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TESORO CORPORATION REPORTS 2016 SECOND QUARTER RESULTS
  • Net earnings from continuing operations of $418 million, or $3.47 per diluted share, consolidated net earnings of $449 million and EBITDA of $956 million, all include a pre-tax benefit of $363 million related to lower of cost or market inventory adjustment
  • Logistics operating income grew 20% year-over-year to $125 million
  • Successfully raised approximately $1 billion of debt and equity in Tesoro Logistics primarily to fund acquisitions from Tesoro and future growth
  • Closed acquisition of Flint Hills Resources wholesale marketing and logistics assets in Alaska
  • Closed acquisition of Dakota Prairie Refining, LLC in North Dakota
  • Increased the quarterly cash dividend by 10% to $0.55 per share

SAN ANTONIO - August 3, 2016 - Tesoro Corporation (NYSE:TSO) today reported second quarter net earnings from continuing operations of $418 million, or $3.47 per diluted share compared to net earnings from continuing operations of $586 million, or $4.62 per diluted share a year ago. Consolidated net earnings were $449 million for the second quarter 2016 compared to $620 million for the same period last year. EBITDA for the second quarter of 2016 was $956 million compared to $1.2 billion last year. Second quarter 2016 earnings and EBITDA include a pre-tax benefit of $363 million ($220 million(a) after-tax) related to a lower of cost or market (LCM) inventory adjustment.

  Three Months Ended
June 30,
  Six Months Ended
June 30,
($ in millions, except per share data) 2016   2015   2016   2015
Operating Income              
  Refining $ 520     $ 757     $ 420     $ 942  
  TLLP 125     104     251     208  
  Marketing 161     212     388     345  
Total Segment Operating Income $ 806     $ 1,073     $ 1,059     $ 1,495  
Net Earnings From Continuing Operations Attributable to
  Tesoro
$ 418     $ 586     $ 476     $ 731  
               
Diluted EPS - Continuing Operations $ 3.47     $ 4.62     $ 3.94     $ 5.77  
Diluted EPS - Discontinued Operations -     (0.03 )   0.09     (0.03 )
Total Diluted EPS $ 3.47     $ 4.59     $ 4.03     $ 5.74  

"Tesoro's integrated business model continues to perform well, even with the Tesoro Index 6% lower this quarter compared to the average of 2014 and 2015," said Greg Goff, Chairman and CEO. "We continue to focus on driving sustainable improvements to the business and growing Logistics and Marketing to further enhance shareholder value."

For the second quarter, the Company recorded segment operating income of $806 million compared to segment operating income of $1.1 billion in the second quarter of 2015. Second quarter 2016 results reflect lower operating income in Refining and Marketing, offset by continued growth in Logistics.

Tesoro previously provided adjusted EBITDA, adjusted earnings and certain other metrics including special adjustments for unusual items impacting quarterly results. The Company decided to limit its disclosures of non-GAAP financial measures to EBITDA (which has been revised to include discontinued operations), segment EBITDA and debt to capitalization, excluding Tesoro Logistics LP (NTSE:TLLP). The Company also adjusted the presentation of certain items to conform to recent guidance regarding non-GAAP measures. Tesoro will continue to highlight significant items impacting quarterly results in its earnings releases and quarterly SEC filings to facilitate analysis of its results.

SEGMENT RESULTS
REFINING. Refining operating income was $520 million for the second quarter 2016 compared to $757 million in 2015 and segment EBITDA was $692 million compared to $880 million in 2015. The Tesoro Index(b) was $13.93 per barrel for the second quarter with a gross refining margin of $15.70 per barrel or 113% capture of the Tesoro Index, compared to a gross refining margin of $19.13 per barrel or 89% capture of the Tesoro Index of $21.61 per barrel last year. Second quarter 2016 gross refining margin and segment EBITDA include a pre-tax benefit of $363 million related to a LCM inventory adjustment. Total refinery throughput for the quarter was 802 thousand barrels per day, or 92% utilization. Manufacturing costs in the second quarter of 2016 decreased $0.57 per barrel over last year to $5.01 per barrel, due to a combination of higher throughput in 2016 and a decline in natural gas prices. Throughput and capture rates in the second quarter were impacted by an extension of planned maintenance in the Kenai, Alaska refinery and unplanned unit downtime within our California region.

LOGISTICS. Logistics operating income increased to $125 million in the second quarter 2016 from $104 million in 2015 and segment EBITDA increased to $172 million from $149 million last year. This performance was driven by volume growth in TLLP's crude oil gathering and natural gas gathering and processing businesses as well as contributions from the LA Storage and Handling Assets acquisition. Year-to-date, TLLP has seen volume growth of approximately 23% in crude oil pipeline gathering volumes, 5% in NGL processing throughput, 4% in terminalling throughput and 4% in pipeline transportation volumes over the same period last year.

MARKETING. Marketing operating income was $161 million compared to $212 million a year ago and segment EBITDA was $173 million compared to $223 million a year ago. In the quarter, the Company experienced lower overall margins but continued to see high consumer demand and growth in the branded network of retail stations. Total stations in second quarter grew 8% over the same period last year. The year-over-year decline in operating income was impacted by fuel margins which declined to 10.5 cents per gallon from 13.7 cents per gallon a year ago.

CORPORATE AND OTHER
Corporate and unallocated costs for the second quarter 2016 were $88 million. The effective tax rate was 34.5% for the quarter.

BALANCE SHEET AND CASH FLOW
Tesoro ended the second quarter with $1.1 billion in cash and cash equivalents compared to $942 million at the end of 2015. Tesoro has $2.1 billion of availability under the Company's revolving credit facility. Total debt, net of unamortized issuance costs, was $4.5 billion or 36% of total capitalization at the end of the second quarter. Excluding TLLP debt and equity, total debt was $1.3 billion or 19% of total capitalization.

Capital spending for the second quarter was $167 million for Tesoro and $42 million for TLLP. Turnaround expenditures for the second quarter were $191 million.

The Company repurchased 1.3 million shares for approximately $100 million in the second quarter and has $1.3 billion remaining under its previously approved share repurchase programs. Tesoro is well positioned to continue to execute its financial priorities of investing in high-return capital projects, returning cash to shareholders and maintaining a strong balance sheet.

Tesoro today announced that the board of directors has increased the quarterly cash dividend by 10% to $0.55 per share payable on September 15, 2016, to all holders of record as of August 31, 2016.

STRATEGIC UPDATE
In June, Tesoro closed the acquisition of Flint Hills Resources wholesale marketing and logistics assets in Anchorage and Fairbanks, Alaska. This acquisition enhances the Company's capabilities to efficiently and reliably serve customers in the state of Alaska. In addition, the Company acquired Dakota Prairie Refining, LLC, which owns a refinery near Dickinson, North Dakota, with strategic access to Bakken crude oil and is located just 100 miles west of the Tesoro Mandan Refinery. Tesoro plans to continue to market the ultra-low sulfur diesel to local customers and utilize the naphtha and resid in its integrated value chain system.

On July 1, 2016, Tesoro executed an agreement for the sale of storage and terminalling assets in Alaska to TLLP for a total consideration of $444 million. The Alaska Storage and Terminalling Assets include crude oil, feedstock and refined product storage tanks in Kenai, Alaska and refined product terminals in Anchorage and Fairbanks. The first phase, the storage portion of the acquisition, closed on July 1, 2016. The second phase, the acquisition of the Anchorage and Fairbanks terminals, is expected to close in the third quarter once the Consent Decree with the State of Alaska becomes effective. The Consent Decree is related to Tesoro's acquisition of certain Flint Hills Resources Alaska assets, which closed on June 20, 2016. The total acquisition price of $444 million includes cash proceeds to Tesoro of $400 million and the issuance of common and general partner units to Tesoro, valued at approximately $44 million.

At Tesoro's 2015 Investor and Analyst Day, the Company provided its expectations for 2016. These included a Tesoro index of $12 to $14 per barrel, Marketing segment fuel margins of $0.11 to $0.14 per gallon, crude oil differentials reflecting transportation costs and year-over-year improvements from higher utilization and operational efficiencies of $500 to $600 million. Through the first half of 2016, the Tesoro Index and Marketing fuel margins are in line with expectations. Crude oil differentials continue to be significantly narrower than expectations and have resulted in lower capture rates and lower refining profitability than the Company's expectations. Refining utilization is at the low end of the Company's expectations, primarily due to unplanned maintenance and, as a result, Tesoro now expects year-over-year improvements from higher utilization and operational efficiencies of $400 to $500 million.

In addition, the Company committed to delivering $400 to $500 million of annual improvements to operating income in 2016, consisting of $200 to $250 million in Refining, $175 to $200 million in Logistics and $25 to $50 million in Marketing. Tesoro remains confident in delivering these annual improvements to operating income. Through the first half of the year, estimated Refining improvements are trending towards the high end of the range, Marketing improvements are on track with full year expectations and estimated Logistics improvements are tracking slightly below the range, primarily attributable to slower than expected organic growth due to the weak commodity price environment.

PUBLIC INVITED TO LISTEN TO ANALYST AND INVESTOR CONFERENCE CALL
At 7:30 a.m. CT tomorrow morning, Tesoro will broadcast, live, its conference call with analysts regarding second quarter 2016 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.

ABOUT TESORO CORPORATION
Tesoro Corporation, a Fortune 100 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 over 895,000 barrels per day and ownership in a logistics business, which includes an interest in Tesoro Logistics LP (NYSE: TLLP) and ownership of its general partner. Tesoro's retail-marketing system includes over 2,400 retail stations under the ARCO®, Shell®, Exxon®, Mobil®, USA Gasoline(TM), Rebel(TM) and Tesoro® 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 ability of our integrated business model to continue performing well, even in a challenging refining margin environment; our ability to continue driving sustainable improvements to the business and grow Logistics and Marketing to further enhance shareholder value; our positioning and ability to continue executing our financial priorities of investing in high-return capital projects, returning cash to shareholders, and maintaining a strong balance sheet; the ability of our recently acquired wholesale marketing and logistics assets to enhance our capabilities to efficiently and reliability serve customers in the state of Alaska; our expectations to continue to market ultra-low sulfur diesel to local customers from our recently acquired refinery near Dickinson, North Dakota and utilize the naphtha and residuals in our integrated value chain system; our expectations regarding the sale of storage and terminalling assets in Alaska to TLLP, including the timing of closing for the second phase of the transaction; the impact of crude differentials on our capture rates, refining profitability and other factors on our expectations for 2016 and our revised expectations for year-over-year improvements from higher utilization and operational efficiencies; our ability to deliver anticipated annual improvements to operating income in 2016 and the impact of the weak commodity price environment on our targeted 2016 Logistics improvements; expectations for throughput, manufacturing costs, depreciation, corporate expense and interest expense in the third quarter of 2016; and our outlook for 2016 capital expenditures. 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.

Contact:
Investors:
Sam Ramraj, Vice President, Investor Relations, (210) 626-4757

Media:
Tesoro Media Relations, media@tsocorp.com, (210) 626-7702

(a)   After-tax amount utilizes the marginal tax rate.
(b)   As a performance benchmark, we utilize crack spreads and the Tesoro Index to measure the difference between market prices for crude oil and refined products. Crack spreads are a commonly used proxy within the industry to estimate or identify trends in gross refining margins, while the Tesoro Index is more specifically designed around Tesoro's assets. Crack spreads and the Tesoro Index can fluctuate significantly over time as a result of market conditions and supply and demand balances. For example, The West Coast 321 crack spread is calculated using three barrels of Alaska North Slope crude oil (ANS) producing two barrels of Los Angeles CARB gasoline and one barrel of Los Angeles CARB diesel. In comparison the Tesoro Index uses several crude oils and approximately 8 to 10 products to provide a potentially closer representation of the trends in the available margin. Our actual gross refining margins differ from these crack spreads and the Tesoro Index based on the actual slate of crude oil we run at our refineries and the products we produce or yield.
TESORO CORPORATION
THIRD QUARTER 2016 GUIDANCE (Unaudited)


Throughput (Mbpd)  
California 515 - 540
Pacific Northwest 180 - 190
Mid-Continent 140 - 155
Consolidated 835 - 885
   
Manufacturing Cost ($/throughput barrel)  
California $5.40 - 5.65
Pacific Northwest $3.60 - 3.85
Mid-Continent $4.50 - 4.75
Consolidated $4.85 - 5.10
   
Corporate/System ($ millions)  
Refining depreciation $150
TLLP depreciation $45
Corporate expense (before depreciation) $90 - 100
Interest expense (before interest income) $65
Noncontrolling Interest $40 - 45

2016 CAPITAL OUTLOOK (Unaudited) (in millions)


  2016 Capital Expenditures Outlook
Capital Expenditures  
Tesoro Corporation $ 700  
Tesoro Logistics LP 270  
Total Capital Expenditures $ 970  


ITEMS IMPACTING COMPARABILITY

The TLLP financial and operational data presented include the historical results of all assets acquired from Tesoro prior to the acquisition dates. The acquisitions from Tesoro were transfers between entities under common control. Accordingly, the financial information of TLLP contained herein has been retrospectively adjusted to include the historical results of the assets acquired in the acquisitions from Tesoro prior to the effective date of each acquisition for all periods presented. The TLLP financial data is derived from the combined financial results of the TLLP predecessor (the "TLLP Predecessor"). We refer to the TLLP Predecessor and, prior to each acquisition date, the acquisitions from Tesoro collectively, as "TLLP's Predecessors."

NON-GAAP MEASURES

Our management uses certain performance "non-GAAP" measures to analyze operating segment performance. Our management also uses additional measures that are known as "non-GAAP" financial measures in its evaluation of past performance and prospects for the future to supplement our financial information presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These financial non-GAAP measures are important factors in assessing our operating results and profitability and include the following:

  • U.S. GAAP-based net earnings before interest, income taxes, and depreciation and amortization expense ("EBITDA");
  • Segment EBITDA is defined as a segment's U.S. GAAP operating income before depreciation and amortization expense plus equity in earnings (loss) of equity method investments and other income (expense), net; and
  • Debt to capitalization ratio excluding TLLP, reflects the ratio achieved by dividing the net result of our consolidated debt less all debt owed by TLLP (both net of unamortized issuance costs) by the sum of our consolidated debt less TLLP's total debt (both net of unamortized issuance costs) and our total equity less noncontrolling interest associated with the public ownership of TLLP.

We present the measures defined above because investors, analysts, lenders and ratings agencies may use these measures to help analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to the following:

  • our operating performance as compared to other publicly traded companies in the refining, logistics and marketing industries, without regard to historical cost basis or financing methods;
  • our ability to incur and service debt and fund capital expenditures; and
  • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

In addition, these measures are used by management to assess internal performance. We believe these measures, when supplemental to information presented under U.S. GAAP, may provide meaningful information to the users of our financial statements. Each of the performance measures should not be used in isolation from their comparable U.S. GAAP measure and thus should not be considered as alternatives to any U.S. GAAP measure. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income.


TESORO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited) (In millions)


  June 30,
 2016
  December 31,
 2015
ASSETS
Current Assets      
Cash and cash equivalents (TLLP: $682 and $16, respectively) $ 1,121     $ 942  
Receivables, net of allowance for doubtful accounts 1,065     792  
Inventories (c) 2,422     2,302  
Prepayments and other current assets 263     271  
Total Current Assets 4,871     4,307  
Net Property, Plant and Equipment (TLLP: $3,086 and $3,450, respectively) 9,642     9,541  
Other Noncurrent Assets (TLLP: $1,453 and $1,190, respectively) 3,099     2,484  
Total Assets $ 17,612     $ 16,332  
       
LIABILITIES AND EQUITY
Current Liabilities      
Accounts payable $ 1,763     $ 1,568  
Other current liabilities 904     962  
Total Current Liabilities 2,667     2,530  
Deferred Income Taxes 1,353     1,222  
Other Noncurrent Liabilities 889     773  
Debt, Net of Unamortized Issuance Costs (TLLP: $3,218 and $2,844, respectively) 4,501     4,067  
Equity 8,202     7,740  
Total Liabilities and Equity $ 17,612     $ 16,332  

(c)    We recorded a lower of cost or market ("LCM") adjustment to cost of sales of $143 million and $359 million at June 30, 2016 and December 31, 2015, respectively, for our crude oil, refined products, oxygenates and by-product inventories to adjust carrying value of our inventories to reflect replacement cost as of those reporting dates. We reverse any lower of cost or market reserve in the subsequent period because the inventories are sold or used and then perform a complete lower of cost or market assessment of ending inventories at the end of each reporting period to determine if a reserve is required.


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


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Revenues $ 6,285     $ 8,232     $ 11,386     $ 14,695  
Costs and Expenses:              
Cost of sales (excluding the lower of cost or market inventory valuation adjustment) 5,019     6,352     8,880     11,659  
Lower of cost or market inventory valuation adjustment (c) (363 )   -     (216 )   (42 )
Operating expenses 606     601     1,222     1,178  
Selling, general and administrative expenses (d) 94     84     176     182  
Depreciation and amortization expense 210     182     422     361  
Loss on asset disposals and impairments 1     4     5     8  
Operating Income 718     1,009     897     1,349  
Interest and financing costs, net (60 )   (54 )   (120 )   (109 )
Equity in earnings of equity method investments 3     2     5     3  
Other income (expense), net (e) 25     1     32     (1 )
Earnings Before Income Taxes 686     958     814     1,242  
Income tax expense 237     334     267     430  
Net Earnings From Continuing Operations 449     624     547     812  
Earnings (Loss) from discontinued operations, net of tax -     (4 )   11     (4 )
Net Earnings 449     620     558     808  
Less: Net earnings from continuing operations attributable to noncontrolling interest 31     38     71     81  
Net Earnings Attributable to Tesoro Corporation $ 418     $ 582     $ 487     $ 727  
Net Earnings (Loss) Attributable to Tesoro Corporation:              
Continuing operations $ 418     $ 586     $ 476     $ 731  
Discontinued operations -     (4 )   11     (4 )
Total $ 418     $ 582     $ 487     $ 727  
Net Earnings (Loss) Per Share - Basic:              
Continuing operations $ 3.50     $ 4.67     $ 3.98     $ 5.84  
Discontinued operations -     (0.03 )   0.09     (0.03 )
Total $ 3.50     $ 4.64     $ 4.07     $ 5.81  
Weighted average common shares outstanding - Basic 119.5     125.2     119.5     125.2  
Net Earnings (Loss) Per Share - Diluted:              
Continuing operations $ 3.47     $ 4.62     $ 3.94     $ 5.77  
Discontinued operations -     (0.03 )   0.09     (0.03 )
Total $ 3.47     $ 4.59     $ 4.03     $ 5.74  
Weighted average common shares outstanding - Diluted 120.6     126.3     120.8     126.6  

(d)   Includes stock-based compensation expense of $11 million and $7 million for the three months ended June 30, 2016 and 2015, respectively, and expense of $8 million and $35 million for the six months ended June 30, 2016 and 2015, respectively. The significant impact to stock-based compensation expense is primarily a result of changes in Tesoro's stock price.
(e)   Other income (expense), net for the three and six months ended June 30, 2016 included insurance proceeds related to a shipment of contaminated crude oil that was received in 2014 as well as a refund of certain tariff charges that were disputed. Additionally, a gain recognized by TLLP on a settlement of amounts disputed by one of its customers on the annual calculation of the natural gas gathering rate is included for the six months ended June 30, 2016.


TESORO CORPORATION
SELECTED SEGMENT OPERATING DATA (Unaudited) (In millions)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Earnings Before Income Taxes              
Refining $ 520     $ 757     $ 420     $ 942  
TLLP 125     104     251     208  
Marketing 161     212     388     345  
Total Segment Operating Income 806     1,073     1,059     1,495  
Corporate and unallocated costs (d) (88 )   (64 )   (162 )   (146 )
Operating Income 718     1,009     897     1,349  
Interest and financing costs, net (60 )   (54 )   (120 )   (109 )
Equity in earnings of equity method investments 3     2     5     3  
Other income (expenses), net 25     1     32     (1 )
Earnings Before Income Taxes $ 686     $ 958     $ 814     $ 1,242  
Depreciation and Amortization Expense              
Refining $ 148     $ 121     $ 298     $ 240  
TLLP 44     44     88     88  
Marketing 12     11     24     23  
Corporate 6     6     12     10  
Total Depreciation and Amortization Expense $ 210     $ 182     $ 422     $ 361  
Segment EBITDA              
Refining $ 692     $ 880     $ 741     $ 1,180  
TLLP 172     149     352     300  
Marketing 173     223     412     368  
Total Segment EBITDA $ 1,037     $ 1,252     $ 1,505     $ 1,848  
Capital Expenditures              
Refining $ 137     $ 148     $ 256     $ 331  
TLLP 42     77     83     144  
Marketing 6     8     19     12  
Corporate 24     4     39     10  
Total Capital Expenditures $ 209     $ 237     $ 397     $ 497  


TESORO CORPORATION
RECONCILIATION OF AMOUNTS REPORTED UNDER U.S. GAAP (Unaudited) (In millions)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Reconciliation of Net Earnings to EBITDA              
Net earnings $ 449     $ 620     $ 558     $ 808  
Depreciation and amortization expense 210     182     422     361  
Interest and financing costs, net 60     54     120     109  
Income tax expense 237     334     267     430  
EBITDA $ 956     $ 1,190     $ 1,367     $ 1,708  

Reconciliation of Refining Operating Income to Refining Segment EBITDA              
Operating income $ 520     $ 757     $ 420     $ 942  
Depreciation and amortization expense 148     121     298     240  
Equity in earnings (loss) of equity method investments -     1     (2 )   (1 )
Other income (expense), net 24     1     25     (1 )
Segment EBITDA $ 692     $ 880     $ 741     $ 1,180  
               
Reconciliation of TLLP Operating Income to TLLP Segment EBITDA              
Operating income $ 125     $ 104     $ 251     $ 208  
Depreciation and amortization expense 44     44     88     88  
Equity in earnings of equity method investments 3     1     7     4  
Other income, net -     -     6     -  
Segment EBITDA $ 172     $ 149     $ 352     $ 300  
               
Reconciliation of Marketing Operating Income to Marketing Segment EBITDA              
Operating income $ 161     $ 212     $ 388     $ 345  
Depreciation and amortization expense 12     11     24     23  
Segment EBITDA $ 173     $ 223     $ 412     $ 368  


TESORO CORPORATION
OTHER SUMMARY FINANCIAL INFORMATION (Unaudited) (In millions, except percentages)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Cash Flows From (Used in):              
Operating activities $ 444     $ 1,055     $ 628     $ 907  
Investing activities (271 )   (275 )   (806 )   (548 )
Financing activities 509     (261 )   357     (381 )
Increase (Decrease) in Cash and Cash Equivalents $ 682     $ 519     $ 179     $ (22 )
               
          June 30,
 2016
  December 31,
 2015
Working capital (current assets less current liabilities)         $ 2,204     $ 1,777  
Total market value of TLLP units held by Tesoro (f)         $ 1,607     $ 1,633  

  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Cash distributions received from TLLP (g):              
For common units held $ 27     $ 19     $ 52     $ 38  
For general partner units held 32     14     57     30  
Total Cash Distributions Received from TLLP $ 59     $ 33     $ 109     $ 68  

TESORO CORPORATION
RECONCILIATION OF AMOUNTS REPORTED UNDER U.S. GAAP (Unaudited) (In millions)


  June 30,
 2016
  December 31,
 2015
Tesoro consolidated debt (h) $ 4,515     $ 4,073  
TLLP debt (h) 3,218     2,844  
Tesoro Debt Excluding TLLP (h) $ 1,297     $ 1,229  
       
Tesoro consolidated equity $ 8,202     $ 7,740  
Noncontrolling interest 2,664     2,527  
Tesoro Stockholder's Equity $ 5,538     $ 5,213  
       
Tesoro debt, net of unamortized issuance costs, to capitalization ratio (h) 36 %   34 %
Tesoro debt, net of unamortized issuance costs, to capitalization ratio excluding
  TLLP and noncontrolling interest (h)
19 %   19 %

(f)    Represents market value of the 32,445,115 common units held by Tesoro at both June 30, 2016 and December 31, 2015. The market values were $49.53 and $50.32 per unit based on the closing unit price at June 30, 2016 and December 31, 2015, respectively.
(g)   Represents distributions received from TLLP during the three and six months ended June 30, 2016 and 2015 on common units and general partner units held by Tesoro.
(h)   These amounts and calculations are shown net of unamortized issuance costs.


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions, except per barrel amounts)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
REFINING SEGMENT 2016   2015   2016   2015
Total Refining Segment              
Throughput (Mbpd)              
Heavy crude (i) 165     174     170     135  
Light crude 586     542     574     544  
Other feedstocks 51     67     48     61  
Total Throughput 802     783     792     740  
Yield (Mbpd)              
Gasoline and gasoline blendstocks 448     416     446     388  
Diesel fuel 173     158     173     151  
Jet fuel 101     118     108     118  
Heavy fuel oils, residual products, internally produced fuel and other 134     144     118     130  
Total Yield 856     836     845     787  
Refined Product Sales (Mbpd) (j)              
Gasoline and gasoline blendstocks 529     512     525     500  
Diesel fuel 200     201     198     190  
Jet fuel 141     152     138     155  
Heavy fuel oils, residual products and other 104     98     101     86  
Total Refined Product Sales 974     963     962     931  
               
Revenues              
Refined products (k) $ 5,508     $ 7,357     $ 9,793     $ 13,050  
Crude oil resales and other 242     309     453     608  
Refining Revenues 5,750     7,666     10,246     13,658  
Cost of Sales              
Cost of sales (excluding lower of cost or market adjustments) 4,967     6,303     8,776     11,567  
Lower of cost or market adjustments (363 )   -     (216 )   (42 )
Refining cost of sales 4,604     6,303     8,560     11,525  
Gross refining margin (l) 1,146     1,363     1,686     2,133  
Expenses              
Operating expenses              
Manufacturing costs 365     397     760     794  
Other operating expenses 111     81     204     144  
Selling, general and administrative expenses 2     4     4     7  
Depreciation and amortization expense 148     121     298     240  
Loss on asset disposal and impairments -     3     -     6  
Segment Operating Income $ 520     $ 757     $ 420     $ 942  
Gross Refining Margin ($/throughput barrel) (m) (n) $ 15.70     $ 19.13     $ 11.70     $ 15.93  
Manufacturing Cost before Depreciation and Amortization Expense ($/throughput barrel) (m) $ 5.01     $ 5.58     $ 5.28     $ 5.93  

(i)    We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less.
(j)    Sources of total refined product sales include refined products manufactured at our refineries and refined products purchased from third parties.
(k)    Refined product sales include intersegment sales to our marketing segment of $3.8 billion and $4.8 billion for the three months ended June 30, 2016 and 2015, respectively, and $6.8 billion and $8.5 billion for the six months ended June 30, 2016 and 2015, respectively.
(l)    Gross refining margin approximates total refining throughput multiplied by the gross refining margin per barrel. Consolidated gross refining margin combines gross refining margin for each of our regions adjusted for other amounts not directly attributable to a specific region. Gross refining margin includes the effect of intersegment sales to the marketing segment and services provided by TLLP. Gross refining margin reflects the incremental expense or benefit associated with the LCM adjustments for all periods presented.
(m)  Management uses various measures to evaluate performance and efficiency and to compare profitability to other companies in the industry, including gross refining margin per barrel, manufacturing costs before depreciation and amortization expense ("Manufacturing Costs") per barrel. We calculate gross refining margin per barrel by dividing gross refining margin (revenues for manufactured refined products sold less costs of feedstocks, purchased refined products, transportation and distribution) by total refining throughput. We calculate Manufacturing Costs per barrel by dividing Manufacturing Costs by total refining throughput.
(n)   Gross refining margin per throughput barrel on a consolidated and regional basis includes the incremental expense or benefit associated with the LCM adjustments for all periods presented.


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions, except per barrel amounts)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
Refining By Region 2016   2015   2016   2015
California (Martinez and Los Angeles)              
Throughput (Mbpd)              
Heavy crude (i) 160     169     166     129  
Light crude 314     313     289     305  
Other feedstocks 39     41     32     39  
Total Throughput 513     523     487     473  
               
Yield (Mbpd)              
Gasoline and gasoline blendstocks 301     290     291     258  
Diesel fuel 103     101     100     92  
Jet fuel 65     80     65     76  
Heavy fuel oils, residual products, internally produced fuel and other 89     98     74     86  
Total Yield 558     569     530     512  
               
Revenues              
Refined products (k) $ 3,731     $ 5,100     $ 6,678     $ 8,976  
Crude oil resales and other 73     171     183     396  
Regional Revenue 3,804     5,271     6,861     9,372  
Cost of Sales              
Cost of sales (excluding LCM) 3,298     4,314     5,866     8,006  
LCM (235 )   -     (144 )   (30 )
Regional Cost of Sales 3,063     4,314     5,722     7,976  
Gross refining margin (l) 741     957     1,139     1,396  
Expenses              
Manufacturing costs 255     280     538     567  
Other operating expenses 54     50     94     86  
Selling, general and administrative expenses 2     4     4     6  
Depreciation and amortization expense 98     82     191     161  
Loss on asset disposals and impairments -     -     -     2  
Operating Income $ 332     $ 541     $ 312     $ 574  
               
Gross Refining Margin ($/throughput barrel) (m) (n) $ 15.85     $ 20.10     $ 12.83     $ 16.27  
Manufacturing Cost before Depreciation and Amortization Expense ($/throughput barrel) (m) $ 5.47     $ 5.89     $ 6.07     $ 6.62  
Capital Expenditures $ 77     $ 59     $ 153     $ 114  

TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions, except per barrel amounts)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Pacific Northwest (Alaska & Washington)              
Throughput (Mbpd)              
Heavy crude (i) 5     5     4     6  
Light crude 146     126     157     132  
Other feedstocks 7     23     11     18  
Total Throughput 158     154     172     156  
               
Yield (Mbpd)              
Gasoline and gasoline blendstocks 75     71     80     70  
Diesel fuel 29     23     32     25  
Jet fuel 26     31     32     32  
Heavy fuel oils, residual products, internally produced fuel and other 33     34     34     34  
Total Yield 163     159     178     161  
               
Revenues              
Refined products (k) $ 1,006     $ 1,386     $ 1,788     $ 2,439  
Crude oil resales and other 6     1     5     4  
Regional Revenue 1,012     1,387     1,793     2,443  
Cost of Sales              
Cost of sales (excluding LCM) 901     1,147     1,580     2,048  
LCM (85 )   -     (52 )   (8 )
Regional Cost of Sales 816     1,147     1,528     2,040  
Gross refining margin (l) 196     240     265     403  
Expenses              
Manufacturing costs 57     60     121     122  
Other operating expenses 16     16     30     30  
Selling, general and administrative expenses -     -     -     -  
Depreciation and amortization expense 22     20     45     40  
Loss on asset disposals and impairments -     -     -     -  
Operating Income $ 101     $ 144     $ 69     $ 211  
               
Gross Refining Margin ($/throughput barrel) (m) (n) $ 13.66     $ 17.12     $ 8.46     $ 14.29  
Manufacturing Cost before Depreciation and Amortization Expense ($/throughput barrel) (m) $ 3.95     $ 4.28     $ 3.87     $ 4.36  
Capital Expenditures $ 37     $ 29     $ 67     $ 55  

TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions, except per barrel amounts)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2016   2015   2016   2015
Mid-Continent (North Dakota and Utah)              
Throughput (Mbpd)              
Light crude 126     103     128     107  
Other feedstocks 5     3     5     4  
Total Throughput 131     106     133     111  
               
Yield (Mbpd)              
Gasoline and gasoline blendstocks 72     55     75     60  
Diesel fuel 41     34     41     34  
Jet fuel 10     7     11     10  
Heavy fuel oils, residual products, internally produced fuel and other 12     12     10     10  
Total Yield 135     108     137     114  
               
Revenues              
Refined products (k) $ 771     $ 871     $ 1,327     $ 1,635  
Crude oil resales and other 163     137     265     208  
Regional Revenue 934     1,008     1,592     1,843  
Cost of Sales              
Cost of sales (excluding LCM) 768     842     1,330     1,513  
LCM (43 )   -     (20 )   (4 )
Regional Cost of Sales 725     842     1,310     1,509  
Gross refining margin (l) 209     166     282     334  
Expenses              
Manufacturing costs 53     57     101     105  
Other operating expenses 41     15     80     28  
Selling, general and administrative expenses -     -     -     1  
Depreciation and amortization expense 28     19     62     39  
Loss on asset disposals and impairments -     3     -     4  
Operating Income $ 87     $ 72     $ 39     $ 157  
               
Gross Refining Margin ($/throughput barrel) (m) (n) $ 17.56     $ 17.15     $ 11.69     $ 16.68  
Manufacturing Cost before Depreciation and Amortization Expense ($/throughput barrel) (m) $ 4.51     $ 5.94     $ 4.17     $ 5.22  
Capital Expenditures $ 23     $ 60     $ 36     $ 163  


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
TLLP SEGMENT 2016   2015   2016   2015
Gathering              
Gas gathering throughput (thousands of MMBtu/day) (o) 854     1,071     878     1,046  
Average gas gathering revenue per MMBtu (o) $ 0.51     $ 0.48     $ 0.52     $ 0.43  
Crude oil gathering pipeline throughput (Mbpd) 208     187     212     173  
Average crude oil gathering pipeline revenue per barrel $ 1.72     $ 1.71     $ 1.74     $ 1.80  
Crude oil gathering trucking volume (Mbpd) 30     45     29     46  
Average crude oil gathering trucking revenue per barrel $ 3.30     $ 3.32     $ 3.27     $ 3.28  
Processing              
NGLs processing throughput (Mbpd) 7.4     7.8     7.8     7.4  
Average keep-whole fee per barrel of NGLs $ 36.60     $ 35.14     $ 35.81     $ 33.60  
Fee-based processing throughput (thousands of MMBtu/
  day)
645     768     660     729  
Average fee-based processing revenue per MMBtu $ 0.43     $ 0.36     $ 0.43     $ 0.40  
Terminalling and Transportation              
Terminalling throughput (Mbpd) 994     913     950     916  
Average terminalling revenue per barrel $ 1.24     $ 1.10     $ 1.27     $ 1.10  
Pipeline transportation throughput (Mbpd) 867     801     845     810  
Average pipeline transportation revenue per barrel $ 0.40     $ 0.38     $ 0.40     $ 0.38  
               
Segment Operating Income              
Revenues              
Gathering              
Gas gathering $ 40     $ 46     $ 83     $ 82  
Crude oil gathering pipeline 32     30     67     57  
Crude oil gathering trucking 9     13     18     27  
Other 1     -     5     -  
Processing              
NGLs processing 25     25     51     45  
Fee-based processing 25     24     51     53  
Other processing 18     18     37     36  
Terminalling and transportation              
Terminalling 112     92     220     182  
Pipeline transportation 31     27     61     56  
TLLP Revenues (p) 293     275     593     538  
Expenses              
Operating expenses (q) 102     99     207     189  
General and administrative expenses (r) 22     28     46     53  
Depreciation and amortization expense 44     44     88     88  
Gain on asset disposals and impairments -     -     1     -  
Segment Operating Income $ 125     $ 104     $ 251     $ 208  

(o)   Prior to TLLP's deconsolidation of Rendezvous Gas Services L.L.C. ("RGS") as of January 1, 2016, fees paid by TLLP to RGS were eliminated upon consolidation and third-party transactions, including revenue and throughput volumes, were included in its results of operations. Third party volumes associated with RGS, included in gas gathering volume for the three and six months ended June 30, 2015, were both 146 thousand MMBtu/d and reduced our average gas gathering revenue per MMBtu by $0.05 for each period. These volumes are no longer included in TLLP operational data.
(p)   TLLP segment revenues from services provided to our refining segment were $168 million and $154 million for the three months ended June 30, 2016 and 2015, respectively, and $337 million and $302 million for the six months ended June 30, 2016 and 2015, respectively. These amounts are eliminated upon consolidation.
(q)   TLLP segment operating expenses include amounts billed by Tesoro for services provided to TLLP under various operational contracts. Amounts billed by Tesoro totaled $34 million and $29 million for the three months ended June 30, 2016 and 2015, respectively, and $71 million and $58 million for the six months ended June 30, 2016 and 2015, respectively. Operating expenses also include imbalance gains and reimbursements pursuant to the Amended Omnibus Agreement of $5 million and $11 million for the three months ended June 30, 2016 and 2015, respectively, and $12 million and $19 million for the  six months ended June 30, 2016 and 2015, respectively. These amounts are eliminated upon consolidation. TLLP segment third-party operating expenses related to the transportation of crude oil and refined products related to Tesoro's sale of those refined products during the ordinary course of business are reclassified to cost of sales in our condensed statements of consolidated operations upon consolidation.
(r)    TLLP segment general and administrative expenses include amounts charged by Tesoro for general and administrative services provided to TLLP under various operational and administrative contracts. These amounts totaled $16 million and $18 million for the three months ended June 30, 2016 and 2015, respectively, and $33 million and $35 million for the six months ended June 30, 2016 and 2015, respectively, and are eliminated upon consolidation. General and administrative expenses are reclassified to cost of sales as it relates to Tesoro's sale of refined products in our condensed statements of consolidated operations upon consolidation.


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS (Unaudited) ($ in millions, except cents per gallon)


  Three Months Ended
June 30,
  Six Months Ended
June 30,
MARKETING SEGMENT 2016   2015   2016   2015
Revenues              
Fuel $ 4,077     $ 5,051     $ 7,375     $ 8,999  
Other non-fuel 22     16     42     32  
Total Revenues 4,099     5,067     7,417     9,031  
Cost of Sales              
Fuel 3,843     4,764     6,839     8,508  
Other non-fuel 4     1     8     3  
Total Cost of Sales 3,847     4,765     6,847     8,511  
Gross Margin              
Fuel (s) 234     287     536     491  
Other non-fuel 18     15     34     29  
Total Gross Margins 252     302     570     520  
Expenses              
Operating expenses 76     72     148     141  
Selling, general and administrative expenses 2     6     7     9  
Depreciation and amortization expense 12     11     24     23  
Loss on asset disposals and impairments 1     1     3     2  
Segment Operating Income $ 161     $ 212     $ 388     $ 345  
               
Fuel Sales (millions of gallons) 2,221     2,099     4,387     4,159  
Fuel Margin (¢/gallon) (s) 10.5 ¢   13.7 ¢   12.2 ¢   11.8 ¢
               
Number of Branded Stations (at the end of the period)              
MSO operated         590     582  
Jobber/Dealer operated         1,856     1,683  
Total Stations         2,446     2,265  

(s)    Management uses fuel margin per gallon to compare fuel results to other companies in the industry. There are a variety of ways to calculate fuel margin per gallon and different companies may calculate it in different ways. We calculate fuel margin per gallon by dividing fuel gross margin by fuel sales volumes. Fuel margin and fuel margin per gallon include the effect of intersegment purchases from the refining segment.


TESORO CORPORATION
RECONCILIATION OF AMOUNTS REPORTED UNDER U.S. GAAP (Unaudited) (In millions)


  Expected Annual EBITDA Contribution
  FHR Alaska Assets Dropdown   Martinez Assets Dropdown   Total Asset Dropdown
Reconciliation of Projected Net Earnings to Projected Annual EBITDA:          
Projected net earnings $ 36     $  16 - 36   $  52 - 72
Add: Depreciation and amortization expenses 4     13     17  
Add: Interest and financing costs, net 11     11     22  
Expected Annual EBITDA $ 51     $  40 - 60   $  91 - 111

  TLLP 2017 Annual Expected Segment EBITDA
Reconciliation of Projected Net Earnings to Projected Annual Segment EBITDA:  
Projected operating income $ 825  
Add: Depreciation and amortization expenses 175  
Projected Annual Segment EBITDA $ 1,000  

  Marketing 2018 Annual Expected Segment EBITDA
Reconciliation of Projected Operating Income to Projected Annual Segment EBITDA:  
Projected operating income $ 960  
Add: Depreciation and amortization expenses 48  
Projected Annual Segment EBITDA $ 1,008  



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