FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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, 1998 was 153,139,531
shares.
TOSCO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
PAGE(S)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2
Consolidated Statements of Income for the three and nine
month periods ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K: 14
Exhibit 11 - Computation of Earnings per Share for the
three and nine month periods ended September 30, 1998
and 1997 15
Signature 16
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, Except Par Value)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $63,377 $34,482
Marketable securities and deposits 53,127 43,687
Trade accounts receivable, less allowance for
uncollectibles of $18,922 (1998) and $19,018 (1997) 210,773 315,123
Inventories 1,200,222 1,253,692
Prepaid expenses and other current assets 106,874 107,632
Deferred income taxes 57,646 57,646
------------- -------------
Total current assets 1,692,019 1,812,262
Property, plant, and equipment, net 3,286,318 3,170,955
Deferred turnarounds, net 122,459 123,330
Intangible assets (primarily tradenames),
less accumulated amortization of $51,364 (1998)
and $34,546 (1997) 682,899 699,559
Other deferred charges and assets 148,570 168,746
------------- -------------
$5,932,265 $5,974,852
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses, and
other liabilities $1,413,292 $1,540,867
Current maturities of long-term debt 1,676 11,908
------------- -------------
Total current liabilities 1,414,968 1,552,775
Revolving credit facility 150,000 166,000
Long-term debt 1,359,274 1,415,257
Accrued environmental costs 255,584 252,964
Deferred income taxes 134,998 140,435
Other liabilities 247,448 203,366
------------- -------------
Total liabilities 3,562,272 3,730,797
------------- -------------
Company-obligated, mandatorily redeemable, convertible
preferred securities of Tosco Financing Trust, holding
solely 5.75% convertible junior subordinated debentures
of Tosco Corporation (Trust Preferred Securities) 300,000 300,000
------------- -------------
Shareholders' equity:
Common stock, $.75 par value, 250,000,000 shares
authorized, 177,822,870 (1998) and 177,706,038
(1997) shares issued 133,599 133,507
Additional paid-in capital 2,030,005 2,028,985
Retained earnings 448,473 254,351
Treasury stock, at cost (542,084) (472,788)
------------- -------------
Total shareholders' equity 2,069,993 1,944,055
-------------
$5,932,265 $5,974,852
============= =============
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,
1998 1997 1998 1997
------------ ----------- ---------- ----------
Sales $2,964,510 $3,758,589 $9,179,954 $9,365,293
Cost of sales 2,717,214 3,457,891 8,460,592 8,730,429
Selling, general, and administrative expenses 76,274 85,864 228,745 222,792
Interest expense 30,258 39,664 101,180 109,608
Interest income (781) (1,679) (3,203) (3,820)
------------- ------------- ------------- ------------
Income before income taxes and distributions
on Trust Preferred Securities 141,545 176,849 392,640 306,284
Income taxes 58,741 73,393 162,945 127,108
------------- ------------- ------------- ------------
Income before distributions on Trust Preferred
Securities 82,804 103,456 229,695 179,176
Distributions on Trust Preferred Securities, net
of income tax benefit of $1,789 (three month
periods) and $5,369 (nine month periods) 2,523 2,523 7,569 7,569
-------------- ------------- -------------- ------------
Net income $80,281 $100,933 $222,126 $ 171,607
============== ============== ============== ==============
Basic earnings per share $ 0.52 $ 0.65 $ 1.43 $ 1.17
============== ============== ============== ==============
Diluted earnings per share $ 0.49 $ 0.61 $ 1.36 $ 1.12
============== ============== ============== ==============
Dividends per share $ 0.06 $ 0.06 $ 0.18 $ 0.18
============== ============== ============== ==============
Weighted average common shares used for
computation of basic earnings per share 154,774,056 156,185,661 155,816,033 146,617,794
Assumed conversion of dilutive stock options 3,790,590 4,424,517 3,994,905 4,301,608
Assumed conversion of Trust Preferred Securities 9,113,940 9,113,940 9,113,940 9,113,940
--------------- ------------- --------------- ---------------
Weighted average common and common
equivalent shares used for computation of
diluted earning per share 167,678,586 169,724,118 168,924,878 160,033,342
=============== ============== ================ ===============
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,
1998 1997
Cash flows from operating activities:
Net income $ 222,126 $ 171,607
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 229,942 220,684
Changes in operating assets and liabilities, net 85,102 85,666
Other, net (2,231) 629
------------- -------------
Net cash provided by operating activities 534,939 478,586
Cash flows from investing activities:
Net change in marketable securities and deposits (9,440) (2,772)
Purchase of property, plant, and equipment, net of proceeds
on sales of $40,501 (1998) and $4,277 (1997) (271,194) (264,267)
Net increase in deferred turnarounds, deferred charges,
and other assets (32,258) (116,103)
Acquisition of 76 Products assets (1,138,464)
Other, net (2,434)
------------- -------------
Net cash used in investing activities (315,326) (1,521,606)
------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facility (16,000) 241,000
Proceeds from note and debenture offering 600,000
Payments under long-term debt and other agreements (13,333) (129,884)
Early payoff of real estate installment purchase note (64,622)
Proceeds from common stock offering, net 697,396
Repurchase of Unocal Shares (393,708)
Repurchase of 2,903,400 shares of common stock (68,962)
Dividends paid on common stock (28,004) (26,543)
Other, net 203 (3,777)
------------- -------------
Net cash (used in) provided by financing activities (190,718) 984,484
------------- -------------
Net increase (decrease) in cash and cash equivalents 28,895 (58,536)
Cash and cash equivalents at beginning of period 34,482 94,418
------------- -------------
Cash and cash equivalents at end of period $63,377 $35,882
============== ==============
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, 1998 AND 1997
(ALL INFORMATION IS UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated interim 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 interim financial statements are
presented in accordance with the disclosure requirements for Form 10-Q. These
unaudited consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's 1997 Annual Report on Form 10-K.
2. ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") and
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP No. 98-1"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (net income plus all other non-owner changes in equity). SOP No 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company will comply with the expanded disclosure
requirements of SFAS No. 130 in its 1998 annual financial statements. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
financial statements for the three and nine month periods ended September 30,
1998.
3. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1998 1997
------------- -------------
Refineries (LIFO):
Raw materials $ 516,127 $ 468,515
Intermediates 274,664 181,414
Finished products 248,918 440,525
Retail (FIFO):
Merchandise 124,083 121,082
Gasoline and diesel 35,298 39,901
Other 1,132 2,255
------------- -------------
$ 1,200,222 $ 1,253,692
============= =============
Inventories accounted for under the LIFO method at September 30, 1998 and
December 31, 1997, are reduced by a $53,000,000 non-cash inventory valuation
reserve recorded in 1997. At September 30, 1998, the fair value of Tosco's LIFO
inventories was less than their carrying value. The price decline is believed to
be temporary.
4. REVOLVING CREDIT FACILITY
SEPTEMBER 30, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1998 1997
------------- -------------
Cash borrowings outstanding $ 150,000 $ 166,000
Letters of credit 24,331 57,241
------------- -------------
Total utilization 174,331 223,241
Availability 825,669 776,759
------------- -------------
$ 1,000,000 $ 1,000,000
============= =============
5. LONG-TERM DEBT
During January 1998, Tosco completed the purchase of approximately 200
convenience stores by paying off the outstanding balance on a real estate
installment purchase note for $64,622,000, including the settlement of
contingent payments.
6. CAPITAL STOCK
During the three month period ended September 30, 1998, the Company repurchased
2,903,400 shares of Common Stock for $68,962,000 pursuant to a Board of
Directors approved $300,000,000 stock repurchase program.
During May 1998, the Company's stockholders approved the adoption of the 1998
Stock Incentive Plan (the "1998 Plan"). The 1998 Plan provides for the grant of
a maximum of 1,500,000 shares of Tosco Common Stock 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 as
determined by the Compensation Committee of the Board of Directors but in no
event after ten years from the date of grant. The exercise price of nonqualified
stock options is determined by the Compensation Committee. Awards under the 1998
Plan may be granted until March 18, 2008. Through September 30, 1998, options to
purchase 324,000 shares of common stock have been issued under the 1998 Plan.
7. LEASES
During July 1998, the Company revised and extended its operating leases for
service stations acquired in 1993 from BP in Northern California and Exxon in
Arizona. The modified leases continue to be accounted for as operating leases
and extend, with renewal options, through July 2003. Minimum annual rental
expense varies with a commercial paper rate.
During August 1998, the Company entered into an operating lease for an office
building in Tempe, Arizona which runs, with renewal options, through August
2003. Minimum annual rental expense varies with a commercial paper rate.
8. COMMITMENTS AND CONTINGENCIES
There are various legal proceedings and claims pending against the Company that
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 that in the aggregate would be
material to the business or operations of the Company.
As a condition of Tosco's March 31, 1997 acquisition of Union Oil Company of
California's ("Unocal") West Coast petroleum assets (the "76 Products
Acquisition"), 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. The contingent participation payments will be
capitalized, when incurred, as an additional cost of the 76 Products
Acquisition. For completed participation periods, the Company's contingent
participation payments, some aspects of which Unocal disputes, are not material
to its consolidated financial position.
Litigation between Unocal and certain petroleum refiners has contested the
validity of patents held by Unocal covering certain formulations for clean
burning fuels meeting California fuel specifications and, in turn, alleged
infringement of those patents by certain refiners. The Company is not a party to
the patent litigation. Under the terms of the 76 Product Acquisition, the
Company has no liability to Unocal 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.
The Company has employment agreements with certain of its executive officers
that 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.
The Company, in keeping with industry practice, schedules periodic maintenance
of major processing units for significant non-routine repairs and replacements
(turnarounds) as the units reach the end of their normal operating cycles.
Unscheduled turnarounds also occur because of operating difficulties or external
factors. Throughput and earnings are lowered, and deferred turnaround
expenditures increased, during such periods.
The Company carries insurance policies on insurable risks which it believes to
be appropriate at commercially reasonable rates. While management believes the
Company 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.
In the normal course of business, the Company has entered into numerous purchase
contracts and transportation agreements. The majority of these contracts and
agreements are short term and none are expected to materially impact the
Company's future results of operations.
9. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
(THOUSANDS OF DOLLARS) 1998 1997
------------- ----------
Cash paid during the period for:
Interest, net of amounts capitalized $ 114,614 $ 100,463
Income taxes, net of refunds received (a) (23,037) 58,949
(a) A $51,670,000 refund of Federal income taxes was received in September
1998.
10. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") during June
1997, SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") during February 1998, and SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
during June, 1998. SFAS No. 131 establishes disclosure standards regarding
information about operating segments. SFAS No. 132 changes the disclosure
requirements for pension and other postretirement benefits, but does not change
any existing measurement or recognition provisions. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company will comply with the expanded disclosure requirements of
SFAS No. 131 and SFAS No. 132 with its 1998 annual financial statements. The
Company plans to adopt SFAS No. 133 on January 1, 2000. Adoption of SFAS No. 133
is not expected to have a material impact on the Company's results of operations
or financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") for the three and nine month periods ended September 30,
1998 should be read in conjunction with Management's Discussion and Analysis
included in the Company's 1997 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 1993 through
1997. This Management's Discussion and Analysis updates that data.
Tosco completed its acquisition of Union Oil Company of California's ("Unocal")
West Coast petroleum refining, marketing, and related supply and transportation
assets on March 31, 1997 (the "76 Products Acquisition"). The assets are
comprised of two petroleum refining systems, a retail gasoline system consisting
of "76" branded gasoline service stations, a distribution system comprised of
company-owned oil storage terminals, crude oil and product pipelines, the
world-wide rights to the "76" and "Union" brands, and a lubricants business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
------------- ------------- ------------- -------------
Sales $ 2,964,510 $ 3,758,589 $ 9,179,954 $ 9,365,293
Cost of sales 2,717,214 3,457,891 8,460,592 8,730,429
Selling, general, and administrative expenses 76,274 85,864 228,745 222,792
Interest expense, net 29,477 37,985 97,977 105,788
------------- ------------- ------------- -------------
Income before income taxes and distributions on
Trust Preferred Securities 141,545 176,849 392,640 306,284
Income taxes 58,741 73,393 162,945 127,108
------------- ------------- ------------- -------------
Income before distributions on Trust Preferred Securities 82,804 103,456 229,695 179,176
Distributions on Trust Preferred Securities, net of
income tax benefit 2,523 2,523 7,569 7,569
------------- ------------- ------------- -------------
Net income $ 80,281 $ 100,933 $ 222,126 $ 171,607
============= ============= ============= =============
Diluted earnings per share (a) $ 0.49 $ 0.61 $ 1.36 $ 1.12
============= ============= ============= =============
(a) Earnings per share throughout MD&A are expressed on a diluted basis.
REFINING DATA SUMMARY (A)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Average charge barrels input per day (b):
Crude oil 839,500 827,500 859,000 659,100
Other feed and blending stocks 105,200 103,300 102,200 82,200
----------- ------------ ----------- -----------
944,700 930,800 961,200 741,300
============ ============= ============= =============
Average production barrels produced per day (b):
Clean products (c) 781,300 775,000 796,000 603,700
Other finished products 153,600 139,900 159,500 127,400
------------- ------------- ------------- -------------
934,900 914,900 955,500 731,100
============= ============= ============= =============
Operating margin per charge barrel (d) $ 4.56 $ 5.45 $ 4.76 $ 5.03
========= ========== ========= ==========
(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 two refineries in Los
Angeles (acquired on March 31, 1997)
- San Francisco Area Refinery System, comprised of the Rodeo-Santa Maria
complex (acquired on March 31, 1997) and the Avon Refinery
- Trainer Refinery, located near Philadelphia (opened on May 8, 1997).
(b) A barrel is equal to 42 gallons.
(c) Clean products are defined as clean transportation fuels (gasoline, diesel,
distillates, and jet fuel) and heating oil.
(d) Operating margin per charge barrel is calculated as operating contribution,
excluding refinery operating costs, divided by total refinery charge
barrels. Operating contribution includes insurance recoveries related to
the unscheduled shutdowns in 1997 of the Bayway Refinery cat cracker and
the Avon Refinery hydrocracker.
RETAIL DATA SUMMARY (A)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
------------- ------------- ------------- -------------
Volume of fuel sold (thousands of gallons) 1,146,957 1,160,639 3,351,723 2,968,062
Blended fuel margin (cents per gallon)(b) 13.4 11.0 11.5 11.9
Number of gasoline stations at period end 4,590 4,675 4,590 4,675
Merchandise sales (thousands of dollars) $ 557,854 $ 532,141 $ 1,575,102 $ 1,515,700
Merchandise margin (percentage of sales) 29.1% 29.2% 29.2% 29.4%
Number of merchandise stores at period end 2,331 2,412 2,331 2,412
Other retail gross profit (thousands of dollars) $ 27,193 $ 36,850 $ 84,883 $ 90,024
(a) The Retail Data Summary includes the operations of the 76 Products service
stations subsequent to March 31, 1997 (date acquired).
(b) Blended fuel margin is calculated as fuel sales minus fuel cost of sales
divided by fuel gallons sold.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Tosco earned net income of $80.3 million ($0.49 per share) on sales of $3.0
billion during the third quarter of 1998, compared to earnings of $100.9 million
($0.61 per share) on sales of $3.8 billion in the corresponding period of 1997.
The decrease in sales of $794.1 million was primarily due to lower product
prices.
Tosco generated an operating contribution (sales less cost of sales) of $247.3
million for the third quarter of 1998, compared to $300.7 million in the
corresponding period in 1997. The decline of $53.4 million was attributable to
refining (reduction of $72.9 million) and retail (improvement of $19.5 million)
operations.
Refining operating contribution, including insurance recoveries, was $125.2
million for the 1998 third quarter, compared to $198.1 million in the 1997 third
quarter. This decrease of $72.9 million was primarily due to lower operating
margins per charge barrel throughout the 1998 third quarter.
Retail operating contribution was $122.1 million for the quarter ended September
30, 1998, compared to $102.6 million in the comparable period in 1997. The 1998
improvement of $19.5 million was primarily attributable to higher blended fuel
margins. Although fuel volumes declined overall, fuel volumes and convenience
store sales for the 1998 third quarter were both higher on a per store basis
than the 1997 third quarter.
Selling, general, and administrative expenses for the quarter ended September
30, 1998 decreased by $9.6 million compared to the corresponding period in 1997
primarily due to the recognition of a $10.3 million gain on the sale of the
Revere distribution terminal in Massachusetts. The 1998 third quarter selling,
general, and administrative expenses also include certain non-recurring costs
related to the consolidation of Tosco's offices and higher incentive
compensation accruals for Tosco's retail operations. The 1997 third quarter
expenses included certain non-recurring transition costs related to the 76
Products Acquisition.
Net interest expense for the quarter ended September 30, 1998 decreased by $8.5
million compared to the 1997 period. This decrease was primarily due to lower
borrowings under Tosco's revolving credit facility and the early payoff of a
real estate installment purchase note.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Tosco earned net income of $222.1 million ($1.36 per share) on sales of $9.2
billion during the nine months ended September 30, 1998, compared to earnings of
$171.6 million ($1.12 per share) on sales of $9.4 billion in the corresponding
period of 1997. The decrease in sales is attributable to lower product prices,
partially offset by higher refinery production and retail fuel volumes resulting
from the 76 Products Acquisition (on March 31, 1997) and the opening of the
Trainer Refinery (on May 8, 1997).
Tosco generated an operating contribution of $719.4 million for the nine month
period ended September 30, 1998, compared to $634.9 million in the corresponding
period in 1997. The improvement of $84.5 million was attributable to refining
(improvement of $96.4 million) and retail (reduction of $11.9 million)
operations.
Refining operating contribution was $442.2 million for the nine month period
ended September 30, 1998, compared to $345.8 million in the first nine months of
1997. The increase of $96.4 million was primarily due to higher production
volumes partially offset by lower operating margin per charge barrel. Production
volumes were higher in 1998 due to the 76 Products Acquisition, the opening of
the Trainer Refinery (on May 8, 1997), and scheduled and unscheduled shutdowns
of certain refinery units during 1997. Refining operating contribution includes
insurance recoveries related to the unscheduled shutdowns in 1997 of the Bayway
Refinery cat cracker and the Avon Refinery hydrocracker.
Retail operating contribution was $277.1 million for the nine month period ended
September 30, 1998, compared to $289.0 million in the comparable period in 1997.
The decrease of $11.9 million was due to lower blended fuel and merchandise
margins, partially offset by higher fuel volumes from the 76 Products
Acquisition.
Selling, general, and administrative expenses for the first nine months of 1998
increased by $6.0 million compared to the corresponding period in 1997,
primarily due to the 76 Products Acquisition on March 31, 1997.
Net interest expense for the nine month period ended September 30, 1998
decreased by $7.8 million compared to the 1997 period, primarily due to lower
borrowings under Tosco's revolving credit facility and the early payoff of a
real estate installment purchase note.
OUTLOOK
Results of operations are primarily determined by the operating efficiency of
the refineries, and by refining and retail fuel margins. All of Tosco's
refineries are currently operating at, or near, capacity and management expects
this to continue for the remainder of 1998. Refining margins at the beginning of
the 1998 fourth quarter have improved somewhat compared to the low levels
existing at the end of the 1998 third quarter. Retail fuel margins generally
vary inversely to refining margins, but competitive markets can from time to
time affect this historical relationship. Tosco is not able to predict the level
of refinery and retail fuel operating margins for the balance of 1998 because of
the uncertainties associated with oil markets. In view of uncertain operating
margins and highly competitive markets, Tosco is committed to improving its
results by lowering costs without compromising safety, reliability, or
environmental compliance.
Tosco's policy is to defer the recognition of non-cash writedowns of inventories
due to price declines at interim reporting dates, unless the decline is not
expected to be restored by year-end. At September 30, 1998, the fair value of
Tosco's LIFO inventories was approximately $150 million less than their carrying
value. This writedown was not recorded because the price decline is believed to
be temporary. Prices subsequent to September 30, 1998 have not yet recovered.
Tosco estimates that a future $1.00 per barrel change in raw material and
finished product prices will have an approximate $50 million impact on the net
realizable value of inventories. However, because raw material and finished
product prices do not move in unison, the net realizable value will vary
depending on actual price changes and the mix and level of inventories.
CASH FLOWS
As summarized in the Consolidated Statement of Cash Flows, cash and cash
equivalents increased by $28.9 million during the nine month period ended
September 30, 1998. Cash provided by operating activities of $534.9 exceeded
cash used in investing activities of $315.3 million and financing activities of
$190.7 million.
Net cash provided by operating activities of $534.9 million was from cash
earnings (net income plus depreciation and amortization) of $452.0 million and a
net decrease in operating assets and liabilities of $85.1 million, net of ($2.2)
million from other sources.
Net cash used in investing activities totaled $315.3 million due to net capital
additions of $271.2 million, spending for turnarounds, deferred charges, and
other assets of $32.2 million, and other items totaling $11.9 million.
Net cash used in financing activities totaled $190.7 million, due to net
repayments under the revolving credit facility of $16.0 million, scheduled and
early principal payments on long-term debt of $77.9 million, Common Stock
repurchases of $69.0 million, dividend payments of $28.0 million, and other
items of ($0.2) million.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, liquidity (cash and cash equivalents, marketable
securities and deposits, and availability under the revolving credit facility)
totaled $942.2 million, a $87.3 million increase from December 31, 1997. Cash
and cash equivalents increased by $28.9 million, marketable securities and
deposits increased by $9.4 million, and availability under the revolving credit
facility increased by $49.0 million.
At September 30, 1998, total shareholders' equity was $2.1 billion, a $125.9
million increase from December 31, 1997. This increase was due to net income of
$222.1 million and other items of $0.8 million, less Common Stock repurchases
and dividends of $69.0 million and $28.0 million, respectively. Debt (current
and long-term debt and the revolving credit facility) decreased by $82.2 million
to $1.5 billion at September 30, 1998 due to lower borrowings under the
revolving credit facility and early and scheduled principal payments under debt
agreements.
The ratio of long-term debt (revolving credit facility and non-current portion
of long-term debt) to total capitalization (revolving credit facility,
non-current portion of long-term debt, Trust Preferred Securities, and total
shareholders' equity) decreased from 41% at December 31, 1997 to 39% at
September 30, 1998.
In January 1997, Tosco filed a shelf registration statement providing for the
issuance of up to $1.5 billion aggregate principal amount of debt and equity
securities. Such securities may be offered, separately or together, in amounts
and at prices and terms to be set forth in one or more supplements to the shelf
registration statement. At September 30, 1998, Tosco had available for issue
$779 million of securities pursuant to this shelf registration statement.
Tosco's Board of Directors previously approved the repurchase of up to $300
million of Tosco Common Stock. Through October 31, 1998, Tosco has repurchased
3,246,000 shares of Common Stock for $75.9 million. Future purchases, if any,
will be made from time to time in the open market or otherwise at prevailing
prices which Tosco considers opportune and as permitted by applicable securities
laws.
The Revolving Credit Facilities, as well as funds potentially available from the
issuance of securities, provide Tosco with adequate resources to meet its
expected liquidity demands for at least the next twelve months.
CAPITAL EXPENDITURES
Tosco spent $311.7 million on budgeted capital projects during the first nine
months of 1998, primarily at retail sites (enhancing existing sites and
upgrading underground storage tanks) and the San Francisco Area Refinery System.
Refinery capital spending programs were primarily for the completion of projects
related to compliance with environmental regulations and permits,
personnel/process safety programs, and operating flexibility and reliability
projects. Tosco continues its efforts to rationalize its marketing system, and
is divesting selected non-core properties.
IMPACT OF THE YEAR 2000 ISSUE
Historically, certain computer programs have used two digits rather than four
digits to define a given calendar year. Computer programs that use two digits to
define the year may recognize a date using "00" as the year 1900 rather than
2000. This could result in business and field system failures or miscalculations
which could cause serious disruptions of operations. This is generally referred
to as the "Year 2000 Issue." For several years, Tosco has been proactively
upgrading and replacing its information systems. During early 1998, Tosco formed
a Year 2000 Program Office to coordinate the efforts of Tosco's operating units
and administrative departments in addressing the Year 2000 Issue. Three primary
areas related to the Year 2000 Issue are being addressed: business systems;
field systems; and third parties. Each of these areas is being addressed in five
overlapping phases: (i) identification and assessment of critical systems,
equipment, and business relationships requiring modification or replacement
prior to 2000; (ii) formulating compliance action plans; (iii) upgrading,
replacing, and/or remediating noncompliant systems and equipment; (iv) testing;
and (v) contingency and business continuation planning.
BUSINESS SYSTEMS: These include computer systems and applications relating to
operations such as financial reporting, human resources, purchasing, commercial,
supply, pricing, and marketing. Tosco has substantially completed the assessment
and planning phases related to its critical business systems and is currently
addressing Year 2000 problems, primarily through software upgrades and
replacements, and remediation of existing systems. The upgrades, replacements,
and remediation of Tosco's core business systems, as well as testing which is
being done on an ongoing basis, are on schedule and expected to be substantially
completed by June 30, 1999.
FIELD SYSTEMS: These include embedded computer chips and computer systems
relating to Tosco's refining, distribution, and marketing operating assets.
Tosco has completed an assessment of the Year 2000 compliance status of
substantially all of its field systems and is currently developing and
implementing plans related to its field system Year 2000 Issues, primarily by
replacing and remediating noncompliant systems. Tosco expects these plans to be
substantially implemented by September 30, 1999 for its marketing, distribution,
and refining field systems. The balance of field system replacements and
remediation is expected to be performed during scheduled turnarounds of major
refinery processing units. Internal and vendor assisted testing is being done on
an ongoing basis as the systems are replaced or remediated. Field system
remediation is currently lagging behind Tosco's business system remediation.
THIRD PARTY RELATIONSHIPS: These include Tosco's critical suppliers, vendors,
customers, financial institutions, utilities, telecommunication providers,
governmental entities, and others with whom Tosco does significant business
(collectively "third parties"). Tosco has initiated two-way communications with
critical third parties about their plans and progress in addressing the Year
2000 Issue. Tosco will continue to communicate with and monitor the progress its
third parties are making in addressing their Year 2000 Issues. Tosco's ability
to accurately assess the Year 2000 readiness of its third parties is dependent
in large part upon the completeness and reliability of the third parties
representations.
CONTINGENCY PLANS: Tosco has formed a Year 2000 Contingency Task Force (the
"Task Force") which includes representatives from all business segments and
other functional responsibilities. The Task Force is currently evaluating
various business disruption scenarios. As business disruption plans are
identified, the Task Force will evaluate existing contingency plans, formulate
new contingency plans as appropriate, and develop preemptive strategies.
Additionally, Tosco will formulate contingency plans based on the progress its
third parties are making in addressing their Year 2000 Issues. By June 30, 1999,
the Task Force will organize crisis management teams and formalize these Year
2000 plans and strategies in conjunction with Tosco's existing contingency plans
for equipment failures, emergencies, and other business disruptions. Throughout
the balance of 1999, the Year 2000 contingency plans and strategies will be
modified as facts and circumstances change.
COSTS: Tosco's Year 2000 compliance costs include external consultants and
contractors, compensation costs of internal employees working directly on Year
2000 Issues, purchases of software and hardware, and system upgrades and
modifications which were accelerated to address the Year 2000 Issue. Tosco does
not believe these historical and estimated future costs will have a material
adverse effect on its 1998 or 1999 operating results or financial position.
RISKS: Tosco believes its business and field systems will be substantially Year
2000 compliant prior to September 30, 1999. Based on information received to
date, Tosco further believes that its critical third parties will be Year 2000
compliant during 1999. In the event that Tosco is unable to make the necessary
computer system changes on a timely basis, fails to identify all critical Year
2000 Issues, or is unable to implement appropriate contingency plans, such
inability could cause significant business disruptions. Additionally, Tosco
could incur significant business disruptions if one or more of its critical
third parties (over whom Tosco does not have control) is not Year 2000 compliant
by December 31, 1999. Business disruptions such as production and/or
distribution shutdowns, out-of-stock conditions, communication and/or energy
outages, or billing and/or collecting problems could negatively affect Tosco's
results of operations.
The foregoing Year 2000 disclosure is based on Tosco's current expectations,
estimates, and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effect of the Year 2000 Issue on Tosco may
be different from our current assessment.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") during June
1997, SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") during February 1998, and SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
during June, 1998. SFAS No. 131 establishes disclosure standards regarding
information about operating segments. SFAS No. 132 changes the disclosure
requirements for pension and other postretirement benefits, but does not change
any existing measurement or recognition provisions. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company will comply with the expanded disclosure requirements of
SFAS No. 131 and SFAS No. 132 with its 1998 annual financial statements. The
Company plans to adopt SFAS No. 133 on January 1, 2000. Adoption of SFAS No. 133
is not expected to have a material impact on the Company's results of operations
or financial position.
FORWARD LOOKING STATEMENTS
TOSCO HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS
WITH RESPECT TO ITS FINANCIAL POSITION, BUSINESS STRATEGY, PROJECTED COSTS,
PROJECTED SAVINGS, AND PLANS AND OBJECTIVES OF MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS
"ANTICIPATES," "INTENDS," "EXPECTS," "PLANS," "BELIEVES," "ESTIMATES," OR WORDS
OR PHRASES OF SIMILAR IMPORT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
NUMEROUS ASSUMPTIONS, RISKS, AND UNCERTAINTIES, AND THE STATEMENTS LOOKING
FORWARD BEYOND 1998 ARE SUBJECT TO GREATER UNCERTAINTY BECAUSE OF THE INCREASED
LIKELIHOOD OF CHANGES IN UNDERLYING FACTORS AND ASSUMPTIONS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS.
IN ADDITION TO FACTORS PREVIOUSLY DISCLOSED BY TOSCO AND FACTORS IDENTIFIED
ELSEWHERE HEREIN, CERTAIN OTHER FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO TOSCO, OR PERSONS ACTING ON BEHALF OF
TOSCO, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FACTORS.
TOSCO'S FORWARD-LOOKING STATEMENTS REPRESENT ITS JUDGMENT ONLY ON THE DATES SUCH
STATEMENTS ARE MADE. BY MAKING ANY FORWARD-LOOKING STATEMENTS, TOSCO ASSUMES NO
DUTY TO UPDATE THEM TO REFLECT NEW, CHANGED, OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In early 1998, a trial court found in Tosco's favor on its claim against Koch
Industries (Tosco Corporation v. Sun Company Inc. (R&M), ET AL., U.S. District
Court, Western District of Oklahoma, Case No. CIV95 556M). On May 4, 1998, Koch
Industries filed a Notice of Appeal to the 10th Circuit Court of Appeals seeking
review of the trial court decision (1997 10K).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
11 - Computation of Earnings Per Share (see page 15)
27 - Financial Data Schedule (filed electronically only)
b. Reports on Form 8-K:
None.