Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for the three and nine-month periods ended September 30, 2000 should be read in conjunction with MD&A included in the Tosco Corporation (“Tosco”) 1999 Annual Report on Form 10-K. The Annual Report sets forth Selected Financial Data that, in summary form, reviewed Tosco’s results of operations and capitalization over the five year period 1995 through 1999. This MD&A updates that data.
On February 29, 2000, the Company began operating retail systems consisting of approximately 1,740 retail gasoline and convenience outlets acquired from Exxon Corporation and Mobil Oil Corporation (collectively “ExxonMobil”) for $860.0 million, plus inventories and transaction costs. Tosco also acquired certain undeveloped sites and distribution terminals, all of which ExxonMobil divested under a Federal Trade Commission consent decree (collectively the “ExxonMobil Acquisition”). The acquired outlets comprise the Exxon system from New York through Maine (the “Northeast Territory”) and the Mobil system from New Jersey through Virginia (the “Middle Atlantic Territory”). The outlets include approximately 685 owned or leased sites and 1,055 open dealer and branded distributor sites. Tosco has exclusive rights to the “Exxon” brand in the Northeast Territory and the “Mobil” brand in the Middle Atlantic Territory for ten years.
On June 1, 2000, the Company purchased the Wood River Refinery and Chemical Complex, both located in Roxana, Illinois, for $688 million, including the cost of inventories from Equilon Enterprises LLC (the “Wood River Acquisition”).
On August 31, 2000, Tosco completed the sale of its Avon Refinery, located on the San Francisco Bay, to Ultramar Diamond Shamrock Corporation for $797 million, including crude oil and other hydrocarbon inventories (the “Avon Sale”). See Note 7 to the Consolidated Financial Statements.
On September 8, 2000, Tosco acquired the Alliance Refinery, located south of New Orleans, from BP Amoco for $939 million, including inventories and transaction costs (the “Alliance Acquisition”). See Note 3 to the Consolidated Financial Statements.
(a) Earnings per share throughout MD&A are expressed on a diluted basis.
Three-Months Ended September 30, 2000 Compared to Three-Months Ended September 30, 1999
Tosco earned net income of $145 million ($0.95 per share) on sales of $6.87 billion during the third quarter of 2000 compared to earnings of $114 million ($0.74 per share) on sales of $3.86 billion in the corresponding period of 1999. The increase in sales of $3.01 billion was primarily due to higher petroleum product prices and the ExxonMobil, Wood River, and Alliance Acquisitions partially offset by the Avon Sale.
Tosco generated an operating contribution (sales less cost of sales) of $461 million for the third quarter of 2000, compared to $377 million in the corresponding period in 1999. The increase of $84 million was attributable to refining (increase of $134 million) and retail (reduction of $50 million) operations.
Refining operating contribution was $423 million for the 2000 third quarter, compared to $289 million in the 1999 third quarter. This increase of $134 million was primarily attributable to the Wood River and Alliance Acquisitions and improved operating margin per charge barrel. These factors were partially offset by reduced production on the West Coast due to the Avon Sale.
Retail operating contribution was $38 million for the quarter ended September 30, 2000, compared to $88 million in the comparable period in 1999. The decline of $50 million was primarily attributable to reduced fuel sales margins (3.8 cents per gallon compared to 7.7 cents per gallon in 1999). This was partially offset by increased fuel volume primarily due to the ExxonMobil Acquisition. Fuel margins during the 2000 third quarter were at very low levels. In Southern California and Arizona, the heart of Tosco’s retail system, street prices were below wholesale prices for most of the 2000 third quarter.
Depreciation and amortization (“DD&A”) for the quarter ended September 30, 2000 was $95 million, compared to $76 million in the comparable 1999 period. This increase of $19 million is due to several factors. Refinery DD&A increased primarily due to the Wood River Acquisition as well as other capital and turnaround projects placed in service subsequent to September 30, 1999. Marketing DD&A increased due to the ExxonMobil Acquisition.
In conjunction with the Avon Sale, Tosco recorded a net gain of $20 million ($11.9 million after tax and $0.08 per share) for the sale of fixed assets and inventories offset by a loss on the purchase / defeasement of Tosco’s $200 million mortgage bonds that were collateralized by the Avon Refinery. See Notes 6 and 7 to the Consolidated Financial Statements.
Selling, general, and administrative (“SG&A”) expenses for the 2000 third quarter increased by $22 million compared to the corresponding 1999 period. This increase is principally due to the 2000 acquisitions and higher incentive compensation accruals for Tosco’s refining division.
The increase in net interest expense of $15 million is primarily due to increased borrowings to finance the ExxonMobil and Wood River Acquisitions and higher short-term interest rates under the Revolving Credit Facility.
Tosco reduced its effective income tax rate in 2000 to 40.5% from 41.0% in 1999, based on an evaluation of projected state income taxes.
Nine-Months Ended September 30, 2000 Compared to Nine-Months Ended September 30, 1999
Tosco earned net income of $365 million ($2.40 per share) on sales of $17.10 billion during the nine month period ended September 30, 2000, compared to net income of $226 million ($1.45 per share) on sales of $10.18 billion in the corresponding period of 1999. The increase in sales of $6.92 billion was primarily due to higher petroleum product prices, increased production, and the ExxonMobil and Wood River Acquisitions. Production during the first nine months of 1999 was reduced due to the turnaround of the Bayway Refinery cat cracker and the stand-down of the Avon Refinery as a result of a fire on February 23, 1999.
Tosco generated an operating contribution of $1.24 billion for the first nine months of 2000, compared to $951 million in the corresponding period in 1999. The increase of $286 million was attributable to refining (increase of $426 million) and retail (reduction of $140 million) operations.
Refining operating contribution was $973 million for the nine-month period ended September 30, 2000 compared to $547 million in the comparable 1999 period. This increase of $426 million was primarily attributable to the Wood River Acquisition, improved East Coast (at the Bayway and Trainer Refineries) operating margin per charge barrel, and higher production volumes. These factors were partially offset by lower West Coast operating margins.
Retail operating contribution was $264 million for the first nine months of 2000, compared to $404 million in the comparable period in 1999. The decline of $140 million was primarily attributable to reduced fuel sales margins (7.1 cents per gallon compared to 11.9 cents per gallon in 1999). This was partially offset by increased fuel volume primarily due to the ExxonMobil Acquisition.
DD&A for the nine month period ended September 30, 2000 was $260 million, compared to $234 million in the comparable 1999 period. This increase of $26 million is primarily due to an increase in refinery DD&A primarily due to the Wood River Acquisition, as well as other capital and turnaround projects placed in service subsequent to September 30, 1999, and the ExxonMobil Acquisition. DD&A for 1999 includes amortization costs of $4 million due to the acceleration of the Bayway Refinery cat cracker turnaround.
The increase in net interest expense of $29 million is primarily due to increased borrowings for the ExxonMobil and Wood River Acquisitions and higher short-term interest rates under the Revolving Credit Facility.
Outlook
Results of operations are primarily determined by the operating efficiency of the refineries, and by refining and retail fuel margins. All of Tosco’s refineries, including the Alliance Refinery acquired on September 8, 2000, are expected to operate at or near normal levels during the 2000 fourth quarter. The strong refining margins of the 2000 third quarter continued into the early fourth quarter while retail margins have improved. Accordingly, Tosco presently expects to earn more in the fourth quarter than it did in the third quarter of 2000 given the increase in refining capacity and current margins. Tosco is also committed to improving its results by improving efficiencies in all areas of operations without compromising safety, reliability, or environmental compliance.
On July 31, 2000, Tosco announced that it had entered into an agreement to purchase substantially all of the assets of the Irish National Petroleum Corporation Limited (the “Irish National Petroleum Acquisition”). The principal assets to be acquired are a 75,000 barrel per day refinery located in Cork, Ireland and a 8.5 million barrel deep water crude oil and oil products storage complex in Bantry Bay, Ireland. See Note 8 to the Consolidated Financial Statements.
Tosco continues to review opportunities to acquire assets that are accretive to earnings.
Cash Flows
As summarized in the Consolidated Statement of Cash Flows, cash and cash equivalents decreased by $10 million during the nine-month period ended September 30, 2000. Cash used in investing activities of $1.715 billion exceeded cash provided by operating activities of $906 million and financing activities of $799 million.
Net cash provided by operating activities of $906 million was due to cash earnings (net income plus depreciation, amortization, and other non-cash items) of $604 million, a net decrease in operating assets and liabilities of $289 million, and other sources of $13 million.
Net cash used in investing activities totaled $1.715 billion due to the ExxonMobil Acquisition of $370 million, the Wood River Acquisition of $688 million, the Alliance Acquisition of $939 million, capital and turnaround expenditures of $495 million, and a net increase in deferred charges and other assets of $43 million partially offset by proceeds on the Avon Sale of $797 million and other sources of $23 million.
Net cash provided by financing activities totaled $799 million, due to net borrowings under the revolving credit facility of $261 million, proceeds from a public debt offering of $600 million (to fund a portion of the ExxonMobil and Wood River Acquisitions), proceeds from a $300 million private issuance of floating interest rate notes (to fund a portion of the Wood River Acquisition), and other sources of $5 million partially offset by long-term debt payments of $126 million, the tender and/or defeasement of Tosco’s First Mortgage Bonds of $211 million, and dividend payments of $30 million.
Liquidity and Capital Resources
At September 30, 2000, liquidity (cash and cash equivalents, marketable securities and deposits, and availability under the Revolving Credit Facility) totaled $638 million, a $175 million decrease compared to the December 31, 1999 balance of $813 million. Cash and cash equivalents decreased by $10 million, marketable securities and deposits increased by $8 million, and availability under the Revolving Credit Facility decreased by $173 million. The decrease in availability under the Revolving Credit Facility reflects the $100 million increase in availability effective September 8, 2000 less additional borrowings to finance the Wood River and Alliance Acquisitions and operating requirements. See Note 5 to the Consolidated Financial Statements.
At September 30, 2000, total shareholders’ equity was $2.454 billion, a $346 million increase compared to the December 31, 1999 balance. This increase was due to net income of $365 million and other sources of $11 million partially offset by dividend payments of $30 million. Debt (current and long-term debt and the Revolving Credit Facility) increased by $835 million to $2.296 billion at September 30, 2000 due to net borrowings under the Revolving Credit Facility of $261 million, the issuance of $900 million of long-term debt partially offset by long-term debt payments of $126 million and the purchase/defeasement of Tosco’s $200 million First Mortgage Bonds. Borrowings were used to finance increased working capital requirements, to fund a portion of the ExxonMobil and Wood River Acquisitions, and for general corporate purposes. Accordingly, the ratio of long-term debt (Revolving Credit Facility and total long-term debt) to total capitalization (Revolving Credit Facility, total long-term debt, Trust Preferred Securities, and total shareholders’ equity) increased to 45% at September 30, 2000 compared to the December 31, 1999 ratio of 38%.
In September 2000, Tosco filed a shelf registration statement providing for the issuance of up to $3.0 billion aggregate principal amount of debt and equity securities. Such securities may be offered, separately or together, in amounts and at prices and terms to be set forth in one or more supplements to the shelf registration statement.
The Revolving Credit Facilities, as well as funds potentially available from the issuance of securities, provides Tosco with adequate resources to meet its expected liquidity demands for at least the next twelve months, including repayment of $150 million Series A floating rate notes that management intends to redeem on November 16, 2000.
Capital Expenditures
During the first nine months of 2000, Tosco spent $495 million on capital and turnaround expenditures ($261 million for refining capital, $57 million for turnarounds, $175 million for marketing capital, and $2 million for non-operating segment capital), all of which were budgeted for 2000. Refining capital expenditures include $127 million for construction of a polypropylene plant at the Bayway Refinery. Turnaround expenditures were primarily for turnaround projects at the Ferndale Refinery and the Rodeo Refinery unicracker. Marketing capital expenditures were primarily for upgraded equipment at existing sites, including rebranding sites in the Northwest and Southeast. Tosco intends to finance its 2000 capital additions, including continued construction of the Bayway Refinery polypropylene plant, through cash flows from operations and, if needed, by borrowings under the Revolving Credit Facility.
On August 3, 2000, Tosco announced that it would invest approximately $375 million over the next five years in its West Coast refineries to produce new clean fuels and increase the yields and efficiencies of its plants. Spending for Tosco’s East Coast and Mid-Continent systems is being evaluated and will be announced at a later date.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138") as an amendment of SFAS No. 133. The Company plans to adopt SFAS No. 133, as amended by SFAS No. 138, on January 1, 2001.
Tosco has substantially completed a review of its business activities in order to identify financial instruments and contractual arrangements that qualify as derivatives pursuant to SFAS No. 133. Although Tosco generally utilizes derivatives to reduce its exposure to price fluctuations, Tosco anticipates that the majority of these derivative instruments will be accounted for as speculative transactions rather than hedges, when SFAS No. 133 is adopted. Accordingly, Tosco is evaluating various strategies to assess the impact of SFAS No. 133 on its future operating results.
Forward Looking Statements
Tosco has made, and may continue to make, various forward-looking statements with respect to its financial position, business strategy, projected costs, projected savings, and plans and objectives of management. Such forward-looking statements are identified by the use of forward-looking words or phrases such as "anticipates," "intends," "expects," "plans," "believes," "estimates," or words or phrases of similar import. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and the statements looking forward beyond 2000 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from those anticipated by the forward-looking statements.
In addition to factors previously disclosed by Tosco and factors identified elsewhere herein, certain other factors could cause actual results to differ materially from such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Tosco, or persons acting on behalf of Tosco, are expressly qualified in their entirety by reference to such factors.
Tosco's forward-looking statements represent its judgment only on the dates such statements are made. By making any forward-looking statements, Tosco assumes no duty to update them to reflect new, changed, or unanticipated events or circumstances.
PART II OTHER INFORMATION
Item 1.Legal Proceedings
Tosco has settled a case in which it was alleged that petroleum coke was released into a creek. (People of the State of California v. Tosco Refining Company, Superior Court, San Luis Obispo County, Case No. 00-1500). (Second Quarter 2000 Form 10-Q).
In September 2000, Tosco received a Notice of Violation from the U.S. Environmental Protection Agency (EPA) alleging that certain batches of gasoline did not meet the standards for reformulated gasoline or was not produced in accordance with specific methods. Tosco is negotiating with the EPA to settle the matter.
Item 6.Exhibits and Reports on Form 8-K
| | 27 - Financial Data Schedule (filed electronically only) |
| | On September 15, 2000, a Report on Form 8-K was filed pursuant to Item 2 related to the sale of the Avon Refinery, located in Contra Costa County, California. |
| | On September 21, 2000, a Report on Form 8-K was filed pursuant to Item 2 related to the acquisition of the Alliance Refinery, located in Belle Chase, Louisiana. |
| | On October 25, 2000, a Report on Form 8-K was filed pursuant to Item 5 to announce a teleconference for that day to discuss Tosco's 2000 third quarter results. |
| | On October 25, 2000, a Report on Form 8-K was filed pursuant to Item 9 to clarify certain information discussed in Tosco's 2000 third quarter earnings teleconference. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2000 | TOSCO CORPORATION
(Registrant)
By: /s/ ROBERT I. SANTO
(Robert I. Santo)
Vice President and
Chief Accounting Officer |
