UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3473

TESORO CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		95-0862768
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828
(Address of principal executive offices) (Zip Code)

210-626-6000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 143,770,191 shares of the registrant’s Common Stock outstanding at April 30, 2011.

 

 

TESORO CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets — March 31, 2011 and December 31, 2010			3
Condensed Statements of Consolidated Operations — Three Months Ended March 31, 2011 and 2010			4
Condensed Statements of Consolidated Cash Flows — Three Months Ended March 31, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6. Exhibits			49
SIGNATURES			50
EXHIBIT INDEX			51
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TESORO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2011				2010
		(Unaudited)
		(Dollars in millions except per share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	724			$	648
Receivables, less allowance for doubtful accounts			1,231				908
Inventories			1,467				1,257
Prepayments and other			176				115
Total Current Assets			3,598				2,928
PROPERTY, PLANT AND EQUIPMENT
Refining			6,016				5,984
Retail			660				659
Corporate and other			205				204
Gross Property, Plant and Equipment			6,881				6,847
Less accumulated depreciation and amortization			(1,738	)			(1,677	)
Net Property, Plant and Equipment			5,143				5,170
OTHER NONCURRENT ASSETS
Acquired intangibles, net			241				246
Other, net			376				388
Total Other Noncurrent Assets			617				634
Total Assets		$	9,358			$	8,732
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	2,338			$	1,852
Accrued liabilities			517				492
Current maturities of debt			82				152
Total Current Liabilities			2,937				2,496
DEFERRED INCOME TAXES			682				616
OTHER NONCURRENT LIABILITIES			565				562
DEBT			1,845				1,843
COMMITMENTS AND CONTINGENCIES (Note H)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.162/3; authorized 200,000,000 shares; 149,637,117 shares issued (149,105,570 in 2010)			25				25
Additional paid-in capital			978				970
Retained earnings			2,505				2,398
Treasury stock, 6,051,893 common shares (5,925,541 in 2010), at cost			(129	)			(128	)
Accumulated other comprehensive loss			(50	)			(50	)
Total Stockholders’ Equity			3,329				3,215
Total Liabilities and Stockholders’ Equity		$	9,358			$	8,732

The accompanying notes are an integral part of these condensed consolidated financial statements.

TESORO CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
		(In millions except per share amounts)
REVENUES (a)		$	6,526			$	4,607
COSTS AND EXPENSES:
Cost of sales (a)			5,735				4,247
Operating expenses			371				373
Selling, general and administrative expenses			95				67
Depreciation and amortization expense			103				100
Loss on asset disposals and impairments			3				22
OPERATING INCOME (LOSS)			219				(202	)
Interest and financing costs			(43	)			(37	)
Foreign currency exchange gain			1				—
EARNINGS (LOSS) BEFORE INCOME TAXES			177				(239	)
Income tax expense (benefit)			70				(84	)
NET EARNINGS (LOSS)		$	107			$	(155	)
NET EARNINGS (LOSS) PER SHARE:
Basic		$	0.76			$	(1.11	)
Diluted		$	0.74			$	(1.11	)
WEIGHTED AVERAGE COMMON SHARES:
Basic			141.6				139.5
Diluted			144.0				139.5
SUPPLEMENTAL INFORMATION:
(a) Includes excise taxes collected by our retail segment		$	91			$	68

The accompanying notes are an integral part of these condensed consolidated financial statements.

TESORO CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
		(Dollars in millions except per share amounts)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss)		$	107			$	(155	)
Adjustments to reconcile net earnings (loss) to net cash from (used in) operating activities:
Depreciation and amortization expense			103				100
Amortization of debt issuance costs and discounts			6				4
Loss on asset disposals and impairments			3				22
Stock-based compensation expense			48				13
Deferred income taxes			60				(83	)
Excess tax benefits from stock-based compensation arrangements			(4	)			(1	)
Other changes in non-current assets and liabilities			(9	)			(14	)
Changes in current assets and current liabilities:
Receivables			(323	)			(65	)
Inventories			(210	)			(241	)
Prepayments and other			(54	)			(17	)
Accounts payable and accrued liabilities			484				402
Net cash from (used in) operating activities			211				(35	)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures			(48	)			(86	)
Proceeds from asset sales			—				1
Net cash used in investing activities			(48	)			(85	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings under revolving credit agreements			60				66
Repayments on revolving credit agreements			(130	)			(66	)
Repayments of debt			—				(1	)
Proceeds from stock options exercised			4				3
Repurchases of common stock			(3	)			(2	)
Excess tax benefits from stock-based compensation arrangements			4				1
Financing costs and other			(22	)			(4	)
Net cash used in financing activities			(87	)			(3	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			76				(123	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			648				413
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	724			$	290
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest		$	(2	)		$	(6	)
Income taxes paid (refunded), net		$	1			$	(85	)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable and accrued liabilities at end of period		$	17			$	15

The accompanying notes are an integral part of these condensed consolidated financial statements.

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE A — BASIS OF PRESENTATION

As used in this report, the terms “Tesoro,” “we,” “us,” or “our” may refer to Tesoro Corporation, one or more of its consolidated subsidiaries or all of them taken as a whole.

The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation and its subsidiaries have been prepared by management without audit according to the rules and regulations of the SEC. The accompanying condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature, unless otherwise disclosed. The consolidated balance sheet at December 31, 2010, has been condensed from the audited consolidated financial statements at that date. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures presented herein are adequate to fairly present the information. The accompanying condensed consolidated financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010.

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, to disclose contingent assets and liabilities at the date of the financial statements and to report revenues and expenses for the periods presented. We review our estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain prior year balances have been disaggregated in order to conform to the current year presentation.

NOTE B — EARNINGS (LOSS) PER SHARE

We compute basic earnings (loss) per share by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share include the effects of potentially dilutive shares, principally consisting of common stock options and unvested restricted stock outstanding during the period.

Share and per share calculations are presented below (in millions except per share amounts):

		Three Months Ended
		March 31,
		2011				2010
Basic:
Net earnings (loss)		$	107			$	(155	)
Weighted average common shares outstanding			141.6				139.5
Basic Earnings (Loss) Per Share		$	0.76			$	(1.11	)
Diluted:
Net earnings (loss)		$	107			$	(155	)
Weighted average common shares outstanding			141.6				139.5
Common stock equivalents			2.4				—
Total diluted shares			144.0				139.5
Diluted Earnings (Loss) Per Share		$	0.74			$	(1.11	)

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Potentially dilutive common stock equivalents were excluded from the calculation of diluted earnings (loss) per share, as the effect of including such securities would have been anti-dilutive, were as follows (in millions):

		Three Months Ended
		March 31,
		2011				2010
Common stock equivalents (a)			—				1.4
Stock options (b)			3.2				5.4

NOTE C — INVENTORIES

Components of inventories were as follows (in millions):

		March 31,				December 31,
		2011				2010
Domestic crude oil and refined products		$	903			$	954
Foreign subsidiary crude oil			439				177
Oxygenates and by-products			28				30
Merchandise			14				14
Materials and supplies			83				82
Total Inventories		$	1,467			$	1,257

We use the last-in, first-out (“LIFO”) cost method as the primary method to determine the carrying value of domestic crude oil and refined product inventories in our refining and retail segments. We determine the carrying value of inventories of oxygenates, by-products, and foreign subsidiary-owned crude oil, using the first-in, first-out (“FIFO”) cost method. The total carrying value of our crude oil and refined product inventories was less than replacement cost by approximately $1.9 billion and $1.4 billion at March 31, 2011 and December 31, 2010, respectively.

NOTE D — FAIR VALUE MEASUREMENTS

We classify financial assets and financial liabilities into the following fair value hierarchy:

	•		level 1 — quoted prices in active markets for identical assets and liabilities;
	•		level 2 — quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability; and
	•		level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We measure fair value using level 1 inputs, when available, because they provide the most reliable evidence of fair value. Derivative instruments are our only financial assets and financial liabilities measured at fair value on a recurring basis. See Note E for further information on the Company’s derivative instruments.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our derivative instruments consist primarily of options, exchange-traded futures (“Futures Contracts”), over-the-counter swaps and options (“OTC Swap Contracts” and “OTC Option Contracts,” respectively), and physical commodity forward purchase and sale contracts (“Forward Contracts”). Options are valued using quoted prices from exchanges and are categorized in level 1 of the fair value hierarchy. Futures Contracts are valued based on quoted prices from exchanges and are categorized in level 1 or level 2 of the fair value hierarchy based on the liquidity of the instrument. OTC Swap Contracts, OTC Option Contracts and Forward Contracts are valued using third-party broker quotes, industry pricing services and price curves derived from commodity exchange postings, with consideration of counterparty credit risk. These quotes are corroborated with market data and are categorized in level 2 of the fair value hierarchy. We did not have any derivative assets or liabilities classified as level 3 at March 31, 2011 or December 31, 2010. The fair values of our derivative assets and liabilities by level within the fair value hierarchy were as follows (in millions):

		March 31, 2011				Level 1				Level 2
Assets:
Commodity Futures Contracts		$	22			$	—			$	22
Commodity OTC Swap Contracts			1				—				1
Commodity Forward Contracts			6				—				6
Total Assets			29				—				29
Liabilities:
Commodity Futures Contracts			67				67				—
Commodity OTC Swap Contracts			4				—				4
Total Liabilities			71				67				4
Net Assets (Liabilities)		$	(42	)		$	(67	)		$	25

		December 31,
		2010				Level 1				Level 2
Assets:
Commodity Futures Contracts		$	6			$	—			$	6
Commodity OTC Swap Contracts			1				—				1
Commodity Forward Contracts			1				—				1
Total Assets			8				—				8
Liabilities:
Commodity Futures Contracts			17				17				—
Total Liabilities			17				17				—
Net Assets (Liabilities)		$	(9	)		$	(17	)		$	8

Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We have elected to offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously.

The physical inventory associated with the futures contracts included in the above table and selected for fair value hedge accounting treatment is adjusted to fair value at the end of the period. At December 31, 2010, the fair value adjustment related to the physical inventory was approximately $4 million. There were no material fair value adjustments to the physical inventory at March 31, 2011.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The carrying value of our financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value because of the short maturities of these instruments. The fair value of our debt was estimated primarily using quoted market prices. The carrying value and fair value of our debt at March 31, 2011, were approximately $1.9 billion and $2.0 billion, respectively. Both the carrying value and fair value of our debt at December 31, 2010, were approximately $2.0 billion.

The fair value of certain nonfinancial assets measured on a non-recurring basis as of December 31, 2010, were as follows (in millions):

		December 31,
		2010				Level 1				Level 2				Level 3				Total Losses
Assets:
Refining equipment		$	4			$	—			$	—			$	4			$	20
Goodwill		$	36			$	—			$	—			$	36			$	10

We continue to evaluate the recoverability of the value of certain capital projects currently in progress. This evaluation resulted in an impairment charge of $20 million related to the deferral of a capital project at our Los Angeles refinery, recognized during the three months ended March 31, 2010. The impairment charge is included in loss on asset disposals and impairments. Equipment specifically manufactured and uniquely configured for this project was written down from a carrying value of $20 million to a fair value of $4 million for a loss of $16 million. The estimated recovery amounts were based on direct equipment cost recoverable if sold to an end user, in the principal or most advantageous market for the asset, in an orderly transaction. An additional $4 million loss was related to certain engineering costs that were determined to not be recoverable. The amounts presented represent our estimates for unobservable inputs that require significant judgment, for which there is little or no market data.

We reviewed the recorded value of goodwill for impairment during the fourth quarter of 2010 as part of our annual goodwill impairment test. This review resulted in a write-off included in loss on asset disposals and impairments. There were no material goodwill or asset impairments, asset retirement obligations or indefinite lived intangible assets that were measured at fair value during the three months ended March 31, 2011.

NOTE E — DERIVATIVE INSTRUMENTS

The timing, direction and overall change in refined product prices versus crude oil prices impacts profit margins and has a significant impact on our earnings and cash flows. Consequently, we periodically use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of feedstocks, products and energy supplies to or from the Company’s refineries, terminals, retail operations and customers. We may also use non-trading derivative instruments to manage price risks associated with inventories above or below our target levels. To achieve our objectives, we may use derivative instruments such as options, Futures Contracts, OTC Swap Contracts, OTC Option Contracts, and Forward Contracts, all generally with maturity dates of less than one year. We believe that there is minimal credit risk with respect to our counterparties.

We may use our excess storage capacity in Panama to take advantage of contango markets when the future price of crude oil is higher than the current spot price. We use commodity derivatives to hedge crude oil held in connection with these arbitrage opportunities.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The accounting for changes in the fair value of a commodity derivative depends on whether the derivative has been designated in a hedging relationship and whether we have elected the normal purchases and normal sales exception. The accounting for the change in fair value can be summarized as follows:

Derivative Treatment		Accounting Method
Normal purchases and normal sales exception		Accrual accounting
Designated in qualifying hedging relationship		Hedge accounting
All other derivatives		Mark-to-market accounting

The primary derivative instruments that we use have the following characteristics. Option contracts provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Futures Contracts include a requirement to buy or sell the commodity at a fixed price in the future. OTC Swap Contracts, OTC Option Contracts and Forward Contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral if our liability position exceeds specified thresholds. At March 31, 2011, we did not have any cash collateral outstanding.

The following table presents the fair value (in millions) and balance sheet classification of our derivative instruments as of March 31, 2011 and December 31, 2010. Net derivative assets and net derivative liabilities are presented in prepayments and other and accrued liabilities in the consolidated balance sheet, respectively. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below will not agree with the amounts presented in our consolidated balance sheet, nor will they agree with the fair value information presented in Note D.

		Derivative Assets								Derivative Liabilities
Derivatives Not Designated as Fair Value		March 31,				December 31,				March 31,				December 31,
Hedging Instruments:		2011				2010				2011				2010
Commodity Future Contracts		$	385			$	88			$	(427	)		$	(96	)
Commodity OTC Swap Contracts			3				3				(6	)			(2	)
Commodity Forward Contracts			6				2				—				(1	)
Total Derivative Instruments		$	394			$	93			$	(433	)		$	(99	)

		Derivative Assets								Derivative Liabilities
Derivatives Designated as Fair Value		March 31,				December 31,				March 31,				December 31,
Hedging Instruments:		2011				2010				2011				2010
Commodity Future Contracts		$	—			$	—			$	(3	)		$	(3	)
Total Derivative Instruments		$	—			$	—			$	(3	)		$	(3	)

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Losses for our non-hedging derivative instruments for the three months ended March 31, 2011 and 2010, were as follows (in millions):

		Three months ended March 31,
Derivatives Not Designated as Hedging Instruments (a):		2011				2010
Commodity Future Contracts		$	(56	)		$	(12	)
Commodity OTC Swap Contracts			(1	)			—
Commodity Forward Contracts			7				—
Total Non-Hedging Derivative Instruments		$	(50	)		$	(12	)

Losses on our fair value hedging derivative instruments during the three months ended March 31, 2011, were as follows (in millions). We did not acquire any fair value hedging derivative instruments during the three months ended March 31, 2010.

Amount of Loss

Amount of Gain

Amount of Loss

Recognized in

Recognized in

Recognized in Income

Derivatives Designated as Fair Value

Income on

Income on Hedged

on Ineffective Portion

Hedging Instruments:

Derivatives

Item

of Derivative (c)

Commodity Futures Contracts (b)

$

(1

)

$

—

$

(1

)

Open Short Positions

All of our open positions are scheduled to mature within the next twelve months. The information below presents the net volume of outstanding contracts by type of instrument and year of maturity as of March 31, 2011, (volumes in thousands of barrels):

Fair value hedges						Mark-to-market derivatives
Derivative instrument						Derivative instrument and
and Year of maturity		Contract Volumes				Year of maturity				Contract Volumes
Swaps						Swaps
2011			—			2011					1,234
2012			—			2012					71
Futures						Futures
2011			150			2011					4,957
2012			—			2012					25
Forwards						Forwards
2011			—			2011					1,148

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE F — DEBT

For additional information regarding our outstanding debt, see “Capital Resources and Liquidity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2.

Tesoro Corporation Revolving Credit Facility (“Revolving Credit Facility”)

We amended our Revolving Credit Facility in March 2011. Modifications included: a change to the total available capacity to $1.85 billion which can be increased up to an aggregate $2.25 billion, subject to receiving increased commitments from the lending group. The Revolving Credit Facility is guaranteed by substantially all of Tesoro’s active domestic subsidiaries, excluding Tesoro Logistics LP and its subsidiaries and is secured by substantially all of the petroleum inventory, cash and receivables of Tesoro’s active domestic subsidiaries. For additional information regarding Tesoro Logistics LP and the redemption of the Junior Subordinated Notes, see Note L.

At March 31, 2011, our Revolving Credit Facility provided for borrowings (including letters of credit) up to the lesser of the amount of a periodically adjusted borrowing base of approximately $2.7 billion (based upon a West Texas Intermediate crude oil price of $97 per barrel), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, net of the standard reserve as defined, or the Revolving Credit Facility’s total capacity of $1.85 billion. As of March 31, 2011, we had no borrowings and $876 million in letters of credit outstanding under the Revolving Credit Facility, resulting in total unused credit availability of approximately $974 million or 53% of the eligible borrowing base.

Borrowings under the Revolving Credit Facility bear interest at either a base rate (3.25% at March 31, 2011), or a Eurodollar rate (0.24% at March 31, 2011) plus an applicable margin. The applicable margin at March 31, 2011, was 1.75% in the case of the Eurodollar rate, but varies based upon our Revolving Credit Facility’s credit ratings. Letters of credit outstanding under the Revolving Credit Facility incur fees at an annual rate tied to the applicable margin described above (1.75% at March 31, 2011). We also incur commitment fees for the unused portion of the Revolving Credit Facility at an annual rate of 0.375% as of March 31, 2011. Our Revolving Credit Facility is scheduled to mature, and the committments will terminate, on March 16, 2016, unless the Company does not (a) refinance or pay in full, the Company’s 6¼% notes due November 2012 on or prior to the stated maturity date, or (b) refinance or pay in full, the Company’s 6⅝% notes due November 2015 on or prior to the stated maturity date, at which point the Revolving Credit Facility would be immediately terminated.

Letter of Credit Agreements

The Revolving Credit Facility allows us to obtain letters of credit under separate letter of credit agreements for foreign crude oil purchases. At March 31, 2011, we had three separate letter of credit agreements with a total capacity of $540 million, of which $459 million was outstanding. Letters of credit outstanding under these agreements incur fees and are secured by the petroleum inventories for which they are issued. The letter of credit agreements may be terminated by either party, at any time.

Tesoro Panama Company Sociedad Anonima (“TPSA”) Revolving Credit Facility

TPSA, a directly and wholly owned subsidiary of Tesoro, entered into a 364-day uncommitted, secured revolving credit agreement that expires in October 2011. TPSA is an excluded and unrestricted subsidiary from the Revolving Credit Facility and outstanding indentures. The TPSA Revolving Credit Facility is non-recourse to Tesoro and is guaranteed by TPSA’s assets. The TPSA Revolving Credit Facility includes two uncommitted facilities, which provide for revolving borrowings, swing line loans and daylight overdraft loans and letters of credit.

At March 31, 2011, our TPSA Revolving Credit Facility provided for borrowings (including letters of credit) up to the lesser of the amount of a periodically adjusted collateral pool consisting of TPSA eligible receivables and petroleum inventories, net of reserves, or the agreement’s capacity based on the net worth of TPSA. As of March 31, 2011, TPSA’s capacity was $350 million, consisting of $245 million under the first facility and $105 million under the second facility. Our total capacity under the TPSA facilities can be further increased up to $700 million provided the facilities’ maximum amounts do not exceed $550 million or $350 million, respectively. At March 31, 2011, we had $80 million in borrowings outstanding under this agreement and letters of credit outstanding of $54 million.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Revolving borrowings bear interest at a Eurodollar rate plus an applicable margin (2.75% as of March 31, 2011), or an alternative base rate (3.25% as of March 31, 2011) plus an applicable margin (1.75% as of March 31, 2011). Letters of credit outstanding under the TPSA Revolving Credit Facility incur fees at the Eurodollar rate (0.24% as of March 31, 2011) plus an annual base rate (1.75% at March 31, 2011).

NOTE G —BENEFIT PLANS

Tesoro sponsors the following four defined benefit pension plans: the funded qualified employee retirement plan, the unfunded nonqualified executive security plan, the unfunded nonqualified restoration retirement plan and the unfunded nonqualified supplemental executive retirement plan. Although our funded employee retirement plan fully meets all funding requirements under applicable laws and regulations, during the three months ended March 31, 2011, we voluntarily contributed $12 million to improve the funded status of the plan. The components of pension benefit expense and other postretirement benefit expense included in the condensed statements of consolidated operations for the three months ended March 31, 2011 and 2010, were (in millions):

										Other Postretirement
		Pension Benefits								Benefits
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Service cost		$	7			$	10			$	1			$	4
Interest cost			7				7				1				6
Expected return on plan assets			(5	)			(5	)			—				—
Amortization of prior service cost (credit)			—				1				(9	)			—
Recognized net actuarial loss			5				3				3				—
Recognized curtailment loss			2				1				—				—
Net Periodic Benefit Expense (Income)		$	16			$	17			$	(4	)		$	10

NOTE H — COMMITMENTS AND CONTINGENCIES

Environmental and Tax Matters

We are a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. Although we cannot predict the ultimate outcomes of these matters with certainty, we have accrued for the estimated liabilities when appropriate. We believe that the outcome of these matters will not materially impact our liquidity and consolidated financial position, although the resolution of certain of these matters could have a material impact on interim or annual results of operations. Additionally, if applicable, we accrue receivables for probable insurance or other third-party recoveries.

We are subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls, or make other modifications to certain emission sources, equipment or facilities.

We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased expenditures in the future. We are also subject to audits by federal, state and foreign taxing authorities in the normal course of business. It is possible that tax audits could result in claims against us in excess of recorded liabilities. We believe that resolution of any such claim(s) would not materially affect our consolidated financial position or results of operations. We believe it is possible that unrecognized tax benefits could decrease by as much as $11 million in the next twelve months through settlements or other conclusions, primarily regarding state tax issues.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Environmental Liabilities

We are, and expect to continue, incurring expenses for environmental liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail station properties. We have accrued liabilities for these expenses and believe these accruals are adequate. At March 31, 2011 and December 31, 2010, our accruals for environmental expenditures totaled $102 million and $108 million, respectively. Our environmental accruals are based on estimates including engineering assessments, and it is possible that our estimates will change and that additional costs will be recorded as more information becomes available.

We received $58.5 million in a settlement with a prior owner of our Golden Eagle refinery in 2007 in exchange for assuming responsibility for certain environmental liabilities arising from operations at the refinery prior to August 2000. These environmental liabilities totaled $59 million and $62 million at March 31, 2011 and December 31, 2010, respectively. We cannot reasonably determine the full extent of remedial activities that may be required at the Golden Eagle refinery. Therefore, it is possible that we will identify additional remediation costs as more information becomes available. We have filed insurance claims under environmental insurance policies that provide coverage up to $190 million for expenditures in excess of $50 million in self-insurance. Amounts recorded for environmental liabilities have not been reduced for possible insurance recoveries.

We are continuing to investigate conditions at certain active wastewater treatment units at our Golden Eagle refinery. This investigation is driven by an order from the San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the Golden Eagle refinery. Costs to investigate these conditions are included in our environmental accruals. We cannot currently estimate the amount of the ultimate resolution of the order, but we believe it will not have a material adverse effect on our financial position or results of operations.

Washington Refinery Fire

In April 2010, the naphtha hydrotreater unit at our Washington refinery was involved in a fire, which fatally injured seven employees and rendered the unit inoperable. The Washington State Department of Labor & Industries (“L&I”), the U.S. Chemical Safety and Hazard Investigation Board (“CSB”) and the U.S. Environmental Protection Agency (“EPA”) initiated separate investigations of the fire. In October 2010, L&I completed its investigation, issued citations and assessed a $2.4 million fine, which we appealed. L&I reassumed jurisdiction of the citation and affirmed the allegations in December 2010. We disagree with L&I’s characterizations of Tesoro’s operations at our Washington refinery and believe, based on available evidence and scientific reviews, that many of the agency’s conclusions are mistaken. In January 2011, we filed an appeal of the citation. The EPA and CSB investigations are ongoing. We have incurred charges related to the incident of $2 million and $27 million during the first quarter of 2011 and year ended December 31, 2010, respectively.

In February 2011, Tesoro Corporation, Tesoro Refining and Marketing Company and other defendants were named in a lawsuit brought by the estates and families of six of the seven fatally injured employees arising from the April 2010 incident. In addition, a third-party truck driver has alleged damages in the lawsuit. The lawsuit includes allegations of negligence, premises liability, strict liability, product liability and seeks unspecified compensatory and punitive damages. This case, Donald and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro Refining and Marketing et al., is proceeding in the Superior Court of the State of Washington, Skagit County. The Company believes that it has defenses to the allegations contained in the lawsuit, and we currently believe that the outcome will not materially impact our liquidity or consolidated financial position.

Our business interruption insurance deductible is satisfied after we have exceeded both 60 days of operational disruption and $25 million in losses primarily based on the operating plan that existed prior to the incident. Our property damage insurance has a $10 million deductible. We have filed business interruption insurance claims and property damage claims related to this incident. We collected $55 million in business interruption insurance recoveries that relate to downtime from April 2010 to August 2010, which were recorded as an offset to cost of sales in the consolidated statement of operations for the year-ended December 31, 2010. We also accrued $12 million for property

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

damage recoveries as an offset to operating expenses. We collected $10 million related to the property damage claims during the three months ended March 31, 2011.

Other Matters

In the ordinary course of business, we become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters. As a result, we have not established accruals for these matters unless a likelihood of loss may be reasonably possible and the amount of loss is currently estimable. On the basis of existing information, we believe that the resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations.

During 2009, Chevron filed a lawsuit against us claiming they are entitled to a share of the refunds we received in 2008 from the owners of the Trans Alaska Pipeline System (“TAPS”). We received $50 million in 2008, net of contingent legal fees, for excessive intrastate rates charged by TAPS during 1997 through 2000, and the period of 2001 through June 2003. Chevron is asserting that it is entitled to a share of its portion of the refunds for retroactive price adjustments under our previous crude oil contracts with them. In September 2010, the trial court judge granted Chevron’s motion for summary judgment and awarded them $16 million, including interest. We disagree with the trial court and have appealed the decision to the Alaska Supreme Court in which the proceeding is now pending. We have established an accrual for this matter and believe that the outcome will not materially impact our liquidity, results of operations or consolidated financial position.

On February 5, 2010, the EPA filed suit against us alleging violations of the Clean Air Act and corresponding regulatory requirements concerning the testing and reporting of transportation fuels and fuel additives. In February 2009, we received a Notice of Violation (“NOV”) from the EPA for alleged violations arising from a compliance review conducted by the EPA in 2006, for the years 2003 through the time of the review in 2006. We are discussing the alleged violations contained in the suit with the EPA and the U.S. Department of Justice and have not established an accrual for this matter. On the basis of existing information, we believe that the resolution of this matter will not have a material adverse effect on our financial position or results of operations.

NOTE I — STOCKHOLDERS’ EQUITY

Our Revolving Credit Agreement and senior notes each limit our restricted payments (as defined) including our ability to pay cash dividends, repurchase stock or make voluntary repayments of subordinate debt. The aggregate amount of restricted payments cannot exceed an amount defined in each of the debt agreements. The indentures for our senior notes also limit our subsidiaries ability to make certain payments and distributions. See Note J for information relating to stock-based compensation and common stock reserved for exercise of options.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE J — STOCK-BASED COMPENSATION

Stock-based compensation expense included in our condensed statements of consolidated operations was as follows (in millions):

		Three months ended March 31,
		2011				2010
Restricted common stock		$	2			$	3
Stock options			—				2
Stock appreciation rights			35				5
Phantom stock options			11				3
Total Stock-Based Compensation Expense		$	48			$	13

The income tax benefit recognized in the income statement for stock-based compensation was $19 million and $5 million for the three months ended March 31, 2011 and 2010, respectively. The income tax benefit recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $10 million and $4 million for the three months ended March 31, 2011 and 2010, respectively.

Restricted Common Stock

The fair value of each restricted share on the grant date is equal to the market price of our common stock on that date. The estimated fair value of our restricted common stock is amortized over the vesting period using the straight-line method. These awards generally vest in annual increments ratably over three years. Unrecognized compensation cost related to our non-vested restricted stock totaled $13.2 million as of March 31, 2011. This cost is expected to be recognized over a weighted-average period of 1.8 years. The fair value of non-vested restricted common stock as of March 31, 2011, totaled $36.5 million.

A summary of our restricted common stock activity for the three months ended March 31, 2011, is set forth below (shares in thousands):

						Weighted-Average
		Number of				Grant-Date
		Restricted Shares				Fair Value
Nonvested at January 1, 2011			1,762			$	15.46
Granted			29			$	25.63
Vested			(406	)		$	23.03
Forfeited			(26	)		$	13.73
Nonvested at March 31, 2011			1,359			$	13.45

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock Options

The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing model. The estimated fair value of these stock options is amortized over the vesting period using the straight-line method. These awards generally will become exercisable in annual increments ratably over three years following the date of grant and expire ten years from the date of grant. Total unrecognized compensation cost related to non-vested stock options totaled $3.9 million as of March 31, 2011, which is expected to be recognized over a weighted average period of 1.9 years. The income tax benefit realized from tax deductions associated with stock options exercised during the three months ended March 31, 2011, totaled $4 million. A summary of our stock options for the three months ended March 31, 2011, is presented below (shares in thousands):

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Options				Price				Term				Value
														(In millions)
Outstanding at January 1, 2011			7,428			$	23.23			5.0 years				$	31
Granted			15			$	25.63
Exercised			(529	)		$	8.44
Forfeited or expired			(5	)		$	12.93
Outstanding at March 31, 2011			6,909			$	24.37			5.0 years				$	56
Vested or expected to vest at March 31, 2011			6,909			$	24.37			5.0 years				$	56
Exercisable at March 31, 2011			6,183			$	25.66			4.6 years				$	47

Stock Appreciation Rights

A stock appreciation right (“SAR”) entitles an employee to receive cash in an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price of the SAR. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model. We did not grant SARs to our employees during the three months ended March 31, 2011. We have accrued $68 million and $39 million in accrued liabilities associated with our SARs awards at March 31, 2011 and December 31, 2010, respectively. A summary of our stock appreciation right activity for the three months ended March 31, 2011, is set forth below (shares in thousands):

						Weighted-				Weighted-Average
		Number of				Average				Remaining
		SARs				Exercise Price				Contractual Term
Outstanding at January 1, 2011			7,372			$	22.34			4.6 years
Exercised			(544	)		$	14.13
Forfeited			(79	)		$	19.57
Outstanding at March 31, 2011			6,749			$	23.03			4.3 years
Vested or expected to vest at March 31, 2011			6,748			$	23.03			4.3 years
Exercisable at March 31, 2011			4,798			$	26.76			4.0 years

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Executive Phantom Stock Options

The fair value of each phantom stock option is estimated at the end of each reporting period using the Black-Scholes option-pricing model. The executive phantom stock options vest ratably over three years following the date of grant and expire ten years from the date of grant. We did not grant phantom stock options to our executive officers during the three months ended March 31, 2011. We have accrued $21 million and $15 million in other noncurrent liabilities associated with these executive phantom stock option awards at March 31, 2011 and December 31, 2010, respectively. A summary of our executive phantom stock option activity is set forth below (shares in thousands):

						Weighted-Average
		Number of Options				Exercise Price
Outstanding at January 1, 2011			1,487			$	14.13
Exercised			(256	)
Outstanding at March 31, 2011			1,231			$	14.13

NOTE K — OPERATING SEGMENTS

The Company’s revenues are derived from two operating segments, refining and retail. We own and operate seven petroleum refineries located in California, Washington, Alaska, Hawaii, North Dakota and Utah. These refineries manufacture gasoline and gasoline blendstocks, jet fuel, diesel fuel, residual fuel oils and other refined products. We sell these refined products, together with refined products purchased from third-parties, at wholesale through terminal facilities and other locations. Our refining segment also sells refined products to unbranded marketers and occasionally exports refined products to foreign markets. Our retail segment sells gasoline, diesel fuel and convenience store items through company-operated retail stations and branded jobber/dealers in 18 states from Minnesota to Alaska and Hawaii. We do not have significant operations in foreign countries. Therefore, revenue in foreign countries and long-lived assets located in foreign countries are not material to our operations.

We evaluate the performance of our segments based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. Intersegment sales from refining to retail are made at prevailing market rates. Income taxes, other income, foreign currency exchange gain (loss), interest and financing costs, interest income, corporate depreciation and corporate general and administrative expenses are excluded from segment operating income. Identifiable assets are those used by the segments, whereas corporate assets are principally cash and other assets that are not associated with a specific operating segment.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Segment information is as follows:

		Three Months Ended March 31,
		2011				2010
		(in millions)
Revenues
Refining:
Refined products		$	6,270			$	4,245
Crude oil resales and other			155				237
Retail:
Fuel (a)			1,115				814
Merchandise and other			52				53
Intersegment sales from Refining to Retail			(1,066	)			(742	)
Total Revenues		$	6,526			$	4,607
Segment Operating Income (Loss)
Refining (b)		$	303			$	(169	)
Retail			2				24
Total Segment Operating Income (Loss)			305				(145	)
Corporate and unallocated costs			(86	)			(57	)
Operating Income (Loss)			219				(202	)
Interest and financing costs			(43	)			(37	)
Foreign currency exchange gain			1				—
Earnings (Loss) Before Income Taxes		$	177			$	(239	)
Depreciation and Amortization Expense
Refining		$	91			$	85
Retail			9				10
Corporate			3				5
Total Depreciation and Amortization Expense		$	103			$	100
Capital Expenditures
Refining		$	38			$	65
Retail			3				2
Corporate			1				—
Total Capital Expenditures		$	42			$	67

		March 31, 2011				December 31, 2010
		(in millions)
Identifiable Assets
Refining		$	7,756			$	7,303
Retail			642				619
Corporate			960				810
Total Assets		$	9,358			$	8,732

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE L — INITIAL PUBLIC OFFERING OF TESORO LOGISTICS LP (“TLLP”)

On April 26, 2011, TLLP closed its initial public offering of 14,950,000 common units at a price of $21.00 per unit, which included a 1,950,000 share over-allotment option that was exercised by the underwriters. Net proceeds to TLLP from the sale of the units was approximately $283 million, net of estimated offering costs and underwriters’ commissions of $31 million. We own a 52% interest in TLLP, including the general partner interest. The initial public offering represented the sale by us of a 48% interest in TLLP. TLLP was formed by Tesoro Corporation to own, operate, develop and acquire crude oil and refined products logistics assets. Headquartered in San Antonio, Texas, TLLP’s initial assets consist of a crude oil gathering system in the Bakken Shale/Williston Basin area, eight refined products terminals in the western United States, and a crude oil and refined products storage facility and five related short-haul pipelines in Utah.

On April 26, 2011, TLLP entered into a senior secured revolving credit agreement (“TLLP Revolving Credit Facility”) with a syndicate of banks and financial institutions, including Bank of America, N.A. as administrative agent. The TLLP Revolving Credit Facility provides for total loan availability of $150 million and permits TLLP to request that the availability be increased up to an aggregate of $300 million, subject to receiving increased commitments from the lenders. At the closing of the offering, TLLP borrowed $50 million under the TLLP Revolving Credit Facility. TLLP distributed total proceeds to us of approximately $330 million, which includes $280 million from the offering and $50 million from the TLLP Revolving Credit Facility, in consideration of assets contributed and to reimburse us for certain capital expenditures incurred with respect to these assets. We redeemed the $150 million Junior Subordinated Notes due in 2012 in May 2011 with cash proceeds from the offering.

The TLLP Revolving Credit Facility is non-recourse to Tesoro and is guaranteed by all of TLLP’s subsidiaries and secured by substantially all of TLLP’s assets. Borrowings available under the TLLP Revolving Credit Facility are up to the total available revolving capacity of the facility. The TLLP Revolving Credit Facility is scheduled to mature on April 25, 2014.

Borrowings bear interest at either a base rate (3.25% at April 26, 2011), plus the applicable margin, or a Eurodollar rate (0.21% at April 26, 2011), plus an applicable margin. The applicable margin at April 26, 2011, was 1.50% in the case of the base rate and 2.50% in the case of the Eurodollar rate but varies based upon Consolidated Leverage Ratio, as defined. The annual rate of commitment fees is 0.50%.

Reconciliation of Cash Proceeds (in millions)
Total proceeds from the offering		$	314
Offering and underwriters’ costs, net debt issuance costs*			(29	)
Proceeds from the offering, net offering and underwriters’ costs			285
Less: Debt issuance costs*			(2	)
Net proceeds from the offering			283
Less: Cash retained by TLLP			(3	)
Net proceeds to Tesoro from the offering			280
Borrowings under TLLP Revolving			50
Gross proceeds to Tesoro		$	330

NOTE M — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Separate condensed consolidating financial information of Tesoro Corporation, subsidiary guarantors and non-guarantors are presented below. Tesoro and certain subsidiary guarantors have fully and unconditionally guaranteed our 6¹/4% senior notes due 2012, 6⁵/8% senior notes due 2015, 6¹/2% senior notes due 2017, and 9³/4% senior notes due 2019. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information. The following condensed consolidating financial information should be read in conjunction with the accompanying condensed consolidated financial statements and notes. The following condensed consolidating financial information is provided as an alternative to providing separate financial statements for guarantor subsidiaries. Separate financial statements of Tesoro’s subsidiary guarantors are not included because the guarantees are full and unconditional and these subsidiary guarantors are 100% owned and jointly and severally liable for Tesoro’s outstanding senior notes. The information is presented using the equity method of accounting for investments in subsidiaries.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Balance Sheet as of March 31, 2011
(in millions)

										Non-
		Tesoro				Guarantor				Guarantor
		Corporation				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	—			$	699			$	25			$	—			$	724
Receivables, less allowance for doubtful accounts			7				1,100				124				—				1,231
Inventories			—				1,028				439				—				1,467
Prepayments and other			51				118				7				—				176
Total Current Assets			58				2,945				595				—				3,598
Net Property, Plant and Equipment			—				4,983				160				—				5,143
Investment in Subsidiaries			4,120				(159	)			(5	)			(3,956	)			—
Long-Term Receivables from Affiliates			2,146				—				—				(2,146	)			—
Other Noncurrent Assets			49				568				—				—				617
Total Assets		$	6,373			$	8,337			$	750			$	(6,102	)		$	9,358
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	144			$	2,401			$	310			$	—			$	2,855
Current maturities of debt			—				2				80				—				82
Total Current Liabilities			144				2,403				390				—				2,937
Long-Term Payables to Affiliates			—				1,960				186				(2,146	)			—
Debt			1,826				19				—				—				1,845
Other Noncurrent Liabilities			1,074				174				(1	)			—				1,247
Stockholders’ Equity			3,329				3,781				175				(3,956	)			3,329
Total Liabilities and Stockholders’ Equity		$	6,373			$	8,337			$	750			$	(6,102	)		$	9,358

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Balance Sheet as of December 31, 2010
(in millions)

										Non-
		Tesoro				Guarantor				Guarantor
		Corporation				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	—			$	612			$	36			$	—			$	648
Receivables, less allowance for doubtful accounts			8				719				181				—				908
Inventories			—				1,080				177				—				1,257
Prepayments and other			29				78				8				—				115
Total Current Assets			37				2,489				402				—				2,928
Net Property, Plant and Equipment			—				5,008				162				—				5,170
Investment in Subsidiaries			4,011				(147	)			(5	)			(3,859	)			—
Long-Term Receivables from Affiliates			2,037				—				88				(2,125	)			—
Other Noncurrent Assets			34				597				3				—				634
Total Assets		$	6,119			$	7,947			$	650			$	(5,984	)		$	8,732
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	76			$	1,940			$	328			$	—			$	2,344
Current maturities of debt			—				2				150				—				152
Total Current Liabilities			76				1,942				478				—				2,496
Long-Term Payables to Affiliates			—				2,125				—				(2,125	)			—
Debt			1,823				20				—				—				1,843
Other Noncurrent Liabilities			1,005				174				(1	)			—				1,178
Stockholders’ Equity			3,215				3,686				173				(3,859	)			3,215
Total Liabilities and Stockholders’ Equity		$	6,119			$	7,947			$	650			$	(5,984	)		$	8,732

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2011
(In millions)

										Non-
		Tesoro				Guarantor				Guarantor
		Corporation				Subsidiaries				Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	8,241			$	688			$	(2,403	)		$	6,526
Costs and expenses			4				8,023				683				(2,403	)			6,307
OPERATING INCOME (LOSS)			(4	)			218				5				—				219
Equity in earnings (loss) of subsidiaries			109				(12	)			—				(97	)			—
Other expense			—				(40	)			(2	)			—				(42	)
EARNINGS (LOSS) BEFORE INCOME TAXES			105				166				3				(97	)			177
Income tax expense (benefit) (a)			(2	)			71				1				—				70
NET EARNINGS (LOSS)		$	107			$	95			$	2			$	(97	)		$	107

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2010
(In millions)

										Non-
		Tesoro				Guarantor				Guarantor
		Corporation				Subsidiaries				Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	5,824			$	559			$	(1,776	)		$	4,607
Costs and expenses			2				6,027				556				(1,776	)			4,809
OPERATING INCOME (LOSS)			(2	)			(203	)			3				—				(202	)
Equity in earnings (loss) of subsidiaries			(154	)			(7	)			—				161				—
Other expense			—				(37	)			—				—				(37	)
EARNINGS (LOSS) BEFORE INCOME TAXES			(156	)			(247	)			3				161				(239	)
Income tax expense (benefit) (a)			(1	)			(84	)			1				—				(84	)
NET EARNINGS (LOSS)		$	(155	)		$	(163	)		$	2			$	161			$	(155	)