Q4 2014 Tesoro Corporation Earnings Conference Call

Thursday, February 12, 2015 7:30 a.m. CT  

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Tesoro Corporation Reports 2014 Fourth Quarter and Record Full Year Results

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  • Record all-time high full year net earnings from continuing operations of $872 million, or $6.67 per diluted share; excluding special items adjusted earnings were $887 million, or $6.79 per diluted share
  • Fourth Quarter net earnings from continuing operations of $172 million, or $1.34 per diluted share; excluding special items adjusted earnings were $187 million, or $1.46 per diluted share
  • Approved a 40% increase to regular quarterly dividend to $0.425 per share
  • Successful close of the $2.5 billion Rockies Natural Gas Business acquisition
  • Achieved annual business improvements of $560 million in 2014 exceeding goal by over 30%
  • Record retail performance with $195 million of segment operating income in the fourth quarter

SAN ANTONIO - February 11, 2015 - Tesoro Corporation (NYSE:TSO) today reported fourth quarter 2014 net earnings of $145 million or $1.13 per diluted share versus last year's $7 million loss and full year 2014 net earnings of $843 million or $6.44 per diluted share, up 105% over 2013 net earnings of $412 million.

Adjusted Earnings for the fourth quarter, excluding special items of $15 million, were $187 million or $1.46 per diluted share.  Special items include expenses related to transaction and integration costs associated with completing the Rockies Natural Gas Business acquisition, an inventory adjustment due to the lower of cost or market valuation, a throughput deficiency receivable from the Rockies Natural Gas Business acquisition and a benefit related to net legal settlements.  Adjusted EBITDA and Adjusted Diluted EPS were negatively impacted by $69 million of compensation related costs for Tesoro and $17 million from an environmental accrual in our logistics business.  Neither of these costs, which equate to $0.37 per diluted share, were included in our original guidance for costs in the fourth quarter.  These costs are not clearly identifiable within our financial statements accompanying this release. 

"2014 was a very successful year for the Company - not only from a financial standpoint - but also from our excellent safety and operating performance" said Greg Goff, Chairman, President and CEO. "We exceeded the Distinctive Performance Objectives we laid out for the company and have continued to transform Tesoro with the acquisition of the natural gas business within Tesoro Logistics LP. We returned over $600 million to shareholders in the form of dividends and share repurchases and invested an additional $500 million in Tesoro Logistics during 2014."

  Three Months Ended
 December 31,
  Years Ended
 December 31,
($ in millions, except per share data) 2014   2013   2014   2013
Operating Income                      
  Refining $ 151     $ 107     $ 1,288     $ 873  
  TLLP 37     21     206     74  
  Retail 195     24     424     120  
Total Segment Operating Income $ 383     $ 152     $ 1,918     $ 1,067  
Net Earning (Loss) From Continuing Operations
  Attributable to Tesoro
$ 172     $ (4 )   $ 872     $ 392  
                       
Diluted EPS - Continuing Operations $ 1.34     $ (0.03 )   $ 6.67     $ 2.85  
Diluted EPS - Discontinued Operations (0.21 )   (0.02 )   (0.23 )   0.15  
Total Diluted EPS $ 1.13     $ (0.05 )   $ 6.44     $ 3.00  
Adjusted Diluted EPS - Continuing Operations $ 1.46     $ 0.04     $ 6.79     $ 2.79  

The fourth quarter 2014 results were driven by strong refining, marketing and logistics performance. "Our record retail results highlight the value of our integrated business model," said Goff.

The refining segment's operating income of $151 million for the quarter was driven by strong fundamentals and consumer demand.  The Tesoro Index was $9.45 per barrel (/bbl) for the quarter, up about $1.80/bbl relative to a year ago. Overall gross margin for the quarter was $11.08/bbl or 117% of the Tesoro Index, compared to $9.45/bbl or 124% of the Tesoro Index last year. As part of our continued commitment to improving our refining performance, we produced an additional 60 thousand barrels per day of higher value distillate products than the prior year, increasing our yield of these products by 1.5%. Total refinery throughput for the quarter was 808 thousand barrels per day, or 95% utilization. Direct manufacturing costs in the fourth quarter 2014 relative to the third quarter 2014 were up $0.12/bbl to $5.54/bbl.

The logistics segment's operating income has seen substantial growth driven by increased throughput in the High Plains Pipeline system in North Dakota and significant growth from the West Coast products distribution assets. On December 2, 2014, Tesoro Logistics LP ("TLLP") completed the acquisition of the Rockies Natural Gas Business, marking a significant step towards our vision of creating a full-service, integrated logistics company. As part of this transaction Tesoro acquired an additional $500 million of TLLP units.

The retail segment's record operating income in the fourth quarter of $195 million was a result of favorable market conditions resulting from strong demand and decreasing crude oil prices.  The lower retail prices have resulted in strong consumer demand and sales from our ARCO® network, and our expanding Exxon® and Mobil® retail network.  Same store fuel sales were higher during the quarter by approximately 1.5% versus fourth quarter last year.

Corporate and unallocated costs were $101 million, including $4 million of corporate depreciation. This is higher than our guidance and run rate of $60 million due to higher compensation related costs.

Capital Spending and Liquidity
Capital spending for the fourth quarter 2014 was $208 million for Tesoro and $107 million for TLLP. Capital spending for the full year 2014 was $535 million for Tesoro and $244 million for TLLP. Full year 2015 capital spending is expected to be $570 million for Tesoro and $450 million for TLLP. Turnaround expenditures for the fourth quarter were $108 million. Turnaround expenditures for the full year were $196 million. Full year 2015 turnaround expenditures of $280 million are expected.

Tesoro ended the fourth quarter with $1.0 billion in cash and $2.2 billion of availability on the revolving credit facility. There are currently no borrowings under the revolving credit facility. Excluding TLLP debt and equity, total debt was $1.7 billion or 27% of total capitalization at the end of the fourth quarter 2014. On a consolidated basis, total outstanding debt was $4.3 billion or 38% of total capitalization.

TLLP ended the quarter with $260 million in borrowings under its separate revolving credit facility.

Returning Cash to Shareholders
During the fourth quarter, Tesoro returned about $187 million to shareholders through the purchase of nearly 2.2 million shares for $150 million and its regular quarterly dividend of $37 million.

Tesoro completed the previously existing $1.0 billion share repurchase program during 2014. Tesoro expects to continue to focus on opportunistic repurchases in 2015 under the new $1.0 billion share repurchase program authorized by the board of directors in July 2014.

Tesoro Corporation today also announced that the board of directors has approved an increase in the regular quarterly dividend by 40% to $0.425 per share payable on March 13, 2015, to all holders of record as of February 27, 2015.

Strategic Update
Through the end of December we estimate that we delivered $560 million in 2014 towards our ongoing Distinctive Performance Objectives around California synergies and business improvements. These objectives, which focus on improving gross margin and managing our costs to drive improvement in operating income, are clearly reflected in our record results this year.

"Tesoro is well positioned to move forward and achieve our business improvement objectives for 2015 by delivering additional annual improvements of $550 to $670 million," said Goff. "We are focused on delivering the West Coast Improvements, Capturing Margin Improvements and Growing our Logistics business while maintaining strong financial discipline."

The permit process for the Vancouver Energy project, to construct a 360 thousand barrel per day crude oil rail-to-marine terminal, is continuing to progress with Washington State's Energy Facility Site Evaluation Committee ("EFSEC"). EFSEC has begun the adjudicative phase and based on the schedule it laid out is expected to release the Draft Environmental Impact Statement in May of 2015. We still expect EFSEC will submit its recommendation to the governor of Washington once it completes the adjudicative phase.

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 fourth quarter and full year 2014 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.

Twitter Communication
Tesoro Corporation is utilizing Twitter, in conjunction with other Regulation FD-compliant disclosure vehicles, such as press releases, 8-Ks and its investor relations web site, as part of broader investor and stakeholder communication strategy. The Twitter page can be found at http://twitter.com/TesoroCorp.

Tesoro Corporation, a Fortune 100 company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates six refineries in the western United States with a combined capacity of over 850,000 barrels per day and ownership in a logistics business which includes a 36% interest in Tesoro Logistics LP (NYSE: TLLP) and ownership of its general partner. Tesoro's retail-marketing system includes over 2,200 retail stations under the ARCO®, Shell®, Exxon®, Mobil®, USA Gasoline(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 expectations about capital spending and turnaround expenditures; continued share repurchases under our new share repurchase program;.estimates and expectations regarding our synergy and business improvement objectives for 2015; and timing of the permitting and approval process for the Vancouver Energy project. 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:
Brian Randecker, Senior Director, Investor Relations, (210) 626-4757

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


Non-GAAP Measures

Our management uses a variety of financial and operating metrics to analyze operating segment performance. To supplement our financial information presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), our management uses additional metrics that are known as "non-GAAP" financial metrics in its evaluation of past performance and prospects for the future. These metrics are significant factors in assessing our operating results and profitability and include earnings before interest, income taxes, depreciation and amortization expenses ("EBITDA"). We define EBITDA as consolidated earnings, including earnings attributable to noncontrolling interest, excluding net earnings (loss) from discontinued operations, before depreciation and amortization expense, net interest and financing costs, income taxes and interest income. We define Adjusted EBITDA as EBITDA plus or minus amounts determined to be "special items" by our management based on their unusual nature and relative significance to earnings (loss) in a certain period. We provide complete reconciliation and discussion of items identified as special items with our presentation of adjusted EBITDA.

We present EBITDA and adjusted EBITDA because we believe some investors and analysts use EBITDA and adjusted EBITDA to help analyze our cash flows including our ability to satisfy principal and interest obligations with respect to our indebtedness and use cash for other purposes, including capital expenditures. EBITDA and adjusted EBITDA are also used by some investors and analysts to analyze and compare companies on the basis of operating performance and by management for internal analysis. EBITDA and adjusted EBITDA should not be considered as alternatives to U.S. GAAP net earnings or net cash from operating activities. EBITDA and adjusted EBITDA have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and net cash from operating activities.

We present net earnings from continuing operations adjusted for special items ("Adjusted Earnings") and net earnings per diluted share from continuing operations adjusted for special items ("Adjusted Diluted EPS") as management believes that the impact of these items on net earnings from continuing operations and diluted earnings per share from continuing operations is important information for an investor's understanding of the operations of our business and the financial information presented. Adjusted Earnings and Adjusted Diluted EPS should not be considered as an alternative to net earnings, earnings per diluted share or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted Earnings and Adjusted Diluted EPS may not be comparable to similarly titled measures used by other entities.

Items Impacting Comparability

As of December 31, 2013, we began reporting the logistics assets and operations of TLLP as a separate operating segment. In previous periods, when certain quantitative thresholds had not been met, TLLP's assets and operations were presented within our refining operating segment. TLLP's assets and operations include certain crude oil gathering assets and crude oil and refined products terminalling and transportation assets acquired from Tesoro and third parties. The historical results of operations of these assets have been retrospectively adjusted to conform to current presentation. These adjustments resulted in lower gross refining margins. The refining segment now includes costs for transportation and terminalling services provided by TLLP that were previously eliminated with consolidated reporting of TLLP revenues within our refining segment results.

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.

On September 25, 2013, we completed the sale of all of our interest in Tesoro Hawaii, LLC, which operated a 94 thousand barrel per day Hawaii refinery, retail stations and associated logistics assets (the "Hawaii Business"). We have reflected its results of operations as discontinued operations in our consolidated statements of operations for all periods presented, and, unless otherwise noted, we have excluded the Hawaii Business from the financial and operational data presented in the tables and discussion that follow.


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

  Three Months Ended
 December 31,
  Years Ended
 December 31,
  2014   2013   2014   2013
Revenues $ 8,445     $ 10,116     $ 40,633     $ 37,601  
Costs and Expenses:                      
Cost of sales (a) 7,282     9,258     35,691     34,085  
Operating expenses (b) 589     560     2,402     1,911  
Selling, general and administrative expenses (c) 133     108     342     337  
Depreciation and amortization expense 153     133     562     489  
Loss on asset disposals and impairments 6     5     4     24  
Operating Income 282     52     1,632     755  
Interest and financing costs, net (c) (d) (67 )   (40 )   (235 )   (149 )
Equity in earnings (loss) of equity method investments -     (1 )   10     11  
Other income (expense), net (b) 54     (2 )   57     63  
Earnings Before Income Taxes 269     9     1,464     680  
Income tax expense 110     3     547     246  
Net Earnings From Continuing Operations 159     6     917     434  
Earnings (loss) from discontinued operations, net of tax (e) (27 )   (3 )   (29 )   20  
Net Earnings 132     3     888     454  
Less: Net earnings (loss) from continuing operations attributable to
  noncontrolling interest
(13 )   10     45     42  
NET EARNINGS (LOSS) ATTRIBUTABLE TO TESORO
  CORPORATION
$ 145     $ (7 )   $ 843     $ 412  
                       
NET EARNINGS (LOSS) ATTRIBUTABLE TO TESORO
  CORPORATION
                     
Continuing operations $ 172     $ (4 )   $ 872     $ 392  
Discontinued operations (27 )   (3 )   (29 )   20  
Total $ 145     $ (7 )   $ 843     $ 412  
                       
NET EARNINGS (LOSS) PER SHARE - BASIC:                      
Continuing operations $ 1.36     $ (0.03 )   $ 6.79     $ 2.90  
Discontinued operations (0.21 )   (0.02 )   (0.23 )   0.15  
Total $ 1.15     $ (0.05 )   $ 6.56     $ 3.05  
Weighted average common shares outstanding - Basic 125.8   132.5   128.5   135.0  
                       
NET EARNINGS (LOSS) PER SHARE - DILUTED:                      
Continuing operations $ 1.34     $ (0.03 )   $ 6.67     $ 2.85  
Discontinued operations (0.21 )   (0.02 )   (0.23 )   0.15  
Total $ 1.13     $ (0.05 )   $ 6.44     $ 3.00  
Weighted average common shares outstanding - Diluted 127.8   134.9   130.8   137.3

____________________
(a)    Includes a charge of $42 million ($25 million after tax) for a lower of cost or market adjustment to inventory at December 31, 2014.
(b)   Includes a refund and settlement from a crude pipeline network rate case of $59 million ($37 million after tax) for the three months and year ended December 31, 2014 partially offset by accruals for legal reserves that are pending resolution of $15 million ($12 million after tax) for the three months and year ended December 31, 2014. Of these accruals, $10 million is recorded in operating expenses for both the three months and year ended December 31, 2014. Also includes a $16 million ($10 million after-tax) benefit related to the release of a legal reserve as a result of a favorable litigation settlement and $54 million ($34 million after-tax) in refunds from the settlement of a rate proceeding from the California Public Utilities Commission for the year ended December 31, 2013.
(c)    Includes stock-based compensation expense of $35 million and $46 million for the three months ended December 31, 2014 and 2013, respectively, and $55 million and $79 million for the years ended December 31, 2014 and 2013, respectively. The significant impact to stock-based compensation expense is primarily a result of changes in Tesoro's stock price during the periods as compared to the prior periods. Also includes transaction and integration costs related to the following acquisitions:
·    $18 million ($7 million to Tesoro, after-tax) for the three months and $19 million ($7 million to Tesoro, after-tax) year ended December 31, 2014 for TLLP's acquisition of the natural gas gathering, processing, treating and transportation and crude oil gathering assets of QEP Field Services, LLC (the "Rockies Natural Gas Business");
·     $16 million ($5 million to Tesoro, after-tax) in bridge fees incurred for TLLP's acquisition of the Rockies Natural Gas Business for the three months and year ended December 31, 2014. These are recorded as interest and financing costs; and
·    $15 million ($9 million to Tesoro, after-tax) for the three months ended December 31, 2013 and $62 million ($35 million to Tesoro, after-tax) for the year ended December 31, 2013 for our acquisition of the integrated Southern California refining, marketing and logistics business on June 1, 2013 from BP West Coast Products, LLC and other affiliated sellers (the "Los Angeles Acquisition") and TLLP's acquisition of Chevron's Northwest Products System.
(d)   Includes charges totaling $31 million and $10 million  for premiums and unamortized debt issuance costs associated with the redemption of Tesoro's 9.750% Senior Notes and TLLP's 5.875% Senior Notes, respectively, during the year ended December 31, 2014.
(e)    Net loss from discontinued operations for the three months and year ended December 31, 2014 includes $42 million ($25 million after-tax) of charges for obligations we have to make certain improvements, and resolve penalties and fines from our past ownership of the Hawaii Refinery. The net earnings from discontinued operations in 2013 includes an $81 million ($49 million after-tax) gain related to the sale of the Hawaii Business, including a $17 million curtailment gain related to the remeasurement of our pension and other postretirement benefit obligations during the year ended December 31, 2013.


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

  Three Months Ended
December 31,
  Years Ended
 December 31,
  2014     2013     2014     2013  
Earnings Before Income Taxes                      
Refining (a) (b) $ 151     $ 107     $ 1,288     $ 873  
TLLP (c) (f) 37     21     206     74  
Retail 195     24     424     120  
Total Segment Operating Income 383     152     1,918     1,067  
Corporate and unallocated costs (c) (101 )   (100 )   (286 )   (312 )
Operating Income 282     52     1,632     755  
Interest and financing costs, net (b) (67 )   (40 )   (235 )   (149 )
Equity in earnings (loss) of equity method investments -     (1 )   10     11  
Other income (expense), net (b) 54     (2 )   57     63  
Earnings Before Income Taxes $ 269     $ 9     $ 1,464     $ 680  
                       
Depreciation and Amortization Expense                      
Refining $ 111     $ 101     $ 428     $ 386  
TLLP 26     16     77     45  
Retail 12     11     42     37  
Corporate 4     5     15     21  
Total Depreciation and Amortization Expense $ 153     $ 133     $ 562     $ 489  
                       
Special Items, Before Taxes (f)                      
Refining $ (6 )   $ -     $ (7 )   $ (70 )
TLLP 28     -     29     4  
Retail -     -     -     -  
Corporate 4     15     5     58  
Total Special Items $ 26     $ 15     $ 27     $ (8 )
                       
Adjusted EBITDA                      
Refining $ 256     $ 208     $ 1,709     $ 1,189  
TLLP 91     37     312     123  
Retail 207     35     466     157  
Corporate (39 )   (83 )   (199 )   (159 )
Total Adjusted EBITDA $ 515     $ 197     $ 2,288     $ 1,310  
                       
Capital Expenditures                      
Refining $ 171     $ 96     $ 451     $ 413  
TLLP 107     24     244     83  
Retail 27     14     54     40  
Corporate 10     12     30     22  
Total Capital Expenditures $ 315     $ 146     $ 779     $ 558  

___________________
(f)    The effects of special items on net earnings before income taxes by segment include:

  Three Months Ended
December 31,
  Years Ended
 December 31,
  2014     2013     2014     2013  
Refining                      
Lower of cost or market inventory adjustment (a) $ 42     $ -     $ 42     $ -  
Legal settlements, net (b) (48 )   -     (49 )   (70 )
TLLP                      
Transaction and integration costs (c) 18     -     19     4  
Throughput deficiency receivable (x) 10     -     10     -  
Corporate and Other                      
Transaction and integration costs (c) -     15     -     58  
Legal settlements, net (b) 4     -     5     -  

TESORO CORPORATION
OTHER SUMMARY FINANCIAL INFORMATION
(Unaudited) (Dollars in millions)

  December 31, 2014   December 31, 2013
Cash and cash equivalents (TLLP: $19 and $23, respectively) $ 1,000     $ 1,238  
Inventories 2,439     2,565  
Current maturities of debt 6     6  
Long-term debt (TLLP: $2,593 and $1,164, respectively) 4,254     2,823  
Total equity 6,976     5,485  
Total debt to capitalization ratio 38 %   34 %
Total debt to capitalization ratio, excluding TLLP debt (g) 27 %   28 %
Working capital $ 1,608     $ 1,918  
Total market value of TLLP units held by Tesoro (h) 1,658     1,000  

  Three Months Ended
December 31,
  Years Ended
December 31,
  2014   2013   2014   2013
Cash distributions received from TLLP (i):                      
For common units held $ 18     $ 10     $ 52     $ 35  
For general partner units held 14     4     35     9  

___________________
(g)   Excludes TLLP's total debt, including capital leases, of $2.6 billion and $1.2 billion and noncontrolling interest of $2.5 billion and $1.2 billion at December 31, 2014 and 2013, respectively. TLLP's debt is non-recourse to Tesoro, except for Tesoro Logistics GP, LLC.
(h)   Represents market value of units held at December 31, 2014 and 2013. Tesoro held 28,181,748 common units at a market value of $58.85 per unit based on the closing unit price at December 31, 2014.  Tesoro held 3,855,824 common units and 15,254,890 subordinated units at a market value of $52.34 per unit based on the closing unit price at December 31, 2013.
(i)    Represents distributions received from TLLP during the three months and years ended December 31, 2014 and 2013 on units held by Tesoro.




TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS
(Unaudited)

  Three Months Ended
December 31,
  Years Ended
December 31,
REFINING SEGMENT 2014     2013     2014     2013  
Total Refining Segment                      
Throughput (Mbpd)                      
Heavy crude (j) 131     158     155     185  
Light crude 609     562     613     459  
Other feedstocks 68     66     57     53  
Total Throughput 808     786     825     697  
                       
Yield (Mbpd)                      
Gasoline and gasoline blendstocks 428     407     429     350  
Diesel fuel 179     174     191     158  
Jet fuel 127     121     127     100  
Heavy fuel oils, residual products, internally produced fuel
  and other
124     132     132     132  
Total Yield 858     834     879     740  
                       
Refined Product Sales (Mbpd) (k)                      
Gasoline and gasoline blendstocks 493     492     507     429  
Diesel fuel 202     181     206     176  
Jet fuel 157     143     149     117  
Heavy fuel oils, residual products and other 94     89     87     86  
Total Refined Product Sales 946     905     949     808  
                       
Segment Operating Income ($ millions)                      
Gross refining margin (l) $ 782     $ 683     $ 3,790     $ 2,848  
Expenses                      
Manufacturing costs 412     392     1,692     1,308  
Other operating expenses 99     75     358     253  
Selling, general and administrative expenses 7     4     21     12  
Depreciation and amortization expense 111     101     428     386  
Loss on asset disposals and impairments 2     4     3     16  
Segment Operating Income $ 151     $ 107     $ 1,288     $ 873  
                       
Gross refining margin ($/throughput bbl) (m) (n) $ 11.08     $ 9.45     $ 12.73     $ 11.19  
Manufacturing cost before depreciation and amortization
  expense ($/throughput bbl) (l)
$ 5.54     $ 5.39     $ 5.62     $ 5.14  
Refined Product Sales Margin ($/bbl) (l) (m)                      
Average sales price $ 91.71     $ 112.95     $ 112.17     $ 118.40  
Average costs of sales 87.17     105.22     102.59     109.64  
Refined Product Sales Margin $ 4.54     $ 7.73     $ 9.58     $ 8.76  

__________________
(j)    We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less.
(k)   Sources of total refined product sales include refined products manufactured at our refineries and refined products purchased from third parties. Total refined product sales margins include margins on sales of manufactured and purchased refined products.
(l)    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 retail segment at prices which approximate market and fees charged by TLLP for the transportation and terminalling of crude oil and refined products at prices which we believe are no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. Gross refining margin approximates total refining throughput multiplied by the gross refining margin per barrel.
(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 and refined product sales margin per barrel.  We calculate gross refining margin per barrel by dividing gross refining margin (revenues 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.  We calculate refined product sales margin per barrel by dividing refined product sales margin by total refining throughput. Refined product sales margin represents refined product sales less refined product cost of sales. 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 U.S. GAAP.
(n)   The gross refining margin per throughput barrel excludes of the impact the $42 million lower of cost or market adjustment recognized at December 31, 2014 in the computation of the rate at a consolidated or regional level.


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS
(Unaudited)

  Three Months Ended
December 31,
  Years Ended
December 31,
Refining By Region 2014     2013     2014     2013  
California (Martinez and Los Angeles)                      
Throughput (Mbpd)                      
Heavy crude (j) 124     152     149     178  
Light crude 332     298     334     206  
Other feedstocks 52     44     40     38  
Total Throughput 508     494     523     422  
                       
Yield (Mbpd)                      
Gasoline and gasoline blendstocks 276     260     282     218  
Diesel fuel 113     112     120     97  
Jet fuel 76     75     80     57  
Heavy fuel oils, residual products, internally produced fuel
  and other
83     85     85     83  
Total Yield 548     532     567     455  
                       
Gross refining margin ($ millions) $ 403     $ 276     $ 2,023     $ 1,304  
Gross refining margin ($/throughput bbl) (m) (n) $ 9.25     $ 6.08     $ 10.76     $ 8.47  
Manufacturing cost before depreciation and amortization
  expense ($/throughput bbl) (l)
$ 6.35     $ 6.11     $ 6.43     $ 5.86  
Capital expenditures ($ millions) $ 67     $ 39     $ 167     $ 140  
                       
Pacific Northwest (Alaska & Washington)                      
Throughput (Mbpd)                      
Heavy crude (j) 7     6     6     7  
Light crude 150     143     153     138  
Other feedstocks 11     18     12     11  
Total Throughput 168     167     171     156  
                       
Yield (Mbpd)                      
Gasoline and gasoline blendstocks 76     75     74     65  
Diesel fuel 28     28     32     28  
Jet fuel 35     31     33     30  
Heavy fuel oils, residual products, internally produced fuel
  and other
34     39     37     38  
Total Yield 173     173     176     161  
                       
Gross refining margin ($ millions) $ 104     $ 168     $ 642     $ 590  
Gross refining margin ($/throughput bbl) (m) (n) $ 7.20     $ 10.94     $ 10.43     $ 10.33  
Manufacturing cost before depreciation and amortization
  expense ($/throughput bbl) (l)
$ 4.50     $ 4.30     $ 4.37     $ 4.17  
Capital expenditures ($ millions) $ 23     $ 6     $ 54     $ 48  

TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS
(Unaudited)

  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Mid-Continent (North Dakota and Utah)                      
Throughput (Mbpd)                      
Light crude 127     121     126     115  
Other feedstocks 5     4     5     4  
Total Throughput 132     125     131     119  
                       
Yield (Mbpd)                      
Gasoline and gasoline blendstocks 76     72     73     67  
Diesel fuel 38     34     39     33  
Jet fuel 16     15     14     13  
Heavy fuel oils, residual products, internally produced fuel
  and other
7     8     10     11  
Total Yield 137     129     136     124  
                       
Gross refining margin ($ millions) $ 274     $ 237     $ 1,120     $ 948  
Gross refining margin ($/throughput bbl) (m) (n) $ 22.91     $ 20.63     $ 23.44     $ 21.73  
Manufacturing cost before depreciation and amortization
  expense ($/throughput bbl) (l)
$ 3.78     $ 3.98     $ 4.00     $ 3.86  
Capital expenditures ($ millions) $ 81     $ 51     $ 230     $ 225  


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS
(Unaudited)

  Three Months Ended
December 31,
  Years Ended
December 31,
TLLP SEGMENT 2014     2013     2014     2013  
Gathering                      
Crude oil gathering pipeline throughput (Mbpd) 150     88     123     86  
Average crude oil gathering pipeline revenue per barrel $ 1.69     $ 1.29     $ 1.46     $ 1.27  
Crude oil gathering trucking volume (Mbpd) 55     43     49     44  
Average crude oil gathering trucking revenue per barrel $ 3.22     $ 3.26     $ 3.23     $ 3.10  
Gas gathering volume (thousands of MMBtu/day) 341     -     86     -  
Average gas gathering revenue per MMBtu $ 0.41     $ -     $ 0.41     $ -  
Processing                      
NGL processing volumes (thousands of gallons) 8,231     -     8,231     -  
Average keep-whole fee per gallon of NGLs $ 0.85     $ -     $ 0.85     $ -  
Natural gas processing volumes (thousands of MMBtu/day) 226     -     57     -  
Average fee-based processing revenue per MMBtu $ 0.30     $ -     $ 0.30     $ -  
Terminalling and Transportation                      
Terminalling throughput (Mbpd) 911     927     917     739  
Average terminalling revenue per barrel $ 1.07     $ 0.72     $ 1.00     $ 0.69  
Pipeline transportation throughput (Mbpd) 814     361     822     205  
Average pipeline transportation revenue per barrel $ 0.37     $ 0.50     $ 0.36     $ 0.52  
                       
Segment Operating Income ($ millions)                      
Revenues                      
Gathering $ 53     $ 24     $ 137     $ 90  
Processing 23     -     23     -  
Terminalling and Transportation 116     77     442     223  
Intersegment sales (2 )   -     (2 )   -  
Total Revenues (o) 190     101     600     313  
Expenses                      
Operating expenses (p) (q) 92     53     247     162  
General and administrative expenses (r) 35     11     74     32  
Depreciation and amortization expense 26     16     77     45  
Gain on asset disposals and impairments -     -     (4 )   -  
Segment Operating Income $ 37     $ 21     $ 206     $ 74  

________________
(o)   TLLP segment revenues from services provided to our refining segment were $139 million and $86 million for the three months ended December 31, 2014 and 2013, respectively, and $497 million and $273 million for the years ended December 31, 2014 and 2013, respectively.  These amounts are eliminated upon consolidation.
(p)   In September 2013, TLLP responded to the release of crude oil in a rural field northeast of Tioga, North Dakota (the "Crude Oil Pipeline Release"). The environmental liabilities related to the Crude Oil Pipeline Release include amounts estimated for remediation activities that will be conducted during the next few years to restore the site for agricultural use. TLLP accrued an additional $17 million during the year ended December 31, 2014 to reflect improved scope definition and estimates which resulted in an increase in the total estimated cost associated with the project.
(q)   TLLP segment operating expenses include amounts billed by Tesoro for services provided to TLLP under various operational contracts. These amounts totaled $11 million and $23 million for the three months ended December 31, 2014 and 2013, respectively, and $35 million and $71 million for the years ended December 31, 2014 and 2013, respectively. These amounts are eliminated upon consolidation. Additionally, TLLP segment third-party operating expenses related to the transportation of crude oil and refined products are reclassified to cost of sales upon consolidation.
(r)    TLLP segment general and administrative expenses include amounts charged by Tesoro for general and administrative services provided to TLLP under various administrative contracts. These amounts totaled $9 million and $7 million for the three months ended December 31, 2014 and 2013, respectively, and $37 million and $20 million for the years ended December 31, 2014 and 2013, respectively. These amounts are eliminated upon consolidation.


TESORO CORPORATION
SEGMENT OPERATING DATA AND RESULTS
(Unaudited)

  Three Months Ended
December 31,
  Years Ended
December 31,
RETAIL SEGMENT 2014     2013     2014     2013  
Average Stations (during period)                      
Company/MSO-operated (s) 586     574     582     571  
Branded jobber/dealer (t) 1,687     1,679     1,692     1,285  
Total Average Retail Stations 2,273     2,253     2,274     1,856  
                       
Fuel Sales (millions of gallons)                      
Company/MSO-operated (s) 271     266     1,097     1,072  
Branded jobber/dealer (t) 791     763     3,086     2,096  
Total Fuel Sales 1,062     1,029     4,183     3,168  
                       
Fuel margin ($/gallon) (u) $ 0.26     $ 0.09     $ 0.17     $ 0.12  
                       
Segment Operating Income ($ millions)                      
Gross Margins                      
Fuel (u) $ 277     $ 96     $ 722     $ 390  
Merchandise and other non-fuel margin 19     28     111     99  
Total Gross Margins 296     124     833     489  
Expenses                      
Operating expenses 81     87     352     318  
Selling, general and administrative expenses 4     1     9     9  
Depreciation and amortization expense 12     11     42     37  
Loss on asset disposals and impairments 4     1     6     5  
Segment Operating Income $ 195     $ 24     $ 424     $ 120  

________________
(s)    During the fourth quarter 2014, we converted our company-operated retail locations to multi-site operators ("MSO") retaining the transportation fuel sales.  All employees and merchandise inventory were transferred to the MSOs.
(t)    Reflects the acquisition of supply rights for approximately 835 dealer-operated and branded wholesale retail stations with the Los Angeles Acquisition on June 1, 2013.
(u)   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. Investors and analysts may 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 an alternative to revenues, segment operating income or any other measure of financial performance presented in accordance with U.S. GAAP. Fuel margin and fuel margin per gallon include the effect of intersegment purchases from the refining segment at prices which approximate market.


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

  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Reconciliation of Net Earnings to EBITDA                      
Net earnings $ 132     $ 3     $ 888     $ 454  
(Earnings) loss from discontinued operations, net of tax 27     3     29     (20 )
Depreciation and amortization expense 153     133     562     489  
Interest and financing costs, net 67     40     235     149  
Income tax expense 110     3     547     246  
EBITDA (v) $ 489     $ 182     $ 2,261     $ 1,318  
Special items (f) 26     15     27     (8 )
Adjusted EBITDA (v) $ 515     $ 197     $ 2,288     $ 1,310  
                       
Reconciliation of Cash Flows from (used in) Operating
  Activities to EBITDA
                     
Net cash from operating activities $ 348     $ 189     $ 1,395     $ 859  
Net cash used in (from) discontinued operations 1     3     3     (71 )
Debt redemption charges -     -     (41 )   -  
Deferred charges 137     118     256     451  
Changes in current assets and current liabilities (42 )   (184 )   186     (55 )
Income tax expense 110     3     547     246  
Stock-based compensation expense (35 )   (46 )   (55 )   (79 )
Interest and financing costs, net 67     40     235     149  
Deferred income tax benefit (expense) (19 )   56     (246 )   (166 )
Loss on asset disposals and impairments (6 )   (5 )   (4 )   (24 )
Other (72 )   8     (15 )   8  
EBITDA (v) $ 489     $ 182     $ 2,261     $ 1,318  
Special items (f) 26     15     27     (8 )
Adjusted EBITDA (v) $ 515     $ 197     $ 2,288     $ 1,310  

________________
(v)   We define EBITDA as consolidated earnings, including earnings attributable to noncontrolling interest, excluding net earnings (loss) from discontinued operations, before depreciation and amortization expense, net interest and financing costs, income taxes and interest income. We define Adjusted EBITDA as EBITDA plus or minus amounts determined to be "special items" by our management based on their unusual nature and relative significance to earnings in a certain period.

  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Reconciliation of Refining Operating Income to Refining EBITDA                      
Operating income $ 151     $ 107     $ 1,288     $ 873  
Depreciation and amortization expense 111     101     428     386  
EBITDA (v) $ 262     $ 208     $ 1,716     $ 1,259  
Special items (f) (6 )   -     (7 )   (70 )
Adjusted EBITDA (v) $ 256     $ 208     $ 1,709     $ 1,189  
                       
  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Reconciliation of TLLP Operating Income to TLLP EBITDA                      
Operating income $ 37     $ 21     $ 206     $ 74  
Depreciation and amortization expense 26     16     77     45  
EBITDA (v) $ 63     $ 37     $ 283     $ 119  
Special items (f) 28     -     29     4  
Adjusted EBITDA (v) $ 91     $ 37     $ 312     $ 123  
                       
  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Reconciliation of Retail Operating Income to Retail EBITDA                      
Operating income $ 195     $ 24     $ 424     $ 120  
Depreciation and amortization expense 12     11     42     37  
EBITDA and Adjusted EBITDA (v) $ 207     $ 35     $ 466     $ 157  
                       
  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Reconciliation of Corporate and Other Operating Loss to
  Corporate and Other EBITDA
                     
Operating loss $ (101 )   $ (100 )   $ (286 )   $ (312 )
Depreciation and amortization expense 4     5     15     21  
Equity in earnings (loss) of equity method investments -     (1 )   10     11  
Other income (expense), net (d) 54     (2 )   57     63  
EBITDA (v) $ (43 )   $ (98 )   $ (204 )   $ (217 )
Special items (f) 4     15     5     58  
Adjusted EBITDA (v) $ (39 )   $ (83 )   $ (199 )   $ (159 )


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

  Three Months Ended
December 31,
  Years Ended
December 31,
  2014     2013     2014     2013  
Net Earnings (Loss) Attributable to Tesoro Corporation from
  Continuing Operations - U.S. GAAP
$ 172     $ (4 )   $ 872     $ 392  
Special Items, After-tax: (w)                      
Transaction and integration costs (c) 12     9     12     35  
Lower of cost or market inventory adjustment (a) 25     -     25     -  
Throughput deficiency receivable (x) 3     -     3     -  
Legal settlements, net (b) (25 )   -     (25 )   (44 )
Adjusted Earnings (y) $ 187     $ 5     $ 887     $ 383  
                       
Diluted Net Earnings (Loss) per Share from Continuing Operations
  Attributable to Tesoro Corporation - U.S. GAAP
$ 1.34     $ (0.03 )   $ 6.67     $ 2.85  
Special Items Per Share, After-tax: (w)                      
Transaction and integration costs (c) 0.09     0.07     0.09     0.26  
Lower of cost or market inventory adjustment (a) 0.20     -     0.19     -  
Throughput deficiency receivable (x) 0.03     -     0.03     -  
Legal settlements, net (b) (0.20 )   -     (0.19 )   (0.32 )
Adjusted Diluted EPS (y) $ 1.46     $ 0.04     $ 6.79     $ 2.79  

________________
(w)  For the purpose of reconciling net earnings, special items have been adjusted pre-tax to reflect our limited and general partner interests in TLLP including amounts attributable to our incentive distribution rights.
(x)   During December 2014, TLLP invoiced a QEP Field Services, LLC customer for a shortfall payment. TLLP did not recognize $10 million ($3 million to Tesoro, after tax) of revenue related to the billing period as it represented an opening balance sheet asset for the acquisition of the Rockies Natural Gas Business; however, TLLP is entitled to the cash receipt from such billing.
(y)   We present net earnings from continuing operations adjusted for special items ("Adjusted Earnings") and net earnings per diluted share from continuing operations adjusted for special items ("Adjusted Diluted EPS") as management believes that the impact of these items on net earnings from continuing operations and diluted earnings per share from continuing operations is important information for an investor's understanding of the operations of our business and the financial information presented. Adjusted Earnings and Adjusted Diluted EPS should not be considered as an alternative to net earnings, earnings per diluted share or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted Earnings and Adjusted Diluted EPS may not be comparable to similarly titled measures used by other entities.


HUG#1893850

Tesoro Corporation to Release Fourth Quarter Earnings

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SAN ANTONIO - January 5, 2015 - Tesoro Corporation (NYSE:TSO) plans to release its earnings for the fourth quarter 2014 after the market closes on Wednesday, February 11, 2015. The Company will broadcast, live, its conference call with analysts regarding fourth quarter results and other business matters on Thursday, February 12, 2015, at 7:30 a.m. CT. Interested parties may listen to the live conference call over the Internet by logging on to www.tsocorp.com.

Tesoro Corporation, a Fortune 100 company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates six refineries in the western United States with a combined capacity of over 850,000 barrels per day and ownership in a logistics business which includes a 35% interest in Tesoro Logistics LP (NYSE: TLLP) and ownership of its general partner. Tesoro's retail-marketing system includes over 2,200 retail stations under the ARCO®, Shell®, Exxon®, Mobil®, USA Gasoline(TM) and Tesoro® brands.

Contact:
Investors:
Brian Randecker, Senior Director, Investor Relations, (210) 626-4757

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


HUG#1884548