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Tesoro Corporation Reports Fourth Quarter $0.99 per Share Loss, Excluding Goodwill Impairment

SAN ANTONIO--(BUSINESS WIRE) Tesoro Corp. (NYSE:TSO) on Feb. 2 reported a fourth quarter 2009 net loss of $179 million, or $1.30 per diluted share compared to net earnings of $97 million, or $0.70 per diluted share for the fourth quarter of 2008. The company's fourth quarter results include a non-cash charge of $43 million for a goodwill impairment related to the Anacortes refinery.

For the full year 2009, the company reported a net loss of $140 million, or $1.01 per diluted share, versus net earnings of $278 million, or $2.00 per diluted share for the full year 2008. Full year 2009 segment operating income was $138 million, compared to $673 million for the full year 2008. The negative variance is a result of lower gross margins, partially offset by lower operating expenses.

For the fourth quarter, the company recorded a segment operating loss of $172 million, compared to segment operating income of $204 million in the fourth quarter a year ago. The decrease in operating income is primarily due to lower distillate margins and compressed discounts for heavy crudes, partially offset by improved margins for gasoline.

The Company's fourth quarter gross refining margin fell to $5.37 per barrel (/bbl) from $12.47/bbl in the 2008 fourth quarter, as clean product inventories on the West Coast built during a time of weak seasonal product demand. West Coast benchmark diesel margins fell by approximately $11.50/bbl, down 60% from the fourth quarter a year ago, while benchmark gasoline margins increased more than $1/bbl to average $8/bbl during the fourth quarter. Accordingly, the company shifted 4% of its production out of the distillate pool relative to the 2008 fourth quarter. Additionally, discounts for foreign heavy crudes narrowed, as Oriente traded $6.50/bbl below Alaska North Slope crude, a 47% decrease from the 2008 fourth quarter. As a result of deteriorating benchmark margins, throughput decreased by approximately 25 thousand barrels per day (mbpd) versus the fourth quarter a year ago, primarily in the California region.

Direct manufacturing costs in the fourth quarter were $261 million, an increase of $13 million from the third quarter of 2009, primarily as a result of increased prices for purchased energy. While higher than the previous quarter, direct manufacturing costs for the system came in below the company's initial guidance as a result of lower repair and maintenance costs associated with the Los Angeles coker repair work, and lower than expected prices for purchased energy. Direct manufacturing costs at Hawaii exceeded guidance as a result of one-time repair and maintenance costs during the quarter.

"Depressed consumer demand for transportation fuels significantly impacted the company's gross margins," said Bruce Smith, Chairman, President and CEO of Tesoro. "While we are disappointed with the loss, we are pleased that we were able to maintain the strength of our balance sheet by making operational adjustments that minimized these difficult market conditions. The supply and optimization team continually adjusted crude supply, throughput and inventory as they attempted to match wildly fluctuating supply prices and product margins to highly uncertain demand. As a result, the team managed to reduce inventories by 3.7 million barrels during the year. The refining team focused on reducing costs and ensuring that our capital program was effective as they reduced our $600 million capital budget to $542 million. We also exceeded our non-capital and capital improvement initiative target of approximately $370 million by $55 million. The result of these combined efforts was a build in cash for the year, given an $8.00/bbl Tesoro Index average for 2009.

"In January, we have seen seasonally high West Coast product inventories. We believe this is partially attributable to builds in anticipation of turnarounds, low demand for winter grade gasoline and the required switch to summer grade gasoline, all of which have kept margins depressed to start 2010. However, January margins are historically the lowest of the year, and on average for the last twenty years, West Coast gasoline demand has increased by more than 75 thousand barrels per day from January to March. 2009 was no exception, as demand increased 125 thousand barrels per day during the January to March time frame," said Smith.

Capital Spending and Liquidity

Capital spending for the full year 2009 was $542 million and in-line with company guidance. For the first quarter of 2010, the company estimates capital spending to be less than $150 million, down from the original estimate of $250 million. For the full year, the company anticipates a capital program of $600 million.

The company ended the year with $413 million in cash and approximately $1 billion of availability on the revolving credit facility. Before the debt offering, our cash position for the year improved by over $175 million dollars from the end of 2008, which includes $66 million for revolver repayments.

2010 Strategy Update

"Effective cash management includes constant review of each capital projects' scope and timing. Since November of last year, we were able to reduce our 2010 capital budget by $75 million, while retaining our 3-year, $300 million quick hit income program. We continue to believe that cost cuts and non-capital improvements are essential to our success; however, they alone are not enough to grow value if margins remain range bound. The quick hit opportunities that exist especially in the California region are low cost, high return projects that are more resilient to margin movement and the program is intended to become self funding after the first year. These projects are intended to improve our plants' competitive position and create incremental shareholder value in this low margin environment," said Smith.

Full details of the plan can be viewed in the November analyst day presentation posted on the Investor Relations section of the www.tsocorp.com website.

Dividend Update

Tesoro Corporation today announced it will suspend its quarterly dividend for the foreseeable future in order to preserve cash and keep a healthy balance sheet. "While we ended the fourth quarter with over a billion dollars of cash and availability under our revolver, we expect further margin volatility as supply adjustments are continuing in the market place. There is still no transparency into the future of global demand for petroleum products, and therefore we must act prudently. We believe that capturing the superior returns of our quick hit investment program will deliver the highest shareholder return, and this action helps to ensure its completion," said Smith.

Public Invited to Listen to Analyst Conference Call

At 7:30 a.m. CST tomorrow morning, Tesoro will broadcast, live, its conference call with analysts regarding fourth quarter and full year 2009 results and other business matters. Interested parties may listen to the live conference call over the Internet by logging on to http://www.tsocorp.com, or via phone by dialing (877) 485-3104 (international dial-in: (201) 689-8579), event ID 341836. A telephone replay of the call will be available for one week, and may be accessed via phone by dialing (877) 660-6853 (international replay: (201) 612-7415 and entering passcode 341836.

Tesoro to Present Tomorrow at Credit Suisse Energy Summit

Bruce Smith, the Chairman, President and CEO of Tesoro, is scheduled to make a presentation tomorrow afternoon at 2:30 p.m. CST at the 2010 Credit Suisse Energy Summit. The webcast will be broadcast live and can be accessed through the Investors section of www.tsocorp.com. A replay of the presentation will be available for one month.

Tesoro Corporation, a Fortune 150 company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. Tesoro's retail-marketing system includes over 880 branded retail stations, of which over 380 are company operated under the Tesoro®, Shell®, Mirastar® and USA GasolineTM brands.

This earnings release contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the market environment, and our expectations about our capital spending and our expectations about forward refining margins. For more information concerning factors that could affect these statements see our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date hereof.

TESORO CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS (Unaudited) (In millions except per share amounts)

Three Months Ended
Years Ended

December 31,

December 31,

2009
2008

2009
2008 Revenues (a) $ 4,669

$ 4,241

$ 16,872

$ 28,416
Costs and Expenses:










Costs of sales and operating expenses (a) (b)
4,672


3,826


16,208


27,177
Selling, general and administrative expenses
59


147


221


325
Depreciation and amortization
111


113


426


401
Loss on asset disposals and impairments (c)
49

5

74

42 Operating Income (Loss)
(222 )

150


(57 )

471
Interest and Financing Costs
(36 )

(28 )

(130 )

(111 ) Interest Income
1


2


4


7
Foreign Currency Exchange Gain (Loss)
8


20


(5 )

12
Other Income (d)
-

-

-

50










Earnings (Loss) Before Income Taxes
(249 )

144


(188 )

429
Income Tax Provision (Benefit)
(70 )

47

(48 )

151 Net Earnings (Loss) $ (179 )
$ 97
$ (140 )
$ 278 Net Earnings (Loss) Per Share:










Basic $ (1.30 )
$ 0.71

$ (1.01 )
$ 2.03
Diluted $ (1.30 )
$ 0.70

$ (1.01 )
$ 2.00
Weighted Average Common Shares:










Basic
138.2


137.3


138.2


136.8
Diluted
138.2


138.7


138.2


139.2











(a) We have reclassified our gains and losses associated with our derivative instruments for the 2008 periods from "Revenues" to "Costs of sales and operating expenses" to conform to the 2009 presentation. The reclassifications totaled a $7 million loss and an $85 million gain during the three months ended December 31, 2009 and 2008, respectively, and losses of $68 million and $107 million during the years ended December 31, 2009 and 2008, respectively.

(b) Reductions in petroleum inventories resulted in decreases of last-in-first-out ("LIFO") layers acquired at lower per-barrel costs. These inventory reductions resulted in decreases to costs of sales of $69 million and $138 million during the years ended December 31, 2009 and 2008, respectively and $57 million during the three months ended December 31, 2009.

(c) The three months and year ended December 31, 2009 include a $43 million impairment charge to write-off goodwill in our refining segment.

(d) Other income for the year ended December 31, 2008 represents refunds received from the Trans Alaska Pipeline System in connection with rulings by the Regulatory Commission of Alaska concerning our protest of intrastate pipeline tariffs set between 1997 and 2003.

TESORO CORPORATION

SELECTED OPERATING SEGMENT DATA

(Unaudited)

(In millions)

















Three Months Ended
Years Ended

December 31,
December 31,

2009
2008
2009
2008 Operating Income (Loss)







Refining $ (213 ) $ 153
$ 55
$ 627
Retail
41
51
83
46 Total Segment Operating Income (Loss)
(172 )
204

138

673
Corporate and Unallocated Costs
(50 )
(54 )
(195 )
(202 ) Operating Income (Loss)
(222 )
150

(57 )
471
Interest and Financing Costs
(36 )
(28 )
(130 )
(111 ) Interest Income
1

2

4

7
Foreign Currency Exchange Gain (Loss)
8

20

(5 )
12
Other Income (d)
-
-
-
50 Earnings (Loss) Before Income Taxes $ (249 ) $ 144 $ (188 ) $ 429







Depreciation and Amortization







Refining $ 96
$ 87
$ 359
$ 326
Retail
10

17

39

49
Corporate
5
9
28
26 Depreciation and Amortization $ 111 $ 113 $ 426 $ 401







Capital Expenditures







Refining $ 106
$ 154
$ 356
$ 561
Retail
4

10

14

20
Corporate
-
14
31
38 Capital Expenditures $ 110 $ 178 $ 401 $ 619 BALANCE SHEET DATA (Unaudited) (Dollars in millions)






December 31,

December 31,

2009

2008 Cash and Cash Equivalents $ 413

$ 20
Total Assets $ 8,070

$ 7,433
Total Debt $ 1,841

$ 1,611
Total Stockholders' Equity $ 3,087

$ 3,218
Total Debt to Capitalization Ratio
37 %

33 %

TESORO CORPORATION OPERATING DATA (Unaudited)

























Three Months Ended

Years Ended



December 31,

December 31,



2009

2008

2009

2008 REFINING SEGMENT











Total Refining Segment











Throughput (thousand barrels per day)











Heavy crude (e)

180


186

177

192 Light crude

313


332

335

369 Other feedstocks

37

37

37

34 Total Throughput

530

555

549

595











Yield (thousand barrels per day)











Gasoline and gasoline blendstocks

238


256

268

275 Jet fuel

71


72

70

78 Diesel fuel

111


141

114

143 Heavy oils, residual products, internally produced fuel
and other



138

116

127

129 Total Yield

558

585

579

625























Gross refining margin ($/throughput bbl) (f)
$ 5.37

$ 12.47
$ 8.90
$ 11.50 Manufacturing cost before depreciation and
amortization ($/throughput bbl) (f)


$ 5.35

$ 4.86
$ 5.01
$ 5.19











Segment Operating Income ($ millions)











Gross refining margin (g)
$ 262

$ 637
$ 1,783
$ 2,506 Expenses











Manufacturing costs

261


248

1,004

1,131 Other operating expenses

57


50

262

284 Selling, general and administrative

13


98

32

127 Depreciation and amortization (h)

96


87

359

326 Loss on asset disposals and impairments (c) (i)

48

1

71

11 Segment Operating Income (Loss)
$ (213 )
$ 153
$ 55
$ 627











Refined Product Sales (thousand barrels per day) (j)











Gasoline and gasoline blendstocks

291


313

306

326 Jet fuel

88


86

84

92 Diesel fuel

112


136

121

144 Heavy oils, residual products and other

87

81

85

94 Total Refined Product Sales

578

616

596

656











Refined Product Sales Margin ($/barrel) (j)











Average sales price
$ 82.26

$ 71.24
$ 72.17
$ 112.06 Average costs of sales

78.76

63.36

64.93

102.37 Refined Product Sales Margin
$ 3.50
$ 7.88
$ 7.24
$ 9.69











(e) We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less.

(f) Management uses gross refining margin per barrel to evaluate performance and compare profitability to other companies in the industry. Gross refining margin per barrel is calculated by dividing gross refining margin by total refining throughput and may not be calculated similarly by other companies. Gross refining margin is calculated as revenues less costs of feedstocks, purchased refined products, transportation and distribution. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations. Manufacturing costs per barrel is calculated by dividing manufacturing costs by total refining throughput and may not be comparable to similarly titled measures used by other companies. Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America.

(g) Consolidated gross refining margin totals gross refining margin for each of our regions adjusted for other costs not directly attributable to a specific region. Gross refining margin includes the effect of intersegment sales to the retail segment at prices which approximate market. Gross refining margin approximates total refining throughput times gross refining margin per barrel.

(h) Includes manufacturing depreciation and amortization per throughput barrel of approximately $1.87 and $1.57 for the three months ended December 31, 2009 and 2008, respectively, and $1.69 and $1.40 for the years ended December 31, 2009 and 2008, respectively.

(i) Includes a termination charge of $12 million during the year ended December 31, 2009, related to cancelling the purchase of equipment associated with a capital project at our Los Angeles refinery.

(j) Sources of total refined product sales included refined products manufactured at the refineries and refined products purchased from third parties. Total refined product sales margin includes margins on sales of manufactured and purchased refined products.

TESORO CORPORATION OPERATING DATA (Unaudited)

Three Months Ended
Years Ended

December 31,

December 31,

2009
2008

2009
2008 Refining By Region









California (Golden Eagle and Los Angeles)









Throughput (thousand barrels per day) (k)









Heavy crude (e)
159
166

160

164 Light crude
46
61

57

73 Other feedstocks
27
24

24

21 Total Throughput
232
251

241

258









Yield (thousand barrels per day)









Gasoline and gasoline blendstocks
109
127

130

133 Jet fuel
17
15

18

18 Diesel fuel
49
76

52

72 Heavy oils, residual products, internally produced fuel
and other


75
52

63

54 Total Yield
250
270

263

277









Gross refining margin $ 126 $ 316
$ 897
$ 1,332 Gross refining margin ($/throughput bbl) (f) $ 5.92 $ 13.66
$ 10.18
$ 14.08 Manufacturing cost before depreciation and
amortization ($/throughput bbl) (f)

$ 7.29 $ 6.13
$ 6.86
$ 7.18









Pacific Northwest (Alaska & Washington)









Throughput (thousand barrels per day) (k)









Heavy crude (e)
-
-

-

7 Light crude
125
128

126

143 Other feedstocks
6
10

9

9 Total Throughput
131
138

135

159









Yield (thousand barrels per day)









Gasoline and gasoline blendstocks
55
56

60

63 Jet fuel
28
30

26

32 Diesel fuel
24
25

23

30 Heavy oils, residual products, internally produced fuel
and other


29
31

30

39 Total Yield
136
142

139

164









Gross refining margin $ 41 $ 24
$ 376
$ 396 Gross refining margin ($/throughput bbl) (f) $ 3.39 $ 1.83
$ 7.65
$ 6.82 Manufacturing cost before depreciation and
amortization ($/throughput bbl) (f)

$ 4.02 $ 4.19
$ 3.81
$ 3.99



















Mid-Pacific (Hawaii)









Throughput (thousand barrels per day)











Heavy crude (e)
21
20

17

21 Light crude
46
46

51

48 Total Throughput
67
66

68

69









Yield (thousand barrels per day)









Gasoline and gasoline blendstocks
15
15

16

16 Jet fuel
16
18

17

18 Diesel fuel
13
11

12

11 Heavy oils, residual products, internally produced fuel
and other


24
24

24

26 Total Yield
68
68

69

71









Gross refining margin $ 12 $ 140
$ 90
$ 170 Gross refining margin ($/throughput bbl) (f) $ 1.99 $ 23.14
$ 3.62
$ 6.72 Manufacturing cost before depreciation and
amortization ($/throughput bbl) (f)

$ 3.51 $ 3.52
$ 3.18
$ 3.30










(k) We experienced reduced throughput due to scheduled turnarounds at the Alaska and Golden Eagle refineries during the 2009 second quarter, scheduled maintenance at the Washington refinery during the 2009 first quarter, and scheduled turnarounds at the Golden Eagle refinery during the 2008 first and second quarters and at the Washington refinery during the 2008 first quarter.

TESORO CORPORATION OPERATING DATA (Unaudited)




















Three Months Ended

Years Ended

December 31,

December 31,

2009
2008

2009

2008 Mid-Continent (North Dakota & Utah)









Throughput (thousand barrels per day)









Light crude
96
97

101

105 Other feedstocks
4
3

4

4 Total Throughput
100
100

105

109









Yield (thousand barrels per day)









Gasoline and gasoline blendstocks
59
58

62

63 Jet fuel
10
9

9

10 Diesel fuel
25
29

27

30 Heavy oils, residual products, internally produced fuel
and other


10
9

10

10 Total Yield
104
105

108

113









Gross refining margin $ 81 $ 155
$ 418
$ 603 Gross refining margin ($/throughput bbl) (f) $ 8.78 $ 16.82
$ 10.95
$ 15.12 Manufacturing cost before depreciation
and amortization ($/throughput bbl) (f)

$ 3.82 $ 3.50
$ 3.49
$ 3.44

TESORO CORPORATION OPERATING DATA (Unaudited)

Three Months Ended
Years Ended


December 31,

December 31,


2009
2008

2009
2008 RETAIL SEGMENT









Number of Stations (end of period)









Company-operated

387

389


387

389
Branded jobber/dealer

499
490

499
490 Total Stations

886
879

886
879









Average Stations (during period)









Company-operated

387

390


388

422
Branded jobber/dealer

484
491

487
489 Total Average Retail Stations

871
881

875
911









Fuel Sales (millions of gallons)









Company-operated

252

257


1,027

1,072
Branded jobber/dealer

73
71

302
282 Total Fuel Sales

325
328

1,329
1,354









Fuel Margin ($/gallon) (l) (m)
$ 0.26
$ 0.32

$ 0.21
$ 0.21
Merchandise Sales ($ millions)
$ 51
$ 52

$ 210
$ 223
Merchandise Margin ($ millions)
$ 14
$ 13

$ 53
$ 57
Merchandise Margin %

27 %
25 %

25 %
26 %









Segment Operating Income ($ millions)









Gross Margins









Fuel (m)
$ 84
$ 105

$ 273
$ 286
Merchandise and other non-fuel margin

19
18

77
78 Total Gross Margins

103

123


350

364
Expenses









Operating expenses

49

46


202

216
Selling, general and administrative

2

5


23

24
Depreciation and amortization

10

17


39

49
Loss on asset disposals and impairments (n)

1
4

3
29 Segment Operating Income
$ 41 $ 51
$ 83 $ 46









(l) Management uses fuel margin per gallon to compare profitability to other companies in the industry. Fuel margin per gallon is calculated by dividing fuel gross margin by fuel sales volumes and may not be calculated similarly by other companies. Investors and analysts use fuel margin per gallon to help analyze and compare companies in the industry on the basis of operating performance. This financial measure should not be considered as an alternative to segment operating income and revenues or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America.

(m) Includes the effect of intersegment purchases from the refining segment at prices which approximate market.

(n) Impairment charges for the year 2008 are related to a potential sale of 20 retail stations and the closure of 42 Mirastar stations.

TESORO CORPORATION RECONCILIATION TO AMOUNTS REPORTED UNDER US GAAP (Unaudited) (In millions)

Three Months Ended
Years Ended


December 31,

December 31,


2009
2008

2009
2008











Net Earnings (Loss)
$ (179 )
$ 97

$ (140 )
$ 278
Add Income Tax Provision (Benefit)

(70 )

47


(48 )

151
Add Interest and Financing Costs

36


28


130


111
Less Interest Income

(1 )

(2 )

(4 )

(7 ) Add Depreciation and Amortization

111


113

426


401 Earnings (Loss) before Income Taxes,
Depreciation and Amortization (EBITDA) (o)


$ (103 )
$ 283
$ 364
$ 934 (o) EBITDA represents earnings before interest and financing costs, interest income, income taxes, and depreciation and amortization. We present EBITDA because we believe some investors and analysts use EBITDA to help analyze our cash flows including our ability to satisfy principal and interest obligations with respect to our indebtedness and to use cash for other purposes, including capital expenditures. EBITDA is also used by some investors and analysts to analyze and compare companies on the basis of operating performance and by management for internal analysis and as a component of the fixed charge coverage financial covenant in our credit agreement. EBITDA should not be considered as an alternative to net earnings, earnings before income taxes, cash flows from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America. EBITDA may not be comparable to similarly titled measures used by other entities.

NET EARNINGS ADJUSTED FOR SPECIAL ITEMS (Unaudited) (In millions except per share amounts)

Three Months
Year

Ended

Ended

December 31,

December 31,

2009

2009 Net Earnings (Loss) - U.S. GAAP $ (179 )
$ (140 ) Special Items:




Goodwill Impairment (c)
43

43 Net Earnings (Loss) Adjusted for Special Items $ (136 )
$ (97 )




Net Earnings (Loss) Per Share - U.S. GAAP $ (1.30 )
$ (1.01 ) Special Items Per Share:




Goodwill Impairment (c)
0.31

0.31 Net Earnings (Loss) Per Share Adjusted for Special Items $ (0.99 )
$ (0.70 ) Note: The special items present information that the Company believes is useful to investors. The Company believes that special items are not indicative of its core operations.

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