FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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
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.
[X] Yes ___ No
Registrant's Common Stock outstanding at October 31, 1997 was 156,228,429
shares.
TOSCO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
PAGE(S)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 1
Consolidated Statements of Income for the three and nine
month periods ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K: 13
Exhibit 11 - Computation of Earnings per Share for the
three and nine month periods ended September 30,
1997 and 1996 14
Exhibit 12 - Ratio of Earnings to Fixed Charges for the
three and nine month periods ended September 30,
1997 and 1996 15
Signatures 16
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Par Value)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $35,882 $94,418
Marketable securities and deposits 24,781 35,238
Trade accounts receivable, less allowance
for uncollectibles of $17,239 (1997) and $8,291 (1996) 376,944 189,654
Inventories 1,334,450 639,760
Prepaid expenses and other current assets 118,813 55,304
Deferred income taxes 28,121 28,121
------------ ----------
Total current assets 1,918,991 1,042,495
Property, plant, and equipment, net 3,158,764 1,681,877
Deferred turnarounds, net 128,440 63,160
Intangible assets (primarily tradenames), net 618,731 621,226
Other deferred charges and assets 194,202 146,067
------------- -----------
$6,019,128 $3,554,825
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses,
and other liabilities $1,622,477 $919,306
Current maturities of long-term debt 13,073 113,200
------------- ------------
Total current liabilities 1,635,550 1,032,506
Revolving credit facilities 241,000 -
Long-term debt 1,417,936 826,832
Accrued environmental costs 266,570 87,363
Deferred income taxes 73,418 80,302
Other liabilities 172,476 157,499
------------- ------------
Total liabilities 3,806,950 2,184,502
------------- ------------
Company-obligated, mandatorily redeemable, convertible
preferred securities of Tosco Financing
Trust, holding solely 5.75% convertible junior
subordinated debentures of Tosco Corporation 300,000 300,000
------------- ------------
Shareholders' equity:
Common stock, $.75 par value, 250,000,000 shares
authorized, 177,664,359 (1997) and
138,486,201 (1996) shares issued 133,475 103,865
Additional paid-in capital 2,028,615 963,667
Retained earnings 222,658 77,594
Treasury stock, at cost (472,570) (74,803)
-------------- ------------
Total shareholders' equity 1,912,178 1,070,323
-------------- ------------
$6,019,128 $3,554,825
============== =============
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars, Except Per Share Data)
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
----------- -------------- ----------- ------------
Sales $3,758,589 $2,709,388 $9,365,293 $7,160,151
Cost of sales 3,457,891 2,538,698 8,730,429 6,741,605
Consolidation charge 13,500
Selling, general, and administrative expenses 85,864 72,281 222,792 147,218
Interest expense 39,664 27,177 109,608 64,764
Interest income (1,679) (1,079) (3,820) (2,766)
-------------- ------------- ------------ ------------
Income before income taxes and distributions on company-
obligated, mandatorily redeemable, convertible
preferred securities 176,849 72,311 306,284 195,830
Income taxes 73,393 29,818 127,108 79,733
-------------- ------------ ------------ ----------
Income before distributions on company-obligated,
mandatorily redeemable, convertible
preferred securities 103,456 42,493 179,176 116,097
Distributions on company-obligated, mandatorily redeemable,
convertible preferred securities, net of income tax
benefit of $1,790 (1997 three months) and
$5,369 (1997 nine months) 2,523 - 7,569 -
-------------- ------------- ------------- -------------
Net income $100,933 $42,493 $171,607 $116,097
============== ============= ============= ==============
Earnings per common and common equivalent share (a):
Primary $0.63 $0.32 $1.14 $0.95
============= ============= ============= =============
Fully diluted $0.61 $0.32 $1.12 $0.95
============= ============= ============= =============
Weighted average common and common equivalent shares
used for computation of earnings per share (a):
Primary 160,610,178 133,825,833 150,919,402 121,975,344
================ ================ =============== ================
Fully diluted 169,947,706 134,174,811 160,379,839 122,520,480
================ ================ =============== ================
(a) Earnings per share and weighted average shares outstanding reflect
the 3-for-1 stock split declared and distributed in February 1997.
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended September 30,
1997 1996
------- --------
Cash flows from operating activities:
Net income $171,607 $116,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property,
plant, and equipment 170,979 81,144
Amortization of deferred turnarounds,
intangible assets, and other deferred charges 49,705 49,934
Deferred income taxes 23,887
Insurance recovery accruals, net of cash collected (50,000)
Changes in operating assets and liabilities, net 135,666 (90,849)
Other, net 629 4,348
----------- ----------
Net cash provided by operating activities 478,586 184,561
----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment, net (264,267) (119,931)
Increase in deferred turnarounds, deferred charges,
and other assets (116,103) (57,820)
Net change in marketable securities and deposits (2,772) (5,392)
Acquisition of BP Northeast refining and marketing assets (64,428)
Acquisition of Circle K, net of cash acquired (413,229)
Acquisition of Unocal refining, marketing, and related
supply and transportation assets, net of
cash acquired (1,138,464)
-------------- -----------
Net cash used in investing activities (1,521,606) (660,800)
-------------- -----------
Cash flows from financing activities:
Proceeds from note and debenture offering 600,000 240,000
Proceeds from common stock offering, net 697,396
Net borrowings under revolving credit facilities 241,000 315,000
Net short-term bank repayments (20,000)
Payments under long-term debt agreements (109,763) (3,344)
Payments under other long-term liabilities (20,121)
Repurchase of Unocal Shares (393,708)
Dividends paid on common stock (26,543) (19,902)
Other, net (3,777) (2,298)
-------------- -----------
Net cash provided by financing activities 984,484 509,456
Net (decrease) increase in cash and cash equivalents (58,536) 33,217
Cash and cash equivalents at beginning of period 94,418 19,148
-------------- -----------
Cash and cash equivalents at end of period $35,882 $52,365
============== ============
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(ALL INFORMATION IS UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Tosco Corporation and subsidiaries
("Tosco" or the "Company") reflect all adjustments, consisting of normal
recurring accruals, which are, in the opinion of management, necessary for a
fair presentation of the Company's consolidated financial position, results of
operations, and cash flows. Such financial statements are presented in
accordance with disclosure requirements established by the Securities and
Exchange Commission for Form 10-Q. These unaudited, interim, consolidated
financial statements should be read in conjunction with the Company's audited
Consolidated Financial Statements and notes thereto included in the Company's
1996 Annual Report on Form 10-K.
Certain reclassifications have been made to conform prior-period amounts with
the current-period presentation.
2. DERIVATIVE ACCOUNTING POLICY
The Company utilizes commodity-based derivative instruments, at times and when
able, to reduce a portion of its exposure to price volatility. Commodity futures
are used to lock in what the Company 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 production, generally for periods not
exceeding one year. In addition, the Company 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 residual fuels production. Futures and forward contracts are
also used to hedge inventories stored for future sale and to hedge against
adverse price movements between the cost of foreign and domestic crude oil.
Gains and losses related to qualifying hedges are deferred and recognized in
cost of sales or as adjustments of the carrying amounts when the underlying
transaction occurs.
3. ACQUISITION
On March 31, 1997, the Company acquired Union Oil Company of California's
("Unocal") West Coast petroleum refining, marketing, and related supply and
transportation assets (the "76 Product Acquisition") for a purchase price
(including liabilities assumed) of approximately $1,400,000,000, plus
inventories valued at approximately $400,000,000 and credit card receivables
valued at approximately $130,000,000. In addition, Unocal is entitled to receive
contingent participation payments over the next seven years, up to a maximum of
$250,000,000, if retail market conditions and/or California Air Resources Board
("CARB") gasoline margins increase above specified levels. For a period of 25
years, Unocal will be responsible for all environmental liabilities arising out
of or relating to the period prior to closing, except that the Company will pay
the first $7,000,000 of such environmental liabilities each year, plus 40% of
any amount in excess of $7,000,000 per year, with Unocal paying the remaining
60% each year. The aggregate maximum amount that the Company may have to pay in
total for the 25 year period for such environmental liabilities is limited to
$200,000,000.
The assets which were acquired from Unocal include two petroleum refining
systems, comprised of four sites in California with an aggregate throughput
capacity of approximately 250,000 barrels per day; a retail gasoline system,
consisting of approximately 1,325 76-branded gasoline stations (approximately
1,100 of which are company-controlled); a distribution system comprised of 13
company-owned oil storage terminals; three modern American-flagged 40,000
deadweight-ton tankers; rights with respect to 1,500 miles of crude oil and
product pipelines; the worldwide rights to the "76" and "Union" brands (together
with the distinctive orange ball logo) in the petroleum refining and marketing
businesses (except for pre-existing license grants relating to 76 Truckstops and
to Uno-Ven); and Unocal's lubricants manufacturing, distribution, and marketing
business.
The purchase price paid pursuant to the 76 Product Acquisition consisted of cash
and 14,092,482 shares of Tosco Common Stock (the "76 Product Shares") having an
aggregate value of $396,880,000. In addition, certain gasoline service stations
were purchased directly from Unocal for $235,000,000 by a special purpose entity
which has leased the service stations to the Company pursuant to a long-term
lease. The 76 Product Shares were valued at $28.1625 per share, which was the
average of the high and low Tosco stock prices for the ten trading days
preceding the closing date. The cash portion of Tosco's purchase price,
including working capital, was paid to Unocal on April 1, 1997 from a
combination of available cash, borrowings under the Revolving Credit Facilities
(Note 6), and proceeds from the sale of $600,000,000 of unsecured debt
securities (Note 7).
In connection with the 76 Product Acquisition, the Company and Unocal entered
into a Stock Purchase and Shareholder Agreement related to Unocal's disposition
of the 76 Product Shares. In May 1997, the Company repurchased the 76 Product
Shares for approximately $393,708,000.
The Company indicated, at the time it completed the 76 Product Acquisition, that
it intended to sell certain non-strategic assets. Through September 30, 1997,
approximately $60,000,000 of such assets have been sold, principally oil tankers
and a heating oil distributorship. These assets were allocated a purchase cost
equal to the net proceeds from the sales.
The 76 Product Acquisition has been accounted for as a purchase and,
accordingly, the acquired assets and liabilities are included in the
accompanying September 30, 1997 balance sheet at values based on a preliminary
allocation of the purchase price. The purchase price allocation is expected to
be finalized by the end of 1997 based upon appraisals and other evaluations
currently in process. The preliminary purchase price allocation is summarized
below:
(THOUSANDS OF DOLLARS)
Cash and cash equivalents $ 499
Credit card receivables 132,959
Inventories 401,394
Prepaid expenses and other current assets 2,530
Property, plant, and equipment 1,397,784
Other deferred charges 23,351
Accrued expenses and other current liabilities (197,674)
Accrued environmental costs (190,000)
Other liabilities (35,000)
---------------
$ 1,535,843
===============
Pro forma results of operations for the nine month periods ended September 30,
1997 and 1996, assuming the 76 Product Acquisition had occurred at the beginning
of each period, are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1997 1996
------------------ -------------
Sales $ 10,319,893 $ 10,055,251
Net income 134,090 180,518
Earnings per common and common equivalent share:
Primary $ 0.83 $ 1.23
Fully diluted 0.83 1.22
The pro forma results of operations are presented for informational purposes
only and do not reflect the improvement in operating contribution anticipated
from the 76 Product Acquisition or the reduction in operating and administrative
costs expected from the consolidation of operations. Accordingly, it is not
necessarily indicative of the operating results that would have occurred nor of
future operating results.
4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1997 1996
------------- ------------
Refineries (LIFO):
Raw materials $ 530,398 $ 227,211
Intermediates 183,127 79,831
Finished products 453,970 174,277
Retail (FIFO):
Merchandise 119,927 116,618
Gasoline and diesel 43,690 39,681
Other 3,338 2,142
------------- --------------
$ 1,334,450 $ 639,760
============== ==============
The excess of replacement cost over carrying value of the inventories accounted
for under the LIFO method was $56,870,000 and $177,653,000 at September 30, 1997
and December 31, 1996, respectively.
5. REVOLVING CREDIT FACILITIES
On January 14, 1997, the Company amended and restated its existing revolving
credit agreement (the "Revolving Credit Facility") to increase the maximum
borrowing capacity from $600,000,000 to $1,000,000,000.
Utilization of the Revolving Credit Facility was as follows:
SEPTEMBER 30, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1997 1996
------------- ------------
Cash borrowings outstanding $ 241,000 $
Letters of credit 55,622 112,113
------------- --------------
Total utilization 296,622 112,113
Availability 703,378 487,887
------------- --------------
$ 1,000,000 $ 600,000
============= ==============
6. LONG-TERM DEBT
On January 14, 1997, the Company issued $200,000,000 of 7.25% Notes due on
January 1, 2007, $300,000,000 of 7.80% Debentures due on January 1, 2027, and
$100,000,000 of 7.90% Debentures due on January 1, 2047 (collectively the "Notes
and Debentures"). Interest on the unregistered Notes and Debentures is payable
each January 1 and July 1, commencing on July 1, 1997. The Notes and Debentures
are non-redeemable and uncollateralized. The proceeds from the Notes and
Debentures were used to finance a portion of the 76 Product Acquisition purchase
price. In May 1997, the Company offered to exchange the unregistered Notes and
Debentures for fully registered and freely salable Notes and Debentures having
identical terms, including the same interest rates and maturity dates. Pursuant
to this offer, all of the unregistered Notes and Debentures were exchanged for
fully registered and freely salable Notes and Debentures in August 1997.
7. CAPITAL STOCK
In February 1997, the Company declared and distributed a 3-for-1 Common Stock
split. The number of shares, per share prices, earnings per share, and dividend
per share amounts have been restated to reflect the 3-for-1 stock split.
The Company's quarterly Common Stock dividend was increased to $.06 per
post-split share effective with the first quarter of 1997.
8. COST OF SALES
Cost of sales for the nine month period ended September 30, 1997 has been
reduced by $73,000,000 of insurance coverage accruals related to the unscheduled
shutdown of the Bayway Refinery cat cracker and the January 1997 accident at the
Avon Refinery hydrocracker. The insurance accruals for damages and business
interruption claims are net of deductible amounts and asset write-offs. During
the three month period ended September 30, 1997, the Company collected
approximately $23,000,000 on these insurance receivables. The Bayway Refinery
cat cracker resumed production in the 1997 first quarter and the Avon Refinery
hydrocracker resumed production in July 1997.
9. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED SEPTEMBER 30,
(THOUSANDS OF DOLLARS) 1997 1996
------------- -------------
Cash paid during the period for:
Interest, net of amounts capitalized $ 100,463 $ 63,780
Income taxes, net of refunds received $ 58,949 $ 41,372
Detail of acquisitions:
Fair value of assets acquired $ 1,958,018 $ 1,587,296
Liabilities assumed (422,674) (782,600)
Common Stock issued (396,880) (327,039)
------------- ---------------
Net cash paid for acquisitions 1,138,464 477,657
Cash acquired in acquisitions 499 41,465
------------- ----------------
Cash paid for acquisitions $ 1,138,963 $ 519,122
============= ================
10. NEW ACCOUNTING STANDARDS
During February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128 modifies the computation, presentation, and disclosure
requirements for earnings per share amounts. The adoption of SFAS No. 128, in
the fourth quarter of 1997, is not expected to have a significant impact on
Tosco's reported earnings per share.
During June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(net income plus all other nonowner changes in equity). SFAS No. 131 establishes
disclosure standards regarding information about operating segments in interim
and annual financial statements. Tosco will comply with the expanded disclosure
requirements of SFAS No. 130 and SFAS No. 131 with its 1997 annual financial
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(ALL INFORMATION IS UNAUDITED)
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine month periods ended September 30, 1997 should
be read in conjunction with Management's Discussion and Analysis included in
Tosco's 1996 Annual Report on Form 10-K. The Annual Report sets forth Selected
Financial Data that, in summary form, reviewed Tosco's results of operations and
capitalization over the five year period 1992 through 1996. This Management's
Discussion and Analysis updates that data.
ACQUISITIONS
On March 31, 1997, Tosco completed its acquisition of Union Oil Company of
California's ("Unocal") West Coast petroleum refining, marketing, and related
supply and transportation assets (the "76 Product Acquisition"). The assets
acquired from Unocal are comprised of two petroleum refining systems, a retail
gasoline system consisting of approximately 1,325 76-branded gasoline service
stations, a distribution system comprised of 13 company-owned oil storage
terminals, rights with respect to 1,500 miles of crude oil and product
pipelines, the world-wide rights to the "76" and "Union" brands, and Unocal's
lubricants manufacturing, distribution, and marketing business. Tosco completed
its acquisition of The Circle K Corporation ("Circle K") on May 30, 1996 (the
"Circle K Acquisition"). Tosco is now the largest independent refiner and
marketer of petroleum products in the United States, and is also the nation's
largest operator of company-controlled convenience stores.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- ---------------------------------------------- -------- ------- ------- -------
Sales $ 3,758,589 $ 2,709,388 $ 9,365,293 $ 7,160,151
Cost of sales 3,457,891 2,538,698 8,730,429 6,741,605
Consolidation charge 13,500
Selling, general, and administrative expenses 85,864 72,281 222,792 147,218
Interest expense, net 37,985 26,098 105,788 61,998
-------------- ------------- -------------- -------------
Income before income taxes and distributions on
Trust Preferred Securities 176,849 72,311 306,284 195,830
Income taxes 73,393 29,818 127,108 79,733
-------------- ------------- -------------- -------------
Income before distributions on Trust Preferred
Securities 103,456 42,493 179,176 116,097
Distributions on Trust Preferred Securities, net of
income taxes 2,523 7,569
-------------- ------------- -------------- --------------
Net income $ 100,933 $ 42,493 $ 171,607 $ 116,097
============== ============= ============== =============
Fully diluted earnings per share (a) $ 0.61 $ 0.32 $ 1.12 $ 0.95
============== ============== ============== ==============
- ----------
(a) Earnings per share reflect the 3-for-1 stock split declared and distributed
in February 1997.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
REFINING DATA SUMMARY (a) 1997 1996 1997 1996
-------------- ------------- -------------- ---------
Average charge barrels input per day (b):
Crude oil 827,500 475,100 659,100 474,400
Other feed and blending stocks 103,300 71,200 82,200 68,500
----------- ---------- ---------- ----------
930,800 546,300 741,300 542,900
============== ============= ============== =============
Average barrels of petroleum products produced per day:
Clean products (c) 775,000 442,200 603,700 437,700
Other finished products 139,900 104,100 127,400 106,300
-------------- ------------- -------------- -------------
914,900 546,300 731,100 544,000
============== ============== ============== =============
Operating margin per charge barrel (d) $ 5.45 $ 4.60 $ 5.03 $ 4.84
============== ============== ============= =============
(a) The refining data summary presents the operating results of the following
refineries:
- Bayway Refinery, located on the New York Harbor;
- Ferndale Refinery, located on Washington's Puget Sound
- Los Angeles Refinery System, comprised of the two acquired refineries
in Los Angeles
- San Francisco Area Refinery System, comprised of the Avon Refinery and
the acquired Rodeo-Santa Maria Complex
- Trainer Refinery, located near Philadelphia.
The refinery data summary includes the operations of the Rodeo-Santa Maria
Complex and the Los Angeles Refinery System subsequent to March 31, 1997
(date acquired) and the Trainer Refinery subsequent to May 8, 1997 (date
opened).
(b) A charge barrel is equal to 42 gallons.
(c) Clean products are defined as clean transportation fuels
(gasoline, diesel, distillates, and jet fuel) and heating oil.
Clean product production for the third quarter of 1997 was
increased due to the refinery acquisitions and the opening of the
Trainer Refinery. Clean product production for the nine months
ended September 30, 1997 was increased due to refinery
acquisitions and the opening of the Trainer Refinery, partially
offset by the scheduled turnaround maintenance at the Avon
Refinery coker unit, and the unscheduled shutdowns of the Bayway
Refinery cat cracker and Avon Refinery hydrocracker.
(d) Operating margin per charge barrel is calculated as operating contribution,
including insurance recoveries and excluding refinery operating costs,
divided by total refinery charge barrels.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
RETAIL DATA SUMMARY (A) 1997 1996 1997 1996
-------------- ------------- -------------- ------------
Volume of fuel sold (thousands of gallons) 1,160,639 684,263 2,968,062 1,399,952
Blended fuel margin (cents per gallon) (b) 11.0 13.7 11.9 11.9
Number of gasoline stations at period end 4,675 3,240 4,675 3,240
Merchandise sales (thousands of dollars) $ 532,141 $ 513,326 $ 1,515,700 $ 700,408
Merchandise margin (percentage of sales) 29.2% 29.9% 29.4% 29.7%
Number of merchandise stores at period end 2,412 2,380 2,412 2,380
Other retail gross profit (thousands of dollars) $ 36,850 $ 18,530 $ 90,024 $ 33,795
(a) The retail data summary includes the operations of The Circle K Corporation
subsequent to May 30, 1996 and the 76 Product gasoline stations subsequent
to March 31, 1997.
(b) The decrease in blended fuel margin for the three month period ended
September 30, 1997 reflects the higher proportion of revenue from
the dealer/jobber channel of trade resulting from the 76 Product
Acquisition.
1997 THIRD QUARTER COMPARED TO 1996 THIRD QUARTER
Tosco earned $100.9 million ($0.61 per fully diluted share) on sales of $3.8
billion for the third quarter of 1997, compared to earnings of $42.5 million
($0.32 per fully diluted share) on sales of $2.7 billion in the corresponding
period of 1996. The increase in sales is attributable to the 76 Product
Acquisition, and the opening of the Trainer Refinery, and higher prices on both
coasts during 1997.
Tosco generated an operating contribution of $300.7 million for the third
quarter of 1997 compared to $170.7 million in the corresponding period in 1996.
Refining operating contribution increased by $114.4 million, primarily due to
operating contributions from the 76 Product assets and Trainer Refinery, and
higher refining margins on both the East and West Coast in 1997. Retail
operating contribution increased by approximately $15.6 million, primarily due
to increased fuel volume from the 76 Product assets, partially offset by lower
fuel margins than in 1996.
Selling, general, and administrative expenses for the quarter ended September
30, 1997 increased by $13.6 million compared to the corresponding period in
1996, primarily due to the 76 Product Acquisition.
Net interest expense for the quarter ended September 30, 1997 increased by $11.9
million compared to 1996. This increase is primarily due to higher debt levels
incurred to finance Tosco's expanded operations and acquisitions.
Income taxes, including the benefit associated with the distributions on
company-obligated, mandatorily redeemable, convertible preferred securities, for
the 1997 third quarter were $71.6 million compared to the 1996 third quarter of
$29.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Tosco earned $171.6 million ($1.12 per fully diluted share) on sales of $9.4
billion during the nine month period ended September 30, 1997, compared to
earnings of $116.1 million ($0.95 per fully diluted share) on sales of $7.2
billion in the corresponding period of 1996. The increase in sales is
attributable to the 76 Product and Circle K Acquisitions, the opening of the
Trainer Refinery, and higher product prices on both coasts during the third
quarter of 1997, partially offset by reduced production at the Avon and Bayway
Refineries and lower West Coast product prices during the second quarter of
1997.
Tosco generated an operating contribution of $634.9 million for the nine month
period ended September 30, 1997 compared to $418.6 million in the corresponding
period in 1996. Refining operating contribution increased by $68.4 million due
to a number of factors (primarily increased contribution from the 76 Product
assets and Trainer Refinery, and higher refining margins on both the East and
West Coast during the third quarter of 1997), partially offset by reduced
production at the Avon Refinery during the 1997 first and second quarters, the
unscheduled shutdown of the Bayway Refinery cat cracker in the 1997 first
quarter, and start-up costs of the Trainer Refinery during the 1997 second
quarter. Lower production at the Avon Refinery was due to the scheduled
turnaround of the coker unit and the unscheduled hydrocracker shutdown. Refinery
operating contribution for the nine month period ended September 30, 1997
includes $73 million of insurance recovery accruals, of which $23.3 million was
collected during the third quarter. See Note 8 to the Consolidated Financial
Statements. Retail operating contribution for the nine month period ended
September 30, 1997 increased by approximately $147.9 million compared to the
same period in 1996, due to the Circle K and 76 Product Acquisitions.
Selling, general, and administrative expenses for the nine month period ended
September 30, 1997 increased by $75.6 million compared to the corresponding
period in 1996, primarily attributable to the 76 Product and Circle K
Acquisitions.
Net interest expense for the nine month period ended September 30, 1997
increased by $43.8 million compared to 1996. This increase is primarily due to
higher debt levels incurred to finance Tosco's expanded operations and
acquisitions.
Income taxes, including the benefit associated with the distributions on
company-obligated, mandatorily redeemable, convertible preferred securities, for
the nine month period ended September 30, 1997 were $121.7 million compared to
$79.7 million in the corresponding period of 1996. Tosco's effective income tax
rate increased due to the nondeductibility of the amortization of certain
intangible assets acquired in the Circle K Acquisition.
OUTLOOK
Results of operations for the balance of 1997 will be primarily determined
by the operating efficiency of the refineries, refining and retail fuel
margins, and retail merchandise margins. Tosco's expanded consolidated refining
production is expected to be at high levels for the balance of 1997. Refining
and retail fuel margins at the beginning of the fourth quarter are at
satisfactory levels. Merchandise margins also remained consistent. Tosco is not
able to predict whether such margins will continue due to the uncertainties
associated with the oil markets.
There has been recent publicity concerning patent litigation between Unocal
Corp. and certain petroleum refiners. The litigation has contested the validity
of patents held by Unocal Corp. covering certain formulations for clean burning
fuels meeting California fuel specifications and, in turn, alleged infringement
of those patents by certain refiners. Tosco is not party to the patent
litigation. Under the terms of the 76 Product Acquisition, Tosco has no
liability to Unocal Corp. for any possible past infringement of the patents,
including to the date of final resolution of the matter, which, considering
appeals, could take several years.
CASH FLOWS
As summarized in the Consolidated Statement of Cash Flows, cash and cash
equivalents decreased by $59 million during the first nine months of 1997 as
cash used in investing activities of $1.5 billion exceeded cash provided by
operating and financing activities of $479 million and $984 million,
respectively.
Net cash provided by operating activities of $479 million was from cash earnings
of $342 million (net income plus depreciation and amortization less insurance
recoveries) a decrease in net operating assets and liabilities of $136 million,
and other operating sources of $1 million.
Net cash used in investing activities totaled $1.5 billion due to the 76 Product
Acquisition ($1.1 billion), capital additions ($264 million), spending for
turnarounds, deferred charges and other assets ($116 million), and other
investing sources ($3 million).
Net cash provided by financing activities totaled $984 million as proceeds from
the Common Stock offering of $697 million, proceeds from notes and debentures of
$600 million, and net borrowings under the Revolving Credit Facilities of $241
million exceeded the repurchase of the 76 Product Shares of $394 million,
principal payments on long-term debt and other noncurrent liabilities of $130
million, dividend payments of $26 million, and other financing uses of $4
million.
LIQUIDITY
At September 30, 1997, liquidity (cash and cash equivalents, current portion of
marketable securities, deposits, and unused credit facilities) totaled $764
million, a $146 million increase from the December 31, 1996 balance of $618
million. Cash and cash equivalents decreased by $59 million, current portion of
marketable securities and deposits decreased by $11 million, and unused credit
facilities increased by $216 million. See Note 5 to the Consolidated Financial
Statements.
In January 1997, Tosco filed a shelf registration statement providing for the
issuance of up to $1.5 billion aggregate principal amount of its securities. The
securities to be issued may consist of one or more series of debentures, notes
or other uncollateralized forms of indebtedness, Common Stock, Preferred Stock,
and Preferred Stock represented by depository shares. Such securities may be
offered, separately or together, in amounts and at prices and terms to be set
forth in one or more supplements to the shelf registration statement. On May 1,
1997, Tosco issued 25,300,000 shares of Common Stock pursuant to a prospectus
supplement to the shelf registration statement. The net proceeds from this
Common Stock offering were $697 million, based on an offering price of $28.50
per share. The net proceeds were used to repurchase and retire the common stock
issued to Unocal ($394 million) and repay borrowings under the Revolving
Credit Facilities used to finance the 76 Product Acquisition ($304 million).
The Revolving Credit Facility, together with funds potentially available from
the issuance of securities, provide Tosco with adequate resources to meet its
expected liquidity demands, including required debt payments and liquidity
requirements associated with the 76 Product Acquisition, for at least the next
year. See Note 7 to the Consolidated Financial Statements.
CAPITAL EXPENDITURES
On March 31, 1997, Tosco completed the 76 Product Acquisition. In addition,
Tosco spent $264 million on budgeted capital projects during the first nine
months of 1997, primarily at the Avon, Bayway, and Trainer Refineries and for
retail assets. Refinery capital spending programs were for compliance with
environmental regulations and permits, personnel/process safety programs, and
operating flexibility and reliability projects. Retail capital spending was
focused on integrating operations, enhancing existing sites, and upgrading
underground storage tanks.
CAPITALIZATION
At September 30, 1997, total shareholders' equity was $1.9 billion, an $842
million increase from the December 31, 1996 balance of $1.1 billion. This
increase was primarily due to the issuance of 25,300,000 shares of Common Stock
for $697 million and net income of $172 million, less Common Stock dividends and
other items of $27 million. Debt (short-term bank borrowings, current and
non-current maturities of long-term debt, and revolving credit facilities) at
September 30, 1997 totaled $1.7 billion, an increase of $733 million from the
December 31, 1996 balance of $940 million. This increase was due to Tosco's
borrowings to fund the 76 Product Acquisition, net of principal payments.
The ratio of long-term debt (revolving credit facilities and non-current portion
of long-term debt) to total capitalization (revolving credit facilities,
non-current portion of long-term debt, Trust Preferred Securities, and total
shareholders' equity) increased from 38% at December 31, 1996 to 43% at
September 30, 1997. This increase was primarily due to the issuance of $600
million of long-term debt in January 1997, net borrowings of $241 million under
the Revolving Credit Facilities, and Common Stock dividends of $26 million, net
of long-term debt payments of $110 million, net proceeds from a Common Stock
offering of $697 million, and net income of $172 million during the nine month
period ended September 30, 1997.
NEW ACCOUNTING STANDARDS
During February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128 modifies the computation, presentation, and disclosure
requirements for earnings per share amounts. The adoption of SFAS No. 128, in
the fourth quarter of 1997, is not expected to have a significant impact on
Tosco's reported earnings per share.
During June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(net income plus all other nonowner changes in equity). SFAS No. 131 establishes
disclosure standards regarding information about operating segments in interim
and annual financial statements. Tosco will comply with the expanded disclosure
requirements of SFAS No. 130 and SFAS No. 131 with its 1997 annual financial
statements.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In a case filed by private litigants against all major petroleum refiners,
distributors, and retailers in California, including Tosco, alleging they have
restrained trade and restricted the supply of a certain type of cleaner burning
gasoline sold in California AGUILAR, ET AL, V. ATLANTIC RICHFIELD CORPORATION,
ET AL. (Superior Court of California, County of San Diego, Case No. 00700810),
the court ruled in Tosco's favor and granted the Defendants' Motions for Summary
Judgment. (1997 1st Quarter Form 10-Q).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
11 - Computation of Earnings Per Share (see page 14)
12 - Ratio of Earnings to Fixed Charges (see page 15)
27 - Financial Data Schedule