SAN ANTONIO--(BUSINESS WIRE)--Feb. 19, 2009-- Tesoro Corporation (NYSE:TSO) today reported fourth quarter 2008 net earnings of $97 million, or $0.70 per diluted share compared to a net loss of $40 million, or $(0.29) per diluted share for the fourth quarter of 2007. Excluding special items, Tesoro had net income of $137 million, or $0.99 per share for the 2008 fourth quarter.

The 2008 fourth quarter special items include an after-tax charge of $(0.41) per share for a receivable for which collection was deemed unlikely, partially offset by a $0.12 per share after-tax accrual reversal following a reduction in estimated costs associated with asset retirement obligations.

Full year 2008 earnings were $278 million, or $2.00 per diluted share compared to $566 million, or $4.06 per diluted share for 2007. Full year 2008 operating income was $471 million, compared to operating income of $967 million in 2007 because of lower per barrel refining margins and higher per barrel manufacturing costs.

The Company’s fourth quarter segment operating income of $204 million was $196 million higher than the $8 million of segment operating income in the fourth quarter of 2007. The increase was primarily due to higher gross margins as we improved our capture of the available industry benchmark margins, especially in the Hawaii and California regions, and improved results from our retail segment. The increase in segment operating income was partially offset by lower throughput rates.

Despite the lower industry benchmarks in the quarter, the Company’s gross refining margin increased 51% to $12.47 per barrel (/bbl) from $8.28/bbl a year ago. Margin realization improved as a result of our efforts to increase crude flexibility and distillate production. The California region benefited from the second full quarter of operating the delayed coker at Golden Eagle, as well as 10 to 15 thousand barrels per day (mbpd) of increased waterborne crude receipts at Los Angeles, allowing us to capture the benefits of attractive heavy, foreign crude discounts in the quarter. At Hawaii, initiatives that we implemented starting in early 2008 led to a 10% increase in heavy crude runs relative to the fourth quarter 2007. For the entire system, runs of light crude grades in the quarter were down 4% versus a year ago. On the product side, continued efforts to maximize distillate production across the system in the quarter led to a 4% increase in diesel and jet fuel production versus the fourth quarter 2007. System throughput was 555 mbpd versus 639 mbpd a year ago.

“The actions we’ve been taking since late in 2007 have positioned the Company to succeed even in this weak market environment,” said Bruce Smith, Chairman, President and CEO of Tesoro. “While falling commodity prices did benefit our wholesale and retail marketing channels, the capital and non-capital initiatives we implemented beginning in early 2008 have enhanced our ability to deliver substantial and sustainable improvements in our capture of the available margin, and I am pleased to see these successful efforts reflected in our fourth quarter results.”

Direct manufacturing costs before depreciation and amortization were $248 million in the fourth quarter, versus $300 million in the prior quarter, as a result of the 25% decrease in natural gas prices together with a $27 million asset retirement obligation reversal, partially offset by higher purchased energy costs in Hawaii.

Capital Spending and Cash

For the fourth quarter 2008, capital spending was $200 million, including deferred turnaround spending. Capital spending for all of 2008 was $724 million, down from $932 million in 2007. We currently expect our 2009 capital expenditures, including turnarounds to be approximately $600 million.

At the end of 2008, we had a cash balance of $20 million. The impact of falling commodity prices during the quarter negatively impacted cash, causing us to borrow $66 million on our revolving credit facility. We estimate the contraction of receivables versus payables due to crude prices dropping $60/bbl in the quarter to have been approximately $325 million, including the impact from the receivable write-off. We are encouraged to see a reversal of this trend, and by the fact that the West Coast has experienced an increase in industry benchmark margins.

“While the strength in first quarter West Coast margins has been a pleasant surprise, we plan to continue to follow our 2009 business plan which is based on industry benchmark margins that are lower than 2008, and our expectation that we will realize continued improvement in margin capture. Our program of non-capital objectives and benefits of our 2008 income capital spending is resilient and continues to provide the platform for our organic growth opportunities,” said Smith.

Board Declares Quarterly Dividend

Tesoro announced today that its Board of Directors has approved a regular quarterly cash dividend of $0.10 per share. The dividend is payable March 16^th, 2009 to shareholders of record as of March 2^nd, 2009.

Public Invited to Listen to Analyst Conference Call

At 8:00 a.m., CST, Friday, February 20^th, 2009 Tesoro will broadcast, live, its conference call with analysts regarding fourth quarter and full year 2008 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 888-241-0558 (international dial-in: 647-427-3417). A replay of the call will be available for thirty days, and may be accessed via phone by dialing 800-678-0453 (international replay: 402-220-1458) and entering passcode 81028143.

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 660,000 barrels per day. Tesoro's retail-marketing system includes over 870 branded retail stations, of which over 380 are company operated under the Tesoro®, Shell®, Mirastar® and USA Gasoline™ 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 cash flow, our capital spending and our margin capture. 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."

Note: Our results of operations for the year ended December 31, 2007 include our Los Angeles refinery assets and retail stations since acquired in May 2007.

(a) During 2008, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO liquidation resulted in a decrease in costs of sales of $138 million.

(b) The three months and year ended December 31, 2008 includes a $91 million charge to write-off a receivable for which collection was deemed unlikely.

(c) During 2008, we received net refunds totaling $50 million from the Trans Alaska Pipeline System for prior year's refinery transportation and distribution costs associated with our protest of intrastate rates set between 1997 and 2003.

Note:The special items present information that the Company believes is useful to investors. The Company believes that the special items described above are not indicative of its core operations.

(d) We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less. Amounts in prior years have been reclassified to conform to the 2008 presentation.

(e) 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 as 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.

(f) Consolidated gross refining margin totals gross refining margin for each of our regions adjusted for other costs not directly attributable to a specific region. Other costs resulted in a $2 million increase and a $1 million decrease for the three months ended December 31, 2008 and 2007, respectively, and a $5 million increase and a $21 million decrease for the years ended December 31, 2008 and 2007, respectively. 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.

(g) In 2008, we reclassified certain environmental expenses from manufacturing expenses to other operating expenses. We have reclassified $18 million and $22 million for the three months and year ended December 31, 2007, respectively, to conform to the 2008 presentation.

(h) Includes manufacturing depreciation and amortization per throughput barrel of approximately $1.57 and $1.41 for the three months ended December 31, 2008 and 2007, respectively, and $1.40 and $1.37 for the years ended December 31, 2008 and 2007, respectively.

(i) 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 and the effects of inventory changes.

(j) We experienced reduced throughput during scheduled turnarounds at the Golden Eagle refinery during the 2008 first and second quarters, the Washington refinery during the 2008 first quarter, the Los Angeles refinery during the 2007 second quarter and the Golden Eagle and Utah refineries during the 2007 first quarter.

(k) Operating data for 2007 includes the Los Angeles refinery since acquired in May 2007.

(l) The retail operating data for 2007 includes the Shell and USA Gasoline stations since acquired in May 2007.

(m) 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 volume 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.

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

(o) The loss on asset disposals and impairments for the year 2008 reflects closing 42 Mirastar stations and the pending sale or closure of additional retail stations.

Source: Tesoro Corporation

Tesoro Corporation
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