharge") to the maximum extent possible. We and the owners of tankers we charter have contracted with various spill response service companies in the areas in which we transport and store crude oil and refined products to...

  • Page 24
    ... of crude oil and refined products. Our Washington refinery receives all of its Canadian crude oil and delivers a high proportion of its gasoline, diesel fuel and jet fuel through third-party pipelines and the balance through marine vessels. Our Hawaii and Alaska refineries receive most...

  • Page 25
    ... or our customers or energy markets in general, may adversely impact our operations. As a result, there could be delays or losses in the delivery of supplies and raw materials to us, delays in our delivery of refined products, decreased sales of our refined products and extension of time for payment...

  • Page 26
    ... 2011, that the State Water Resources Control Board referred an investigation to the Attorney General alleging violations of the California Health and Safety Code at twelve of our retail gasoline stations. The allegations relate to the testing, monitoring, repairing and reporting of information...

  • Page 27
    ...In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants were named in a lawsuit brought by the estates and families of the seven fatally injured employees arising from the April 2010 incident at our Washington refinery. In addition, a third-party truck driver...

  • Page 28
    ... Tesoro's including refining, transporting, storing and marketing transportation fuels and related products. The New Peer Group is representative of companies that we internally benchmark against. The change in Peer Group from 2010 is the addition of Marathon Petroleum and HollyFrontier Corporation...

  • Page 29
    ... 2011 for $95 million pursuant to the Board's approval. 2012 Annual Meeting of Stockholders The 2012 Annual Meeting of Stockholders will be held at 8:30 A.M. Central Time on Thursday, May 3, 2012, at Tesoro Corporate Headquarters, 19100 Ridgewood Parkway, San Antonio, Texas. Holders of common stock...

  • Page 30
    ..., Net Total Assets Current Liabilities Total Debt (e) Total Equity Current Ratio Working Capital Total Debt to Capitalization (e) Tesoro Stockholders' Equity (f) Common Stock Outstanding (millions of shares) Tesoro Stockholders' Equity per Outstanding Share (f) Cash Flows From (Used In) Operating...

  • Page 31
    ... _____ (a) (b) (c) (d) (e) Our financial results include the results of our Los Angeles refinery and Shell and USA Gasoline retail stations since acquisition in May 2007. Share and per share amounts have been adjusted to reflect our May 2007 two-for-one stock split. Net earnings (loss) included...

  • Page 32
    ... operations and in transporting and storing crude oil and refined products; • earthquakes or other natural disasters affecting operations; • changes in our cash flow from operations; • changes in capital requirements or in execution of planned capital projects; • changes in our inventory...

  • Page 33
    ... stock-based compensation awards Successfully completed the initial public offering of Tesoro Logistics LP in April 2011 Strengthened refining and marketing integration through the addition of wholesale supply contracts for 300 branded stations in 2011 and announced agreements to lease or purchase...

  • Page 34
    ... by the underwriters. Tesoro Logistics GP, LLC ("TLGP"), a 100% consolidated subsidiary, serves as the general partner of TLLP. Headquartered in San Antonio, Texas, TLLP's assets consist of a crude oil gathering system in the Bakken Shale/Williston Basin area, eight refined products terminals in the...

  • Page 35
    ... quarter of 2012. The project includes unloading facilities for trains of rail cars ("unit trains") and is expected to deliver up to 30 Mbpd of Bakken crude oil to our Washington refinery. Retail Acquisitions During 2011, we entered into agreements to expand our network of retail stations with the...

  • Page 36
    ... recovery in Asian markets has improved global middle distillate values. Strong Asian refining crack spreads, high demand in Latin America and continued strength in U.S. light product exports provided additional support during the year. During 2011, U.S. West Coast benchmark diesel fuel margins were...

  • Page 37
    .... In addition to current market conditions, there are long-term factors that may impact the supply and demand of refined products in the U.S. including: world crude oil prices; increased federal fuel efficiency standards for motor vehicles; increased volumes of renewable fuels, mandated by the...

  • Page 38
    ... 87%, and the temporary shut-down of processing at the Washington refinery in 2010; and • growth in refining and marketing integration from the increased number of retail stations and wholesale supply contracts. The increase in net earnings during 2011 relative to 2010 was partially offset by the...

  • Page 39
    ... of feedstocks, purchased refined products, transportation and distribution) by total refining throughput. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations. There are a variety of ways to calculate manufacturing cost per barrel; different companies may...

  • Page 40
    ... $ 359 71 55 306 84 Refined Product Sales (Mbpd) (h) Gasoline and gasoline blendstocks Jet fuel 91 143 Diesel fuel Heavy fuel oils, residual products and other Total Refined Product Sales Refined Product Sales Margin ($/bbl) (h) Average sales price Average cost of sales 85 660 $ $ 121.09 109...

  • Page 41
    ... throughput due to scheduled turnarounds at our Martinez refinery in 2011 and at our Hawaii, North Dakota, Martinez and Utah refineries in 2010. We also temporarily shut-down processing at the Washington refinery beginning in April 2010, and resumed operations at planned rates in November 2010...

  • Page 42
    ... Washington refinery subsequent to the April 2010 incident. Additionally, our throughputs were higher in 2011 because of favorable market conditions, improved reliability and turnarounds at our Martinez, Hawaii, Utah and North Dakota refineries in 2010. Refined Products Sales. Revenues from sales...

  • Page 43
    ... our Hawaii, North Dakota, Martinez and Utah refineries. Similarly, 2009 throughputs were impacted by scheduled turnarounds at our Alaska and Martinez refineries, scheduled maintenance at our Washington refinery and unscheduled downtime at the Los Angeles refinery. Refined Products Sales. Revenues...

  • Page 44
    ... purchases from our refining segment at prices which approximate market. (c) Reflects the phased expansion of our branded marketing presence through the addition of approximately 300 wholesale supply contracts, predominantly in the Mid-Continent region during 2011. 2011 Compared to 2010 Operating...

  • Page 45
    ... awards outstanding during the period as a result of vestings and forfeitures. Selling, general and administrative expenses increased $21 million or 10% to $242 million in 2010 from $221 million in 2009. The increase was primarily due to the impact of higher stock prices on stock-based compensation...

  • Page 46
    ... our capital resources and liquidity are impacted by changes in the price of crude oil and refined products, availability of trade credit, market uncertainty and a variety of additional factors beyond our control. These factors include the level of consumer demand for transportation fuels, weather...

  • Page 47
    ... other things, our ability to: pay dividends and make other distributions with respect to our capital stock and purchase, redeem or retire our capital stock; incur additional indebtedness and issue preferred stock; sell assets unless the proceeds from those sales are used to repay debt or are...

  • Page 48
    ... distributions from its subsidiaries; dispose of assets unless the proceeds from those sales are used to repay debt or are reinvested in its business; make certain amendments, modifications or supplements to organization documents and material contracts; engage in certain business activities; engage...

  • Page 49
    ...31, 2011. Anti-dilutive Share Purchase Program In August 2011, our Board of Directors approved a program designed to offset the dilutive effect of 2011 and future stock-based compensation awards. The Board authorized the purchase of approximately 0.7 million shares related to 2011 awards granted to...

  • Page 50
    ...of $150 million. Working capital requirements (excluding cash) increased $218 million in 2011, primarily related to significant increases in crude oil and product prices, which impact inventory values, related payables and trade receivables. Additionally, refining feedstock inventories increased by...

  • Page 51
    ... our Martinez, Los Angeles, Hawaii and Alaska refineries. Refining throughput and yields in 2012 will be affected by these turnarounds. During 2011, we spent $109 million for refinery turnarounds and catalyst, primarily at our California refineries. Environmental Capital Erpenditures The EPA issued...

  • Page 52
    ... our refineries, tank farms, pipelines, operating retail stations, closed retail stations, operating refined-products terminals and closed refined products terminals. The impact of these legislative and regulatory developments, including any greenhouse gas cap-and-trade program or low carbon fuel...

  • Page 53
    .... Subsequent to the incident, refinery processing was temporarily shut down until the unit reconstruction was completed. The Washington refinery resumed operations at planned rates in November 2010. In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants...

  • Page 54
    ..., results of operations or liquidity. Environmental In December 2011, we agreed to settle a lawsuit filed on February 5, 2010 by the EPA alleging we violated the Clean Air Act and corresponding regulatory requirements concerning the testing and reporting of transportation fuels and fuel additives...

  • Page 55
    ... contracts and in the spot market, which is not included in the table above. (d) Represents primarily long-term commitments for the transportation of crude oil and refined products as well as to purchase industrial gases, chemical processing services and utilities at our refineries. These purchase...

  • Page 56
    ... based on years of service and compensation. Our long-term expected return on plan assets is 7.25% as of December 31, 2011, and our funded employee pension plan assets experienced a return of $28 million in 2011 and a return of $30 million in 2010. Based on a 4.86% discount rate and fair values of...

  • Page 57
    ... value of expected net cash flows and a market approach based on recent sales transactions and current stock prices. Decreased forecasted cash flows and quoted market prices reduced our estimated fair value below carrying value at certain of our refining reporting units resulting in a goodwill write...

  • Page 58
    ...fair values of some retirement obligations, principally those associated with our refineries, pipelines and certain terminals and retail stations, because the related assets have indeterminate useful lives which preclude development of assumptions about the potential timing of settlement dates. Such...

  • Page 59
    ... in actual experience or significant changes in assumptions would affect pension and other postretirement benefits costs and obligations. We determine the discount rate primarily by reference to the effective yields on high quality corporate bonds that have a comparable cash flow pattern to the...

  • Page 60
    ...The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. However, in October 2011, the FASB...

  • Page 61
    ... prices we sell our refined products for and the prices we pay for crude oil and other feedstocks. We also use derivative instruments to manage the risks from changes in the prices of crude oil and refined products, fluctuations in foreign currency exchange rates, or to capture market opportunities...

  • Page 62
    ...change in quoted market prices of our derivative instruments, assuming all other factors remain constant, could change the fair value of our derivative instruments and pre-tax operating income by approximately $4 million. Tesoro Panama Company S.A. We formed TPSA to use our leased pipeline and tank...

  • Page 63
    ... debt, and the fair value of our fixed-rate debt. These changes also affect the rates used to discount liabilities which could result in lower or higher accretion expense over time. The fair value of our debt was estimated primarily using quoted market prices. The carrying value and fair value of...

  • Page 64
    ...period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tesoro Corporation's internal control over financial reporting as of December 31...

  • Page 65
    ... of Contents TESORO CORPORTTION STTTEMENTS OF CONSOLIDTTED OPERTTIONS Years Ended December 31, 2011 2010 (In millions except per share amounts) 2009 REVENUES (a) $ 30,303 $ 20,583 $ 16,872 COSTS AND EXPENSES: Cost of sales (a) Operating expenses Selling, general and administrative expenses...

  • Page 66
    ...Loss) Pension and other benefit liability adjustments, net of tax benefit (expense) of $16, $(77), and $(13) million Other comprehensive income (loss) Total comprehensive income (loss) Less noncontrolling interest in comprehensive income Comprehensive income (loss) attributable to Tesoro Corporation...

  • Page 67
    ... accounts Inventories Prepayments Other current assets $ 900 $ Total Current Assets PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost Less accumulated depreciation and amortization Net Property, Plant and Equipment OTHER NONCURRENT ASSETS Acquired intangibles, net Other, net...

  • Page 68
    ...Tccumulated Other Comprehensive Income (Loss) Non-controlling Interest Total Equity AT DECEMBER 31, 2008 Net loss Cash dividends Repurchases of common stock Shares issued for equity-based compensation awards and benefit plans Amortization of equity settled awards Other comprehensive income 145...

  • Page 69
    ... of common units -Tesoro Logistics LP Distributions to noncontrolling interest 288 (9) - 5 - - (2) (49) 4 - - (2) Repurchases of common stock Excess tax benefits from equity-based compensation arrangements (101) 13 (37) 3 2 (3) Financing costs and other Net cash from (used) in financing...

  • Page 70
    ... in wholesale and bulk markets to a wide variety of customers within the operations area. Our retail operating segment ("retail") sells transportation fuels and convenience products in 18 states through a network of 1,175 retail stations, primarily under the Tesoro ®, Shell®, and USA Gasoline...

  • Page 71
    ..., highly integrated and interdependent crude oil processing facilities and supporting logistical infrastructure (units), and these units are continuously improved. We plan for these improvements by developing a multi-year capital program that is updated and revised based on changing internal and...

  • Page 72
    ... closure of our refining facilities, terminal facilities or pipelines, including the demolition or removal of certain major processing units, buildings, tanks, pipelines or other equipment; and • removal of underground storage tanks at our owned retail stations at or near the time of closure. We...

  • Page 73
    ... are recorded when the services have been provided. We record certain transactions in cost of sales on a net basis. These transactions include nonmonetary crude oil and refined product exchange transactions used to optimize our refinery supply, and sale and purchase transactions entered into with...

  • Page 74
    ... manage exposure to commodity price risks associated with the purchase or sale of feedstocks, products and energy supplies to or from the Company's refineries, terminals, retail operations and customers. We also use non-trading derivative instruments to manage price risks associated with inventories...

  • Page 75
    ...Canadian operations. We use foreign currency exchange and purchase contracts to manage our exposure to these exchange rate fluctuations. Amounts related to these contracts are recorded in foreign currency exchange gain (loss). New Accounting Standards and Disclosures Goodwill Impairment Testing The...

  • Page 76
    ..., develop and acquire logistics assets. Its assets are integral to the success of Tesoro's refining and marketing operations and are used to gather, transport and store crude oil and to distribute, transport and store refined products. Its assets consist of a crude oil gathering system in the Bakken...

  • Page 77
    ... through the High Plains truck-based crude oil gathering operation, which was amended, effective January 1, 2012, to extend the agreement to five years; • a 10-year master terminalling services agreement under which TLLP will provide terminalling services at eight refined products terminals, which...

  • Page 78
    ... in the consolidated balance sheets of Tesoro Corporation. December 31, 2011 (In millions) December 31, 2010 TSSETS Cash and cash equivalents Receivables, less allowance for doubtful accounts Trade Affiliate Other Current Assets Net Property, Plant and Equipment Other Noncurrent Assets $ 18...

  • Page 79
    ... market price of the common stock during each respective reporting period. NOTE D - RECEIVTBLES Receivables at December 31, 2011 and 2010 consisted of the following (in millions): 2011 2010 Trade receivables Tax receivables Other receivables Allowance for doubtful accounts Total Receivables, Net...

  • Page 80
    ... the goodwill related to the Hawaii refinery reporting unit was impaired and wrote-off $10 million during 2010. Decreased forecasted cash flows and quoted market prices reduced our estimated fair value below carrying value for our Washington refinery reporting unit resulting in a goodwill write-off...

  • Page 81
    ... and as a producer of transportation fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the EPA's quota. To the degree we are unable to blend at that rate, we must purchase RINs in the open market to satisfy our obligation. Our...

  • Page 82
    ...our financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value because of the short maturities of these instruments. The fair value of our debt was estimated primarily using quoted market prices. The carrying value...

  • Page 83
    ... cash flows. Consequently, we use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of feedstocks, products and energy supplies to or from the Company's refineries, terminals, retail operations and customers. We also use non-trading...

  • Page 84
    ... sell the commodity at a fixed price in the future. OTC Swap Contracts, OTC Option Contracts and Forward Contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date. Certain of these contracts require cash...

  • Page 85
    ... hedges. Open Long (Short) Positions All of our open positions are scheduled to mature within the next twelve months. As of December 31, 2011, we had an open forward contract to purchase 64 million Canadian dollars that matured on January 25, 2012 . The information below presents the net volume of...

  • Page 86
    ... The aggregate maturities of Tesoro's debt for each of the five years following December 31, 2011 were: 2012 - $418 million ; 2013 - $3 million; 2014 - $53 million ; 2015 - $453 million ; and 2016 - $2 million. From time to time, we may purchase our Senior Notes in the open market or in privately...

  • Page 87
    ... borrowing base, as of December 31, 2011. Our committed Revolving Credit Facility is scheduled to mature on March 16, 2016. The Revolving Credit Facility will terminate if the Company does not (a) refinance or pay in full the Company's 6 1/4% notes, due November 2012, on or prior to the stated...

  • Page 88
    ... of TPSA eligible receivables and petroleum inventories, net of reserves, or the agreement's capacity based on the net worth of TPSA. We had $117 million in borrowings outstanding under this agreement and letters of credit outstanding of $169 million at December 31, 2011. We have the option to elect...

  • Page 89
    ... the open market for an aggregate purchase price of $28 million , including accrued interest and premiums during the year ended December 31, 2011. 9 3/4% Senior Notes Due 2019 We issued $300 million aggregate principal amount of 9 3/4% senior notes, due June 2019, for general corporate purposes...

  • Page 90
    ... our leased retail stations. Changes in AROs for the years ended December 31, 2011 and 2010, were as follows (in millions): 2011 2010 Balance at beginning of year (current and noncurrent) Additions to accrual Accretion expense Settlements Changes in timing and amount of estimated cash flows Balance...

  • Page 91
    ... 2010 Deferred tax assets: Accrued pension and other postretirement benefits Investment in TLLP Other accrued liabilities Stock-based compensation Accrued environmental remediation liabilities Tax credit carryforwards Asset retirement obligations Net operating losses Other $ 137 $ 79 69 57 34...

  • Page 92
    ... costs, and penalties in selling, general and administrative expenses in the statements of consolidated operations. The tax years 2006 forward remain open to federal examination by the Internal Revenue Service, and in general the tax years 2001 forward remain open to examination by various state...

  • Page 93
    ... senior level employees that are not provided under the qualified retirement plan due to limits imposed by the Internal Revenue Code. • The unfunded nonqualified executive security plan provides certain executive officers and other key personnel with supplemental pension benefits. These benefits...

  • Page 94
    ..., derived from the quoted prices in active markets of the underlying securities. Mutual funds are classified as Level 1 investments; commingled funds are classified as Level 2 investments. (c) Fixed income assets represent securities primarily invested in corporate, government related, mortgage...

  • Page 95
    ... the funded status for our pension plans and other postretirement benefits as of December 31, 2011 and 2010, were (in millions): Pension Benefits Other Postretirement Benefits 2011 2010 2011 2010 Change in projected benefit obligation: Projected benefit obligations at beginning of year Service...

  • Page 96
    ... statements of operations for the years ended December 31, 2011, 2010 and 2009, were (in millions): Pension Benefits Other Postretirement Benefits 2009 2011 2010 2011 2010 2009 Components of net periodic benefit expense (income): Service cost Interest cost Expected return on plan assets...

  • Page 97
    ... (a) We determine the discount rate primarily by reference to the effective yields on high quality corporate bonds that have a comparable cash flow pattern to the expected payments to be made under our plans. (b) (c) As a result of the changes to other postretirement benefits during the second...

  • Page 98
    ... We have various cancellable and noncancellable operating leases related to land, office and retail facilities, ship charters, tanks and equipment and other facilities used in the storage, transportation, and sale of crude oil, feedstocks and refined products. In general, these leases have remaining...

  • Page 99
    ... $83 million in 2012. We have certain commitments or obligations for the transportation of crude oil and refined products as well as to purchase industrial gases, chemical processing services and utilities associated with the operation of our refineries. The minimum annual payments under these take...

  • Page 100
    ... expenses for environmental 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...

  • Page 101
    ...In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants were named in a lawsuit brought by the estates and families of the seven fatally injured employees arising from the April 2010 incident at our Washington refinery. In addition, a third-party truck driver...

  • Page 102
    ... We did not pay any cash dividends during 2011 or 2010. During 2009, we paid cash dividends on common stock totaling $0.35 per share. Treasury Stock We have the option to purchase shares of our common stock in open market transactions to meet our obligations under employee benefit plans. We also...

  • Page 103
    ... awards under our 2006 Long-Term Incentive Plan ("2006 Plan"), Amended and Restated Executive Long-Term Incentive Plan, Non-Employee Director Stock Plan and Key Employee Stock Option Plan. Tesoro had 5,938,797 shares available for future grants under our plans at December 31, 2011. Generally...

  • Page 104
    ...share of common stock on the date of exercise over the grant price of the SAR. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model. We did not grant SARs to our employees during the year ended December 31, 2011. We paid cash of $11...

  • Page 105
    ...period using the Black-Scholes option-pricing model. We did not grant phantom stock options to our executive officers during the year ended December 31, 2011. We paid cash of $18 million to settle phantom stock options exercised during 2011. There were no liabilities recorded related to these awards...

  • Page 106
    ... We granted market stock units under the 2011 Plan in May 2011. These market stock units represent the right to receive a target number of shares that will vest at the end of a three-year performance period. The number of shares ultimately issued will be based on Tesoro's stock price changes over...

  • Page 107
    ... tied to performance measures is estimated using the market price of our common stock on the grant date. The estimated fair value of these performance share awards is amortized over a three year vesting period using the straight-line method. The value of the award ultimately paid will be based on...

  • Page 108
    ...of each stock account is a function of the changes in the market value of Tesoro's common stock, which is payable in cash commencing at the separation of service, death, disability or in the case of elective deferrals, an in-service lump sum. Payments may be made as a total distribution or in annual...

  • Page 109
    ...and other locations. Our refining segment also sells refined products to unbranded marketers and occasionally exports refined products to foreign markets. Our retail segment sells gasoline, diesel fuel and convenience store items through company-operated retail stations and branded jobber/dealers in...

  • Page 110
    Table of Contents TESORO CORPORTTION NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS Segment information is as follows: 2011 2010 2009 Revenues Refining: Refined products Crude oil resales and other Retail: Fuel (a) Merchandise and other Intersegment sales from Refining to Retail (In millions) $ 29...

  • Page 111
    ... 2011 2010 2009 Identifiable Tssets: Refining Retail Corporate (In millions) $ 8,152 644 $ 7,303 $ 619 810 6,690 656 724 8,070 Total Assets $ 1,096 9,892 $ 8,732 $ NOTE T - CONDENSED CONSOLIDTTING FINTNCITL INFORMTTION Separate condensed consolidating financial information of Tesoro...

  • Page 112
    ... 31, 2011 (In millions) Parent Guarantor Subsidiaries Non-Guarantors Eliminations Consolidated TSSETS Current Assets: Cash and cash equivalents Receivables, less allowance for doubtful accounts Inventories Prepayments and other $ - $ 1 - 106 107 Total Current Assets Net Property, Plant and...

  • Page 113
    ...: Cash and cash equivalents Receivables, less allowance for doubtful accounts Inventories Prepayments and other $ - $ 8 - 29 37 - 4,011 612 $ 719 1,080 36 $ 181 177 78 2,489 5,008 (147) 8 402 162 (5) 3,859) (2,125) - (5,984) $ 648 908 1,257 115 Total Current Assets Net Property, Plant and...

  • Page 114
    ...) NET ETRNINGS (LOSS) $ (29) $ _____ (a) The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries. Condensed Consolidating Statement of Operations for the Year Ended December 31, 2009 (In millions) Tesoro Corporation...

  • Page 115
    ... stock Excess tax benefits from equity-based compensation arrangements Payments of distribution to noncontrolling interest Proceeds from issuance of common units-Tesoro Logistics LP Distributions to General Partner Distributions to Common unitholders Distributions to Subordinated unitholders Net...

  • Page 116
    ... revolver Repayments of debt Proceeds from stock options exercised Repurchases of common stock Excess tax benefits from stock-based compensation arrangements Net intercompany borrowings (repayments) Financing costs and other Net cash from (used in) financing activities (296) 2 - (294) - - (1) 66...

  • Page 117
    ... Repayments of debt Proceeds from stock options exercised Repurchases of common stock Dividend Payments Excess tax benefits from stock-based compensation arrangements Net intercompany borrowings (repayments) Financing costs and other Net cash from (used in) financing activities - - (155) (155...

  • Page 118
    ... V - SUBSEQUENT EVENTS We announced in January 2012 that we intend to sell our Hawaii operations as part of a previously announced strategy to focus on the Mid-Continent and West Coast markets. The assets for sale include the Kapolei refinery, 32 retail stations and the associated logistical assets...

  • Page 119
    ... are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Exchange Act is accumulated and communicated to management, as appropriate. During the quarter ended December 31, 2011, there have been no changes in our internal control...

  • Page 120
    ... accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight...

  • Page 121
    ... share award and market stock unit grants. Stock options granted in connection with the inducement awards of the CEO Agreement were not granted under an equity compensation plan. (b) (c) (d) Additional information required under this Item will be contained in the Company's 2012 Proxy Statement...

  • Page 122
    ... 2.2 to the Company's Current Report on Form 8-K filed on February 1, 2007, File No. 1-3473). 2.9 Purchase and Sale Agreement and Joint Escrow Instructions by and among the Company and USA Petroleum Corporation, USA Gasoline Corporation, Palisades Gas and Wash, Inc. and USA San Diego LLC dated as...

  • Page 123
    ... Logistics LP, dated April 26, 2011 (incorporated by reference herein to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 29, 2011, File No. 1-3473). 4.1 Form of Indenture relating to the 6 1/4% Senior Notes due 2012, dated as of November 16, 2005, among Tesoro Corporation...

  • Page 124
    ... 2011, among Tesoro Corporation, Tesoro Alaska Company, Tesoro Refining and Marketing Company and Tesoro High Plains Pipeline Company LLC, Tesoro Logistics LP, Tesoro Logistics GP, LLC, Tesoro Logistics Operations LLC. (incorporated by reference herein to Exhibit 10.2 to the Company's Current Report...

  • Page 125
    ...†10.28 Tesoro Corporation Market Stock Unit Awards Granted in 2011 Summary of Key Provisions (incorporated by reference 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 Stock Unit Awards Granted in 2012 Summary of...

  • Page 126
    ... filed on August 4, 2008, File No. 1-3473). Code of Business Conduct (incorporated by reference herein to Exhibit 14.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2011, File No. 1-3473). Subsidiaries of the Company. Consent of Independent Registered Public Accounting...

  • Page 127
    ...the registrant has duly caused 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 Executive Officer (Principal Executive Officer) Dated: February 24, 2012 Pursuant to the requirements of the...

  • Page 128
    ... Executive Officer) Date February 21, 2012 /s/ G. SCOTT SPENDLOVE G. Scott Spendlove /s/ ARLEN O. GLENEWINKEL, JR. Arlen O. Glenewinkel, Jr. Senior Vice President and Chief Financial Officer (Principal Financial Officer) February 21, 2012 Vice President and Controller (Principal Accounting...

  • Page 129
    ...between Tesoro Logistics Operations LLC ("TLO") and Tesoro Refining and Marketing Company ("TRMC"). AND WHEREAS TLO and TRMC are parties to that Master Terminalling Services Agreement (the "MTA"), effective April 26, 2011 (the "TSA"), under which TLO stores and throughputs refined petroleum products...

  • Page 130
    ... supersede the Schedule A and Schedule B attached to the MTA. In Witness Whereof, we execute this Agreement effective as of the date first stated above. TESORO LOGISTICS OPERATIONS LLC /s/ PHILLIP M. ANDERSON By: Phillip M. Anderson President , TESORO REFINING AND MARKETING COMPANY /s/ GREGORY...

  • Page 131
    ... improved ULSD dyed cetane improved Material: TERMINAL Anchorage AK Boise ID Burley ID Los Angeles CA Mandan ND Salt Lake City UT Stockton CA Vancouver WA X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X No dedicated storage is to be provided for any Product...

  • Page 132
    ...SECURITIES AND EXCHANGE COMMISSION.**] Schedule B Throughput and Ancillary Services Fees All Fees are per barrel except where noted otherwise. fee description Anchorage Boise $** $** N/A N/A $** Burley $** $** N/A N/A $** Los Angeles Mandan $** $** N/A N/A $** N/A N/A Salt Lake City Stockton...

  • Page 133
    ... named executive officers. The 2012 Program consists of two equally weighted components: Corporate and Business Unit performance outlined below. The performance results of Tesoro Corporation (the "Company") and the individual business units may be adjusted to take into account unbudgeted business...

  • Page 134
    ... of Name of Subsidiary Tesoro Alaska Company Tesoro Refining and Marketing Company Tesoro Companies, Inc. Tesoro Northstore Company Tesoro Canada Supply & Distribution, Ltd. Tesoro Hawaii Corporation Tesoro Panama Company S.A. Tesoro Logistics GP, LLC Delaware Delaware Delaware Delaware British...

  • Page 135
    ...to various employee benefit plans of Tesoro Corporation; of our reports dated February 24, 2012, 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 136
    ... 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 24, 2012 /s/ GREGORY J. GOFF Gregory J. Goff Chief Executive Officer

  • Page 137
    ... 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 138
    ... OF 2002 In connection with the Annual Report of Tesoro Corporation (the "Company") on Form 10-K for the year ended December 31, 2011 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...

  • Page 139
    ... 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, 2011 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 140