FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[)] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________________
to________________________
COMMISSION FILE NUMBER 1-7910
TOSCO CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-1865716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
72 CUMMINGS POINT ROAD
STAMFORD, CONNECTICUT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 977-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.75 par value New York Stock Exchange
Pacific Stock Exchange
9% Series A First Mortgage Bonds due March 15, 1997 New York Stock Exchange
9 5/8% Series B First Mortgage Bonds due March 15, 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 No
The aggregate market value of the voting stock held by non-affiliates of
the registrant on February 29, 1996 based on the closing price at which such
stock was sold on the New York Stock Exchange on such date was $1,656,757,925.
Registrant's Common Stock outstanding at February 29, 1996 was 37,126,228
shares.
Portions of registrant's definitive Proxy Statement relating to its 1996
Annual Meeting of Shareholders are incorporated by reference into Part III, as
set forth herein.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
TOSCO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
Items 1 and 2. Business and Properties 1
Introduction 1
Petroleum Refining, Supply,
Distribution, and Marketing 1
Other Activities 7
Office Properties 7
Employees 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote
of Security Holders 9
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 13
Item 8. Financial Statements and Supplementary
Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
Item 10. Directors and Executive Officers of
the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related
Transactions 17
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 18
Index to Consolidated Financial Statements
and Financial Statement Schedules.. F-1
PART I
Items 1 and 2. Business and Properties
INTRODUCTION
Tosco Corporation ("Tosco"), through divisions and subsidiaries, is a
large independent refiner, wholesaler, and retail marketer of petroleum
products, principally on the East and West Coasts of the United States. Tosco
has extensive distribution facilities and also engages in related commercial
activities throughout the United States and internationally.
During 1995, Tosco focused its efforts on consolidating its 1993 and
1994 acquisitions of retail marketing assets in the Pacific Northwest,
California and Arizona and expanding both the British Petroleum ("BP") brand in
nine western states and the Exxon brand in Arizona, where Tosco has the
exclusive right to market under those brands. Tosco continued to maintain and
upgrade its three refineries, Avon, Bayway and Ferndale, to remain competitive
in the domestic refining markets.
Tosco also has interests in oil shale properties in Colorado and Utah.
Tosco was incorporated under the laws of the State of Nevada in 1955.
Its principal executive offices are located at 72 Cummings Point Road,
Stamford, Connecticut 06902 and its telephone number is (203) 977-1000.
RECENT DEVELOPMENTS
On February 2, 1996, Tosco purchased from BP for $59 million,
excluding inventories, BP's retail marketing system in the Northeast including
seven terminals, the exclusive right to market under the BP brand in eleven
northeastern states and, the Washington D.C. metropolitan area, a
jobber network of approximately 500 service stations, and the Marcus Hook
refinery located outside Philadelphia, PA. The refinery, which was acquired in
a shutdown mode, has a refining capacity of approximately 180,000 barrels of
crude oil per day. Tosco is reviewing various uses for the facility.
With the entry of Tosco into the East Coast retail market in February
1996, Tosco reorganized its business into functional divisions, with Tosco
Refining Company ("Tosco Refining"), a division of Tosco, managing the business
of the four refineries and bulk commercial activity and Tosco Marketing Company
("Tosco Marketing"), also a division, managing the retail and wholesale
distribution and marketing of petroleum products.
On February 16, 1996, Tosco agreed to purchase all of the outstanding
shares of The Circle K Corporation ("Circle K") and to merge Circle K with a
subsidiary of Tosco. Circle K has approximately 2,500 convenience stores in the
U.S. of which 2,300 are company-owned and operated and 200 are franchised.
Approximately 1,900 of the Circle K stores sell gasoline. Completion of the
transaction is subject to the approval of various regulatory authorities, the
shareholders of Circle K, and the satisfaction of certain conditions. It is
expected to close prior to mid-1996. Payment of the total acquisition price of
approximately $710 million, not including transaction and certain other costs,
will consist of approximately 6.5 million shares of Common Stock and cash. The
Common Stock to be issued is subject to adjustment if the price of Common Stock
fluctuates outside an agreed range and for shares issued with respect to stock
options held by certain employees of Circle K. Upon completion of the
acquisition Tosco will be the largest operator of company-owned convenience
stores in the United States and Tosco's retail gasoline sales are expected to
increase significantly to approximately 8,000,000 gallons per day. A large
portion of the Circle K system is located in areas where Tosco is licensed to
operate under the BP or Exxon brand. Tosco intends, where appropriate, to
rebrand these locations.
PETROLEUM REFINING, SUPPLY, DISTRIBUTION, AND MARKETING
Refining
Tosco, through three major facilities, processed in 1995 approximately
541,000 barrels per day of crude oil and other feedstocks into various
petroleum products, consisting chiefly of light transportation fuels (gasoline,
diesel and jet fuel) and heating oil.
The Avon Refinery ("Avon"), is located in the San Francisco Bay Area.
The Avon Refinery, the largest independently owned refinery on the West Coast
of the United States, with approximately 160,000 barrels per day of crude oil
distillation capacity, is technologically complex, with coking, catalytic
cracking, hydrocracking and hydrodesulfurizing units to accommodate
comparatively lower gravity crude oils. It is capable of processing a broad
range of crude oils and other feedstocks into a high percentage of light
refined petroleum products, consisting chiefly of transportation fuels.
The Ferndale Refinery ("Ferndale"), is located on Puget Sound, 100
miles north of Seattle. It is connected by the Olympic pipeline to its major
retail markets, has crude oil distillation capacity of approximately 90,000
barrels per day and is equipped with thermal catalytic cracking and
hydrodesulfurization units, as well as modern marine facilities. The refinery,
together with an extensive retail gasoline marketing and distribution system
(the "Pacific Northwest Assets") was acquired from BP Exploration & Oil Inc. in
December 1993.
The Bayway Refinery ("Bayway") is located in Linden, New Jersey.
Bayway is the largest refinery (as measured by distillation capacity) on the
U.S. East Coast and can process in excess of 275,000 barrels per day of crude
oil and other feedstocks. Its facilities include hydrodesulfurization units and
the largest fluid catalytic cracking unit in the world. Bayway produces
transportation fuels and is a principal supplier of heating oil to the U. S.
East Coast. It is strategically located on the New York Harbor in a large
market area, with ready access to marine, rail, and truck transportation and
product distribution pipelines, giving it considerable flexibility to change
its raw material input and product output to respond to changing market
conditions. In 1995, Bayway broke ground on the construction of a $48 million
solvent deasphalter, which will process approximately 20,000 barrels a day of
lower valued residual fuel to produce feedstock for Bayway's catalytic cracker.
This project is intended to increase Bayway's self-sufficiency for producing
higher quality petroleum products and is expected to be completed by September
1996.
The table below sets forth quantities of crude oil and feedstocks
processed and refined products manufactured by Tosco during 1995, 1994 and
1993. A barrel is 42 gallons.
Average Barrels Per Calendar Day
Avon Bayway Ferndale
Refinery Refinery Refinery(3) Consolidated
1995 1994(1) 1993 1995 1994 1993(2) 1995 1994 1995 1994 1993
Crude oil refined 152,650 147,450 158,160 233,750 196,660 196,150 79,700 88,840 466,100 432,950 354,310
Additional refinery feed
and blending stocks 15,060 13,370 8,150 57,860 55,560 63,100 1,890 1,800 74,810 70,730 71,250
Total Input 167,710 160,820 166,310 291,610 252,220 259,250 81,590 90,640 540,910 503,680 425,560
Petroleum products produced:
Gasoline 90,160 86,020 98,640 148,430 120,580 130,140 34,220 39,860 272,810 246,460 228,780
Distillates 46,530 46,680 38,970 78,780 75,380 76,820 17,810 19,150 143,120 141,210 115,790
Jet fuel 14,280 8,770 7,020 2,600 3,790 16,880 12,560 7,020
Residual 6,930 14,130 11,820 38,150 36,980 29,800 23,780 26,060 68,860 77,170 41,620
Petroleum coke
(fuel oil equiv.) 6,880 6,190 7,370 6,880 6,190 7,370
Propane 4,280 4,090 4,260 11,840 9,710 10,910 1,320 1,480 17,440 9,490 15,170
Other 11,820 2,240 3,050 5,720 4,870 9,800 (240) (1,880) 17,300 11,020 12,850
Total petroleum products
produced 166,600 159,350 164,110 297,200 256,290 264,490 79,490 88,460 543,290 504,100 428,600
(1) Avon's raw material charges for 1994 were restated to include raw
materials processed at the MTBE Plant.
(2) Operations of the Bayway Refinery for 1993 are for the period April 8, 1993 (date acquired) to December 31, 1993.
(3) The Ferndale Refinery was acquired December 28, 1993.
The Federal Clean Air Act Amendments of 1990 and the laws and regulations
of state and local agencies impose certain air quality requirements that have a
significant impact on Tosco. These regulations require the sale of reformulated
and oxygenated gasoline in areas that do not meet certain air quality
standards. Effective January 1, 1995, federal regulations require the sale of
reformulated gasoline in the nine U.S. cities with the highest levels of ozone
in their air quality, including areas in which Tosco sells its gasoline.
Effective March 1, 1996, the California Air Resources Board required the sale
of reformulated gasoline in California that meets specifications that are
stricter than the federal requirement ("CARB Phase II"). Tosco has made the
modifications necessary to meet with these requirements, including
modifications at Avon to produce fuel meeting the CARB Phase II requirements.
Raw Material Supply
During 1995, Tosco's crude oil and feedstock requirement of approximately
541,000 barrels per day were supplied by third parties. Avon's and Ferndale's
requirements were supplied primarily from domestic sources, chiefly California
and Alaska, while Bayway's crude oil and feedstock requirements were met
primarily from foreign sources. An average of approximately 212,000 barrels per
day was purchased under term contracts from a variety of domestic sources
including Atlantic Richfield Co. ("ARCO"), BP Oil Supply Company ("BP Oil"),
Texaco Trading and Transportation Inc. ("Texaco Trading"), and Chevron U.S.A.,
a portion of which was resold. Approximately 75,000 barrels per day of foreign,
waterborne crude and feedstock was obtained under contracts with Statoil
(Norway). The balance of Tosco's crude oil and feedstock requirement during
1995 was purchased on the spot market, where Tosco purchased a total of
approximately 328,000 barrels per day (including 275,000 barrels per day from
foreign sources). Tosco resold approximately 12% of its raw material purchases.
In October 1986, Tosco entered into an agreement (the "ARCO Exchange
Agreement") with ARCO, having an initial ten year term, under which ARCO
delivers an average of 50,000 barrels per day of crude oil to the Avon Refinery
in exchange for a variable quantity of gasoline based upon the prices of
certain crude oils. In January 1996, ARCO informed Tosco that it will not
extend the agreement when it expires at the end of 1996. The ARCO Exchange
Agreement had two five-year renewal options exercisable by ARCO. The
termination of the ARCO Exchange Agreement is not expected to have a material
adverse effect on Tosco's ability to obtain crude oil for the Avon Refinery.
Under the ARCO Exchange Agreement, Tosco has agreed that in the event it
desires to sell the Avon Refinery, Tosco will first offer it for sale to ARCO.
If ARCO declines, Tosco will be free for a certain period of time to sell the
Avon Refinery for consideration no less favorable to Tosco than was initially
offered to ARCO, subject to the effect of possible continuing Tosco obligations
of exchange under the ARCO Exchange Agreement. In addition, in any such
subsequent sale ARCO has the right to participate in the bidding and to acquire
the Avon Refinery if it is the high bidder.
In June 1986, Tosco and Texaco Refining & Marketing, Inc. ("Texaco")
entered into a crude oil purchase, sale and exchange agreement. This contract
was extended in May 1988, in February 1990 and again in April 1992, with Texaco
Trading on similar terms. Pursuant to this agreement, Texaco Trading has agreed
to supply, and Tosco has agreed to purchase, an average of 35,000 to 40,000
barrels per day of San Joaquin Valley heavy crude oil (subject to certain
volume rate changes). Crude oil from the San Joaquin Valley is principally
moved to the Avon Refinery via pipelines owned by Texaco. To the extent such
pipelines are not available, Tosco's operating results may be materially
adversely affected.
Bayway has several term contracts with foreign suppliers of crude oil and
feedstocks and believes that in the event such contracts are terminated, it
would be able to replace them in the market without material adverse effect. In
connection with Bayway's reliance on European sources as its primary supplier
of crude oil, Tosco established a U.K. subsidiary during 1994 for the purpose
of obtaining better information and access to the European markets. During
1994, Bayway entered into a twelve-year tanker agreement with Neptune Orient
Lines, Ltd. of Singapore for the charter of four 100,000 dead weight tons
("DWT") crude oil tankers. The tankers will be built to maximize the use of
Bayway's dock receiving facilities as well as to meet the requirements of the
U.S. Oil Pollution Act of 1990. The first tanker is expected to be delivered in
the second half of 1996.
Bayway has a long-term lease agreement with Statia Terminals for
3,600,000 barrels of crude oil storage in Nova Scotia, Canada, which it entered
into in 1994. The tankers are expected to be utilized to move crude oil to
Bayway or other locations from the Nova Scotia storage location or in direct
shipments from suppliers.
In 1993 Tosco and BP Oil entered into a five year crude oil supply
agreement for the Ferndale Refinery, under which Tosco has the right to
purchase from BP Oil Alaska North Slope ("ANS") crude oil delivered to the
Ferndale Refinery in an amount approximately equivalent to the requirements of
that refinery on terms Tosco considers to be favorable.
Tosco believes its average crude oil inventory is presently sufficient
for normal refinery operations at Avon, Bayway and Ferndale. Tosco's crude oil
inventory level is managed in light of market risk, carrying costs, and
delivery method.
The cost to Tosco of crude oil and other feedstocks depends on many
factors, including the terms of purchase, credit and delivery. In general,
heavy crude oils are less expensive than lighter crude oils. Thus, if Avon's
supply of San Joaquin Valley heavy crude oil is reduced or curtailed, or if its
price relative to lighter crude oils increases, Tosco's operations could be
adversely affected. In 1995, Congress deregulated the ANS crude oil market by
permitting it to be exported, which caused an increase in its price. While this
change may affect Tosco adversely, it is not expected to have a material
impact. If Bayway's foreign sources of crude oil or the marine system for
delivering crude oil, including required marine insurance for possible marine
environmental liabilities, were curtailed, Tosco's operations could be
adversely affected. In addition, the loss, or an adverse change in the terms,
of certain of the crude oil supply contracts described above or the loss of
other sources or means of delivery of crude oil could have a material adverse
effect on Tosco's operating results. The volatility of prices and quantities of
crude oil that may be purchased on the spot market or pursuant to long and
short-term contracts could materially adversely affect Tosco's operating
results.
Wholesale Marketing and Distribution
Tosco sells unbranded refined petroleum products to wholesale purchasers.
Tosco's wholesale sales of gasoline and distillates are made to large end
users, retailers, independent marketers and jobbers who serve unbranded
markets, including the retail, industrial, commercial, agricultural and
governmental classes of trade. Sales are also made to other refiners and
resellers, both major and independent. Tosco generally sells its other
industrial petroleum products directly to the end users and resellers of such
industrial products. Tosco's costs associated with meeting the new federal and
state requirements, particularly the CARB Phase II requirements in California,
were significant. Tosco cannot be certain that the higher costs will be fully
recovered. Tosco's ability to sell its products on economical terms is
dependent, in part, on the competitive position of its customers in changing
and often turbulent markets. During 1995 and 1994, wholesale gasoline products
accounted for approximately 49% and 44% respectively, of Tosco's revenues,
while during the same periods distillates accounted for approximately 23% and
29%, respectively, of Tosco's revenues. Tosco believes that its average
inventory of transportation fuels of 10 to 15 days of sales is slightly lower
than average industry inventories.
There were no long-term sales contracts (i.e., in excess of one year)
which accounted for more than 10% of Tosco's consolidated revenues.
During 1995 and 1994, Tosco purchased for resale an average of
approximately 314,200 and 320,800 barrels per day, respectively, of petroleum
products from third parties.
Tosco's long-term supply agreements with Chevron USA Products Company
provide Tosco with 35,000 barrels per day of CARB Phase II gasoline, and Tosco
in turn provides Chevron with 35,000 barrels per day of conventional grade
gasoline plus differentials. These agreements have a seven year initial term
and continue on an evergreen basis thereafter.
Tosco's 1986 ARCO Exchange Agreement (entered into for an initial ten
year term) for an average crude oil supply of 50,000 barrels per day for the
Avon Refinery in exchange for a variable quantity of gasoline to ARCO will
terminate at the end of 1996, as described above. See "Petroleum Refining,
Supply, Distribution, and Marketing - Raw Material Supply." The economic
effects of the termination are uncertain. However, Tosco expects to acquire
alternative suppliers and customers (including its own expanded retail
operations) to replace ARCO when the exchange agreement expires.
In 1995 Tosco distributed refined petroleum products, principally in the
eastern and western United States, through an extensive distribution network
comprised of 121 terminal locations in 21 states and by means of pipelines,
rail tank cars, trucks, ocean-going tankers and barges. See Note 14 to the
Consolidated Financial Statements.
Tosco also engages in commercial activities related to its petroleum
refining, distribution, and marketing businesses throughout the United States
and internationally.
Retail Marketing
In 1995, Tosco operated and expanded its retail petroleum fuel marketing
business. Tosco's 1995 sales volume through its retail marketing system
averaged approximately 68,200 barrels per day.
Tosco's West Coast gasoline marketing system was acquired from BP in two
transactions. The Washington and Oregon assets were purchased in late 1993 and
the California assets followed in 1994. During 1995, the Northwest system was
expanded to a total of 591 retail locations, comprised of 160 company
controlled stations, 431 independently owned and operated stations, and two
distribution terminals. The California system currently includes 414 retail
locations, 131 of which are company controlled, 283 of which are independently
owned and operated stations, a distribution terminal and related assets. The
majority of the company controlled California assets are leased from a special
purpose entity that purchased the assets from BP. The 1996 trademark and
licensing agreement, which was part of the February 1996 Northeast purchase
from BP, not only expanded Tosco's license to market under the BP brand to
include eleven Northeastern states and the Washington DC metro area for a
period of at least 15 years, but also extended the license to market in the
nine Western states for a period of at least 15 years.
Tosco's Arizona marketing system was acquired from Exxon in late 1994.
The Arizona assets currently include approximately 78 company controlled retail
locations and approximately 53 independently owned and operated service
stations. The majority of the company controlled retail locations in Arizona
are leased from a special purpose entity that purchased the assets from Exxon.
In 1994, Tosco entered into a branded distributor agreement with Exxon with a
minimum term of 7 years. The Arizona retail assets are operated under the Exxon
brand.
In 1995, Tosco entered into a long-term lease agreement with Car Wash
Enterprises, d.b.a. Brown Bear Car Wash, for Brown Bear's 28 car wash
facilities in the Puget Sound Region. Tosco operates the system and rebranded a
majority of the 16 locations with gasoline marketing facilities to the BP
image.
Compliance With Environmental Requirements
Tosco is subject to extensive federal, state and local laws and
regulations governing releases into the environment and the storage,
transportation, disposal and clean-up of hazardous materials, including, but
not limited to, the Federal Clean Water Act, the Clean Air Act, the Resource
Conservation and Recovery Act, and analogous state and local laws and
regulations. See "Legal Proceedings".
Environmental compliance has required, and will continue to require,
capital expenditures. Tosco spent approximately $9.6 million in 1995, and $17.2
million in 1994 for such capital expenditures. Tosco currently estimates that
capital expenditures for environmental compliance may approximate $12.2 million
and $9.1 million for 1996 and 1997, respectively. Such amounts do not include
amounts that would be necessary to produce gasoline to meet changing "clean
fuels" specifications.
In July 1993, outstanding litigation concerning environmental issues
with respect to the Avon Refinery was settled with certain former owners of the
Avon Refinery. Under the settlement, the former owners agreed to pay up to $18
million for one-half of the costs that may be incurred to comply with certain
environmental orders and to provide Tosco a $6 million credit for past
environmental expenses (which Tosco uses to reduce its one-half share of
costs). See "Legal Proceedings". Because anticipated remedial actions are
subject to negotiation with governmental agencies the amount and timing of
actual cash expenditures is uncertain. In addition, further investigative work
and negotiations with governmental agencies may result in different or
additional remedial actions which Tosco cannot presently predict.
Governmental regulations are complex and subject to different
interpretations. Therefore, future action and regulatory initiatives could
result in changes to expected operating permits, additional remedial actions or
increased capital expenditures and operating costs that Tosco cannot presently
assess with certainty. See Note 15 to the Consolidated Financial Statements.
Competition
Many of Tosco's competitors are fully integrated companies engaged, on a
national and/or international basis, in many segments of the petroleum
business, including exploration, production, transportation, refining and
marketing, on scales much larger than Tosco. Such competitors may have greater
flexibility than Tosco in responding to or absorbing market changes occurring
in one or more of such segments. Tosco's petroleum refining and marketing
business is not seasonal.
Tosco faces strong competition in its market for the sale of refined
petroleum products, including gasoline. Such competitors, especially major
integrated oil companies, have in the past and may in the future engage in
marketing practices that result in profit margin deterioration for Tosco for
periods of time, causing an adverse impact on Tosco. The Company does not
believe that there is any one or a small number of dominant competitors in the
petroleum refining and marketing business. The Company does not know its
precise competitive position therein. Principal methods of competition are
price or service. Tosco believes it is able to compete with these methods
because of its facilities and their locations.
Tosco must purchase substantially all of its crude oil and feedstock
supplies from others, while some of its competitors have proprietary sources of
crude oil available for their own refineries. Tosco believes it has a crude oil
cost disadvantage to the extent major integrated oil companies have access to
proprietary sources of crude oil. However, Tosco has agreements with ARCO,
British Petroleum, PetroEcuador, Statoil, Texaco Trading and others to provide
Tosco certain amounts of crude oil. Under present market conditions, Tosco does
not anticipate difficulty in obtaining necessary crude oil supplies. See
"Petroleum Refining, Supply, Distribution and Marketing - Raw Material Supply".
Operating Properties
Tosco owns the 2,300 acre site on which the Avon Refinery is located
and the buildings, tanks, pipelines and related facilities at that refinery.
The Avon Refinery, including certain leased facilities, occupies approximately
l,400 acres of the site. Of the approximately 900 remaining acres,
approximately 400 acres are not subject to encumbrances described below. Bayway
owns the 1,300 acre site on which the Bayway Refinery and its related
facilities are located and Tosco owns the 850 acre site on which the Ferndale
Refinery is located.
Tosco had available at December 31, 1995, through ownership, lease
agreement, exchange or other appropriate arrangement, the use of storage tanks,
loading racks, wharves, warehouses and other related assets at approximately
121 terminal distribution locations in 21 states. Tosco believes its
refinery-related properties are well-maintained and are suitable and adequate
for their present purposes.
Tosco or its wholly owned subsidiaries own or control by lease
approximately 369 retail service stations located in the states of Arizona,
California, Oregon and Washington. In addition to marketing transportation
fuels (gasoline and diesel) many of the stations have convenience store, car
wash, and/or automotive repair facilities.
Encumbrances
In March 1992, Tosco sold $300 million of First Mortgage Bonds ("Bonds"),
comprised of $100 million of 9% Series A Bonds due March 15, 1997 and $200
million of 9-5/8% Series B Bonds due March 15, 2002. Interest on the Bonds is
payable each March 15th and September 15th. Each of the issues is non-callable
and is collateralized by Tosco's Avon Refinery and certain related assets.
In April 1993, Tosco sold $150 million of 8-1/4% First Mortgage Bonds due
May 15, 2003 ("Bayway Bonds"). The issue is non-callable, guaranteed by Bayway
Refining Company and collateralized by the Bayway Refinery and related assets
and a guarantee of Tosco. Interest on the Bonds is payable each May 15th and
November 15th. See Note 9 to the Consolidated Financial Statements.
On August 1, 1994 and December 16, 1994 Tosco provided Deeds of Trust on
the improvements at retail service station locations in California and Arizona
that it acquired from BP and Exxon, respectively, to the special purpose entity
from whom Tosco leases the land and equipment at those locations.
Patents
Tosco's patents relating to petroleum operations are not material.
OTHER ACTIVITIES
Oil Shale
Tosco and its wholly owned subsidiary, The Oil Shale Corporation ("Oil
Shale"), have interests in oil shale properties aggregating approximately
23,100 net mineral acres in Colorado and 20,525 net mineral acres in Utah.
Tracts vary in size from l60 to l7,570 mineral acres. Tosco is also the owner
of water rights and certain oil shale processes and technologies. In addition,
Oil Shale controls approximately l,900 acres of oil shale properties through
unpatented mining claims. (Unpatented properties are those in which the United
States Government has not conveyed to others all of its right, title and
interest.)
OFFICE PROPERTIES
At December 31, 1995, Tosco occupied a total of approximately 318,099
square feet of office space principally in Concord, California; Linden, New
Jersey; Seattle, Washington; Stamford, Connecticut; London, England; and
Singapore. The office space occupied by Tosco is generally suitable and
adequate for its purposes.
EMPLOYEES
At December 3l, 1995, Tosco (including its subsidiaries) had
approximately 4,024 employees at various locations, including approximately 548
part-time employees. Approximately 24% of Tosco's employees are represented by
labor organizations. The compensation paid to the Company's wholesale sales
force is based on the same general components as the Company's compensation to
certain other salaried employees, which is salary plus a bonus under cash
incentive plans based on results of operations. The compensation paid to retail
site managers is based, in part, on commission on non-fuel sales and service
station efficiency. The Company does not maintain key person life insurance
coverage on its executive officers. Tosco believes that its labor relations
with its employees are good.
Item 3. Legal Proceedings
Tosco's Spokane, Washington terminal is located within a site being
investigated by the United States Environmental Protection Agency (the "EPA")
and the Washington Department of Ecology (the "WDOE") for suspected hydrocarbon
and lead contamination. Tosco has been notified by the WDOE that it, and the
major oil company from which it purchased the facility, are included in the
list of six parties potentially liable for cleanup of the site under state law.
The area identified by the WDOE was included on the Superfund National
Priorities List (the "Superfund List"). The source, extent and nature of the
contamination have not been determined but are the subject of investigations.
Tosco and other potentially liable parties are working with the WDOE with
regard to the investigation of the site. The extent of Tosco's liability, if
any, is unknown.
In 1990 the EPA and the California Regional Water Quality Control Board,
San Francisco Bay Region ("RWQCB") issued Orders ("Orders") identifying
suspected releases of hazardous constituents at a number of hazardous waste and
solid waste management units on the Avon Refinery property, including several
older inactive units which were used by Phillips Petroleum Company
("Phillips"), a former owner, but not by Tosco, and directed Tosco to
investigate the identified releases and determine the need for corrective
action. In July 1992, the RWQCB issued Waste Discharge Requirements which,
among other things, ordered Tosco to submit a plan of corrective action
("Corrective Action Plan") to deal with the suspected releases of hazardous
waste at the Avon Refinery. The Corrective Action Plan was submitted on January
4, 1993. This Plan was subsequently modified through submission of a Perimeter
Groundwater Monitoring Plan ("PGMP") which received conditional approval by the
RWQCB in September 1995. The PGMP is currently under review by EPA. The RWQCB
also issued an Order in June 1990 which required Tosco to expand programs
monitoring groundwater quality throughout the Avon Refinery and to investigate
the presence of subsurface liquid hydrocarbons. In 1992, Tosco received an
Order from the RWQCB that among other things, set a date by which significant
amounts of subsurface liquid hydrocarbons were to be removed. Pursuant to a
lawsuit that was settled in July 1993, Phillips and Texaco, the former owners
of the refinery, for the next four years or until the funds provided under the
agreement are expended (whichever is later), will pay up to an aggregate of $18
million for one-half of the costs that may be incurred for compliance with
certain environmental orders, and in addition, provide Tosco a $6 million
credit for past expenses. After the initial term of the agreement, the parties
would be free to reinstate the suit. Tosco has not relinquished any of its
rights to make claims for reimbursement for costs incurred after the date of
settlement and would not be required to reimburse amounts received under the
agreement.
On September 4, 1992, Tosco received a Report of Violation ("ROV") from
the California Department of Toxic Substances Control ("DTSC"), alleging
violations of hazardous waste regulations identified during an inspection of a
parcel of land owned by Tosco that was used for petroleum coke storage in
connection with operations of Tosco's former Bakersfield Refinery, which was
sold in 1986. The ROV, without specifying dates, orders Tosco to comply with
various hazardous waste handling practices in connection with the site. Tosco
has entered into discussions with DTSC concerning required actions.
On July 19, 1995, the WDOE issued an Enforcement Order identifying Tosco,
along with approximately 17 other parties, as a potentially liable party under
state law for the investigation and remediation of a site known as the Yakima
Railroad Area to which the parties allegedly sent carbon containing chlorinated
solvents for regeneration. The source, extent and nature of the contamination
has not been determined and the extent of Tosco's liability, if any, is
unknown.
A refinery in Duncan, Oklahoma, formerly owned by Tosco, is subject to
investigation by the Oklahoma Department of Environmental Quality ("ODEQ"). The
ODEQ has requested that Tosco participate with the former owner, Sun Company,
Inc. (R&M) ("Sun"), from whom Tosco purchased the site, and the subsequent
owners, including those to whom Tosco sold the site, in the investigation and
potential remediation of alleged environmental contamination. On September 29,
1995, Tosco entered into a Consent Agreement and Final Order with ODEQ to
investigate the extent of contamination at the refinery, and conduct certain
interim remedial actions and prepare a remedial action plan. On April 10, 1995,
Tosco filed a complaint for declaratory relief against Sun (Tosco Corporation
v. Sun Company, Inc. (R&M), U.S. District Court, Western District of Oklahoma,
Case No. Civ 95 556M) to recover the costs of complying with the ODEQ order,
and seeking an order determining Tosco's and Sun's rights and legal relations
under various environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation
and Recovery Act ("RCRA") and the Oil Pollution Act ("OPA"), and under the
Purchase Agreement through which Tosco purchased the Duncan Refinery, relating
to the costs of environmental investigation and potential remediation at the
site.
On November 18, 1992, the RWQCB issued an order requiring Tosco, Phillips
and Wickland Oil Company ("Wickland") to investigate the presence of petroleum
hydrocarbons and other substances in the soil and groundwater at an oil
terminal owned by Wickland. On the basis of this investigation, on January 17,
1996, the RWQCB approved a remedial work plan identifying Wickland as the party
solely responsible for implementing remedial actions at the site.
On June 14, 1994, Lion Oil Company ("Lion") filed a Complaint against
Tosco (Lion Oil Company v. Tosco Corporation, United States District Court,
Western District of Arkansas, Case No. 94-1072) as amended on August 22, 1994,
seeking an order for reimbursement under CERCLA, contribution and declaratory
relief in connection with the investigation and remediation of alleged
environmental contamination of a refinery formerly owned by Tosco located in El
Dorado, Arkansas. Tosco sold the property to Lion pursuant to an Asset Purchase
& Sale Agreement of March 22, 1985 which included specific provisions limiting
Tosco's liability with respect to environmental matters. On August 10, 1995,
Tosco's motion to dismiss the suit for failure to state a claim was granted.
Lion Oil has appealed.
The operator of a landfill to which it is alleged Tosco sent hazardous
waste has sued numerous alleged waste generators, including Tosco,
municipalities and transporters, under CERCLA and other environmental laws,
(ACME Landfill Corporation v. Althin CD Medical, Inc. et al., United States
District Court, Northern District of California, Case No. C91444268 SBA) to
recover the costs for closure/post closure of the site. The extent of Tosco's
liability is yet unknown.
The Department of Toxic Substances Control, Region 1 ("DTSC"), notified
Tosco Corporation that DTSC was preparing an Imminent and Substantial
Endangerment Order ("Order") naming Tosco and numerous other companies as PRPs
for the remediation of the Environmental Protection Corporation ("EPC")
Eastside Landfill located ten miles northeast of Bakersfield, California. On
January 4, 1996, after extensive negotiations, Tosco and 12 other companies
entered into a Consent Agreement with DTSC, under which the companies agreed to
conduct an investigation of the Landfill, to be funded in part by a trust fund
created by EPC and administered by DTSC.
The costs of remedial actions are highly uncertain due to, among other
items, the complexity and evolving nature of governmental laws and regulations
and their interpretations as well as the varying costs and effectiveness of
alternative cleanup technologies. However, Tosco presently believes that any
cost in excess of the amounts already provided for in the financial statements
should not have a materially adverse effect upon Tosco's operations or
financial condition. Tosco further believes, as discussed with respect to the
Phillips case above, that a portion of future environmental costs, as well as
environmental expenditures previously made, will be recovered from other
responsible parties under contractual agreements and existing laws and
regulations. See Note 15 to the Consolidated Financial Statements.
There are various other suits and claims pending against Tosco and its
subsidiaries, which in the opinion of Tosco are not material or meritorious or
are substantially covered by insurance. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to these
suits and claims, Tosco believes the aggregate amount of such liabilities will
not result in monetary damages which in the aggregate would be material to the
business or operations of Tosco.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
Served as an
Name Age Officer Since Principal Occupation and Positions Held
Thomas D. O'Malley 54 1989 Chairman of the Board and Chief Executive Officer of Tosco
since January 1990; President of Tosco since May 1993 and
from October 1989 to May 1, 1990; Chairman and Chief
Executive Officer of Argus Investments, Inc. since July 1988
and Argus Energy Corporation since December 1987; Vice
Chairman of Salomon Inc. from 1983 to December 1986.
Jefferson F. Allen 50 1990 Executive Vice President and Chief Financial Officer of
Tosco Corporation since June 1990; Treasurer of Tosco from
June 1990 to October 1995; various positions including
Chairman and CEO, with Comfed Bancorp, Inc. and related
entities from November 1988 to June 1990; Executive Vice
President, Argus Investments during 1988; Senior Vice
President, Exploration Management Corporation from 1985 to
April 1988.
Robert J. Lavinia 49 1993 Executive Vice President of Tosco Corporation and President
of Tosco Marketing Company (a division of Tosco) since
February 1996; President of Tosco Refining and Marketing
Company (a division of Tosco) from August 1995 to February
1996; President of Tosco Northwest Company (a division of
Tosco) from October 1993 to August 1995; Senior Vice
President of Tosco Corporation since May 1994; Vice
President of Tosco Corporation since 1993; Executive Vice
President of Bayway Refining Company during 1993; President,
Tosco Energy Corporation during 1992; prior to 1992, various
positions with Phibro Energy for a period in excess of five
years, most recently as a Senior Vice President.
Dwight L. Wiggins 55 1993 Executive Vice President of Tosco Corporation and President
of Tosco Refining Company (a division of Tosco) since
February 1996; Senior Vice President of Tosco Corporation
since May 1994; Vice President of Tosco Corporation and
President of Bayway Refining Company since January 1993; New
Jersey Area Manager for Exxon Company U.S.A. 1990 to 1993;
Benicia Refinery Manager for Exxon Company 1983 to 1990.
Wilkes McClave III 48 1989 Vice President and General Counsel of Tosco and Senior Vice
President of Tosco Refining Company (a division of Tosco)
since May 1990; Secretary of Tosco since August 1989; Vice
President and Secretary of Bayway Refining Company since
January 1993, of Tosco Marketing Company (a division of
Tosco) since February 1996, of Tosco Refining and Marketing
Company (a division of Tosco) from August 1995 to February
1996, and of Tosco Northwest (a division of Tosco) from
October 1993 to August 1995; Assistant General Counsel of
Tosco from January 1986 to May 1990.
Peter A. Sutton 50 1992 Vice President of Tosco Corporation since January 1992;
Senior Vice President of Tosco Refining Company since May
1990, various other positions with Tosco for a period in
excess of five years.
George E. Ogden 53 1994 Vice President of Tosco Corporation since May 1994; Vice
President of Tosco Refining Company from March 1992 to March
1994. Independent Petroleum Consultant from 1984 to 1992.
Craig R. Deasy 51 1984 Vice President and Treasurer of Tosco since October 1995;
Vice President and Treasurer of Bayway Refining Company
since April 1993; Assistant Treasurer since 1986, various
other positions with Tosco for a period in excess of five
years.
Richard W. Reinken 40 1994 Vice President and Chief Information Officer of Tosco
Corporation since November 1994; Consultant, Andersen
Consulting from 1985 to 1994.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Tosco's Common Stock is traded on the New York Stock Exchange ("NYSE")
and the Pacific Stock Exchange. Set forth below are the high and low sales
prices as reported on the NYSE Composite Tape.
Price Range of Common Stock
1995 High Low 1994 High Low
1st Quarter $31 1/8 $27 1/2 1st Quarter $35 $29
2nd Quarter 36 1/2 27 3/8 2nd Quarter 32 3/8 27 3/8
3rd Quarter 34 3/4 30 5/8 3rd Quarter 32 7/8 27 3/8
4th Quarter 38 1/2 33 7/8 4th Quarter 32 26 3/4
The number of Tosco shareholders of record on February 29, 1996 was
10,465.
Dividend Policy
Tosco has paid a regular quarterly cash dividend on its Common Stock
since the third quarter of 1989. Pursuant to the terms of Tosco's working
capital facility and its bond indentures, dividends on Tosco's Common Stock are
permitted to the extent Tosco satisfies certain defined criteria. Continued
payment of such quarterly dividend is also subject to profitable results of
operations, which are primarily dependent on the continued favorable
performance of Tosco's operating facilities and favorable operating margins.
There can be no assurance that Tosco will be able to continue payment of such
quarterly dividend.
Item 6. Selected Financial Data
The following Selected Financial Data are qualified in their entirety by
the more detailed Consolidated Financial Statements and related Notes at the
end of this report. The Selected Financial Data for each of the five years
ended December 31, 1995 are derived from the Consolidated Financial Statements
of Tosco audited by Coopers & Lybrand L.L.P., independent accountants.
TOSCO CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA(a)
(Millions of dollars except per share and ratio data)
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
RESULTS OF OPERATIONS
Sales $ 7,284.0 $6,365.8 $ 3,559.2 $ 1,861.0 $ 1,608.7
Gross profit on sales $ 284.8 $ 260.4 $ 251.8 $ 132.7 $ 121.2
Inventory valuation (recovery) writedown (17.7) 17.7
Restructuring (1995) and environmental
cost accruals 5.2 6.0 25.0 4.0
Operating contribution 279.6 272.1 234.1 107.7 117.2
Selling, general and administrative expense 95.9 84.1 58.2 38.7 30.2
Interest expense, net 56.3 54.2 44.1 18.0 16.5
Pre-tax income 127.4 133.8 131.8 51.0 70.5
Provision for income taxes (b) 50.3 50.0 51.2 20.8 2.4
Income from continuing operations
before other items 77.1 83.8 80.6 30.2 68.1
Discontinued operations, net of income taxes (120.9) 7.3
Cumulative effect of accounting changes 16.2
Net income (loss) $ 77.1 $ 83.8 $ 80.6 $ (74.5) $ 75.4
INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Primary:
Income from continuing operations $ 2.06 $ 2.27 $ 2.38 $ 0.68 $ 2.15
Discontinued operations (4.08) 0.24
Cumulative effect of accounting
changes 0.55
Net income (loss) $ 2.06 $ 2.27 $ 2.38 $ (2.85) $ 2.39
Fully Diluted
Income from Continuing operations $ 2.04 $ 2.24 $ 2.33 $ 0.68 $ 2.12
Discontinued operations (4.08) 0.23
Cumulative effect of accounting
changes 0.55
Net income (loss) $ 2.04 $ 2.24 $ 2.33 $ (2.85) $ 2.35
CAPITALIZATION (AT END OF PERIOD)
Total Assets $ 2003.1 $1,797.2 $ 1,492.9 $ 952.9 $ 871.0
Long-term and revolver debt $ 624.0 $ 687.4 $ 603.3 $ 356.8 $ 211.9
Preferred stock 111.2 111.2 111.2
Common shareholders' equity 627.1 575.5 410.4 270.2 385.6
Total capitalization $ 1,251.1 $1.262.9 $ 1,124.9 $ 738.2 $ 708.7
OTHER INFORMATION
Ratio of long-term and revolver debt
to total capitalization .499 0.54 0.54 0.48 0.30
Current ratio 1.3 1.8 2.2 2.6 1.6
Book value per share $ 16.92 $ 15.53 $ 12.60 $ 9.10 $ 12.78
Cash dividends per share $ 0.64 $ 0.62 $ 0.60 $ 0.60 $ 0.60
(a) Reflects Seminole Fertilizer Corporation, acquired on July 1, 1989, as a discontinued operation for all applicable periods.
(b) Reflects the provision for income taxes at regular tax rates effective January 1, 1992 pursuant to the provisions
of SFAS No. 109.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INTRODUCTION
1995 was a year of progress for Tosco. Excluding special items, operating
results improved over 1994 despite lower refinery operating margins, a
testament to Tosco's successful strategy to diversify the company's asset base
by expanding downstream into retail. Tosco increased the number of company
operated stations, acquired under long-term lease 28 Brown Bear car wash sites
in the Puget Sound area, and entered into an agreement to acquire BP Oil's
Northeast marketing and refining assets which was completed in February 1996.
Tosco's balance sheet was also strengthened as the ratio of long-term debt to
total capitalization dropped below 50% for the first time since 1993 when Tosco
entered into its period of rapid growth. Tosco took initial steps in
transitioning to an unsecured debt structure through the issuance of $125
million of unsecured 7% notes to pay down collateralized floating rate bank
debt and through an agreement to sell receivables to a financial institution.
West Coast administrative operations were also consolidated to achieve
efficiencies.
Results of operations - 1995
For the Year Ended December 31.
1995 1994
(Thousands of Dollars)
Sales $7,284,051 $ 6,365,757
Cost of sales 6,999,301 6,105,293
Restructuring charge 5,200
Inventory valuation recovery ( 17,651)
Environmental cost accrual 6,000
----------- ----------
Operating contribution 279,550 272,115
Selling, general, and administrative expense 95,858 84,123
Net interest expense 56,253 54,143
---------- ---------
Pre-tax income 127,439 133,849
Provision for income taxes 50,381 50,006
---------- --------
Net income $ 77,058 $ 83,843
----------- ----------
Tosco earned $77.1 million, or $2.04 per fully diluted share, on sales of
$7.3 billion for 1995 compared to $83.8 million, or $2.24 per fully diluted
share, on sales of $6.4 billion for 1994. Results of operations for 1995,
include a restructuring charge totaling $5.2 million ($3.1 million after tax,
$.08 per share) related to a major expense reduction program at the Avon
Refinery. Results of operations for 1994 include the reversal of 1993's $17.7
million ($10.7 million after tax, $.29 per share) writedown of LIFO inventories
due to the recovery of prices during 1994, and a $6 million ($3.6 million after
tax, $.10 per share) environmental cost accrual for probable investigative and
remedial liabilities at former operating locations.
Excluding special items, Tosco generated an operating contribution (income
before selling, general and administrative expense, net interest expense and
income taxes) for 1995 of $285 million, an increase of $24 million over 1994.
The increase was primarily attributable to the excellent production operations
of the Avon and Bayway Refineries, lower production costs, moderately higher
East Coast operating margins, and the continued strong performance of expanded
retail operations which more than offset declines in West Coast refinery
operating margins and reduced production from the Ferndale Refinery.
REFINING DATA SUMMARY
YEAR ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF B/D EXCEPT FOR REFINING MARGINS)
AVON BAYWAY(A) FERNDALE CONSOLIDATED
1995 (B) 1994(D) 1995(C) 1994(D) 1995(B) 1994 1995
1994
Crude and other raw materials 167.7 160.8 291.6 252.3 81.6 90.6 540.9 503.7
===== ===== ===== ===== ==== ====== ===== =====
Petroleum products produced:
Clean products 136.8 132.7 241.5 204.8 54.6 62.8 432.9 400.3
Other finished products 29.8 26.7 55.7 51.5 24.9 25.7 110.4 103.9
Total finished products produced 166.6 159.4 297.2 256.3 79.5 88.5 543.3 504.2
Operating margin per charge
barrel (e) (f) $5.56 $ 6.23 $2.88 $ 2.63 $3.25 $3.62 $3.77 $3.96
(a)Bayway's margins include the results of hedges designed to lock in a
predetermined level of operating margins on a varying percentage of Bayway's
production.
(b)Avon's catcracker (the principal gasoline production unit) and the
processing units at the Ferndale Refinery were shut down for scheduled
maintenance during the first quarter of 1995.
(c)Bayway's production results for 1995 reflect the benefit of expanded crude
distillation capacity completed in the third quarter of 1994.
(d) Avon's fluid coker (the refinery's principal conversion unit) and Bayway's
fluid catcracker were shut down for scheduled turnaround maintenance in 1994.
(e) As illustrated by the table, operating margins vary significantly by
refinery. This variance is due to a number of reasons including marketing
conditions in the principal areas served by the refineries, their configuration
and complexity (ability to convert raw material into clean product) and
maintenance schedules.
(f) Restated to reflect operating contribution per charge barrel (sales minus
cost of sales, excluding refinery operating costs and non-operating items
divided by total refinery charges).
The Avon Refinery's operating contribution declined from 1994 due to poor
operating margins that overshadowed record production. The fluid catalytic
cracking unit (catcracker), Avon's principal gasoline production unit, was
shutdown for major scheduled maintenance for 55 days in the first quarter of
1995, negatively impacting clean product yields for the year. Despite the
catcracker shutdown, crude oil processed averaged 167,700 barrels per day
(B/D), an increase of 6,900 B/D over 1994 and the highest in Avon's history.
Production of clean transportation fuels (gasoline, diesel and jet fuel)
increased by 4,100 B/D to 136,800 B/D. However, Avon's operating margin per
charge barrel declined by $.67 to $5.56 per barrel for 1995 as excess supply in
highly competitive markets depressed product prices, particularly in the first
quarter of 1995. In response to continuing poor operating margins, Tosco
implemented a restructuring program to reduce costs and increase efficiency.
The restructuring cost of $5.2 million, recorded in the first and second
quarters of 1995, was primarily for the then anticipated severance costs of
approximately 175 people at the Avon Refinery and related support locations.
Bayway's operating contribution for 1995 improved over 1994 due to record
refinery production rates, higher margins, and lower production costs. Raw
material throughput increased 39,300 B/D to a record 291,600 B/D, while
production of clean transportation fuels and heating oil also increased 36,700
B/D to a record 241,500 B/D. Expanded crude distillation capacity completed in
1994 and record production unit rates of the fluid catalytic cracking unit, the
world's largest and Bayway's principal gasoline production unit, were the
principal reasons for the record production rates. The catcracker was shutdown
for scheduled turnaround maintenance in 1994. Bayway's operating margin per
charge barrel improved $.25 per barrel for the year, primarily during the
second half of 1995 as a result of increased sale prices. Operating margins for
the year were hurt by the exceptionally weak market conditions of the first
quarter of 1995 caused by the combined impact of a surplus of heating oil and
poor gasoline markets. Operating margins improved during the balance of the
year as demand strengthened and uncertainty over the introduction of
reformulated gasoline (RFG) subsided.
Operating contribution from Tosco Northwest, whose operations encompass
retail marketing operations and the Ferndale Refinery, declined from 1994. The
decrease was primarily due to poor refining margins and the shutdown of the
refinery for 33 days for turnaround maintenance during the first quarter of
1995. Ferndale's operating margin per charge barrel declined $.37 per barrel and
refinery throughput declined 9,000 B/D to 81,600 B/D. Retail operations
generated an operating contribution of $75 million for 1995, an increase of $11
million from 1994. Retail volumes sold increased 18,000 B/D to 68,000 B/D due to
the acquisitions of retail operations in Northern California and Arizona in
August 1994 and December 1994, respectively. Retail gasoline margins remained
approximately the same at $.10 per gallon for 1995 and 1994.
Selling, general, and administrative expense (SG&A) for 1995 increased by
$11.7 million to $95.9 due to Tosco's expanded retail operations and higher
levels of incentive compensation (due to higher levels of operating income
before special items) which was partially offset by certain benefit recoveries.
SG&A expense for 1994 was reduced by insurance recoveries of $3.5 million
(related to now-settled litigation with the predecessor owners of the Avon
Refinery over environmental matters) and $1.0 million (related to a retroactive
adjustment of prior year medical costs based on favorable claim experience).
See Note 15 to the Consolidated Financial Statements.
In June 1995, Tosco entered into a three year agreement with a financial
institution to sell on a revolving basis up to $100 million of an undivided
percentage ownership interest in a designated pool of accounts receivable
(Receivable Transfer Agreement). Costs of the Receivable Transfer Agreement,
which totaled $3.1 million for six months (less than interest costs would have
been on equivalent cash borrowings under Tosco's Revolving Credit Agreement),
are included in cost of sales. See Note 3 to the Consolidated Financial
Statements. Interest expense increased in 1995, despite the reduction in
interest costs resulting from the Receivable Transfer Agreement, due to higher
debt levels related to Tosco's expanded operations.
The provision for income taxes for 1995 increased by $.4 million despite
lower pre-tax income because the tax provision for 1994 included recognition of
revised income tax benefits of $2.9 million related to Tosco's discontinued
fertilizer operations.
RESULTS OF OPERATIONS - 1994
Tosco earned $83.8 million, or $2.24 per fully diluted share, on sales of
$6.4 billion for 1994 compared to $80.6 million or $2.33 per fully diluted
share, on sales of $3.6 billion for 1993. Despite income rising $3.3 million,
earnings per fully diluted share for 1994 fell by $.09 per share because of the
issuance of 2,990,000 shares of Common Stock in December 1993. Results of
operations for 1994 include the reversal of 1993's $17.7 million writedown of
LIFO inventories due to the recovery of prices during 1994. Tosco also recorded
a $6 million environmental cost accrual for probable investigative and remedial
liabilities at former operating locations.
Tosco's acquisitions and expanded wholesale operations were the principal
reasons for the increase in sales and cost of sales for 1994 compared to 1993.
In April 1993, Tosco purchased the Bayway Refinery and related assets from
Exxon Corporation. In December 1993, Tosco acquired, through long-term lease,
Northville Industries' Long Island, New York oil distribution system and
purchased the Ferndale Refinery and retail marketing operations in the Pacific
Northwest from BP Exploration & Oil Inc. (BP). In August 1994 and mid-December
1994, Tosco expanded its retail system through the acquisition, under long-term
lease arrangements, of the retail marketing operations of BP in Northern
California and Exxon in Arizona, respectively.
Tosco generated an operating contribution before special items for 1994 of
$260 million from its three refineries and retail marketing operations, an
increase of $8 million over 1993.
Tosco Northwest produced an operating contribution of $118.6 million in
its initial year of operations due to strong retail margins, good production
results from the Ferndale Refinery, and good refining margins in the Pacific
Northwest. The Ferndale Refinery processed 90,600 B/D of raw materials for
1994, a 17,100 B/D improvement over 1993 production results under previous
management. Operating margins per charge barrel were $3.62 for 1994 due to
strong product prices, especially for residual fuels, while retail margins
averaged $.10 per gallon on sales volume of 2.1 million gallons per day.
The Avon Refinery and its related commercial operations experienced a
decline in operating contribution from 1993 due to reduced production levels
and poor operating margins. Raw material throughput rates for 1994 fell by
5,700 B/D to 160,800 B/D while production of clean transportation fuels fell by
4,900 B/D to 132,700 B/D. Scheduled turnaround maintenance on the fluid coker,
which was completed during the second quarter of 1994, was the primary reason
for the fall in production. Tosco also reduced production levels in early
December 1994 in response to poor operating margins and to prepare for an early
start of the major upgrade and turnaround of the catcracker which occurred in
January 1995. Avon's operating margins per charge barrel for 1994 declined by
$1.17 to $6.23, the lowest since 1987. Increases in raw material costs were not
matched by increases in product prices because of excess supply, highly
competitive markets, and the lingering effects of the recession in California,
Avon's principal market, which lagged the improvement in the national economy.
Bayway's operating contribution for 1994 includes the reversal of the
$17.7 million writedown of LIFO inventories recorded in 1993. Excluding the
inventory valuation, Bayway's operating contribution for 1994 declined from the
approximate nine month operating period of 1993. The decline in operating
contribution was primarily due to reduced production, weak operating margins
and higher distribution costs. Raw materials processed declined by 7,000 B/D to
252,200 B/D while production of clean transportation fuels and heating oil
declined by 9,100 B/D to 204,800 B/D due to scheduled turnaround maintenance of
the catcracker, during the third quarter of 1994. Bayway also reduced
production runs in early December in response to weak operating margins in the
Northeast and to perform some minor but necessary maintenance of production
units.
Operating margins per charge barrel averaged $2.63 for the year, a decline
of $.55 from 1993. Bayway, like Avon, was not able to match increases in raw
material costs with comparable increases in product prices, due to excess
supply in highly competitive markets. In addition, fourth quarter margins were
negatively impacted by mild winter weather and market uncertainty over the
introduction of cleaner burning but higher cost reformulated gasoline (RFG).
Certain areas in the Northeast elected to opt out, and were permitted to do so
by the federal government, of their voluntary participation in the RFG program
(mandated by federal regulations for the largest metropolitan areas of the
United States). Operating costs were also impacted by higher distribution costs
as Bayway expanded its terminal distribution network and commercial operations.
Selling, general and administrative expense for 1994 increased by $25.9
million to $84.1 million due to Tosco's expanded operations.
The increase in net interest expense for 1994 is primarily due to higher
levels of debt related to Tosco's acquisitions and their associated working
capital requirements and higher short-term interest rates.
The provision for income taxes for 1994 reflects a 1.5% reduction in the
annual effective income tax rate and recognition of $2.9 million of revised
income tax benefits related to Tosco's former activities. The effective rate
reduction is attributable to revised state income tax allocation factors and
estimated California investment tax credits. The provision for income taxes for
1993 included prior year tax credits of approximately $2.5 million which were
finalized in tax returns filed in October 1993.
RESULTS OF OPERATIONS - 1993
Tosco's continuing operations earned $80.6 million, or $2.33 per fully
diluted share, on sales of $3.56 billion for 1993 as compared to income from
continuing operations of $30.2 million, or $.68 per fully diluted share, on
sales of $1.86 billion for 1992. Continuing operations exclude the results of
Tosco's former phosphate fertilizer operations.
Tosco's operating contribution of $234.1 million for 1993, after an
inventory writedown of $17.7 million, increased by $126.4 million over 1992 due
to a $74.8 million increase in operating contribution from Avon and its related
commercial activities and an operating contribution of $51.6 million from
Bayway and its related commercial activities. Avon's improvement in operating
contribution was primarily attributable to record production rates, improved
operating margins and lower environmental cost accruals, partially offset by
the increased refinery and product distribution costs associated with higher
levels of production. Raw material throughput rates averaged a then record
166,310 B/D for 1993 (versus 152,510 B/D for 1992) and production of clean
transportation fuels also averaged a record 137,610 B/D (versus 126,570 B/D for
1992). Operating margins improved by $.37 to $7.40 per barrel as per barrel
costs of raw materials fell by more than the sales value of refined products
produced. The improved margins (achieved despite the sluggish economy,
especially in California) were assisted by the completion and start up of
facilities for the production of low-sulfur, low-aromatic diesel fuel meeting
the California Air Resources Board's (CARB) cleaner burning fuel standards
effective October 1, 1993.
Bayway achieved an operating contribution of $51.6 million, after an
inventory writedown of $17.7 million, for the period April 8, 1993 to December
31, 1993 due to strong refinery performance in a period of lackluster margins.
Raw material throughput averaged 259,250 B/D while production of clean
transportation fuels and heating oil, and total production averaged 213,980 and
264,490 B/D, respectively. Operating margins, including net realized results of
hedges, averaged $3.18 per barrel.
Consolidated selling, general and administrative expense of $58.2 million
for 1993 increased by $19.4 million over 1992 primarily due to the acquisition
of Bayway (including approximately $7.5 million of non-recurring costs incurred
in establishing commercial, accounting and general and administrative functions
at Bayway).
Consolidated net interest expense for 1993 of $44.1 million increased by
$26.2 million over 1992. Net interest expense for 1992 includes $12.8 million
of intercompany interest income from discontinued operations and the writeoff
of approximately $3.6 million of deferred financing costs related to previously
outstanding indebtedness. Without the effect of these two items, consolidated
net interest expense for 1993 increased by $17 million as the costs of higher
levels of debt (resulting from the purchase of Bayway and its associated
working capital requirements) more than offset the benefits of lower interest
rates.
The provision for income taxes for 1993 includes the 1% increase in
federal income tax rates effective January 1, 1993 as well as tax credits of
approximately $2.5 million which were finalized in tax returns filed in October
1993.
ACQUISITIONS
On February 2, 1996, Tosco completed the purchase of the U.S. Northeast
marketing and refining assets from BP for $59 million, excluding the value of
inventories. Under the purchase agreement, Tosco obtained an exclusive license
valid for 15 years, with various renewal options, to market retail gasoline and
diesel fuels under the BP brand. The license covers Delaware, Maryland, the
Washington D. C. metropolitan area, Pennsylvania, New Jersey, New York,
Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire and Maine.
Portions of western Pennsylvania and Maryland are excluded. The term of Tosco's
exclusive license in nine Western states was also extended to 15 years from the
closing date. The purchase also included the 180,000 B/D Marcus Hook Refinery
near Philadelphia (which was taken over in a non-operating mode), petroleum
product terminals and certain associated pipeline interests (some of which are
surplus to Tosco's needs and will be sold). Tosco has also offered to buy BP's
one-third interest in the Harbor pipeline on which BP's partners have a right
of first refusal to acquire BP's interest. BP retains environmental obligations
relating to the Marcus Hook Refinery and other properties included in the sale.
On February 16, 1996, Tosco announced an agreement to purchase all
outstanding shares of the Circle K Corporation (Circle K) for $29 per share and
to merge Circle K with a subsidiary of Tosco. Circle K is a large gasoline
retailer and operator of company-owned convenience stores. A definitive
agreement was signed with the holders of approximately 68% of Circle K's
outstanding shares (Selling Shareholders) and a merger agreement was approved
by the Board of Directors of both companies. Under the stock purchase
agreement, Selling Shareholders will receive a combination of cash and common
stock of Tosco (Common Stock). Under the merger agreement the remaining
shareholders will receive Common Stock. Payment of the total acquisition price
of approximately $710 million, not including transaction and certain other
costs, will consist of approximately 6.5 million shares of Common Stock and
cash. The common stock to be issued is subject to adjustment if the price of
Common Stock fluctuates outside an agreed range and for shares issued with
respect to stock options held by certain employees of Circle K. Tosco expects
to finance the cash requirements from borrowings under contemplated new debt
arrangements and from available cash and credit facilities. Completion of the
transaction is subject to certain conditions including the approvals of
regulatory authorities and the shareholders of Circle K. The acquisition is
expected to close prior to mid-year.
OUTLOOK
Results of operations are determined by two principal factors: the
operating efficiency of the refineries and refining and retail operating
margins. Scheduled major maintenance of Avon's cat cracker and the processing
units at Ferndale in the first quarter of 1995 completed a cycle of heavy
turnaround maintenance. Accordingly, Tosco's currently operating refineries are
expected to operate at high production levels for 1996. The Marcus Hook
Refinery is expected to remain in a non-operating mode in 1996. Margins at the
beginning of 1996 were satisfactory but Tosco is not able to predict the level
or trend of refinery and retail operating margins because of the uncertainties
associated with oil markets.
Tosco, and other refiners, made significant capital expenditures to meet
the cleaner burning RFG gasoline standards of the California Air Resources Board
(CARB) effective March 1, 1996 (CARB Phase II gasoline). Tosco also entered into
a 7 year arrangement with Chevron Products Company which provides Tosco 35,000
B/D of CARB Phase II gasoline for 35,000 B/D of conventional gasoline plus
differentials. Tosco is not certain that the higher cost of CARB Phase II
gasoline will be fully recovered in higher sales prices. In November 1995, the
22 year ban on the export of Alaskan North Slope (ANS) crude oil, a primary
source of raw material for West Coast refineries, was lifted. This action may
lead to higher costs for ANS and other domestic crude oils.
In January 1996, Atlantic Richfield Company (ARCO) informed Tosco that it
would not extend its ten year exchange agreement when it expires at the end of
1996. Under the exchange agreement, ARCO presently delivers 50,000 B/D of ANS
crude oil to the Avon Refinery in exchange for a variable quantity of gasoline.
The economic effects of the termination are uncertain. However, Tosco expects
to acquire alternative suppliers and customers (including its own expanded
retail operations) to replace ARCO when the exchange agreement expires.
In view of uncertain operating margins and highly competitive markets,
Tosco is committed to improving its results by lowering costs in all areas of
operation. Restructuring efforts taken in the first half of 1995 produced
reductions in unit operating costs at the Avon Refinery. These efforts are
continuing. West Coast operating and administrative functions were consolidated
in late 1995 and the company was reorganized into functional organizations in
February 1996. The acquisition of Circle K will also allow further economies of
scale.
To reduce Tosco's exposure to fluctuations in refinery operating margins,
Tosco has at times used futures contracts and other derivatives to lock in what
it considered to be acceptable refinery operating margins on a varying
percentage of future production. At December 31, 1995, Tosco had hedged
approximately 3% of Bayway's expected first quarter and annual 1996 production
at acceptable historical margins.
Tosco's expansion and diversification into retail marketing has been
successful in providing earnings growth and stability. The acquisition of
Circle K, which Tosco expects to be additive to Tosco's per share earnings
after the combined operations are fully integrated, advances Tosco's goal of
becoming a major gasoline retailer. It adds convenient store operations, a
third major related component to Tosco's petroleum refining and gasoline retail
business.
CASH FLOWS AND LIQUIDITY - 1995
As summarized in the Statement of Cash Flows, cash decreased by $5 million
during 1995 as cash used in investing and financing activities of $301 million
and $111 million, respectively, exceeded cash provided by operating activities
of $407 million.
Cash provided by operating activities of $407 million was from cash
earnings of $226 million (net income plus depreciation, amortization, and
deferred income taxes) plus a decrease in working capital of $180 million and $1
million from other sources.
Net cash used in investing activities totaled $301 million, primarily for
capital additions and deferred turnaround expenditures of $203 million and $48
million, respectively and increases in other assets (primarily trademarks) of
$51 million.
Cash used in financing activities totaled $111 million as net repayments
under short-term bank lines and the revolving credit facility of $210 million,
dividend payments of $24 million and debt and other payments totaling $2
million exceeded proceeds from the 7% Notes of $125 million.
Liquidity (as measured by cash, short-term investments and deposits and
unused credit facilities) increased by $150 million during 1995 due to an
increase of $156 million in unused credit facilities partially offset by a
decrease in cash, cash equivalents, short-term deposits and investments of $6
million. At December 31, 1995, liquidity totaled $363 million (an amount when
supplemented by cash borrowings under contemplated new debt arrangements to
finance the Circle K acquisition, Tosco believes is adequate to meet its
expected liquidity demands for at least the next twelve months).
CAPITAL EXPENDITURES AND CAPITALIZATION
Tosco spent $203 million on budgeted capital projects in 1995. Tosco and
BP also entered into an agreement to settle contingent participation payments
related to the acquisition of BP's Pacific Northwest refining and retail assets
for $35 million. See Note 8 to the Consolidated Financial Statements.
A large portion of capital spending on refinery projects was related to
the Avon Refinery's clean fuels program to meet the CARB Phase II
specifications. The multi-year project, which was completed on time and on
budget, converts a significant portion of Avon's gasoline production to CARB
Phase II gasoline. With the exchange of conventional gasoline for CARB Phase II
gasoline with Chevron, approximately 85% of Avon's gasoline production will
meet CARB Phase II specifications. Other refinery capital expenditures
continued to address required environmental and safety programs. The balance of
Tosco's refinery capital investments targeted discretionary low cost, high
return projects to lower operating costs, improve refinery throughput or
yields, or increase operating flexibility and reliability. Bayway's fuel
products controls were improved with the installation of a modern "state of the
art" refinery control system. The new computer system, which monitors and
directs all refinery production processes, has resulted in better production
levels and yields with greater reliability, safety and environmental
compliance.
Bayway Refining Company has entered into a contract to acquire a Solvent
Deasphalter for approximately $32.5 million, plus the cost of agreed upon
modifications and interest, at mechanical completion (as defined). Construction
of this unit began in 1995 and mechanical completion is expected in the third
quarter of 1996. Tosco is responsible for other capital improvements to tie in
the Solvent Deasphalter into the Bayway Refinery system raising the total
expected cost of the unit to approximately $48 million. When completed, this
unit will process approximately 20,000 B/D of lower-valued residual fuel to
produce feedstock for the refinery's fluid catalytic cracker and reduce the
amount of higher-cost, partially refined feedstocks that Bayway currently
purchases from third parties.
In May 1995, Tosco announced a three-year, $200 million capital program to
expand its western retail operations through the development of new, and
enhancement of existing, retail facilities in existing and new markets, the
acquisition of existing stations or systems, and development of new jobber
business. In August 1995, Tosco entered into an agreement to expand an existing
lease facility to finance the acquisition and improvement of up to $15 million
of service station properties in Arizona. At December 31, 1995, Tosco, as agent
for the lessor, had spent approximately $3.6 million but had not yet entered
into leases pending completion of construction. In November 1995, Tosco
acquired under long-term lease the Brown Bear car wash facilities in the Puget
Sound area. The pending acquisition of Circle K has curtailed further expansion
plans. Capital spending will now be focused on improving present sites that can
be financed from internal cash flows.
Tosco expects to fund its 1996 capital expenditures for its refineries from
cash provided by operations, available credit, and other resources. In view of
the pending acquisition of Circle K, capital spending for retail operations
will be refocused on the enhancement of existing retail sites and the
intergration, after the acquisition, of both operations. To increase financial
flexibility and reduce interest costs, Tosco amended its working capital
agreement in April 1995, entered into a Receivable Transfer Agreement in June
1995, and issued $125 million of unsecured 7% Notes in July 1995. Tosco is
contemplating other financing alternatives to improve its financial capacity and
flexibility, including a new unsecured credit facility to be used for general
corporate purposes and, to partially fund the Circle K acquisition, a $200
million public debt offering.
At December 31, 1995, total shareholders' equity was $627 million, an
increase from December 31, 1994 of $52 million due to net income ($77 million)
less dividend and other payments ($25 million). Debt, including current
maturities and short-term bank borrowings, decreased by $85 million to $645
million at the end of 1995.
IMPACT OF INFLATION
The impact of inflation has been less significant during recent years
because of the relatively low rates of inflation experienced in the United
States. Raw material costs, energy costs, and labor costs are important
components of Tosco's costs. Any or all of these components could be increased
by inflation, with a possible adverse effect on profitability, especially in
high inflation periods when raw material and energy cost increases generally
lead finished product prices. In addition, a rapid escalation of raw material
and finished products prices could result in credit restrictions if working
capital requirements exceed the maximum availability under Tosco's working
capital facilities.
RISK MANAGEMENT
Tosco uses a variety of strategies to reduce commodity price, interest and
operational risks.
As discussed in Note 2 to the Consolidated Financial Statements, Tosco, at
times and when able, uses futures contracts to lock in what it believes to be
favorable margins on a varying portion of Bayway's production by taking
offsetting long (obligation to buy at a fixed price) positions in crude oil and
short (obligation to deliver at a fixed price) positions in gasoline and
heating oil futures and forward contracts. This strategy hedges Bayway's
exposure to fluctuations in refining margins and therefore reduces the
volatility of operating results. In addition, Tosco enters into swap contracts
with counterparties (typically agreeing to sell at fixed forward prices, and to
buy at future variable market prices, stated volumes of residual fuels) to
hedge sales prices of the Bayway Refinery's residual fuels production. At
December 31, 1995, Bayway had hedged approximately 3% of its expected
first quarter and annual 1996 production, respectively, at acceptable
historical margins. Tosco utilizes futures and forward contracts to a lesser
extent to hedge inventories stored for future sale and to hedge against adverse
price movements between the cost of foreign crude oil that Bayway refines and
the cost of domestic crude oil.
Tosco manages its interest rate risk by maintaining a mix of fixed rate
and floating rate debt. Currently, floating rate debt, primarily borrowings
under the Revolving Credit Facilities which provide up to $450 million of
revolving credit availability, is used to finance Tosco's working capital
requirements. Existing fixed rate debt consists primarily of $125 million
unsecured non-callable notes issued in July 1995 to repay indebtedness under
the Revolving Credit Facilities and $450 million of mortgage bonds issued in
1992 and 1993 to refinance previously outstanding floating rate bank debt and
to finance the acquisition of capital assets including the acquisition of the
Bayway Refinery. As required by the previously outstanding bank debt agreement,
Tosco entered into an interest rate swap agreement which converted a
predetermined percentage of floating rate bank term debt ($31.5 million at
December 31, 1995) to fixed rate term debt. The interest rate swap expires in
the second quarter of 1996.
Tosco carries insurance policies on insurable risks, which it believes to
be appropriate at commercially reasonable rates. While Tosco believes that it
is adequately insured, future losses could exceed insurance policy limits or,
under adverse interpretations, be excluded from coverage. Future liability or
costs, if any, incurred under such circumstances would have to be paid out of
general corporate funds, if available. See Note 2 to the Consolidated Financial
Statements for a discussion of Tosco's strategy to reduce credit risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Part II, Item
8, are included in Part IV, as indexed at Item 14(a)(1) and (a)(2).
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information appearing under
the caption "Nominees for Election" in the registrant's definitive Proxy
Statement relating to its 1996 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission. See also the information appearing
under the caption "Executive Officers of the Registrant" appearing in Part I.
Tosco is not aware of any family relationship between any Director or
executive officer. Each officer is generally elected to hold office until the
next Annual Meeting of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing
under the caption "Executive Compensation" in the registrant's definitive Proxy
Statement relating to its 1996 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing
under the caption "Stock Ownership of Officers and Directors" and "Other
Matters - Certain Security Holdings" in the registrant's definitive Proxy
Statement relating to its 1996 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing
under the caption "Executive Compensation" in the registrant's definitive Proxy
Statement relating to its 1996 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) AND (A)(2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES. The consolidated financial statements and financial statement
schedules of Tosco Corporation and subsidiaries, required by Part II, Item 8,
are included in Part IV of this report. See Index to Consolidated Financial
Statements and Financial Statement Schedules on page F-1.
(A)(3). EXHIBITS.
3(a). Restated Articles of Incorporation of Registrant as currently in effect,
including Certificates of Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights of Preferred Stock.
Incorporated by reference to Exhibit 28.2 to Registrant's Current Report on
Form 8-K dated July 29, 1991.
3(b). By-laws of Registrant as currently in effect. Incorporated by
reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
4(a). Form of Indenture between Registrant and IBJ Schroder Bank and Trust
Company, as Trustee, relating to 9% Series A First Mortgage Bonds due March 15,
1997 and 9 5/8% Series B First Mortgage Bonds due March 15, 2002. Incorporated
by reference to Exhibit 4.1 to Registration Statement filed by Registrant on
Form S-3 dated March 4, 1992.
4(b). Form of Indenture among Registrant, Bayway Refining Company and the First
National Bank of Boston, as Trustee, relating to 8 1/4% First Mortgage Bonds
due 2003. Incorporated by reference to Exhibit 4.1 to Registration Statement
filed by Registrant on Form S-4 dated April 29, 1993.
4(c). Form of Indenture dated as of July 7,1995 between Registrant and The
First National Bank of Boston, as Trustee, relating to 7% Notes due 2000.
Incorporated by reference to Exhibit 4.1 to Registration Statement filed by
Registrant on Form s-3 dated May 18, 1995 (No- 33-59423).
10(a). Second Amended and Restated Credit Agreement dated as of April 7, 1995
among Tosco Corporation, Tosco Europe Limited and Bayway Refining Company, as
Borrowers, and the Banks names therein, as Banks, and The Chase Manhattan Bank
(National Association) as Co-Agent, Bank of America National Trust and Savings
Association, as Co-Agent and Co-Arranger, and the First National Bank of
Boston. as Agent and Arranger.
10(b). Exchange Agreement dated October 2, 1986, between Registrant and
Atlantic Richfield Company. Incorporated by reference to Exhibit 10(aa) to
Registration Statement filed by Registrant on Form S-1 under the Securities Act
of 1933 (No. 33-9578).
10(c) Severance Agreement dated November 15, 1989, between Registrant and James
M. Cleary. Incorporated by reference to Exhibit l0(i) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990. Schedule
identifying similar agreement between Registrant, or its subsidiaries, and
another employee. Amendments, effective as of January 1 and February 1, 1993,
to said Agreements. Incorporated by reference to Exhibit 10(e) to Registrant's
Annual Report on Form 10- K for the fiscal year ended December 31, 1993.
10(d). Severance Agreement dated January 1, 1993 between Registrant and Thomas
D. O'Malley including schedule identifying similar agreements between
Registrant, or its subsidiaries, and four of its employees. Incorporated by
reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
10(e). Indemnification Agreement dated September 30, 1987, between Registrant
and James M. Cleary, including schedule identifying similar agreements between
Registrant and its Directors and/or officers, together with related Trust
Agreement. Incorporated by reference to Exhibit 10(aa) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
10(f). Sale and Purchase Agreement for Bayway Refinery and Related Facilities
dated December 10, 1992 between Exxon Corporation and Bayway Refining Company.
Incorporated by reference to Exhibit 10(l) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
10(g). Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No.
35P73, dated February 22, 1990 between Texaco Trading and Transportation Inc.
and Tosco Refining Company. Incorporated by reference to Exhibit 10(q) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1992.
10(h). Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No.
17P77, dated April 13, 1988 between Texaco Trading and Transportation Inc. and
Tosco Refining Company. Incorporated by reference to Exhibit 10(r) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1992.
10(i). Crude Oil Supply Agreement dated December 28, 1993 between BP Oil Supply
Company and Tosco Corporation. Incorporated by reference to Exhibit 10(r) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
10(j). Trademark License Agreement dated December 28, 1993 between British
Petroleum Company p.l.c. and Tosco Corporation. Incorporated by reference to
Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993. Schedule Identifying (i) Amended and Restated Trademark
License Agreement between British Petroleum Company p.l.c. and Tosco Corporation
dated as of August 1, 1994 and (ii) Trademark License Agreement (California)
between BP Oil Marketing Inc. and Tosco Corporation dated as of August 1, 1994.
These agreements extended the term of the original agreement and expanded the
territory of the original agreement.
10(k). Agreement for the Purchase and Sale of Assets dated as of the 9th day of
November, 1993 by and between BP Exploration & Oil Inc. and Registrant.
Incorporated by reference to Exhibit 1 to Registrant's current Report on Form
8-K dated November 9, 1993.
10(l). Stock Sale Agreement dated February 16, 1996 by and among Tosco and
various stockholders of the Circle K Corporation. Incorporated by reference to
Exhibit 1 to Registrant's Schedule 13D dated February 23, 1996, filed with
respect to The Circle K Corporation.
10(m) Agreement and Plan of Merger dated as of February 16, 1996 by and
among Tosco, Tosco Acquisition Sub, Inc. and The Circle K Corporation.
Incorporated by reference to Exhibit 2 to Registrant's Schedule 13D dated
February 23, 1996, filed with respect to The Circle K Corporation.
11. Statement regarding computation of per share earnings. See Exhibit 11
to Financial Statements (page F-28), as required by Item 8 and appearing in
Item 14 hereof.
21. A list of all subsidiaries of the Registrant.
. 23. Consent of Coopers & Lybrand.
. 27. Financial Data Schedule
99. Condensed Consolidating Financial Information and Report of Independent
Accountants
(B). REPORTS ON FORM 8-K
None
(C). Financial Statement schedules required by Regulation S-X are
excluded from the Annual Report to Shareholders by Rule 14a-3(b)(1). See
Schedule II to the Financial Statements, as required by Item 8, and appearing
under Item 14 hereof.
TOSCO CORPORATION AND SUBSIDARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K
YEAR ENDED DECEMBER 31, 1995
PAGE(S)
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1995,1994 and 1993 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Common Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8 - F-27
Financial Statements Schedules:
II - Valuation and Qualifying Accounts F-28
Financial Exhibits F-29 - F-34
Financial statement schedules other than those listed above have been omitted
since they are either not required, are not applicable, or the required
information is shown in the financial statements and related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Tosco Corporation
We have audited the consolidated financial statements and the financial
statement schedule of Tosco Corporation and subsidiaries listed in the index on
page F-1 of this Form 10-K. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tosco Corporation
and subsidiaries as of December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Oakland, California
January 25,1996, except as to the information in Note 16, for which the date is
February 16, 1996
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
thousands of Dollars
December 31,
ASSETS 1995 1994
Current Assets
Cash and cash equivalents $ 19,148 $ 23,793
Short-term investments and deposits 29,125 30,829
Trade accounts receivable, less
allowance for uncollectibles
of $8,523,000 (1995) and
$8,392,000 (1994) 296,768 291,772
Inventories 489,479 463,637
Prepaid expenses and other
current assets 42,363 41,923
Deferred income taxes 4,558 6,160
Total current assets 881,441 858,114
Property, plant and equipment, net 961,418 822,057
Deferred turnarounds 82,249 74,849
Deferred income taxes 6,998
Other deferred charges and assets 78,063 35,188
Total assets $2,003,171 $1,797,206
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 503,900 $ 328,572
Accrued expenses and other
liabilities 166,391 151,561
Total current liabilities 670,291 480,133
Revolver debt 45,000 233,000
Long-term debt 579,036 454,429
Other liabilities 15,660 14,338
Environmental cost liability 34,379 35,382
Net liability of discontinued operations 1,256 2,526
Deferred income taxes 30,439 1,934
Shareholders' equity Common shareholders' equity:
Common Stock - $.75 par
value 50,000,000 shares
authorized 39,613,950 (1995)
and 39,598,900 (1994) shares
issued 29,714 29,702
Capital in excess of par value 640,306 640,078
Retained earnings (deficit) 27,903 (25,436)
Treasury stock, at cost (70,813) (68,880)
Total shareholders' equity 627,110 575,464
Total liabilities and
shareholders' equity $2,003,171 $1,797,206
The accompanying notes are an integral part of these financial statements
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars Except Per Share Data)
YEAR ENDED DECEMBER 31,
1995 1994 1993
SALES $7,284,051 $6,365,757 $3,559,217
Cost of sales 6,999,301 6,105,293 3,307,492
Inventory valuation (recovery) writedown (17,651) 17,651
Restructuring (1995) and environmental cost (1994) accruals 5,200 6,000
Selling, general and administrative expense 95,858 84,123 58,174
Interest expense 59,815 58,315 48,868
Interest income (3,562) (4,172) (4,722)
7,156,612 6,231,908 3,427,463
Income before provision for income taxes 127,439 133,849 131,754
Provision for income taxes 50,381 50,006 51,175
NET INCOME 77,058 83,843 80,579
Preferred stock dividend requirements (6,293) (10,063)
INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 77,058 $ 77,550 $ 70,516
INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Primary: $ 2.06 $ 2.27 $ 2.38
Fully diluted: $ 2.04 $ 2.24 $ 2.33
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31,
1995 1994 1993
Cash flows from operating activities:
Net income $ 77,058 $ 83,843 $ 80,579
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization 63,345 51,905 35,618
Amortization of deferred items 48,104 32,956 29,473
Inventory valuation (recovery) writedown (17,651) 17,651
Environmental cost accrual 6,000
Deferred income taxes 37,105 34,734 (10,189)
(Increase) decrease:
Trade accounts receivable (Note 3) (4,996) (117,487) (83,431)
Inventories (25,842) (83,702) (95,389)
Prepaid expenses and other current assets (440) 1,605 (16,020)
Increase (decrease):
Accounts payable and accrued liabilities 211,670 127,607 151,236
Other liabilities and deferred gains 1,514 3,320 3,676
Other, net (377) 2,390 (532)
Net cash provided by operating activities 407,141 125,520 112,672
Cash flows from investing activities:
Purchase of property, plant and equipment, net (202,686) (160,119) (73,897)
Purchase of Bayway assets, including acquired
inventories (317,630)
Purchase of Tosco Northwest, including acquired
inventories (159,981)
Increase in deferred turnarounds (48,254) (76,045) (5,568)
Increase in deferred charges and other assets (50,585) (15,374) (18,087)
Net proceeds from sale of discontinued operations 91,217
Transfers (to) from discontinued operations (1,270) (9,207) 41,791
Net change in short-term investments and deposits 1,704 (794) 2,181
Proceeds from Continental-Tosco Limited Partnership 9,519 4,880
Net cash used in investing activities (301,091) (252,020) (435,094)
Cash flows from financing activities:
Proceeds from bond offering 125,000
Proceeds from Bayway Mortgage Bonds 150,000
Borrowings (repayments) under revolver, net (188,000) 86,000 147,000
Short-term bank borrowings (repayments) (21,500) 41,500
Early retirement of debt (50,000)
Principal payments under debt agreements (783) (2,275) (795)
Issuance of Common Stock, net of expenses 88,418
Dividends paid on Preferred and Common Stock (23,719) (27,767) (28,056)
Other, net (1,693) (2,256) (727)
Net cash used in financing activities (110,695) 95,202 305,840
Net decrease in cash and cash equivalents (4,645) (31,298) (16,582)
Cash and cash equivalents at beginning of period 23,793 55,091 71,673
Cash and cash equivalents at end of period $ 19,148 $ 23,793 $ 55,091
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Cash Flow Information
(Thousands of Dollars)
Year Ended December 31,
1995 1994 1993
CASH PAID DURING THE YEAR
Interest $58,263 $54,059 $44,923
Income taxes $ 5,777 $ 9,891 $ 2,576
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Dollar(Amounts in Thousands)
Capital
in
Excess Retained Total Common
of Par Earnings Shareholders
Common Stock Issued Value (Deficit) Treasury Stock at Cost Equity
Shares Amount Shares Amount
Balance, January 1, 1993 31,821,158 $23,869 $449,265 ($134,035) 2,548,444 $(68,866) $270,233
Net Income 80,579 80,579
Dividends - Preferred stock (10,063) (10,063)
Dividends - Common Stock (17,993) (17,993)
Issuance of Common Stock 2,990,000 2,243 86,175 88,418
Purchase of Common Stock 597 (14) (14)
Other (713) ( 713)
Balance, December 31, 1993 34,811,158 26,112 534,727 (81,512) 2,549,041 (68,880) 410,447
Net income 83,843 83,843
Dividends - Preferred stock (6,293) (6,293)
Dividends - Common Stock (21,474) (21,474)
Exercise of stock options 3,333 2 46 48
Conversion of Series F
Preferred Stock 4,784,409 3,588 106,503 110,091
Other (1,198) (1,198)
Balance, December 31, 1994 39,598,900 29,702 640,078 (25,436) 2,549,041 (68,880) 575,464
Net income 77,058 77,058
Dividends - Common Stock (23,719) (23,719)
Exercise of stock options 15,050 12 228 (188,549) 4,467 4,707
Acquisition of Common Stock - 188,549 (6,400) (6,400)
Balance, December 31, 1995 39,613,950 $29,714 $640,306 $27,903 2,549,041 $(70,813) $627,110
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tosco Corporation and its wholly owned subsidiaries (Tosco), including Seminole
Fertilizer Corporation (Seminole), a discontinued operation whose principal
operating assets were sold in 1993.
All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
result of operations and disclosure of contingent assets and liabilities .
Nature of Business
Tosco is an independent oil refiner and marketer of petroleum products with
related distribution facilities and domestic and international commercial
activities.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
classifications adopted in 1995.
Cash, Cash Equivalents, Short-term Investments and Deposits
Cash in excess of operating requirements is invested in certificates of
deposit, government securities, commercial paper and other highly liquid
investments. Investments with original maturities of more than three months and
less than 12 months are classified as short-term investments and carried at
cost which approximates market.
Tosco purchased director and officer liability insurance coverage from its
wholly owned subsidiary Loil Group Ltd. (Loil), with limits of liability
coverage of approximately $14,000,000 at December 31, 1995 and 1994, (an amount
approximately equal to the amount of cash and investments of Loil). The assets
of Loil are restricted to payment of defense costs and claims made against the
directors and officers of Tosco. At December 31, 1995 the portfolio's carrying
value of marketable investments, considered "available for sale" in accordance
with SFAS No. 115 - "Accounting for Certain Investments in Debt and Equity
Securities", approximated fair value. Unrealized holding gains and losses and
proceeds from any sale of these securities and any resulting gains and losses
were not material for 1995.
Inventories
Inventories of raw materials and products are valued at the lower of cost,
determined on the last-in, first-out (LIFO) basis, or market. The net
realizable value of LIFO inventories is measured by aggregating similar pools
on a consolidated basis.
Deferred Charges and Turnarounds
Financing charges related to the acquisition or refinancing of debt are
deferred and amortized over the term of the related debt using the effective
interest method.
Refinery processing units are periodically shut down for major maintenance
(turnarounds). Turnaround costs are deferred and amortized on a straight-line
basis over the expected period of benefit (which generally ranges from 24 to 48
months, to the next scheduled shutdown of the unit).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including capitalized interest, are carried
at cost less accumulated depreciation. Depreciation and amortization are
provided over the estimated useful lives of the respective classes of assets
utilizing the straight-line method. Expenditures which materially increase
values, change capacities or extend useful lives are capitalized. Routine
maintenance, repairs, and replacement costs are expensed. Gains and losses on
disposition of assets are reflected in results of operations.
Trademarks and Licenses
Trademarks and licenses are stated at cost and are amortized on a
straight-line basis over their estimated useful life (predominantly 15 years).
Excise Taxes
Excise taxes collected on behalf of governmental agencies of $1,168,000,000
for 1995 were not included in sales, cost of sales or other expenses.
Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessment and/or remedial efforts are probable and the costs can
be reasonably estimated. Generally, the timing of these accruals coincides with
completion of investigations and other studies or Tosco's commitment to a
formal plan of action.
Earnings Per Share
Primary earnings per share is computed by dividing net income less
preferred stock dividend requirements by the weighted average number of common
and common equivalent shares outstanding during the year. Fully diluted
earnings per share computations for 1994 and 1993 assumed that all shares of
previously outstanding convertible preferred stock were converted to common
stock of Tosco (Common Stock) at the beginning of each period and that no
preferred dividends were paid.
The weighted average number of shares used in computing earnings per
share are as follows:
YEAR ENDED DECEMBER 31,
1995 1994 1993
------ -------- ------
(IN THOUSANDS)
Primary........... 37,481 34,214 29,679
Fully Diluted..... 37,738 37,408 34,641
2. FINANCIAL INSTRUMENTS
Tosco, at times and when able, uses commodity futures to lock in what it
considers to be acceptable margins between the sales value of refined products
produced and the cost of raw materials purchased, on a varying percentage of
Bayway Refinery production, generally for periods not exceeding one year. In
addition, Tosco enters into swap contracts with counterparties (typically
agreeing to sell at fixed forward prices, and to buy at future variable market
prices, stated volumes of residual fuels) to hedge sales prices of Bayway's
residual fuels production. Realized gains and losses on liquidated raw material
futures contracts are deferred in inventory until the related refined products
are sold. Tosco also utilizes commodity futures and forward contracts to a
lesser extent to hedge inventories stored for future sale and to hedge against
adverse price movements between the cost of foreign crude oil that Bayway
refines and the cost of domestic crude oil.
At December 31, 1995, Tosco had, as part of its hedging program, open long
(obligation to purchase) and short (obligation to deliver) futures, swap and
forward contracts for crude oil and products with a notional value (number of
barrels under contract multiplied by the per barrel contract value) of
approximately $380,000,000 and $408,000,000 respectively. The unrecognized net
loss on such open contracts as well as deferred gains and losses on closed
futures and swap contracts totaling approximately $901,000 will be recognized
or reversed in 1996 as an offset to realized margins on refined products sold.
Pursuant to the requirements of the commodity exchanges, margin deposits
for a percentage of the value of the futures contracts have been placed with
commodity brokers. The margin deposits are classified as short-term deposits on
the balance sheet.
Fair Values
The carrying value of cash and cash equivalents, short-term investments and
deposits, trade accounts receivable, and accounts payable and other current
liabilities approximates fair value due to the relatively short maturity of
these financial instruments. Estimated fair values of other financial
instruments are as follows:
DECEMBER 31,
1995 1994
-------------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(THOUSANDS OF DOLLARS)
Mortgage and Exchange Bonds (a) ..........$450,000 $504,495 $450,000 $448,578
7% Notes (a) 125,000 127,225
Revolving Credit Facilities (b) 45,000 45,000 233,000 233,000
Note collateralized by oil shale properties(c) 4,807 5,200
(a) The fair value of these instruments reflects quoted market prices at
the end of each year.
(b) Borrowings under the floating rate revolving credit facilities
approximate fair value.
(c) These instruments are not publicly traded; therefore the fair value is
not practicable to estimate.
Credit Risk
Financial instruments which potentially subject Tosco to concentrations of
credit risk consist principally of temporary cash investments, trade
receivables and commodity futures, swap and forward contracts. Tosco does not
believe that it has a significant credit risk on its futures, swap and forward
contracts. Futures contracts are transacted through the New York Mercantile
Exchange (NYMEX) and other large commodity exchanges with established
collateral and credit criteria for participants. To reduce credit risk,
temporary cash investments are spread among several high quality financial
institutions. In addition, Tosco conducts ongoing evaluations of its broad base
of customers and counter parties and requires letters of credit or other
collateral arrangements as appropriate. Tosco's actual trade receivable credit
losses have not been significant.
3. ACCOUNTS RECEIVABLE
In June 1995, as part of its ongoing program to reduce interest costs,
Tosco entered into a three year agreement with a financial institution to sell
on a revolving basis up to $100,000,000 of an undivided percentage ownership
interest in a designated pool of accounts receivable (Receivable Transfer
Agreement). Under the Receivable Transfer Agreement, Tosco retains
substantially the same risk of credit loss as if the receivables had not been
sold. Tosco also retains collection and administrative responsibilities on the
participating interest sold as agent for the financial institution. Sales of
accounts receivable averaged $432,000,000 per month in 1995. At December 31,
1995 accounts receivable was reduced by approximately $99,800,000 for
receivables sold under the Receivable Transfer Agreement. Expenses of
$3,052,000 related to this program are included in cost of sales.
4. DISCONTINUED OPERATIONS
On May 4, 1993, Seminole completed the sale of its principal operating
assets to Cargill Fertilizer Inc. (Cargill). The loss on disposition was
accounted for as discontinued operations in 1992 and current financial
statements reflect the phosphate fertilizer segment as a discontinued segment.
Net liabilities of the discontinued segment are as follows:
DECEMBER 31,
1995 1994
----------------- ---------
(THOUSANDS OF DOLLARS)
Assets (a).................................................... $ 14,007 $ 25,015
Other liabilities (b)......................................... ( 15,263) ( 27,541)
---------- -----------
Net liabilities of discontinued operations.................... ($ 1,256) ($ 2,526)
======== ==========
(a) Assets include income tax receivables of $6,668,000 and $12,936,000 at
December 31, 1995 and 1994, respectively, which will be utilized to reduce
Tosco's consolidated tax liability.
(b) A subsidiary of Seminole sold its 50% interest in a partnership
effective January 1, 1994. Pursuant to the sale agreement, the subsidiary
remains obligated for its 50% share of the capital lease obligations of the
partnership. Under the terms of the 1993 sale agreement, Seminole executed
promissory notes to Cargill totaling $14,500,000, payable in two equal
installments on January 1, 1994 and 1995.
5. Inventories
DECEMBER 31,
1995 1994
-------- --------
(THOUSANDS OF DOLLARS)
Raw materials.......................................... $ 223,795 $ 163,866
Intermediates.......................................... 18,147 24,603
Finished products...................................... 242,558 272,462
Retail................................................. 4,979 2,706
----------- -----------
$ 489,479 $ 463,637
========= =========
The excess of replacement cost over the value of inventories based upon the
LIFO method was $43,304,000 and $5,821,000 at December 31, 1995 and 1994,
respectively.
Results of operations for 1994 include the reversal (based on price levels at
the end of 1994) of the $17,651,000 market valuation reserve recorded at
December 31, 1993.
6. DEFERRED CHARGES AND OTHER ASSETS
DECEMBER 31,
1995 1994
-------- --------
(THOUSANDS OF DOLLARS)
Deferred financing costs............................... $ 15,701 $ 15,332
Service station dealer advances........................ 9,304 4,725
Deposits............................................... 5,500 5,500
Trademarks and licenses (Notes 8(a) and 14)............ 38,731 3,787
Other assets........................................... 8,827 5,844
----------- -----------
$ 78,063 $ 35,188
========== =========
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, Straight-Line
1995 1994 ANNUAL RATE
-------- -------- -----------
(Thousands of Dollars)
Land................................................... $ 98,445 $ 94,511
Refineries and related assets.......................... 919,060 821,517 4% to 15%
Retail marketing and related assets.................... 96,854 50,866 5% to 20%
Furniture, fixtures and improvements................... 41,901 36,012 3% to 33%
Transportation equipment............................... 13,746 10,120 4% to 33%
Mineral properties, principally oil shale
interests (a)........................................ 21,815 21,815
Natural gas properties................................. 4,507 4,104
Construction in progress............................... 144,831 104,264
----------- -----------
1,341,159 1,143,209
Less accumulated depreciation and amortization......... 379,741 321,152
----------- -----------
$ 961,418 $ 822,057
========== ==========
(a) At cost, net of impairments.
Expenditures for maintenance and repairs (excluding the amortization of
turnaround costs) were $102,552,000, $89,513,000, and $74,596,000 for 1995,
1994 and 1993, respectively.
8. ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31,
1995 1994
---------- --------
(THOUSANDS OF DOLLARS)
Accrued taxes other than taxes on income............. $ 64,122 $ 71,964
Accrued compensation and related benefits............ 15,759 11,570
Accrued interest..................................... 14,197 11,958
Income taxes payable (receivable).................... ( 1,943) ( 9,546)
Acquisition related liabilities (a).................. 37,841 15,856
Other accrued costs.................................. 9,714 7,476
Short term borrowings (b)............................ 20,000 41,500
Dividends payable.................................... 5,930
Current installments of long-term debt .............. 771 783
---------------------------
$ 166,391 $ 151,561
========== ==========
(a) In December 1993, Tosco acquired the Ferndale Refinery, retail
marketing assets in the Pacific Northwest, and the right to market under the BP
brand (Tosco Northwest) from BP Exploration and Oil Inc (BP). The purchase
price for Tosco Northwest included annual contingent participation payments
over the five years following the acquisition of up to $50,000,000 and
$100,000,000 based on the performance of the refining and retail marketing
segments, respectively. In December 1995, Tosco and BP agreed to settle all
contingent participation payments, including participation payments due for
1995, for $35,000,000, payable no later than April 2, 1996. The payment was
allocated to trademarks and fixed assets.
(b) Cash borrowings of $20,000,000 (unsecured) and $41,500,000 (partially
collateralized) were outstanding at December 31, 1995 and 1994, respectively,
under short-term lines of credit with interest at alternative rates at Tosco's
option. The weighted average interest rate was 6.6% and 6.9% for 1995 and 1994.
9. LONG-TERM DEBT
DECEMBER 31,
1995 1994
---------- --------
(THOUSANDS OF DOLLARS)
COLLATERALIZED
First Mortgage Bonds (a) (f)......................... $ 300,000 $ 300,000
Exchange Bonds (b) (f)............................... 150,000 150,000
Revolving Credit Facilities (c) (f).................. 45,000 233,000
Note collateralized by oil shale mining properties (d). 4,807 5,200
UNCOLLATERALIZED (e) (f)............................. 125,000 12
------- -----------
624,807 688,212
Less: Current installments..................................... 771 783
----------- -----------
$624,036 $ 687,429
======== =========
(a) In March 1992, Tosco issued $300,000,000 of First Mortgage Bonds (Bonds),
comprised of $100,000,000 of 9% Series A Bonds due March 15, 1997 and
$200,000,000 of 9-5/8% Series B Bonds due March 15, 2002. Interest on the Bonds
is payable each March 15th and September 15th. The Bonds are non-callable and
are collateralized by the Avon Refinery and certain related assets.
(b) In connection with the acquisition of the Bayway Refinery, Tosco issued in
a private placement $150,000,000 of 8-1/4% First Mortgage Bonds due May 15,
2003, guaranteed by Bayway, with interest payable semi-annually on May 15th and
November 15th (Bayway Bonds). Proceeds for the sale of the Bayway Bonds, net of
$2,325,000 of costs, were contributed as an equity investment to Bayway. The
Bayway guarantee is collateralized by the Bayway Refinery and related assets
and a guarantee of Tosco. Effective July 7, 1993, the Bayway Bonds were
exchanged, pursuant to a registration statement, for a new series of publicly
traded 8-1/4% First Mortgage Bonds (Exchange Bonds), the terms of which are
substantially identical to the Bayway Bonds.
(c) Tosco amended its collateralized credit facility effective April 7,
1995 (Amended Revolving Credit Facilities). The amendment extended the maturity
of the credit facility by one year to April 1998 and reduced the cost of
borrowing. Cash borrowings under the Amended Revolving Credit Facilities now
bear interest at the option of Tosco at one of three alternative rates (a
federal funds rate, a Eurodollar rate, or a base rate related to prime) plus an
incremental margin for each rate option. The incremental margin is dependent on
the credit rating of the First Mortgage Bonds. A commitment fee of approximately
3/8% per annum on the unused portion of the commitment is also due. The Amended
Revolving Credit Facilities is collateralized by investments, accounts
receivable and inventory.
(d) On December 17, 1987, The Oil Shale Corporation, a subsidiary of Tosco,
exercised options to acquire certain oil shale mining claims (Ertl and Paraho
oil shale properties in Rio Blanco County, Colorado) for a cash payment of
$1,150,000 and execution of a promissory note of $11,562,000, payable in
fifteen equal annual principal installments beginning on December 17, 1990. The
promissory note, with a stated interest rate of 5%, was discounted, based upon
long-term market rates, to a value of $6,356,000 at the date of issue.
(e) In July 1995, Tosco filed a registration statement for the issuance, from
time to time, of up to $250,000,000 of unsecured debt securities on terms
determined by market conditions at the time of issuance. On July 12, 1995
$125,000,000 of authorized debt securities were issued under the registration
statement as 7% unsecured, non-callable notes due July 15, 2000 (7% Notes). The
proceeds from the public offering, net of costs, were used to repay
indebtedness under the Amended Revolving Credit Facilities. Interest on the 7%
Notes is payable each January 15 and July 15, beginning January 15, 1996.
(f) The debt agreements contain covenants which limit Tosco's ability to incur
additional indebtedness, pay dividends, acquire equity securities of Tosco, and
make investments in certain subsidiaries and discretionary capital
expenditures. In addition, the Amended Revolving Credit Agreement requires the
maintenance of specified ratios and net worth. At December 31, 1995, Tosco was
in compliance with all debt covenants.
Future Installments of Long-Term Debt
Maturities relating to long-term debt during the next five years are as
follows:
YEARS ENDING THOUSANDS
DECEMBER 31, OF DOLLARS
1996...................... $ 771
1997...................... 100,771
1998...................... 45,771 (a)
1999...................... 771
2000...................... 125, 771
(a) Includes cash borrowings of $45,000,000 at December 31, 1995 under the
revolving credit facility.
Utilization of Revolving Credit Facility
DECEMBER 31,
1995 1994
-------- ------
(THOUSANDS OF DOLLARS)
Revolving Credit Facility
Cash borrowings........................ $ 45,000 $233,000
Letters of credit...................... 90,055 58,517
---------- ---------
Total utilization................... 135,055 291,517
Availability........................... 314,945 158,483
---------- ---------
Total credit line................... $450,000 $450,000
======== ========
10. CAPITAL STOCK
Common Stock
Tosco has paid a regular quarterly cash dividend on its Common Stock since
the third quarter of 1989. Tosco increased its quarterly dividend payment by
$.01 to $.16 per share effective with the third quarter of 1994. Dividends of
$.16 per share for the fourth quarter of 1995 were paid on January 2, 1996.
11. STOCK OPTIONS AND SHARES RESERVED FOR ISSUANCE
Tosco had two stock option plans in effect at December 31, 1995: the 1992
Stock Incentive Plan (1992 Plan) and the 1989 Stock Incentive Plan (1989 Plan).
The 1989 and 1992 Stock Incentive Plans provide for the issuance to key
employees, consultants, and non-employee directors of a maximum of 1,280,000
and 2,200,000 shares of Common Stock, respectively, in the form of stock
options, restricted stock awards and/or stock appreciation rights. Stock
options may be granted as "Incentive Stock Options" (as defined by the Internal
Revenue Code of 1986), or as nonqualified options, including nonqualified stock
options whose purchase price or vesting requirements are based on the
employee's achievement of established performance objectives. Options may be
exercised only within ten years from the date of grant. The exercise price of
nonqualified stock options is determined by the Compensation Committee of the
Board of Directors and may be less than the fair value of Common Stock on the
date of grant. Awards under the 1989 and 1992 Plan may be granted until March
7, 1999 and March 13, 2002, respectively.
Options to acquire an aggregate of 651,583 shares of Common Stock at
prices ranging from $29.19 to $35.88 per share (the fair value of Common Stock
on the respective dates of grant) were granted during 1995. Subject to the
severance agreements with certain employees (Note 15), one-third of the options
may be exercised at any time following the first anniversary of the date of
grant and an additional one-third after each of the second and third
anniversaries.
YEAR ENDED DECEMBER 31,
1995 1994 1993
------------------------- ----------------------- ---------------
OPTION PRICE OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
Outstanding, beginning of year 1,975,266 $14.81 to $31.81 1,619,299 $14.38 to $31.37 1,468,099 $11.90 to $28.56
Grants - 1992 Plan 632,916 $29.19 to $35.88 287,000 $30.31 to $31.81 542,500 $21.69 to $25.94
Grants - 1989 Plan 18,667 $35.88 165,000 $29.25 24,000 $31.37
Exercised ( 203,599)$15.94 to $30.31 ( 89,533)$14.38 to $28.56 ( 221,633) $18.86 to $23.56
Expired or canceled ( 40,084)$24.25 to $29.19 ( 6,500)$24.25 to $25.94 ( 193,667) $28.44 to $28.56
Outstanding, end of year (a) 2,383,166 $14.81 to $35.88 1,975,266 $14.81 to $31.81 1,619,299 $14.38 to $31.37
Exercisable 1,301,583 1,069,600 722,799
=========== =========== ==========
Available for future grant 640,168 251,667 697,167
============ ============ ==========
Shares reserved for:
Exercise of stock options 3,023,334 2,226,933 2,316,466
Conversion of Series F Stock 4,791,590
------------------ ----------------- ---------
Total shares reserved 3,023,334 2,226,933 7,108,056
=========== =========== =========
(a) As of December 31, 1995, the expiration dates of options outstanding
range from June 27, 1999 to November 14, 2005.
12. INCOME TAXES
The provision for income taxes is summarized below:
Year Ended December 31,
1995 1994(a) 1993(b)
(Thousands of Dollars)
Current:
Federal $ 9,005 $ 10,774 $ 51,915
State 3,669 7,362 12,096
Foreign 602 218
Total current 13,276 18,136 64,229
Deferred:
Federal 32,171 36,073 ( 6,366)
State 4,934 ( 1,339) ( 3,823)
Total deferred 37,105 34,734 ( 10,189)
Adjustments ( 2,864) ( 2,865)
Provision for income taxes $ 50,381 $ 50,006 $ 51,175
A reconciliation of the provision for income taxes to income taxes computed
by applying the statutory federal income tax rate to earnings before income
taxes is as follows:
YEAR ENDED DECEMBER 31,
1995 1994 (A) 1993 (B)
---------- ------------- -----------
(THOUSANDS OF DOLLARS)
Computed income taxes at 35 %........ .$ 44,604 $ 46,847 $ 46,114
State income taxes........................ 8,921 9,302 11,858
Federal tax benefit of state income taxes ( 3,122) ( 3,279) ( 4,150)
Foreign 218
Adjustments and other............. ( 22) ( 2,864) ( 2,865)
----------- ---------- -----------
$ 50,381 $ 50,006 $ 51,175
========= ========= ==========
(a) The provision for income taxes for 1994 reflects a 1.5 % reduction in the
effective state income tax rate and recognition of $2,900,000 of revised income
tax benefits related to Tosco's former activities.
(b) The provision for income taxes for 1993 includes prior year tax credits of
approximately $2,500,000 which were finalized in tax returns filed in October
1993.
Effective January 1, 1992 Tosco adopted Statement of Financing Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income taxes are recognized for the tax consequences of " temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Temporary differences and carry forwards which give rise to deferred tax
assets and liabilities are as follows:
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
(Thousands of Dollars)
Deductible temporary differences:
Environmental cost liability........................ ($ 34,379) ($ 35,382)
Postretirement benefit obligations other than
pensions.......................................... ( 5,021) ( 4,530)
Accrued liabilities deductible for tax when paid ( 38,049) ( 29,466)
Deferred state income taxes (a)............ ( 6,868) ( 1,934)
Allowance for bad debts..................... ( 8,523) ( 8,392)
Other ...................................... ( 11,800) ( 12,516)
--------- ---------
( 104,640) ( 92,220)
-------- ---------
Tax carryforwards:
Net operating losses (b) (d)........................ ( 24,000) (106,834)
-------- -------
Taxable temporary differences:
Inventories................................... 64,012 20,258
Property, plant and equipment................ 165,059 174,953
Deferred turnarounds expensed for tax......... 34,704 41,239
Other.................................... 7,108 4,753
----------- ---------
270,883 241,203
--------- ---------
Total temporary differences and carryforwards. $ 142,243 $ 42,149
========= =========
Federal income taxes at 35%.................. $ 49,785 $ 14,752
Tax credit carryforwards (b) (d)............ ( 17,197) ( 17,197)
Alternative minimum tax credit carryforwards (c) (d) ( 13,575) ( 10,713)
Deferred federal income tax liability (asset) $ 19,013 ($ 13,158)
Current deferred (asset)..................... $ ( 4,558) ($ 6,160)
Long-term deferred liability ................ 23,571 ( 6,998)
---------- ---------
$ 19,013 ($ 13,158)
========= ========
(a)Deferred state income tax liabilities were provided for temporary
differences, primarily the excess of state tax over book depreciation.
(b)The NOLs which expire by 2001 were generated during the four-year
period 1983 through 1986 when Tosco disposed of three refineries and its
investments in oil and gas ventures and restructured its operations around the
Avon Refinery. Investment tax credit carryforwards expire as follows:
$4,334,000 (1997), $8,330,000 (1998), $464,000 (1999), $732,000 (2000),
$337,000 (2001), $462,000 (2002) and $2,537,000 (2008).
(c)Alternative minimum tax credit (AMT) carryforwards may be carried
forward indefinitely.
(d) Tosco believes that it is more likely than not that the tax loss and
credit carryforwards will be realized prior to the expiration of the
carryforward periods based upon future reversals of existing taxable temporary
differences and the expected continuation of Tosco's profitable results of
continuing operations since 1986.
13. EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
Pension Plans
Tosco has non-contributory, defined benefit pension plans covering
substantially all employees located at the Avon and Bayway Refineries and its
union employees at the Ferndale Refinery (collectively, the Plans). Benefits
under the Plans are generally based on the employee's years of service and
average earnings for the three highest consecutive calendar years of
compensation during the ten years immediately preceding retirement.
Contributions to the Plans are at least sufficient to meet the minimum funding
requirements of applicable laws and regulations but no more than the amount
deductible for federal income tax purposes. Assets of the Plans are managed by
major financial institutions and invested in high quality equity securities,
guaranteed investment contracts, corporate and government debt securities and
real estate equity funds. The funded status of the Plans and amounts recognized
in Tosco's balance sheet are as follows:
DECEMBER 31,
1995 1994
------- ------
(THOUSANDS OF DOLLARS)
Actuarial present value of benefit obligations:
Vested benefits....................................... ($ 48,457) ($ 36,132)
Nonvested benefits.................................... ( 2,232) ( 1,762)
--------- ---------
Accumulated benefit obligations (ABO)................. ( 50,689) ( 37,894)
Plan assets at fair value ............................... 63,538 47,371
--------- --------
Plan assets in excess of ABO ........................... $ 12,849 $ 9,477
======== ========
Projected benefit obligations (PBO) for services
rendered to date ...................................... ($77,011) ($60,016)
Plan assets at fair value ............................... 63,538 47,371
--------- --------
PBO in excess of plan assets ........................... ( 13,473) ( 12,645)
Prior service cost not yet recognized
in net periodic pension cost........................ 9,776 10,528
Unrecognized net loss ................................... 3,044 781
Unrecognized net obligation at January 1, 1987
being amortized over 15 years......................... 1,726 2,014
---------- ---------
Prepaid pension cost .................................... $ 1,073 $ 678
========= =========
Net pension cost included the following components:
Service cost.......................................... 4,475 $ 5,284
Interest.............................................. 4,568 4,283
Actual return on plan assets.......................... (11,617) ( 450)
Net amortization and deferral......................... 8,924 ( 1,715)
--------- --------
Net pension cost...................................... $ 6,350 $ 7,402
======== =========
Major assumptions at year end (a)
Assumed discount rate (b)............................. 7% 8-1/4%
Assumed rate of future compensation increase.......... 5% 5%
Expected rate of return on plan assets................ 7-1/2% 7-1/2%
- --------------------
(a)Net pension cost is determined using the assumptions as of the beginning
of each respective year. The funded status of the Plans is determined using the
assumptions as of the end of each respective year. Net pension cost for 1993
was $5,571,000.
(b)The discount rate represents the expected yield on a diversified
portfolio of high-grade (AA rated or equivalent) fixed income investments with
cash flow streams approximating payments under the Plans. The lower 1995
discount rate is reflective of the decline in interest rates that occurred in
1995.
In connection with Tosco's acquisition of the Bayway and Ferndale refineries in
1993, pension coverage was extended to certain acquired employees. Pension
benefits granted provide for recognition of past employees' service but
benefits accrued through the respective acquisition dates will be paid by their
former employers. Benefits are payable at the normal retirement age of 65 with
reduced benefits for early retirement (as defined).
In 1990, Tosco adopted a Senior Executive Retirement Plan to provide
retirement benefits to selected senior executives of Tosco and their
beneficiaries. A provision of $1,265,000, $1,855,000 and $1,267,000 was
recorded in 1995, 1994 and 1993, respectively.
Employee and Retiree Benefit Plans
Tosco provides health care and life insurance benefits for all employees
and postretirement health care and life insurance benefits for certain
employees (primarily employees at the Avon Refinery). Beginning January 1,
1988, new employees, including employees acquired in Tosco's acquisitions but
excluding new employees at the Avon Refinery, are not eligible for
postretirement benefits. Health care benefits for eligible employees and
retirees are provided through insurance companies whose premiums are based on
the benefits paid during the year. The health care plans are contributory, with
employee/retiree contributions adjusted periodically, and contain other
cost-sharing features such as deductibles and coinsurance. The life insurance
plans are noncontributory.
Tosco elected to prospectively recognize its accumulated postretirement
benefits obligation (APBO) other than pensions of $32,661,000 as of January 1,
1992, the effective date of Tosco's adoption of SFAS No. 106. In view of the
escalating costs of medical care, Tosco revised its retiree benefit plans to,
among other things, limit its future obligation to absorb health care
increases. These revisions as well as favorable changes in experience and cost
trends reduced Tosco's APBO to $16,191,000 and $14,209,000 at December 31, 1995
and 1994, respectively. The total cost of postretirement benefits, including
the amortization of the transition obligation, was $582,000 for 1995, an
increase of $291,000 over the amount which would have been expensed under the
pay as you go approach.
The funded status of the postretirement plans and the amounts recognized in
Tosco's balance sheet are as follows:
DECEMBER 31,
1995 1994
---------- -------
(Thousands of Dollars)
Accumulated postretirement benefit obligation (APBO :
Retirees .............................................$ 12,045 $ 10,788
Fully eligible active plan participants 1,920 1,418
Other active plan participants ....................... 2,226 2,003
----------
16,191 14,209
Plan assets at fair value (Insurance assets) 5,266 5,265
APBO in excess of plan assets 10,925 8,944
Unrecognized net gain from past experience
different from that assumed and from other changes 8,837 11,461
Unrecognized transition obligation ( 14,941) ( 15,875)
-------- --------
Accrued postretirement benefit liability $ 4,821 $ 4,530
========= ========
Net periodic postretirement benefit cost for 1995 and 1994 includes the
following components:
Amortization of transition obligation over 20 years $ 934 $ 934
Interest cost on APBO 1,077 1,702
Service cost 165 330
Actual return on life insurance assets ( 463) 41
Net amortization and deferral ( 1,131) ( 377)
-------- -----------
Net postretirement benefit cost 582 2,630
Liability at beginning of year 4,530 3,439
Employer payments, net of dividends and employee
contributions ( 291) ( 1,539)
----------- ----------
Accrued postretirement benefit liability $ 4,821 $ 4,530
========= =========
The following assumptions were used to develop the net postretirement
benefit:
Discount rate 7% 8-1/4%
Current year health care cost trend rate (a) 7.8% (2.6%)
Ultimate healthcare cost trend rate 5-1/2% 5-1/2%
Year ultimate trend rate is achieved 2002 2002
Rate of return on life insurance assets 5-1/2% 5-1/2%
Effect of a 1% point increase in the health care
cost trend rate
APBO $ 995 $ 881
Aggregate of service and interest cost $ 80 $ 136
(a) The negative trend rate for 1994 was a result of premium rate
reductions.
The changes in assumptions as well as changes in circumstances and
experience resulted in a net gain of $11,461,000 in 1994 which is being
recognized as a reduction in postretirement benefit expense on a straight line
basis over the average remaining employee service period of 6 years
Postretirement benefit expense for 1993 was $2,541,000.
SAVINGS PLAN
A savings plan has been established for all eligible employees (Tosco
Corporation Capital Accumulation Plan (CAP)) to encourage long-term savings and
to provide additional funds for retirement. Participants may make, within
certain limitations, voluntary contributions under Section 401(k) of the
Internal Revenue Code of a percentage of their compensation. Tosco makes
matching contributions based upon years of contributory participation (as
defined under the CAP) for employees who elect to make certain specified and
minimum contributions. In addition, eligible employees receive an additional
contribution equal to 5% of their compensation (up to $150,000 in 1994 and
1995) in lieu of pension plan benefits. Participants are immediately vested in
both their voluntary and Tosco contributions.
Contributions by Tosco to the savings plan for the years ended December 31
were $7,837,000 (1995), $7,146,000 (1994), and $5,524,000 (1993).
Management Incentive Plans
A Cash Incentive Plan (CIP) has been established for members of middle and
senior management. The CIP sets forth discretionary and other awards which are
computed as a variable percentage of a participant's base salary, which
percentage is dependent upon the pretax income (as defined) of the business
unit. A bonus plan was adopted in 1990 for senior executives who are not
participants in the CIP based on Tosco's per share pretax income (as defined).
Results of operations for the years ended December 31, 1995, 1994 and 1993
include incentive compensation of $13,175,000, $6,800,000 and $9,531,000
respectively, of which $10,203.000, $5,350,000 and $7,458,000, respectively,
were included in selling, general and administrative expense. Special bonuses
totalling $2,200,000 were also awarded to certain employees, including
union employees and other employees not covered by management incentive plans.
14. LEASE COMMITMENTS
Tosco distributes petroleum products throughout its marketing areas through
a combination of owned and leased terminals. Leases for the Riverhead product
distribution terminal and Northville Industries oil distribution system, both in
Long Island, New York, expire in 1997 and 2002 and ten year leases for two major
West Coast product distribution terminals expire in 2001. Tosco has an option to
purchase the Riverhead Terminal at its fair market value at the end of the
lease. Other product distribution terminal leases are generally for short
periods of time and continue in effect until canceled by either party with
contracted days of notice. The product distribution terminal leases, other than
the Long Island leases, are subject to escalation either based on increases in
annual average wage rates or as allowed by the Public Utilities Commission
(PUC). A portion of the product distribution terminals' storage and handling
facilities is subleased to others. Tosco has a five year lease expiring in 1999,
with options to renew for two additional five year periods, with Statia
Terminals for approximately 3,600,000 barrels of storage capacity at Point
Tupper, Nova Scotia. The facility will be used primarily to store crude oil
destined for the Bayway Refinery. At December 31, 1995, minimum annual rentals
for product distribution and oil storage terminals totalled $25,339,000 for
1996, including $4,800,000 for the Point Tupper facility. Thereafter, annual
rentals total $30,920,000, (including an $11,500,000 payment due at the end of
the Riverhead terminal lease), $14,921,000 and $11,755,000 and $9,370,000 for
the years 1997 to 2000, respectively.
In conjunction with the acquisition of the BP California retail system in
August 1994, Tosco entered into long-term leases with a special purpose entity
established to purchase land and equipment in the BP California retail system.
The leases provide Tosco with options to purchase at agreed upon contracted
values (a) not less than all of the leased assets at annual anniversary dates
and (b) a portion of the leased assets for resale to unaffiliated parties at
quarterly lease payment dates. Tosco may also cancel the leases at the second
through sixth anniversary dates provided that the lessor receives minimum sales
values for the leased assets. The purchase option price and guaranteed sales
values decline over the applicable periods of the leases. Minimum annual
rentals, which vary with a reference interest rate (LIBOR) and assume that Tosco
exercises its lease renewal options, approximate $5,100,000 for the years 196
thru 1998, $4,500,000 for 1999 and 2000 and $3,000,000 for 2001. Final payments
totaling $55,000,000 are due at the end of the leases. Tosco entered into
similar leases in conjunction with the acquisition of Exxon's retail marketing
assets in Arizona in December 1994 (Original Arizona Lease). In August 1995,
Tosco entered into a $15 million expansion of the Arizona lease facility to
finance, for a one year period, the acquisition and improvement of service
station properties in Arizona (Additional Arizona Lease). At December 31, 1995,
Tosco, as agent for the lessor, had spent approximately $3,600,000 under this
facility but had not yet entered into leases pending completion of construction.
Minimum annual rentals therefore currently approximate $5,600,000 over the
remaining term of the Original Arizona Lease with a final payment of $44,000,000
due in December 2001 (the end of the lease). In addition, Tosco also assumed
existing leases of property, with expiration dates through 2011, and subleases
of retail properties, with expiration dates through 1998, in connection with the
acquisitions of retail assets in Northern California and Arizona.
In November 1995, Tosco acquired under long-term lease the 28-site car
wash operations of Brown Bear Car Wash located in the Puget Sound region.
Quarterly lease payments of $670,000 are escalated over the initial fifteen
year term of the lease. In connection with the transaction, Tosco acquired the
right to use the Brown Bear trademark and to acquire the trademark for
additional specified payments.
Tosco leases sulfuric acid and MTBE manufacturing facilities, both
located at the Avon Refinery. The initial term of the leases of the sulfuric
acid and MTBE facilities expire in 1998 and 2007, respectively. The leases may
be extended or the facilities purchased at their estimated fair market values
at the end of the lease terms. Tosco also leases transportation equipment,
including railcars and trucks, as well as computer and office equipment
primarily at leased office space at various locations in the United States.
Future minimum obligations under non-cancelable operating leases and
warehousing agreements at December 31, 1995 were as follows:
YEARS ENDING THOUSANDS
DECEMBER 31, OF DOLLARS
1996....... $ 60,623
1997....... 62,546
1998....... 39,649
1999....... 37,400
2000....... 33,870
2001 and subsequent..... 208,843
----------
442,931
Less future minimum sublease income...... ( 43,921)
Total minimum lease payments .............$ 399,010
Rental expense, including amounts under non-cancelable operating leases, was as
follows:
YEAR ENDED DECEMBER 31,
1995 1994 1993
----- ------ ------
(THOUSANDS OF DOLLARS)
Minimum rental and warehousing charges ................ $65,672 $54,986 $25,428
Contingent rental and warehousing charges
(based primarily on throughput)...................... 15,022 6,952 4,203
--------- --------- -----
80,694 61,938 29,631
Rental income on properties subleased to others........ (27,269) ( 21,214) ( 3,025)
--------- -------- -------
Net rental expense .................................... $53,425 $ 40,724 $26,606
======= ======== ======
15. COMMITMENTS AND CONTINGENCIES
Tosco is subject to extensive federal, state and local regulation of
environmental and permitting matters relating to its petroleum refining and
marketing operations. These regulations are complex and subject to differing
interpretations, and Tosco is currently involved in a number of proceedings and
discussions regarding the removal and mitigation of the environmental effects
of subsurface liquid hydrocarbons and alleged levels of hazardous waste at the
Avon Refinery and other locations, including Tosco's Spokane, Washington
terminal which is located in a site on the Superfund National Priorities List.
Environmental cost accruals were recorded in prior years based upon a
determination that investigative work and remedial actions would be required.
In July 1993, outstanding litigation concerning environmental issues was
settled with the predecessor owners of the Avon Refinery (Settlement
Agreement). Under the Settlement Agreement, the former owners agree to pay up
to $18,000,000 for one-half of the costs that may be incurred for compliance
with certain environmental orders and to provide Tosco with a $6,000,000 credit
for past expenses (which Tosco uses to reduce its one-half share of costs).
After the initial term of the Settlement Agreement (the later of four years or
until the $36,000,000 shared cost maximum is expended), the parties may elect
to continue the Settlement Agreement or to reinstate litigation. Tosco and the
former owners have established a committee to review and approve expenditures
for environmental investigative and remedial actions at the Avon Refinery.
Through December 31, 1995, the committee has spent approximately $2,100,000 on
such matters. Remedial actions are subject to negotiation with governmental
agencies and therefore the timing and amount of future cash expenditures is
uncertain. In addition, further investigative work and negotiations with the
governmental agencies may result in additional remedial actions which Tosco
cannot presently predict. Tosco has not relinquished its right to make claims
for reimbursement of future costs and is not required to reimburse amounts
received under the Settlement Agreement. Tosco received $3,474,000 in 1994 in
partial settlement of litigation cost reimbursement claims from its insurance
carriers and is pursuing additional recoveries and reimbursement under
insurance policies in effect during the applicable periods of coverage.
By agreement, Exxon is responsible for environmental obligations related
to or arising out of its ownership and operation of the Bayway Refinery,
purchased by Tosco in April 1993, as will be set forth in a list to be prepared
under administrative consent orders between Exxon and the state of New Jersey.
Bayway has the right, for a period of one year following the expected 1997
completion date of such list, to add additional items to the list.
Responsibility for clean-up projects thereafter identified will be shared by
Exxon and Tosco based on their respective length of ownership. Tosco has also
received indemnifications with respect to environmental obligations arising out
of or relating to the period prior to the respective acquisition dates of the
Ferndale Refinery and retail assets in the Pacific Northwest and Northern
California from BP, and the Arizona retail properties from Exxon.
Environmental exposures are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the lack of reliable data, the number of potentially responsible
parties and their financial capabilities, the multiplicity of possible
solutions, the years of remedial and monitoring activity required, and the
identification of new sites. While Tosco believes that it has adequately
provided for environmental exposures, should these matters be resolved
unfavorably to Tosco, they could have a material adverse effect on its
long-term consolidated financial position and results of operations.
There are various other legal proceedings and claims pending against Tosco
which are common to its operations. While it is not feasible to predict or
determine the ultimate outcome of these matters, it is the opinion of
management that these suits will not result in monetary damages which in the
aggregate would be material to the business or operations of Tosco.
In October 1986, Tosco and Atlantic Richfield Co.(ARCO) entered into an
agreement pursuant to which ARCO agreed for ten years (with two five-year
renewal options exercisable by ARCO) to deliver to Tosco an average of 50,000
barrels per day of Alaskan North Slope crude oil in exchange for a quantity of
gasoline that is a variable percentage of the amount of crude oil delivered,
based upon the prices of certain crude oils (ARCO Exchange Agreement). ARCO has
informed Tosco that it will not seek to extend the exchange agreement when it
expires at the end of 1996. The end of the ARCO Exchange Agreement will also
end Tosco's obligation to first offer the Avon Refinery for sale to ARCO if
Tosco desired to sell the Avon Refinery.
Tosco has employment agreements with certain of its executive officers
which provide for lump sum severance payments and accelerated vesting of
options upon termination of employment under certain circumstances or a change
of control, as defined. Tosco's potential obligation to nine officers was
$6,418,000 at December 31, 1995.
Tosco, in keeping with industry practice, schedules periodic maintenance
of major processing units for significant non-routine repairs and replacements
as the units reach the end of their normal operating cycles (turnarounds).
Unscheduled turnarounds also occur because of operating difficulties or
external factors. Throughput and earnings are lowered, and deferred turnaround
expenditures increased, during such periods.
Tosco's NOL, investment tax and AMT credit carryforwards (Note 12) are
subject to various complex tax rules and regulations which may be subject to
varying interpretations. These carryforwards may be adversely affected by
changes in the rules and regulations or significant changes in the ownership of
Tosco or its trade or business. Therefore, the future benefit of these
carryforwards, although more likely than not realizable under current rules and
regulations, is not assured.
Effective December 1993, the date commercial operation of a hydrogen
production facility (Hydrogen Plant) commenced, Tosco entered into 15 year
agreements to purchase up to 25 million cubic feet per day of hydrogen and
steam (Hydrogen Supply Agreement) and to provide utilities, wastewater disposal
and other services to the Hydrogen Plant. The Hydrogen Plant, located at the
Avon Refinery on property leased from Tosco, is owned and operated by a third
party. The Hydrogen Supply Agreement may be modified to provide for higher
levels of hydrogen at prices to be negotiated and can be terminated under
certain circumstances upon payment of a stipulated fee (which decreases over
the term of the agreement).
To control costs and improve delivery reliability, Tosco entered into a
twelve year time charter agreement with Neptune Orient Lines commencing after
completion of construction of four 100,000 DWT crude oil tankers. The first
tanker is scheduled to be delivered in June 1996 with the last tanker scheduled
for delivery in the first quarter of 1997. The tankers are expected to be
utilized for the movement of crude oil from the Point Tupper Storage facility to
Bayway or other locations or in direct shipments from suppliers.
Bayway Refining Company has entered into a contract to acquire a Solvent
Deasphalter for approximately $32.5 million, plus the cost of agreed
modifications and interest, upon its mechanical completion (as defined).
Construction of this unit began in 1995 and mechanical completion is
expected in the third quarter of 1996. Tosco is responsible for other capital
improvements to tie in the Solvent Deasphalter into the Bayway Refinery system
raising the total expected cost of the unit to approximately $48 million.
16. SUBSEQUENT EVENTS
On February 2, 1996, Tosco completed the purchase of the U.S. Northeast
marketing and refining assets from BP for $59 million, excluding inventories.
Under the purchase agreement, Tosco obtained an exclusive license valid
for 15 years, with various renewal options, to market retail gasoline and diesel
fuels under the BP brand. The license covers Delaware, Maryland, the Washington
D. C. metropolitan area, Pennsylvania, New Jersey, New York, Connecticut, Rhode
Island, Massachusetts, Vermont, New Hampshire and Maine. Portions of western
Pennsylvania and Maryland are excluded. The term of Tosco's exclusive license in
nine Western states was also extended to 15 years from the closing date. The
purchase also included the 180,000 B/D Marcus Hook Refinery near Philadelphia
(which was taken over in a non-operating mode), petroleum product terminals and
certain associated pipeline interests (some of which are surplus to Tosco's
needs and will be sold). Tosco has also offered to buy BP's one-third interest
in the Harbor pipeline on which BP's partners have a right of first refusal to
acquire BP's interest. BP retains environmental obligations relating to the
Marcus Hook Refinery and other properties included in the sale.
On February 16, 1996, Tosco announced an agreement to purchase all
outstanding shares of the Circle K Corporation (Circle K) and
to merge Circle K with a subsidiary of Tosco. Circle K is a large gasoline
retailer and operator of company-owned convenience stores. A definitive
agreement was signed with the holders of approximately 68% of Circle K's
outstanding shares (Selling Shareholders) and a merger agreement was approved
by the Board of Directors of both companies. Under the stock purchase
agreement, Selling Shareholders of Circle K will receive a combination of cash
and common stock of Tosco (Common Stock). Under the merger agreement the
remaining shareholders will receive Common Stock. Payment of the total
acquisition price of approximately $710 million, not including transaction and
certain other costs, will consist of approximately 6.5 million shares of Common
Stock and cash. The common stock to be issued is subject to adjustment if the
price of Common Stock fluctuates outside an agreed range and for shares issued
with respect to stock options held by certain employees of Circle K. Completion
of the transaction is subject to certain conditions including the approvals of
regulatory authorities and the shareholders of Circle K. The acquisition is
expected to close prior to mid-year.
17. Quarterly Financial Data (Unaudited)
Thousands of Dollars Except Per Share Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995 $ 1,696,319 $ 1,904,038 $ 1,816,846 $ 1,866,848
Sales
Gross profit on sales 32,146 74,948 82,750 $ 95,356
Restructuring accrual 2,200 3,000
Operating contribution $ 29,946 $ 71,498 $ 82,750 $ 95,356
Income (loss) from operations
before income taxes $ (7,155) $ 34,502 $ 44,188 $ 55,904
Provision (credit) for income taxes (2,882) 13,778 17,344 22,141
Net income $ (4,273) $ 20,724 $ 26,844 $ 33,763
Earnings (loss) per share:
Primary $ (0.12) $ 0.55 $ 0.72 $ 0.90
Fully diluted $ (0.12) $ 0.55 $ 0.71 $ 0.89
Thousands of Dollars Except Per Share Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
1994
Sales $ 1,495,688 $ 1,399,761 $ 1,671,557 $ 1,798,751
Gross profit on sales 105,497 45,049 48,175 61,743
Inventory valuation recovery 17,651
Environmental cost accrual (6,000)
Operating contribution $ 105,497 $ 45,049 $ 48,175 $ 73,394
Income from operations
before income taxes $ 65,893 $ 17,534 $ 16,099 $ 34,323
Provision for income taxes 27,026 3,082 6,423 13,475
Net income $ 38,867 $ 14,452 $ 9,676 $ 20,848
Earnings per share:
Primary $ 1.11 $ 0.37 $ 0.25 $ 0.56
Fully diluted $ 1.04 $ 0.37 $ 0.25 $ 0.56
SCHEDULE II
TOSCO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(THOUSANDS OF DOLLARS)
Column A Column B Column C Column D Column E
Charged
Balance at (Credited) to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
1995
Allowance for Uncollectible
Trade Accounts Receivable $ 8,392 $ 404 $ 273 $ 8,523
1994
Allowance for Uncollectible
Trade Accounts Receivable $ 5,091 $ 3,301 $ - $ 8,392
1993
Allowance for Uncollectible
Trade Accounts Receivable $ 5,164 $ - $ 73 $ 5,091