FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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 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. [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 1, 1999 based on the closing price at which such stock
was sold on the New York Stock Exchange on such date was $3,123,469,647.
Registrant's Common Stock outstanding at March 1, 1999 was 152,356,373
shares.
Portions of registrant's definitive Proxy Statement relating to its 1999
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 8
Office Properties 9
Employees 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 24
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 24
Index to Consolidated Financial Statements
and Financial Statement Schedules F-1
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
Tosco Corporation ("Tosco") is one of the largest independent refiners and
marketers of petroleum products in the United States, operating principally on
the East and West Coasts of the United States. Tosco operates eight refineries
with the capacity to process approximately 950,000 barrels per day of crude oil,
feedstocks, and blendstocks into various petroleum products. Through its retail
distribution network, Tosco sells approximately 4.5 billion gallons of fuel
annually. Tosco has owned the "76" products terminal and pipeline distribution
system since 1997, expanding upon Tosco's 1996 purchase of The Circle K
Corporation ("Circle K"), by which Tosco became one of the nation's largest
operators of company-controlled convenience stores. Tosco also engages in
related commercial activities throughout the United States and internationally.
Tosco's refining and marketing business is managed and operated through two
divisions, Tosco Refining Company, based in Linden, New Jersey, and Tosco
Marketing Company, based in Tempe, Arizona.
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.
PETROLEUM REFINING, SUPPLY, DISTRIBUTION, AND MARKETING
REFINING
Tosco, through five major facilities consisting of eight refineries,
processed in 1998 approximately 945,000 barrels per day of crude oil,
feedstocks, and blendstocks into various petroleum products, chiefly light
transportation fuels (gasoline, diesel, and jet fuel) and heating oil. Tosco's
refining facilities are located on the East and West Coasts of the United
States.
Bayway Refinery ("Bayway"), located in Linden, New Jersey, on the New York
Harbor and Trainer Refinery ("Trainer"), located in Trainer, Pennsylvania, near
Philadelphia, are operated in coordination with each other. Bayway can process
in excess of 275,000 barrels per day of crude oil and other feedstocks. Bayway's
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.
Trainer, acquired in a shutdown mode in February 1996 and started up by
Tosco in May 1997 after an approximately $100 million modernization and
upgrading program, can process approximately 170,000 barrels per day of crude
oil. Trainer's fluid catalytic cracking unit, hydrocracking unit and
hydrodesulfurization units enable it to produce a high percentage of light
refined petroleum products. Bayway and Trainer, Tosco's two East Coast
refineries, have ready access to marine, rail, and truck transportation and
product distribution pipelines, giving them considerable flexibility to change
their raw material input and product output to respond to changing market
conditions.
Bayway currently produces approximately 4.7 million barrels per year of
light petroleum products, including propylene used in the manufacture of
polypropylene. In February 1999 Tosco and Union Carbide Corporation ("Union
Carbide") entered into a memorandum of understanding to create a joint venture
for the marketing of polypropylene. Tosco anticipates beginning the two-year
construction of a 775 million pound per year polypropylene plant at Bayway later
in 1999. Tosco will use Union Carbide's UNIPOLTM PPProcess for the plant.
Tosco's production from the new plant when completed, comprising a full range of
homopolymers and random and impact copolymers, will be committed to the joint
venture with Union Carbide, as will the production of Union Carbide's plants at
Seadrift, Texas, and Norco, Louisiana. Combined capacity of the three plants is
estimated to be 1.6 billion pounds annually, to be marketed by Union Carbide.
Polypropylene is used to make a wide range of film, fiber and molded consumer
and industrial products. The joint venture is expected to be one of the top five
suppliers of polypropylene in North America. All of Bayway's propylene
production will be sold to the new joint venture on a long-term basis at market
related prices. The plant's Linden, New Jersey location will be an advantageous
site, near major consumers of polypropylene, many of which are located in the
Northeast and Midwest. Completion of the transaction and formation of the joint
venture are subject to reaching a final agreement, Board of Directors and
certain regulatory approvals, and satisfaction of other conditions.
Avon Refinery ("Avon"), Rodeo Refinery ("Rodeo"), both located in the San
Francisco Bay area, and Santa Maria Refinery ("Santa Maria"), located on the
mid-California coast (collectively, the San Francisco Area Refinery ("SFAR")
System), are operated on an integrated basis. Avon has approximately 130,000
barrels per day of crude oil processing capacity. Rodeo and Santa Maria, both
acquired in 1997 from Union Oil Company of California ("Unocal"), together have
approximately 120,000 barrels per day of crude oil distillation capacity. SFAR
is technologically complex with coking, catalytic cracking, hydrocracking, and
hydrodesulfurizing units to accommodate comparatively lower gravity crude oils.
Coke calcining plants, acquired from Unocal in 1997, are located near Rodeo and
Santa Maria and are operated as part of SFAR. The calcining facilities process
green petroleum coke, a by-product of refining operations, for use in the
production of aluminum and other industrial applications.
The Los Angeles Refinery ("LAR") System, consisting of two linked
refineries located in Carson and Wilmington, California, acquired from Unocal in
1997, has approximately 140,000 barrels per day of crude oil and other feedstock
processing capacity. LAR is a technologically complex facility 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. Pipelines and
marine facilities link LAR to various crude supply and product distribution
systems in the large southern California market area.
In the Northwest, 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 95,000
barrels per day, and is equipped with thermal catalytic cracking and
hydrodesulfurization units, as well as modern marine facilities.
The following table sets forth certain significant refining operating data
for the years ended December 31, 1998, 1997, and 1996. A barrel is equal to 42
gallons.
REFINING DATA SUMMARY (A)
1998 1997 1996
------------------ ----------------- ------------------
Average charge barrels input per day:
Crude oil 837,200 703,400 468,900
Other feed and blending stocks 107,600 90,000 66,100
------------- -------------- -------------
944,800 793,400 535,000
============= ============== ===============
Average barrels of petroleum products produced per day:
Gasoline 507,200 415,800 269,900
Distillates 217,100 196,400 151,100
Jet fuel 62,600 49,800 12,900
Residuals 93,200 77,700 71,200
Propane 20,800 15,800 16,900
Petroleum coke 29,800 21,300 7,200
Other 11,600 11,000 9,300
------------- -------------- -------------
942,300 787,800 538,500
============= ============== ==============
(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
(the period beginning April 1, 1997)
- San Francisco Area Refinery System, comprised of the Rodeo-Santa Maria
Complex (the period beginning April 1, 1997) and the Avon Refinery
- Trainer Refinery, located near Philadelphia (the period beginning May 8,
1997).
RAW MATERIAL SUPPLY
During 1998, Tosco's crude oil, feedstock, and blendstock requirements of
approximately 945,000 barrels per day were supplied by third parties. Tosco's
1998 East Coast requirements of approximately 462,000 barrels per day were met
from foreign imports. Approximately 18% of Tosco's East Coast requirements were
met by long-term contracts, with suppliers such as Statoil (Norway), a
consortium of producers in Argentina, and other foreign sources. Tosco's 1998
West Coast requirements of approximately 483,000 barrels per day were supplied
primarily through domestic production, mainly Californian and Alaskan crudes,
and to a lesser extent foreign imports. Approximately 75% of Tosco's West Coast
requirements were met by long-term contracts, with suppliers such as BP Oil
Supply Company ("BP Oil"), Chevron U.S.A. ("Chevron"), Exxon Corporation
("Exxon"), Equiva Trading Company ("Equiva"), and Occidental Petroleum Company
("Occidental"). These barrels are delivered to Tosco's West Coast refineries
primarily through the major crude oil pipelines in California. To the extent
these pipelines are not available, Tosco's future operating results may be
adversely affected. The balance of Tosco's 1998 West and East Coast crude oil
and feedstock requirements were purchased on the spot market. During 1998, Tosco
resold less than 5% of its raw material purchases.
For the supply of Bayway and Trainer on the East Coast, Tosco 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 the two
East Coast refineries' reliance on European sources as their primary suppliers
of crude oil, Tosco's U.K. subsidiary (established in 1994 for the purpose of
obtaining better information and access to the European markets) continues to
act as a resource. Tosco's long-term lease agreement with Statia Terminals for
3,600,000 barrels of crude oil storage in Nova Scotia, Canada, entered into in
1994, remains in place. Similarly, Tosco's twelve-year agreement, through a
subsidiary, also entered into in 1994 with Neptune Orient Lines, Ltd. of
Singapore for the charter of four 100,000 deadweight ton ("DWT") crude oil
tankers, remains in place. The double hulled tankers were 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 tankers are being utilized to move crude
oil to Bayway and Trainer, or other locations, from the Nova Scotia storage
location and for direct shipments from suppliers.
In February 1998, Tosco entered into a fifteen year contract with
Occidental to buy a substantial portion of Occidental's crude oil production
from the Elk Hills oil field in California. Tosco is building a 14-mile pipeline
from the Elk Hills field to existing lines that serve Tosco's SFAR System,
reducing Tosco's delivered raw material cost and better utilizing Tosco's
existing pipeline assets. This domestic supply of light crude oil will
significantly reduce the need for Tosco to purchase waterborne crude oil for
Tosco's West Coast operations. Tosco anticipates it will purchase additional Elk
Hills production as it becomes available.
Tosco believes its average crude oil inventory is presently sufficient for
normal refinery operations at its refineries. 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 Tosco's
West Coast refineries' 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. Similarly, since Congress and the
President deregulated the Alaska North Slope ("ANS") crude oil market by
permitting ANS to be exported in 1995, the deregulation may result in an
increase in ANS crude prices from time to time. With respect to Tosco's East
Coast refineries, Bayway and Trainer, if their 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 federal and state environmental
requirements of 1990 and more recently, particularly the CARB Phase II
requirements in California, were significant. Tosco cannot be certain that its
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 1998 and 1997,
wholesale gasoline products (including product transfers to retail marketing)
accounted for approximately 53% and 55%, respectively, of Tosco's wholesale
petroleum revenues, while distillates (including product transfers to retail
marketing) accounted for approximately 25% of Tosco's wholesale petroleum
revenues in both 1998 and 1997. Tosco's average inventory of gasoline and
distillates is 10 to 15 days of wholesale sales.
There were no long-term sales contracts (i.e., in excess of one year) that
accounted for more than 10% of Tosco's consolidated revenues.
During 1998 and 1997, Tosco purchased for resale an average of
approximately 326,000 and 365,000 barrels per day, respectively, of petroleum
products from third parties.
In 1998, Tosco distributed refined petroleum products, principally in the
Eastern and Western United States, through an extensive distribution network
comprised of 170 proprietary and third-party terminal locations in 28 states and
by means of pipelines, rail tank cars, trucks, ocean-going tankers, and barges.
See Note 17 to the Consolidated Financial Statements. Tosco's proprietary
petroleum trucking operations, located primarily on the West Coast, deliver
approximately 4,000,000 gallons per day of products.
Tosco also engages in commercial activities related to its petroleum
refining, distribution, and marketing businesses throughout the United States
and internationally. During 1998, commercial operations were based in Stamford,
Connecticut.
LUBRICANTS
Tosco's 76 Lubricants Company markets lubricating oils and greases
internationally. Tosco entered the lubricants market with its acquisition of a
lubricants manufacturing, distribution, and marketing business from Unocal in
1997. Tosco's four lubricant blending and packaging facilities are located in
Los Angeles, California, in Richmond, California (approximately 30 miles east of
San Francisco), in Portland, Oregon, and Savannah, Georgia. From these plants
over 55 million gallons annually of automotive and commercial motor oils,
industrial oils, gear oils, and greases are sold directly to large end users,
retail discount chains, and to over 200 petroleum jobbers in the United States
and in 70 countries internationally. In 1998, jobbers accounted for
approximately 80% of all sales.
Tosco entered into long-term supply agreements with base stock refiners to
ensure a supply of the high quality base stocks needed for its lubricants
operations. These supply agreements provide base stocks on terms which Tosco
considers favorable. Tosco does not anticipate difficulty obtaining necessary
supplies in the event these suppliers could not meet their commitments.
RETAIL MARKETING
Tosco's retail system currently includes approximately 5,070 retail
marketing locations operating under the BP, Exxon, 76 and Circle K tradenames,
approximately 2,420 of which are company-controlled and operated, approximately
1,310 are company-controlled and dealer-operated, approximately 1,090 are owned
and operated by third parties, and approximately 250 are franchise locations.
Approximately 320 of the company-controlled and operated sites do not sell
gasoline.
Tosco's U.S. retail gasoline marketing business grew significantly, into
the system described above, with the acquisition of refining and marketing
assets from Unocal in 1997, following Tosco's 1996 acquisition of Circle K,
which had combined Tosco's then existing retail operations with the Circle K
stores. In December 1993, Tosco had entered the retail marketing business with
the acquisition of BP's retail marketing system in the Pacific Northwest, in a
transaction that gave Tosco an exclusive license to market under the BP brand in
Washington and Oregon. In August 1994, Tosco acquired BP's Northern California
retail marketing system, extending the existing license for a twelve year term
and expanding it to include a total of nine Western states. Tosco's retail
marketing system was further expanded with the acquisition of Exxon's Arizona
retail assets in December 1994, including the right to market under the Exxon
brand in Arizona for seven years. In February 1996, Tosco expanded in the East
by acquiring BP's Northeast retail marketing system, including a jobber network
of approximately 500 service stations. The acquisition gave Tosco a license to
market under the BP brand in eleven Northeastern states and the Washington, D.C.
metropolitan area for a period of at least 15 years. The Northern California
retail assets (rebranded from BP to 76 in 1997 and 1998) and Arizona retail
assets are leased from special purpose entities that purchased the assets from
BP and Exxon, respectively.
As of December 31, 1998, the portion of Tosco's retail gasoline system
which is 76-branded consists of approximately 1,860 gasoline stations,
approximately 1,490 of which are company-controlled. Approximately 320 of these
gasoline stations in California are leased from a special purpose entity that
purchased these assets directly from Unocal in 1997. In addition, as of December
31, 1998, Tosco had approximately 3,620 other gasoline service stations and/or
Circle K convenience stores, in 28 states, many of which were
company-controlled. Circle K stores are primarily located in the "sunbelt
region" of the United States, which provides attractive opportunities for
convenience retailing due to its relatively high population growth and warm
climate. Since 1996, Tosco has been one of the nation's largest operators of
company-controlled convenience stores.
The following table sets forth certain significant retail operating data
for the years ended December 31, 1998, 1997, and 1996. A barrel is equal to 42
gallons.
RETAIL DATA SUMMARY (A)
1998 1997 1996
------------- -------------- ---------------
Volume of fuel sold (thousands of gallons) 4,490,448 4,159,360 2,060,590
Blended fuel margin (cents per gallon) (B) 12.1 12.8 11.6
Merchandise sales (thousands of dollars) $ 2,097,810 $ 2,003,417 $ 1,173,370
Merchandise margin (percentage of sales) 29.6% 29.4% 29.7%
Other retail gross profit (thousands of dollars) $ 112,918 $ 116,162 $ 53,000
(a) The Retail Data Summary includes the operations of The Circle K Corporation
subsequent to May 30, 1996 (date acquired) and the 76 Products gasoline
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.
GASOLINE DISTRIBUTION AND SUPPLY
In 1998, the retail operations of Tosco sold over 4.4 billion gallons of
gasoline including the operations of the convenience store system. The
convenience stores provide an important advantage in the sale of gasoline in the
competitive retail gasoline markets, as do the presence of such amenities as car
washes. All Tosco gasoline stations accept major credit cards.
MERCHANDISING
In 1998, the retail operations of Tosco, including Circle K and 76
Products, had over $2 billion of merchandise sales. Offering gasoline is an
important competitive advantage in the convenience store retailing industry. The
convenience stores benefit not only from the sale of gasoline but also from
increased customer traffic in the stores occasioned by gasoline purchases.
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, laws relating to underground storage tanks
("USTs"), and analogous state and local laws and regulations. See "Legal
Proceedings."
Environmental compliance at the refineries and terminals has required, and
will continue to require, capital expenditures. Tosco spent approximately $88
million in 1998 and $21 million in 1997 for such capital expenditures. Tosco
currently estimates that capital expenditures for environmental compliance may
approximate $53 million and $49 million for 1999 and 2000, respectively. Such
amounts do not include amounts that may be necessary to produce gasoline to meet
changing "clean fuels" specifications.
Because anticipated remedial actions are subject to negotiation with
governmental agencies, the amount and timing of actual cash expenditures are
uncertain. In addition, further investigative work and negotiations with
governmental agencies may result in different or additional remedial actions
that Tosco cannot presently predict.
The U.S. Environmental Protection Agency (the "EPA") has established
standards for UST owners and operators relating to, among other things: (i)
maintaining leak detection systems; (ii) upgrading UST systems; (iii)
implementing corrective action in response to releases; (iv) closing out-of-use
USTs to prevent future releases; (v) maintaining appropriate records; and (vi)
maintaining evidence of financial responsibility for corrective action and
compensating third parties for bodily injury and property damage resulting from
UST releases. All states in which Tosco operates also have adopted UST
regulatory programs.
Under current federal and certain state regulatory programs, Tosco was
obligated to upgrade or replace by December 22, 1998, those USTs it owned or
operated which did not meet new corrosion protection and overfill/spill
containment standards. In some states, this upgrading or replacement was
required to be accomplished by earlier dates. Tosco evaluated each of its sites
selling gasoline to determine the type of expenditures required to comply with
these and other requirements under the federal and state UST regulatory
programs. In certain instances where Tosco believed it would be unable to meet
the December 22, 1998 or other applicable deadline, Tosco has taken sites out of
service until they can be brought up to the applicable standards or has taken
them out of service permanently.
Environmental capital expenditures in Tosco's retail system, including
those relating to upgrading or replacing existing USTs, were approximately $60
million in 1998 and are estimated to be approximately $9 million in 1999.
Tosco's estimated capital expenditures to comply with these UST regulations may
increase if certain upgrade alternatives at particular sites cannot be
implemented, thus requiring the replacement of USTs at these sites.
As evidence of Tosco's continuing commitment to the environment, Tosco is
advocating two important initiatives for clean fuels. First, Tosco believes that
MTBE, which poses a potential water pollution threat, should be reduced or
eliminated as an additive in gasoline. Secondly, Tosco vigorously supports a
dramatic reduction in the amount of sulfur allowed in gasoline - from the
current national average of approximately 350 ppm down to 80 ppm or less.
Automobile manufacturers have indicated that a nationwide low-sulfur, clean fuel
specification is important for the design of new cars to achieve the low
tailpipe emission levels mandated in 2004.
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 11 to the Consolidated Financial Statements.
COMPETITION
Many of Tosco's competitors in the petroleum industry are fully integrated
companies engaged, on a national or international basis or both, 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 effect on Tosco. Tosco does not believe that
there is any one or a small number of dominant competitors in the petroleum
refining and marketing business. Tosco does not know its precise competitive
position therein. Tosco's principal methods of competing are low unit cost of
production, price, or service. Tosco believes it is able to compete with these
methods because of its facilities, their locations, and direction of management.
Tosco must purchase all of its crude oil and substantially all of its
feedstock supplies from others, while some of its competitors have proprietary
sources of crude oil available for their own refineries. Tosco has agreements
with British Petroleum, Exxon, Statoil, Equiva, Shell, 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."
Tosco faces similarly strong competition in the sale of petroleum
lubricants. The lubricants market is fragmented. Major integrated oil company
brands are the main competitors in the engine oil segment. These same companies
as well as specialty oil marketers are active in the industrial oil market.
Tosco must purchase all of its lubricants base stock from its competitors. See
"Petroleum Refining Supply, Distribution and Marketing - LUBRICANTS."
Tosco also faces strong competition in the market for the sale of retail
gasoline and merchandise. The competitors include service stations of large
integrated gasoline companies, independent gasoline service stations, other
convenience stores owners and operators, fast food stores, supermarkets,
warehouse retailers, neighborhood grocery stores and other similar retail
outlets, some of which are well-recognized national or regional retail systems.
Tosco believes that among the key competitive factors in the retail gasoline
markets are site location, name recognition, customer loyalty, ease of access,
store management, product selection, pricing, hours of operation, store safety,
cleanliness, product promotions, and marketing. Retail gasoline similar or
identical to that sold by Tosco is generally available to its competitors. Tosco
competes by pricing gasoline competitively, combining its retail gasoline
business with convenience stores which provide a wide variety of branded
products at reasonable prices, and using effective advertising and promotional
campaigns.
OPERATING PROPERTIES
Tosco, itself or through its wholly owned subsidiaries, owns the sites at
which its refineries are located (2,300-acre site at Avon, 1,300-acre site at
Bayway, 850-acre site at Ferndale, 650-acre site at LAR, 1,210-acre site at
Rodeo, 1,790-acre site at Santa Maria and a 500-acre site at Trainer) and the
buildings, tanks, pipelines, and related facilities.
Tosco had available at December 31, 1998, through ownership, lease
agreement, exchange, or other appropriate arrangement, the use of storage tanks,
loading racks, wharves, and other related assets at approximately 170 terminal
distribution locations in 28 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 over 3,730
retail service stations located in 28 states. In addition to marketing
transportation fuels (gasoline and diesel), many of the stations have
convenience store, car wash, and/or automotive repair facilities.
PATENTS AND TRADEMARKS
Tosco's patents relating to petroleum and lubricants operations are not
material to Tosco as a whole. The ownership of the 76, Union 76 and Circle K
tradenames and other trademarks employed in the marketing of petroleum products
are important to Tosco's operations.
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, 1998, Tosco occupied a total of approximately 800,000
square feet of office space principally in Linden, New Jersey, Tempe, Arizona,
and Stamford, Connecticut, and at various office locations for the refining and
retail systems. The office space occupied by Tosco is generally suitable and
adequate for its purposes.
EMPLOYEES
At December 3l, 1998, Tosco had approximately 26,300 employees at various
locations, including approximately 19,700 store personnel, of which
approximately 5,300 are part-time. Approximately 9% of Tosco's employees,
primarily those employed at the refining facilities, are represented by labor
organizations. Tosco believes that its labor relations with its employees are
good.
ITEM 3. LEGAL PROCEEDINGS
A refinery in Duncan, Oklahoma, formerly owned by Tosco, is subject to
investigation by the Oklahoma Department of Environmental Quality ("ODEQ"). The
ODEQ 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, 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. The
complaint was subsequently amended to name Koch Industries, Inc. ("Koch"),
another former owner, as another defendant. On February 14, 1996, Tosco obtained
default judgments against some of the current owners of the refinery. In January
1998, Tosco entered into a Settlement Agreement with Sun, pursuant to which Sun
agreed to pay $7 million in exchange for a release from liability with respect
to the site. In early 1998, a trial was held on Tosco's claim against Koch. The
court ruled in Tosco's favor that Koch was responsible for effectively 15% of
past and future investigation and remediation costs at the site. On May 4, 1998,
Koch filed a Notice of Appeal to the 10th Circuit Court of Appeals seeking
review of the trial court decision.
Circle K entered into Consent Orders with the Arizona Department of
Environmental Quality on September 20, 1994, and September 23, 1994, for sites
in Springerville and Phoenix, Arizona, respectively. The sites had releases of
petroleum products from USTs or lines. Tosco is subject to these Orders as a
result of its 1996 acquisition of the Circle K Corporation. Remediation on the
sites is ongoing. Expenses for the remediation are eligible for reimbursement
under the Arizona UST Trust Fund.
In a case filed in 1996 by private litigants against all major petroleum
refiners, distributors, and retailers in California, including Tosco, alleging
that the defendants 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 granted the Defendants' Motions for Summary
Judgment in October 1997; however, on January 29, 1998, the court reversed
itself and ordered a new trial. This ruling is pending on appeal. On January 28,
1998, a plaintiff allegedly representing a class of all wholesale purchasers of
gasoline in the State of California sued nine petroleum refineries, including
Tosco, making essentially the same allegations as those made in the Aguilar
case, GILLEY V. ATLANTIC RICHFIELD CORP., ET AL., (U.S. District Court, Southern
District of California, Case No. 93-CVU132BTM). The court has stayed all
proceedings in this matter pending the decision of the Court of Appeals in the
AGUILAR case.
On October 22, 1998, a complaint was filed by a private litigant,
purportedly on behalf of a class of all direct or indirect purchasers of
California diesel fuel between March 19, 1996 and December 31, 1997, against all
California refiners of California diesel fuel (CAL-TEX CITRUS JUICE, ET AL. V.
ATLANTIC RICHFIELD COMPANY, ET AL. Superior Court of California, County of
Sacramento, Case No. 98AS05227). The complaint alleges violations of various
state statutes by the defendants' alleged conspiracy to fix prices of California
diesel fuel. Tosco has filed an Answer.
In October 1998, a complaint was filed against gasoline refiners and
wholesalers in Hawaii, including Tosco, by the State of Hawaii alleging that
defendants fixed the price of gasoline and allocated market share and seeking
damages and injunctive relief (BRONSTER V. CHEVRON CORPORATION, ET AL., U.S.
District Court, District of Hawaii, Case No. CV9800792SPK). Tosco has filed a
Motion to Dismiss.
In three cases, complaints were filed by private litigants and a water
company against numerous defendants, including Tosco, alleging violation of
state law in the production and sale of gasoline which included an additive,
methyl tertiary butyl ether, (KUBAS, ET AL. V. UNOCAL CORPORATION, ET AL.,
Superior Court of California, County of Los Angeles, Case No. BC191876,
COMMUNITIES FOR A BETTER ENVIRONMENT V. UNOCAL CORPORATION, ET AL., Superior
Court of California, County of San Francisco, Case No. 997013, SOUTH TAHOE
PUBLIC UTILITY DISTRICT V. ATLANTIC RICHFIELD COMPANY, ET AL., U.S. District
Court, District of Delaware, Civil Action No. 98-336). It is alleged that the
additive contaminated water supplies. Tosco has filed Answers in all cases.
The California Air Resource Board (CARB) has issued a Report of Violation
to Tosco alleging that Tosco supplied two service stations for two days with
gasoline which did not meet California specifications (ROV F98-3-2). Tosco has
reached a settlement in principle with CARB on this matter and other unrelated
matters for a total of $200,000.
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 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 Notes 11 and 18 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 that 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 Principal Occupation
Name Age an Officer Since and Positions Held
Thomas D. O'Malley 57 1989 Chairman of the Board and
Chief Executive Officer
of Tosco since January
1990; President of Tosco
from May 1993 to May 1997
and from October 1989 to
May 1, 1990.
Jefferson F. Allen 53 1990 President of Tosco since
May 1997 and Chief
Financial Officer since
June 1990; Executive Vice
President from June 1990
to May 1997; 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.
Robert J. Lavinia 52 1993 Executive Vice President
of Tosco and President of
Tosco Marketing Company
(a division of Tosco)
since February 1996;
Senior Vice President of
Tosco from May 1994 to
February 1996; Vice
President of Tosco from
1993 to May 1994;
President, Tosco Energy
Corporation during 1992;
prior to 1992, various
positions with Phibro
Energy for a period in
excess of five years.
Dwight L. Wiggins 58 1993 Executive Vice President
of Tosco and President of
Tosco Refining Company (a
division of Tosco) since
February 1996; Senior
Vice President of Tosco
from May 1994 to February
1996; Vice President of
Tosco from January 1993
to May 1994; President of
Bayway Refining Company
since January 1993; New
Jersey Area Manager for
Exxon Company U.S.A. 1990
to 1993.
Wilkes McClave III 51 1989 Senior Vice President of
Tosco since May 1996 and
General Counsel of Tosco
since May 1990; Vice
President of Tosco from
May 1990 to May 1996;
Secretary of Tosco since
August 1989; Assistant
General Counsel of Tosco
from January 1986 to May
1990.
Peter A. Sutton 53 1992 Senior Vice President of
Tosco since August 1998;
Vice President of Tosco
from January 1992 to
August 1998; Senior Vice
President of Tosco
Refining Company since
May 1990; various other
positions with Tosco for
a period in excess of
five years.
Duane B. Bordvick 53 1997 Vice President of Tosco
for environmental and
external affairs since
February 1997; Vice
President of Tosco
Refining Company for a
period in excess of five
years.
Craig R. Deasy 54 1986 Vice President and
Treasurer of Tosco since
October 1995; Vice
President and Treasurer
of Bayway Refining
Company since April 1993;
various other positions
with Tosco for a period
in excess of five years.
Ann Farner Miller 47 1996 Vice President of Tosco
for governmental
relations since May 1996;
director of governmental
relations of Tosco
Refining Company for a
period in excess of five
years.
Richard W. Reinken 42 1994 Vice President and Chief
Information Officer of
Tosco since November
1994; Senior Vice
President of Tosco
Marketing Company since
June 1996; Consultant,
Andersen Consulting from
1985 to 1994.
Robert I. Santo 55 1992 Vice President of Tosco
since January 1998; Chief
Accounting Officer of
Tosco since January 1992;
various other positions
with Tosco for a period
in excess of five years.
Wanda Williams 52 1996 Vice President of Tosco
for human resources since
May 1996; Vice President
of Tosco Marketing
Company since May 1996;
Vice President of Circle
K for human resources
from June 1993 to May
1996; various other
positions with Circle K
from July 1992 to May
1996; various human
resources positions in
the oil industry and
convenience store
industry from 1971 to
1992.
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. All share and per-share data have been
adjusted to reflect the 3-for-1 stock split distributed on February 25, 1997 to
shareholders of record on February 13, 1997 and have been rounded to the nearest
sixteenth.
PRICE RANGE OF COMMON STOCK
1998 High Low Dividend 1997 High Low Dividend
1st Quarter $37 7/8 $31 5/8 $0.06 1st Quarter $31 1/2 $25 13/16 $0.06
2nd Quarter 36 5/8 26 3/8 $0.06 2nd Quarter 34 1/4 26 1/4 $0.06
3rd Quarter 31 1/1 20 7/8 $0.06 3rd Quarter 35 1/4 27 1/8 $0.06
4th Quarter 29 19 3/4 $0.06 4th Quarter 38 1/4 28 $0.06
The number of Tosco shareholders of record on March 1, 1999 was 9,109.
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 Revolving Credit
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, 1998, are derived from the Consolidated Financial Statements of
Tosco audited by PricewaterhouseCoopers LLP, independent accountants.
TOSCO CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Thousands of Dollars, Except Per Share and Ratio Data)
Year Ended December 31,
-------------------------------------------------------------------------------------------
Statement of Income Information (a) 1998 1997 (b) 1996 (c) 1995 1994
-------------- ------------ ------------ ------------ ------------
Sales $12,021,527 $13,281,620 $9,922,611 $7,284,051 $6,365,757
Operating contribution (d) 1,215,684 1,168,128 725,613 389,411 333,249
Depreciation and amortization 313,864 303,539 184,505 111,449 84,861
Net income 106,209 212,675 146,286 77,058 83,843
Diluted earnings per share $0.67 $1.37 $1.16 $0.69 $0.75
Cash dividends per common share 0.24 0.24 0.22 0.21 0.21
December 31,
----------------------------------------------------------------------------------------
Balance Sheet Information 1998 1997 1996 1995 1994
----------- ---------- ------------- -------------- ------------
Total assets $5,842,816 $5,974,852 $3,554,825 $2,003,171 $1,797,206
Revolving credit facility $196,000 $166,000 $- $ 45,000 $233,000
Long-term debt 1,358,553 1,415,257 826,832 579,036 454,429
Trust Preferred Securities (e) 300,000 300,000 300,000
Shareholders' equity 1,912,990 1,944,055 1,070,323 627,110 575,464
------------- ------------ ----------- --------------- ------------
Total capitalization $3,767,543 $3,825,312 $2,197,155 $1,251,146 $1,262,893
============= ============ ============ =============== ============
Debt to total capitalization ratio (f) 0.41 0.41 0.38 0.50 0.54
Book value per common share $12.57 $12.44 $8.17 $5.64 $5.18
(a) Certain reclassifications, primarily the separate disclosure of
depreciation and amortization, have been made to conform prior year
information to the 1998 presentation.
(b) Includes the operations of 76 Products for the period commencing March
31, 1997 (date acquired).
(c) Includes the operations of The Circle K Corporation for the period
commencing May 30, 1996 (date acquired).
(d) Operating contribution is calculated as sales minus cost of sales.
(e) Trust Preferred Securities consist of company-obligated, mandatorily
redeemable, convertible preferred securities of Tosco Financing Trust,
holding solely 5.75% convertible junior subordinated debentures of Tosco.
(f) Debt includes cash borrowings outstanding under the revolving credit
facility and long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The business environment in 1998 was difficult. While income from
operations (before special items) increased over 1997, it fell short of
expectations due primarily to poor refining margins. Special items for 1998 were
a pre-tax $240 million write-down to reduce the value of LIFO inventories to
market, and a $40 million restructuring charge primarily related to the San
Francisco Area Refining System. Tosco's marketing division continued to operate
well in highly competitive markets. Significant progress was made in integrating
the acquired Unocal operations. In February 1999, Standard & Poor's raised
Tosco's corporate credit and senior unsecured debt ratings.
On February 23, 1999, a fire occurred at a crude unit at the San
Francisco Area Refinery, Avon facility. The fire was quickly isolated and
extinguished with no offsite impacts or health risks to the community. On March
2, 1999, Tosco announced that the Avon Refinery would be shutdown for at least
30 days, while a thorough safety review is conducted.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 (a) 1996(b)
------------------ ------------- -----------
Sales $ 12,021,527 $ 13,281,620 $ 9,922,611
Cost of sales (c) 10,805,843 12,113,492 9,196,998
Depreciation and amortization 313,864 303,539 184,505
Inventory writedown 240,000 53,000
Restructuring charge 40,000 13,500
Selling, general, and administrative expenses (c) 300,311 296,338 196,335
Interest expense, net (d) 122,707 134,455 83,424
------------- -------------- -------------
Income before income taxes and distributions on Trust Preferred
Securities 198,802 380,796 247,849
Income taxes 82,502 158,030 101,099
------------- -------------- -------------
Income before distributions on Trust Preferred Securities 116,300 222,766 146,750
Distributions on Trust Preferred Securities, net of income tax benefit 10,091 10,091 464
------------- -------------- -------------
Net income $ 106,209 $ 212,675 $146,286
============= ============== =============
Earnings per share (e) $ 0.67 $ 1.37 $ 1.16
============= ============== =============
(a) Results of operations include the West Coast petroleum refining, marketing,
and related supply and transportation operations acquired from Union Oil
Company of California ("Unocal") on March 31, 1997 (the "76 Products
Acquisition").
(b) Results of operations include The Circle K Corporation ("Circle K")
acquired on May 30, 1996 (the "Circle K Acquisition").
(c) Amounts have been restated to exclude depreciation and amortization.
(d) Interest expense has been restated to exclude the amortization of deferred
financing costs.
(e) Earnings per share throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations are expressed on a diluted
basis.
REFINING DATA SUMMARY (a): FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
------------- -------------- -------------
Average charge barrels input per day (b):
Crude oil 837,200 703,400 468,900
Other feed and blending stocks 107,600 90,000 66,100
------------- -------------- -------------
944,800 793,400 535,000
============= ============== =============
Average barrels of petroleum products produced per day (b):
Clean products (c) 786,900 662,000 433,900
Other finished products 155,400 125,800 104,600
------------- -------------- -------------
942,300 787,800 538,500
- ----- ============= ============== =============
Operating margin per charge barrel (d) $ 4.61 $ 4.89 $ 4.89
============= ============== =============
(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 (for the period beginning April 1, 1997)
- San Francisco Area Refinery System, comprised of the Rodeo-Santa
Maria complex (for the period beginning April 1, 1997) and the Avon
Refinery
- Trainer Refinery, located near Philadelphia (for the period beginning
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
(sales less cost of sales), excluding refinery operating costs, divided by
total refinery charge barrels. Operating contribution includes insurance
recoveries related to the unscheduled 1997 shutdowns of the Bayway Refinery
cat cracker and Avon Refinery hydrocracker.
RETAIL DATA SUMMARY (a): FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
------------- -------------- -------------
Volume of fuel sold (thousands of gallons) 4,490,448 4,159,360 2,060,590
Blended fuel margin (cents per gallon) (b) 12.1 12.8 11.6
Number of gasoline stations at year end 4,476 4,652 3,270
Merchandise sales (thousands of dollars) $ 2,097,810 $ 2,003,417 $ 1,173,370
Merchandise margin (percentage of sales) 29.6% 29.4% 29.7%
Number of merchandise stores at year end 2,313 2,395 2,400
Other retail gross profit (thousands of dollars) $ 112,918 $ 116,162 $ 53,000
(a) The Retail Data Summary includes the operations of Circle K and gasoline
service stations acquired in the 76 Products Acquisition commencing May 30,
1996 and March 31, 1997 (the respective acquisition dates).
(b) Blended fuel margin is calculated as fuel sales minus fuel cost of sales
divided by fuel gallons sold.
1998 COMPARED TO 1997
Tosco earned net income of $106 million ($0.67 per share) in 1998
compared to $213 million ($1.37 per share) in 1997. Results of operations for
1998 include a $240 million ($140 million after tax, $0.88 per share) non-cash
inventory writedown and a $40 million ($23 million after tax, $0.15 per share)
restructuring charge. Results of operations for 1997 include a $53 million ($31
million after tax, $0.19 per share) non-cash inventory writedown. Sales in 1998
were $12.022 billion compared to $13.282 billion in 1997. This decrease of
$1.260 billion was attributable to lower product prices partially offset by
higher refinery throughput and retail fuel sales volumes. The higher throughput
and sales volumes resulted from the 76 Products Acquisition (twelve months in
1998 versus nine months in 1997) and the full year operation of the previously
shutdown Trainer Refinery, which was reopened on May 8, 1997.
Operating contribution, as restated to exclude depreciation and
amortization, of $1.216 billion for 1998 increased by $48 million over 1997. The
increase was from refining ($54 million) partially offset by a decrease from
marketing ($6 million).
Refining operating contribution for 1998 increased by $54 million to
$682 million due primarily to increased throughput (944,800 barrels per day
("B/D") in 1998 compared to 793,400 B/D in 1997) partially offset by lower
operating margin per charge barrel ($4.61 in 1998 compared to $4.89 in 1997).
The increase in throughput volumes was primarily due to the acquisition of the
76 Product refineries and the start-up of the Trainer Refinery, and to a lesser
degree to increases at the Avon and Bayway refineries, both of which experienced
no unscheduled shutdowns in 1998. The decrease in operating margin per charge
barrel was primarily due to lower product prices experienced throughout 1998.
Refining operating contribution includes insurance recoveries related to the
unscheduled shutdowns in 1997 of the Bayway Refinery cat cracker and Avon
Refinery hydrocracker.
Marketing operating contribution for 1998 was $534 million compared to
$540 million in 1997. The decrease of $6 million was due to lower blended fuel
margins (12.1 cents per gallon in 1998 versus 12.8 in 1997) partially offset by
higher fuel sales volumes from the 76 Products Acquisition and higher
merchandise sales volumes and profit margins.
Tosco recorded a $240 million charge for the write-down of raw
material and product inventories to their fair value at December 31, 1998. The
inventory writedown was the result of the steep market decline in crude oil and
product prices in 1998 lowering the value of inventories acquired in connection
with Tosco's acquisitions since 1993. During 1997, Tosco recorded a $53 million
inventory write-down also as a result of declining prices.
During 1998, Tosco recorded a $40 million charge primarily related to
the restructuring of its San Francisco Area Refinery System. The restructuring
will result in an increase in the production of clean burning CARB Phase 2
gasoline and is being made to improve efficiency, reliability, and profitability
of the system, without compromising safety or environmental compliance. The key
component of the restructuring plan revolves around the continued integration of
the Avon Refinery and the Rodeo-Santa Maria complex acquired in 1997. The
improved operation will involve the shutdown of several of the less efficient
processing units at the Avon Refinery with resulting staff reductions. At
December 31, 1998, the $40 million charge includes the write-down, shutdown, and
dismantling costs of certain processing units and facilities that will no longer
be used, contract termination costs, and employee severance. See Notes 8 and 21
to the Consolidated Financial Statements.
Selling, general, and administrative ("SG&A") expenses for 1998
include the recognition of a $10 million gain on the sale of the Revere
distribution terminal in Massachusetts, and approximately $3 million of
non-recurring costs related to the consolidation of Tosco's offices. SG&A
expenses for 1997 include non-recurring transition expenses of $18 million
related to the integration of the 76 Products assets into Tosco's operations.
Excluding these 1998 and 1997 non-recurring items, SG&A expenses increased by
$29 million in 1998, due primarily to the 76 Products Acquisition.
Net interest expense, as restated, for 1998 was $12 million less than
1997 due to lower levels of borrowings and interest rates under the Revolving
Credit Facility.
Income taxes, including the benefit associated with the distributions
on company-obligated, mandatorily redeemable, convertible preferred securities
("Trust Preferred Securities"), were $75 million for 1998 compared to $151
million in 1997. The decrease was due to lower taxable income in 1998.
1997 COMPARED TO 1996
Tosco earned net income of $213 million ($1.37 per share) in 1997
compared to $146 million ($1.16 per share) in 1996. Results of operations for
1997 include a $53 million ($31 million after tax, $0.19 per share) non-cash
inventory writedown as a result of higher levels of inventories from the 76
Products Acquisition and the start-up of the Trainer Refinery combined with
declining raw material and product prices in late 1997. Results of operations
for 1996 include a pre-tax charge of $13 million ($8 million after-tax, $0.06
per share) for the consolidation of the retail marketing division following the
acquisition of Circle K.
Operating contribution (sales less cost of sales) was $1.168 billion
in 1997 compared to $0.726 billion in 1996, an increase of $442 million: $155
million for refining and $287 million for marketing. Operating contribution for
1997 and 1996 have been restated to exclude depreciation and amortization
previously included in cost of sales.
Refining operating contribution for 1997 increased by $155 million to
$628 million due primarily to increased throughput (793,400 barrels per day
("B/D") in 1997 compared to 535,000 B/D in 1996). This increase was due to the
acquisition of the 76 Product refineries and the start-up of the Trainer
Refinery, partially offset by reduced throughput at the Avon Refinery during the
1997 first and second quarters and an unscheduled shutdown of the Bayway
Refinery cat cracker in the 1997 first quarter. Lower throughput at the Avon
Refinery was due to the scheduled turnaround of the coker unit and the
unscheduled hydrocracker shutdown. The 1997 refining operating margin per charge
barrel, which fluctuated significantly during the year, averaged $4.89,
consistent with the 1996 average. Refinery operating contribution for 1997
includes insurance recovery accruals related to the Avon hydrocracker and the
Bayway cat cracker.
Marketing operating contribution for 1997 increased by $287 million to
$540 million primarily due to the 76 Products and Circle K Acquisitions and
higher blended fuel margins. The volume of fuel sales approximately doubled to
4.16 billion gallons and the blended fuel margin increased by 1.2 cents per
gallon, despite a higher proportion of dealer/jobber sales resulting from the 76
Products Acquisition. Fuel margins at dealer/jobber sites are typically lower
than company-operated sites. The increase in blended fuel margins occurred in
the fourth quarter due to declining wholesale product prices without a
corresponding decline in retail prices. The retail operating contribution also
increased in 1997 due to increased merchandise sales ($2.003 billion in 1997
compared to $1.173 billion in 1996) with reasonably consistent margins.
Depreciation and amortization for 1997 was $304 million, a $119
million increase compared to the 1996 balance of $185 million. This increase was
primarily due to the 76 Products Acquisition and the Trainer Refinery reopening.
SG&A expenses were $296 million in 1997 compared to $196 million in
1996. The increase of $100 million was primarily attributable to the 76 Products
and Circle K Acquisitions, including nonrecurring transition expenses of $18
million related to the integration of 76 Products into Tosco's operations.
Incentive compensation also increased in 1997 due to higher levels of operating
income.
Net interest expense for 1997 increased by $51 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 Trust Preferred Securities, were $151 million for 1997 compared to $101
million in 1996. The increase was due to higher taxable income in 1997. The
effective income tax rate also reflects the effect of the nondeductibility of
amortization of certain intangible assets acquired in the Circle K Acquisition.
OUTLOOK
Results of operations are primarily determined by the operating
efficiency of the refineries and by refining and retail fuel margins. On
February 23, 1999, a fire occurred at a crude unit at Tosco's Avon Refinery and
resulted in four fatalities. On March 2, 1999, Tosco announced that the Avon
Refinery will be shutdown for at least 30 days while a thorough safety review is
conducted. The refinery, including the crude unit, which was not severely
damaged, will be brought back up only when safety issues and concerns have been
addressed. The negative impact on the 1999 first and second quarter results can
not currently be estimated, given the uncertainty of the shut down period. Tosco
also accelerated the start of the previously scheduled third quarter 1999
turnaround of its Fluid Catalytic Cracking Unit at the Bayway Refinery. The
turnaround should be completed in April 1999. Except for the Avon Refinery,
whose date of return to service is uncertain, Tosco expects, given reasonable
margins, to operate its refineries at high levels through the balance of 1999.
Refining margins in early 1999 were weak, especially on the East Coast. Retail
fuel margins in 1999 were satisfactory through February but have deteriorated in
March. While refining margins may improve during the balance of 1999, Tosco is
not able to predict the level or timing of operating margins for the year
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 in all areas of operation without
compromising safety, reliability, or environmental compliance.
In February 1999, Tosco signed a memorandum of understanding to create
a 50/50 joint venture with Union Carbide Corporation ("Union Carbide") for the
marketing of polypropylene. A 775 million pounds per year polypropylene plant is
planned to be constructed at the Bayway Refinery over the next two years. When
completed, the joint venture is expected to be one of the top five suppliers of
polypropylene in North America. The production from this new plant and Union
Carbide's plants in Seadrift, Texas and Norco, Louisiana, estimated to be 1.6
billion pounds per year, will be committed to the joint venture and marketed by
Union Carbide. Completion of the joint venture is subject to execution of
definitive documents and satisfactory compliance with various conditions.
Effective January 1, 1999, Tosco will prospectively extend the useful
lives of certain refinery and distribution assets in order to better represent
the remaining useful lives of the assets, as determined by a third party
appraisal. Management estimates that this change in accounting estimate will
decrease 1999 depreciation and amortization by approximately $35 million.
Through March 15, 1999, Tosco closed sales for 200 convenience stores
for $60 million, plus the cost of inventories. Additionally, Tosco expects to
divest approximately 185 additional convenience stores during the balance of
1999. These stores are located in areas of the United States in which Tosco does
not have a significant market share. The sale of these convenience stores is not
expected to impact 1999 results of operations.
Crude oil and finished product prices have significantly fluctuated in
recent years and Tosco believes this pattern will continue throughout 1999.
Tosco estimates that a $1.00 per barrel change in raw materials and finished
products will have an approximate $50 million impact on its net realizable value
reserve of $293 million at December 31, 1998. However, because raw material and
finished product prices do not move in unison, the impact on the reserve will
vary depending on actual price changes and the mix and level of inventories.
Tosco continues to review acquisition opportunities. However, future
acquisitions will occur only at reasonable prices, which are based on realistic
earnings in a normalized refining and marketing environment as determined by
management.
CASH FLOWS
As summarized in the Consolidated Statement of Cash Flows, cash and
cash equivalents decreased by $3 million during 1998. Cash used in investing
activities of $485 million and financing activities of $190 million exceeded
cash provided by operating activities of $672 million.
Net cash provided by operating activities of $672 million was from
cash earnings (net income plus depreciation and amortization, and other non-cash
charges and provisions) of $836 million, less net increases in operating assets
and liabilities (primarily working capital) and other items of ($151) million
and ($13) million, respectively.
Net cash used in investing activities totaled $485 million due to net
capital additions of $393 million and spending for turnarounds of $95 million
less reduction of other long-term assets of ($3) million.
Net cash used in financing activities totaled $190 million due to
scheduled and early principal payments on long-term debt of $79 million, Common
Stock repurchases of $101 million, dividend payments of $37 million, and other
uses of $3 million which exceeded net borrowings under the revolving credit
facility of ($30) million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity (as measured by cash, cash equivalents, marketable
securities, deposits, and availability under the Revolving Credit Facility) was
$855 million at December 31, 1998, which is equal to the December 31, 1997
amount. An increase in marketable securities and deposits of $6 million was
offset by decreases in cash and cash equivalents of $3 million and availability
under the Revolving Credit Facility of $3 million.
At December 31, 1998, total shareholders' equity was $1.913 billion, a
$31 million decrease from December 31, 1997. This decrease was due to the Common
Stock repurchases of $101 million and dividend payments of $37 million exceeding
net income of $106 million and other items of $1 million. Debt, including
current maturities and the Revolving Credit Facility, decreased by $37 million
to $1.556 billion at December 31, 1998. This decrease was due to scheduled and
early payments during 1998 partially offset by a $30 million increase in cash
borrowings under the Revolving Credit Facility. The ratio of 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 Shareholders' Equity) was 41% at December
31, 1998, consistent with the December 31, 1997 ratio.
During 1998, Tosco adopted a Shareholders Rights Plan. Under the terms
of the Shareholders Rights Plan, shareholders received rights to purchase shares
of a new preferred stock. The rights expire on December 6, 2008 and are
exercisable only if a person or group acquires beneficial ownership of 15% or
more of Common Stock, a person commenced a tender or exchange offer for more
than 15% of Common Stock, or if an adverse person (as defined by the Company's
Board of Directors) acquires beneficial ownership of 10% or more of Common
Stock.
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 December 31, 1998, Tosco may issue up to
$779 million of securities pursuant to this shelf registration statement.
In order to reduce financing costs, Tosco elected to not renew its
$100 million Facility B under the Revolving Credit Facility which expired on
January 12, 1999. The $900 million Facility A under the Revolving Credit
Facility continues until January 14, 2002. See Note 9 to the Consolidated
Financial Statements. In February 1999, Standard & Poor's raised Tosco's
corporate credit and senior unsecured debt rating to "triple-B" from
"triple-B-minus." The upgrade reflects the significant progress Tosco has made
in integrating its acquisitions into its operations and the announced joint
venture with Union Carbide for the marketing of polypropylene.
The Revolving Credit Facility, as well as funds potentially available
from the issuance of securities, provides Tosco with adequate resources to meet
its expected liquidity demands for at least the next twelve months.
CAPITAL EXPENDITURES
During 1998, Tosco spent $554 million on budgeted capital and
turnaround projects. Refining capital spending totaled $337 million: $242
million for property, plant, and equipment and $95 million for turnarounds. The
property, plant, and equipment spending consisted primarily of supporting
business growth, improving safety and reliability of operations, and
environmental compliance. Retail capital spending of $217 million was primarily
focused on enhancing existing sites, integrating operations, and completion of
underground storage tank upgrades and replacements.
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, including the settlement of contingent payments, for
$65 million. See Note 10 to the Consolidated Financial Statements.
Tosco expects to fund its 1999 refinery and retail capital
expenditures from cash provided by operations, available credit, and other
resources. Refinery capital spending during 1999 will continue to consist
primarily of supporting business growth, improving safety and reliability of
operations, and environmental compliance. The polypropylene plant is expected to
be constructed and financed by a special purpose entity that will lease the
plant to Tosco under a long-term operating lease upon completion. Capital
spending for retail operations in 1999 will be primarily focused on enhancing
existing retail sites.
RISK MANAGEMENT
Tosco uses a variety of strategies to reduce commodity price,
interest, and operational risks. Tosco, at times and when able, uses futures and
forward contracts to lock in what it believes to be favorable margins on a
varying portion of refinery 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. This strategy hedges
Tosco's exposure to fluctuations in refining margins and therefore tends to
reduce the volatility of operating results. In addition, Tosco enters into swap
contracts with counterparties to hedge sales prices of residual fuels
production. Futures and forward contracts are also used to a lesser extent to
hedge inventories stored for future sale and to hedge against adverse price
movements between the cost of domestic and foreign crude oil.
Tosco uses a value-at-risk ("VAR") model to assess the market risk of
its derivative instruments. VAR represents the potential losses for an
instrument or portfolio from adverse changes in market factors, for a specified
time period and confidence level. Tosco estimates VAR across its derivative
instruments using a model with historical volatilities and correlations
calculated using a one-day interval. Tosco's measured VAR, using a VAR model
with a 95% confidence level and assuming normal market conditions at December
31, 1998, was not material.
Tosco's calculated VAR exposure represents an estimate of reasonably
possible net losses assuming hypothetical movements in future market rates and
is not necessarily indicative of actual results that may occur. The calculated
VAR does not represent the maximum possible loss nor any expected loss that may
occur, since actual future gains and losses will differ from those estimated,
based upon actual fluctuations in market rates, operating exposures, and the
timing thereof, and changes in Tosco's holdings of derivative instruments during
the year.
Tosco manages its interest rate risk by maintaining a mix of fixed
rate and floating rate debt. Floating rate debt, primarily borrowings under the
Revolving Credit Facility that currently provides up to $900 million of
uncollateralized revolving credit availability, is used to finance Tosco's
working capital requirements. Tosco elected not to renew its $100 million
Facility B under the Revolving Credit Facility when it expired on January 12,
1999. Fixed rate debt consists of $600 million of notes and debentures issued in
connection with the 76 Products Acquisition, $125 million uncollateralized
noncallable notes issued in July 1995 to repay indebtedness under the previously
outstanding Collateralized Revolving Credit Facility, $350 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, and $240 million uncollateralized
noncallable notes issued in May 1996 to finance a portion of the Circle K
purchase price.
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 costs, if any,
incurred under such circumstances would have to be paid out of general corporate
funds, if available. See Note 4 to the Consolidated Financial Statements for a
discussion of Tosco's strategy to reduce credit risk.
IMPACT OF INFLATION
The impact of inflation has been less significant during the recent
years because of the relatively low rates experienced in the United States.
Indeed, raw material and petroleum product prices have declined during the last
two years. The deflation in raw material and product prices resulted in
write-downs of Tosco's inventories and reduced profitability during significant
periods over the last two years, when product prices fell faster than raw
material costs. The historically low prices for crude oil and products, and low
inflation rates generally, are presently forecasted to continue through 1999.
Accordingly, Tosco does not expect that inflation will have a significant impact
on its 1999 operating results. However, as raw material, energy, and labor are
important components of Tosco's costs, inflationary increases could have adverse
effects on profitability, especially during high inflation periods when raw
material and energy cost increases generally lead finished product prices.
IMPACT OF THE YEAR 2000 ISSUE
Historically, certain computer programs have used two 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
that 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 specifically coordinate the efforts of Tosco's
operating units and administrative departments. 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) identifying and assessing 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 financial reporting, human resources, purchasing, commercial,
supply, pricing, and marketing activities. Tosco has completed the assessment
and planning phases related to its critical business systems and substantially
completed these phases for its other business systems. Tosco is currently
addressing its Year 2000 issues, primarily through software upgrades and
replacements, and remediation of existing systems. Business system testing is
also being done on an ongoing and prioritized basis. We believe these systems
will be substantially Year 2000 ready 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 the replacement and remediation of noncompliant
systems. Tosco expects these plans to be substantially implemented by September
30, 1999. The balance of field system replacements and remediation are expected
to be performed during scheduled turnarounds of refinery processing units in the
fourth quarter. Field system remediation progress is dependent upon the timely
delivery of Year 2000 compliant third party software and devices. Internal and
vendor assisted testing is being done on an ongoing basis as the systems are
replaced or remediated.
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 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 its third parties' Year 2000 readiness 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 scenarios 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 management response 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. Year 2000
compliance costs did not have a material effect on Tosco's 1998 operating
results or financial position. Year 2000 compliance costs are not expected to
have a material effect on Tosco's 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. Tosco further
believes that its critical third party vendors and suppliers are making good
progress on their own Year 2000 remediation efforts. In the event that Tosco is
unable to make the necessary 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) are 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
effect 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 STANDARD
During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company plans to adopt SFAS No. 133 on January 1, 2000. Tosco is
currently evaluating the effect SFAS No. 133 will have on its financial position
and results of operations.
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 1999 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.
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) 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 Tosco's definitive Proxy Statement
relating to its 1999 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" 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 Tosco's definitive Proxy Statement
relating to its 1999 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 Tosco's definitive Proxy Statement relating to its
1999 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 Tosco's definitive Proxy Statement
relating to its 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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) Amended and Restated Articles of Incorporation of Registrant.
Incorporated by reference to Exhibit 3(a) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
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 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).
4(d) Form of Indenture dated as of May 1, 1996, between Registrant and
State Street Bank and Trust Company. Incorporated by reference to
Exhibit 4.1 to Registration Statement filed by Registrant on Form
S-3 dated April 15, 1996 (No. 333-521).
4(e) Rights Agreement dated as of November 19, 1998 between Registrant
and BankBoston N.A., as Rights Agent. Incorporated by reference to
Exhibit 4 to Registrant's Current Report on Form 8-K dated November
30, 1998.
10(a) Fourth Amended and Restated Credit Agreement dated as of January 14,
1997, among Tosco Corporation, as Borrower, and the Banks named
therein, as Banks, and The Chase Manhattan Bank as Co-Agent, Bank of
America National Trust and Savings Association, as Co-Agent, and the
First National Bank of Boston, as Agent. Incorporated by reference
to Exhibit 10(a) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10(b) Severance Agreement dated May 8, 1996, between Registrant and Thomas
D. O'Malley, including schedule identifying similar agreements
between Registrant, or its subsidiaries, and two of its employees.
Incorporated by reference to Exhibit 10(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
10(c) Indemnification Agreement dated September 30, 1987, between
Registrant and Thomas D. O'Malley, including schedule identifying
similar agreements between Registrant and its Directors and/or
officers, together with related Trust Agreement. Incorporated by
reference to Exhibit 10(b) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1987.
10(d) 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. Incorporated by reference to Exhibit 10(d) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
10(e) 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(f) 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.
10(g) Sale and Purchase Agreement for 76 Products Company between Union
Oil Company of California and Registrant, dated December 14, 1996.
Incorporated by reference to Exhibit 10(k) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
10(h) 1996 Long-term Incentive Plan, as amended. Incorporated by reference
to Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
10(i) Tosco Corporation Senior Executive Retirement Plan of 1990, as
amended and restated as of May 15, 1996. Incorporated by reference
to Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10(j) Tosco Corporation Senior Executive Retirement Plan of 1990, as
amended and restated as of September 23, 1993. Incorporated by
reference to Exhibit 10(j) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
10(k) Severance Agreements dated January 1, 1993, as amended, between
Registrant and Robert J. Lavinia and Dwight L. Wiggins. Incorporated
by reference to Exhibit 10(g) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
21. A list of all subsidiaries of the Registrant.
23. Consent of PricewaterhouseCoopers LLP.
27. Financial Data Schedule.
99. Condensed Consolidating Financial Information and Report of
Independent Accountants.
(b). REPORTS ON FORM 8-K
Report dated November 30, 1998, reporting pursuant to Item 5 on
Registrant's Rights Agreement.
(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.
(This Page Intentionally Left Blank)
TOSCO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULE AND FINANCIAL EXHIBITS
FILED WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PAGE(S)
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended December 31,
1998, 1997, and 1996 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-7- F-26
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997, and 1996 (a) F-27
Financial Exhibits:
Exhibit 23 - Consent of Independent Accountants F-28
Exhibit 99 - Condensed Consolidating Financial Information (b):
Report of Independent Accountants on Exhibit 99 F-29
Condensed Consolidating Financial Information as of December 31,
1998 and for the year then ended F-30
Condensed Consolidating Financial Information as of December 31,
1997 and for the year then ended F-31
Condensed Consolidating Financial Information for the year ended
December 31, 1996 F-32
(a) Financial statement schedules, other than Schedule II, have been omitted
since they are either not required or applicable, or the required
information is presented in the consolidated financial statements and
related notes.
(b) The condensed consolidating financial information presents the financial
position, operating results, and cash flows of Tosco Corporation ("Tosco"),
Bayway Refining Company ("Bayway"), and Tosco's Nonguaranteeing
Subsidiaries. This information is provided to meet the reporting and
informational requirements of Bayway as guarantor of the 8.25% Bayway
Bonds. See Note 10 to the Consolidated Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Tosco Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 of this Form 10-K present fairly, in all material
respects, the financial position of Tosco Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
January 29, 1999, except as to the information in
Note 21, for which the date is March 2, 1999
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Par Value)
December 31,
---------------------
1998 1997
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $31,302 $34,482
Marketable securities and deposits 49,594 43,687
Trade accounts receivable, less allowance for
uncollectibles of $16,838 (1998) and $19,018 (1997) 265,439 315,123
Inventories, net 1,077,302 1,253,692
Prepaid expenses and other current assets 95,349 107,632
Deferred income taxes 57,646
------------- ------------
Total current assets 1,518,986 1,812,262
Property, plant, and equipment, net 3,379,404 3,210,496
Deferred turnarounds, net 156,310 123,330
Intangible assets (primarily tradenames),
less accumulated amortization of $51,907 (1998)
and $32,465 (1997) 638,542 660,018
Other deferred charges and assets 149,574 168,746
--------------- --------------
$5,842,816 $5,974,852
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $651,408 $786,575
Accrued expenses and other current liabilities 728,352 754,292
Current maturities of long-term debt 1,608 11,908
Deferred income taxes 23,334
-------------- ----------------
Total current liabilities 1,404,702 1,552,775
Revolving credit facility 196,000 166,000
Long-term debt 1,358,553 1,415,257
Accrued environmental costs 253,691 252,964
Deferred income taxes 179,453 140,435
Other liabilities 237,427 203,366
------------- -----------------
Total liabilities 3,629,826 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, 177,823,514 (1998)
and 177,706,038 (1997) shares issued 133,596 133,507
Additional paid-in capital 2,029,969 2,028,985
Retained earnings 323,476 254,351
Treasury stock, at cost (574,051) (472,788)
---------------- ----------------
Total shareholders' equity 1,912,990 1,944,055
---------------- -----------------
$5,842,816 $5,974,852
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,
-----------------------------------------------
1998 1997 1996
Sales $12,021,527 $13,281,620 $9,922,611
Cost of sales 10,805,843 12,113,492 9,196,998
Depreciation and amortization 313,864 303,539 184,505
Inventory writedown 240,000 53,000
Restructuring charge 40,000 13,500
Selling, general, and administrative expenses 300,311 296,338 196,335
Interest expense 126,952 139,594 87,296
Interest income (4,245) (5,139) (3,872)
-------------- -------------- ------------
Income before income taxes and distributions on Trust Preferred
Securities 198,802 380,796 247,849
Income taxes 82,502 158,030 101,099
-------------- -------------- ------------
Income before distributions on Trust Preferred Securities 116,300 222,766 146,750
Distributions on Trust Preferred Securities, net
of income tax benefit of $7,159 (1998 and 1997) and $303 (1996) 10,091 10,091 464
-------------- -------------- -----------
Net income $106,209 $212,675 $146,286
============== ============== ===========
BASIC EARNINGS PER SHARE
Earnings used for computation of basic earnings per share $ 106,209 $ 212,675 $ 146,286
Weighted average common shares outstanding 155,026,149 149,024,176 122,857,830
--------------- -------------- --------------
Basic earnings per share $0.69 $1.43 $1.19
=============== ============== ==============
DILUTED EARNINGS PER SHARE
Earnings used for computation of diluted earnings per share (a) $ 106,209 $ 222,766 $146,750
--------------- -------------- ------------
Weighted average common shares outstanding 155,026,149 149,024,176 122,857,830
Assumed conversion of dilutive stock options 4,096,111 4,335,971 2,984,610
Assumed conversion of Trust Preferred Securities (a) 9,113,940 405,064
--------------- -------------- ------------
Weighted average common and common equivalent shares used for
computation of diluted earnings per share 159,122,260 162,474,087 126,247,504
--------------- -------------- -------------
Diluted earnings per share $0.67 $1.37 $1.16
=============== ============== =============
(a) Conversion of the Trust Preferred Securities was not assumed in 1998 due to the anti-dilutive impact of the conversion.
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands of Dollars)
Common Stock Treasury Stock
-------------------- Additional Retained ---------------------
Shares Amount Paid-in Capital Earnings Shares Amount Total
--------- -------- --------------- ---------- -------- --------- ---------
Balance, December 31, 1995 118,841,850 $29,714 $640,306 $27,903 7,647,123 $(70,813) $627,110
Net income 146,286 146,286
Dividends - common stock (27,356) (27,356)
Exercise of stock options 168,096 43 1,191 (877,350) 4,703 5,937
Acquisition of common stock 701,223 (8,693) (8,693)
Issuance of common stock 19,476,255 4,869 322,170 327,039
3-for-1 stock split (a) 69,239 (69,239)
------------- ---------- -------------- ------------ ------------ --------- -----------
Balance, December 31, 1996 138,486,201 103,865 963,667 77,594 7,470,996 (74,803) 1,070,323
Net income 212,675 212,675
Dividends - common stock (35,918) (35,918)
Exercise of stock options 128,902 97 936 (423,057) 4,492 5,525
Acquisition of common stock 300,009 (8,769) (8,769)
Issuance of common stock 25,300,000 18,976 678,420 697,396
Issuance of Unocal shares (Note 3) 14,092,482 10,569 386,311 396,880
Repurchase of Unocal shares (Note 3) 14,092,482 (393,708) (393,708)
Other (301,547) (349) (349)
------------- ---------- -------------- ------------ ----------- --------- -----------
Balance, December 31, 1997 177,706,038 133,507 2,028,985 254,351 21,440,430 (472,788) 1,944,055
Net income 106,209 106,209
Dividends - common stock (37,084) (37,084)
Exercise of stock options 116,592 88 959 (33,326) 379 1,426
Repurchase of common stock (Note 13) 4,258,000 (101,089) (101,089)
Other 884 1 25 16,834 (553) (527)
------------- ---------- -------------- ------------ ------------ --------- -----------
Balance, December 31, 1998 177,823,514 $133,596 $2,029,969 $323,476 25,681,938 $(574,051) $1,912,990
============= =========== ============== ============ ============ ========== ===========
(a) The Company transferred $69,239 from Retained Earnings to Common Stock for the impact of the 3-for-1 stock split (Note 13).
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,
1998 1997 1996
-------- ---------- ---------
Cash flows from operating activities:
Net income $106,209 $212,675 $146,286
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property, plant, and equipment 228,454 224,917 124,309
Amortization of deferred turnarounds, intangible assets, and other
deferred charges 85,410 78,622 60,196
Provision (recovery) for bad debts 10,380 8,234 (265)
Inventory writedown 240,000 53,000
Restructuring charge 40,000 13,500
Deferred income taxes 125,435 39,390 32,871
Changes in operating assets and liabilities, net:
Trade accounts receivable 40,265 (2,659) 157,200
Inventories (62,985) (304,683) 3,308
Prepaid expenses and other current assets 30,217 (25,958) 11,560
Accounts payable, accrued expenses and other current liabilities (191,165) 411,908 (101,455)
Accrued environmental costs and other liabilities 32,696 (6,470) 19,572
Other, net (12,702) (2,978) 3,617
------------ ------------ ------------
Net cash provided by operating activities 672,214 685,998 470,699
------------ ------------ ------------
Cash flows from investing activities:
Net change in marketable securities and deposits (5,907) (8,449) (14,138)
Purchase of property, plant, and equipment (458,510) (417,552) (199,788)
Proceeds on sale of property, plant, and equipment 65,201 13,546 6,097
Deferred turnaround spending (95,166) (104,511) (21,665)
Decrease (increase) in deferred charges and other assets, net 9,014 (4,806) (10,744)
Acquisition of BP Northeast refining and marketing assets (64,428)
Acquisition of Circle K, net of cash acquired (412,096)
Acquisition of 76 Products assets, net of cash acquired (1,189,149)
Proceeds on sale of 76 Products assets 72,689
Other, net 162 6,022 (560)
------------ ------------ ------------
Net cash used in investing activities (485,206) (1,632,210) (717,322)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facilities 30,000 166,000 (45,000)
Net short-term bank repayments (20,000)
Proceeds from note and debenture offerings 600,000 240,000
Payments under long-term debt agreements (14,442) (113,699) (8,157)
Early payoff of real estate installment purchase note (64,622)
Payments under Circle K pre-acquisition liabilities (3,510) (23,807) (102,504)
Proceeds from Trust Preferred Securities offering 300,000
Proceeds from common stock offering, net 697,396
Repurchase of Unocal Shares (393,708)
Repurchase of common stock (101,089)
Dividends paid on common stock (37,084) (35,918) (27,356)
Other, net 559 (9,988) (15,090)
------------ ------------ ------------
Net cash (used in) provided by financing activities (190,188) 886,276 321,893
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,180) (59,936) 75,270
Cash and cash equivalents at beginning of year 34,482 94,418 19,148
------------ ------------ ------------
Cash and cash equivalents at end of year $31,302 $34,482 $94,418
============ ============ ============
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. NATURE OF BUSINESS
Tosco Corporation ("Tosco" or the "Company") through divisions and
subsidiaries is one of the largest independent oil refiners and marketers of
petroleum products and operators of company-controlled convenience stores in the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Tosco and its wholly owned subsidiaries. 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, the reported results
of operations, and the disclosure of contingent assets and liabilities.
CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND DEPOSITS
Cash in excess of operating requirements is used to pay down cash
borrowings under the Company's Revolving Credit Facility or invested in highly
liquid cash equivalents. Margin deposits, based on a percentage of the value of
the futures contracts, are maintained with commodity brokers in accordance with
the requirements of commodity exchanges. Margin deposits are included in
marketable securities and deposits on the balance sheet.
At December 31, 1998 and 1997, the Company had approximately
$17,500,000 and $15,000,000, respectively of director and officer liability
insurance coverage with a wholly owned subsidiary (amounts approximately equal
to the fair value of marketable securities held in trust by the subsidiary). The
subsidiary's trust assets are restricted to payment of directors' and officers'
liability defense costs and claims. Marketable securities held by the
subsidiary, classified as available for sale, consist of highly liquid debt and
equity securities. The cost of the marketable securities approximates fair
value. Accordingly, unrealized gains and losses, net of related income taxes,
are not significant. Debt securities with original maturities of three months or
less at the date of purchase are classified as cash equivalents, while debt
securities with maturities of twelve months or less from the balance sheet date
are included in marketable securities and deposits on the balance sheet.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
refinery inventories is determined on the last-in, first-out ("LIFO") basis. The
cost of retail fuel inventories is determined on the first-in, first-out
("FIFO") basis. The cost of retail merchandise inventories is determined under
the retail method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, including capitalized interest, are
carried at cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the estimated useful lives of the respective
classes of assets utilizing the straight-line method. Expenditures that
materially increase values, change capacities, or extend useful lives are
capitalized. Routine maintenance and repairs are expensed. Gains and losses on
disposition of assets are reflected in results of operations.
Computer software costs are deferred and amortized over their useful
lives, generally not to exceed five years. Certain enterprise-wide information
systems are amortized over periods of up to ten years.
DEFERRED TURNAROUNDS
Refinery processing units are periodically shut down for major
scheduled 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.
INTANGIBLE ASSETS (PRIMARILY TRADENAMES)
Tradenames acquired in the 76 Products (Note 3) and The Circle K
Corporation ("Circle K") acquisitions are amortized on a straight-line basis
over 40 years. Other tradenames and intangible assets are amortized on a
straight-line basis over periods of up to 15 years.
OTHER DEFERRED CHARGES AND ASSETS
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. Production costs of media advertising are deferred until the
advertising occurs. Advertising expense for 1998, 1997, and 1996 was
$48,302,000, $43,856,000, and $15,243,000, respectively.
SELF-INSURANCE
The Company is self-insured up to certain limits for workers'
compensation (in certain states), property damage, and general liability claims.
Accruals for loss incidences are made based on the Company's claims experience
and actuarial assumptions followed in the insurance industry. Actual losses
could differ from accrued amounts.
EXCISE TAXES
Excise taxes collected on behalf of governmental agencies are excluded
from sales, cost of sales, and other expenses. Excise taxes totaled
$2,316,524,000, $1,768,078,000, and $1,382,020,000, for 1998, 1997, and 1996,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company, to reduce its exposure
to fluctuations in the price of crude oil and other petroleum products, is party
to derivative financial instruments with off-balance sheet risk. Such contracts,
which are designated as hedges, are recorded using hedge accounting. Gains and
losses on these financial instruments are deferred until the underlying physical
transaction occurs. The gains and losses are then recognized and reported as a
component of the related transaction. Any cash flow recognition resulting from
holding these financial instruments are treated in the same manner as the
underlying hedge transaction.
ENVIRONMENTAL COSTS
Liabilities for future remediation costs are recorded when
environmental assessments and/or remedial efforts are probable and the costs can
be reasonably estimated. Other than for assessments, the timing and magnitude of
these accruals are generally based on the completion of investigations or other
studies or a commitment to a formal plan of action. The gross amount of the
liability is based on the Company's best estimate of undiscounted future costs
using currently available technology, and applying current regulations, as well
as the Company's own internal environmental policies. Estimated reimbursements
of remediation costs of petroleum releases from underground storage tanks are
recorded as assets when reimbursements from state trust fund programs are
probable.
DEFERRED REVENUE
Advances received in connection with long-term supplier marketing or
display allowances are amortized to income over the terms of the respective
arrangements based on projected purchase levels.
EARNINGS PER SHARE
Basic and diluted earnings per share for all periods are computed in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 128
"Earning per Share."
RECLASSIFICATION ENTRIES
Certain reclassifications, primarily the separate disclosure of
depreciation and amortization, have been made to the 1997 and 1996 financial
statements to conform to the presentation in the 1998 financial statements.
3. 76 PRODUCTS 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 Products Acquisition"). The purchase
price (including environmental and other liabilities assumed) was
$1,546,074,000, plus inventories and credit card receivables. In addition,
Unocal is entitled to receive contingent participation payments if gasoline
margins increase above specified levels (Note 18).
The acquired assets include two petroleum refining systems with an
aggregate throughput capacity of approximately 250,000 barrels per day; a retail
gasoline system consisting of 76-branded gasoline service stations (most of
which are company-controlled); a distribution system comprised of 13
company-owned oil storage terminals; rights with respect to approximately 1,300
miles of crude oil and product pipelines; the worldwide rights to the "76" and
"Union" tradenames, together with the distinctive orange ball logo, (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 consisted of cash and shares of common stock
of Tosco ("Common Stock") (Note 13). The cash portion was financed from
available cash, borrowings under revolving credit facilities (Note 9), and
proceeds from the sale of unsecured debt securities (Note 10). In addition,
certain gasoline service stations were purchased directly from Unocal by a
special purpose entity that leased the service stations to the Company pursuant
to a long-term lease (Note 17).
The 76 Products Acquisition has been accounted for as a purchase. The
purchase price allocation is summarized below:
(Thousands of Dollars)
Current assets $ 500,954
Property, plant, and equipment:
Los Angeles Area Refinery System 389,236
Rodeo Refinery 238,240
Santa Maria Refinery 69,161
Other, primarily marketing and distribution assets 771,965
Other noncurrent assets 68,811
Accrued expenses and other current liabilities (193,737)
Accrued environmental costs and other noncurrent liabilities (247,275)
----------
$1,597,355
==========
4. FINANCIAL INSTRUMENTS
FAIR VALUES
The carrying value of cash, cash equivalents, marketable securities,
short-term deposits, trade accounts receivable, accounts payable, and other
current liabilities approximates their fair value due to the relatively short
maturity of these financial instruments. The carrying value of the revolving
credit facility approximates fair value due to its variable interest rate. The
fair value (based on quoted market prices and estimates) of long (obligation to
purchase) and short (obligation to deliver) derivative financial instruments
were $55,868,000 and $95,860,000, respectively at December 31, 1998.
Estimated fair values of other financial instruments at December 31,
1998 and 1997 are as follows:
1998 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
(THOUSANDS OF DOLLARS) VALUE VALUE (A) VALUE VALUE (A)
-------------- ------------- -------------- -------------
First Mortgage Bonds $ 200,000 $ 219,900 $ 200,000 $ 222,120
Bayway Bonds 150,000 161,595 150,000 161,550
Real estate installment purchase note 52,563 52,563
7% Notes 125,000 126,900 125,000 126,975
7.625% Notes 240,000 250,680 240,000 252,600
7.25% Notes 200,000 208,600 200,000 204,420
7.8% Debentures 300,000 316,290 300,000 330,720
7.9% Debentures 100,000 105,990 100,000 109,400
Trust Preferred Securities 300,000 299,250 300,000 389,250
(a) The fair value of these instruments reflects quoted market prices,
except for the fair value of the real estate installment purchase note
that was estimated by discounting future cash flows.
DERIVATIVES
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.
At December 31, 1998 and 1997, the Company had open long and short
futures, swap and forward contracts for crude oil and products with a notional
volume (number of barrels under contract) and value (number of barrels under
contract multiplied by the per-barrel contract value) as follows:
1998 1997
------------------------------- -------------------------------
CONTRACT CONTRACT CONTRACT CONTRACT
(THOUSANDS OF DOLLARS) VOLUME VALUE VOLUME VALUE
-------------- ------------- -------------- -------------
Open long positions 4,937 $ 61,552 9,531 $ 189,267
Open short positions 7,679 97,153 10,555 218,512
Deferred gains and losses on futures and swap contracts totaled
$7,270,000 and $3,648,000 at December 31, 1998 and 1997, respectively. These
amounts will be recognized or reversed in the following year as an offset to
realized margins on refined products sold.
CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
marketable securities, short-term deposits, trade receivables, and derivative
instruments. The Company places its cash equivalents, marketable securities, and
short-term deposits with several high-quality financial institutions. The
Company's customer base consists of a large number of diverse customers. The
Company conducts ongoing evaluations of its customers and requires letters of
credit or other collateral arrangements as appropriate. Accordingly, trade
receivable credit losses have not been significant. The Company does not believe
that it has a significant credit risk on its derivative instruments which are
transacted through the New York Mercantile Exchange, or with counterparties
meeting established collateral and credit criteria.
5. ACCOUNTS RECEIVABLE
In March 1998, the Company entered into a three-year agreement with a
financial institution to sell on a revolving basis up to $300,000,000 of an
undivided percentage ownership interest in a designated pool of accounts
receivable (the "Receivable Transfer Agreement"). The Receivable Transfer
Agreement replaced a similar agreement with another financial institution. In
October 1997, the Company 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 credit card accounts
receivable (the "Credit Card Receivable Transfer Agreement"). Under the
Receivable Transfer Agreement and Credit Card Receivable Transfer Agreement, the
Company retains substantially the same risk of credit loss as if the receivables
had not been sold. The Company also retains collection and administrative
responsibilities on the participating interest sold as agent for the financial
institution. At December 31, 1998 and 1997, accounts receivable were reduced by
$375,000,000 and $400,000,000, respectively, for receivables sold under these
programs. Sales of accounts receivables under these programs averaged
$903,169,000, $984,216,000, and $506,455,000 per month in 1998, 1997, and 1996,
respectively.
6. INVENTORIES
(THOUSANDS OF DOLLARS) 1998 1997
------------- --------------
Market value of refinery inventories:
Raw materials $ 418,768 $ 468,515
Intermediates 191,575 181,414
Finished products 302,225 440,525
Retail (FIFO):
Merchandise 129,223 121,082
Gasoline and diesel 35,428 39,901
Other 83 2,255
------------- --------------
$ 1,077,302 $ 1,253,692
============= ==============
Excess of refinery inventories LIFO cost over market value $ 293,000 $ 53,000
============== ==============
7. PROPERTY, PLANT, AND EQUIPMENT
STRAIGHT-LINE
(THOUSANDS OF DOLLARS) 1998 1997 ANNUAL RATE
------------- -------------- -------------
Land $ 888,430 $ 907,370
Refineries and related assets 2,009,005 1,992,629 4% to 15%
Retail marketing and related assets 852,811 715,629 5% to 20%
Furniture, fixtures, and improvements 96,349 82,822 3% to 33%
Transportation equipment 123,960 30,040 4% to 33%
Natural gas properties 5,384 4,537
------------- --------------
3,975,939 3,733,027
Less accumulated depreciation and amortization (a) 892,687 687,963
--------------- -----------
3,083,252 3,045,064
Construction in progress 296,152 165,432
------------- --------------
$ 3,379,404 $ 3,210,496
============= ==============
(a) Includes accumulated amortization related to assets under capital
leases of $6,647,000 and $13,027,000 at December 31, 1998 and 1997,
respectively.
Expenditures for maintenance and repairs (excluding the amortization of
turnaround costs) during 1998, 1997, and 1996 were $257,838,000, $210,443,000,
and $135,006,000, respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(THOUSANDS OF DOLLARS) 1998 1997
------------- -------------
Accrued taxes, other than income taxes $ 191,950 $ 173,115
Accrued compensation and related benefits 130,010 120,221
Restructuring accrual 24,630
Acquisition-related liabilities 5,972 37,326
Dividends payable 9,904 9,375
Other 365,886 414,255
------------- ------------
$ 728,352 $ 754,292
============= ============
During 1998, Tosco recorded a $40,000,000 charge primarily related to
the restructuring of its San Francisco Area Refinery System. The restructuring
will result in an increase in the production of clean burning CARB Phase 2
gasoline and is being made to improve efficiency, reliability, and profitability
of the system, without compromising safety or environmental compliance. The key
component of the restructuring plan revolves around the continued integration of
the Avon Refinery and the Rodeo-Santa Maria complex acquired in 1997. The
improved operation will involve the shutdown of several of the less efficient
processing units at the Avon Refinery, with resulting staff reductions. At
December 31, 1998, the $40,000,000 restructuring charge includes the write-down,
shutdown, and dismantling costs of certain processing units and facilities that
will no longer be used, contract termination costs, and employee severance (Note
21). Activity for 1998 is summarized below:
(THOUSANDS OF DOLLARS)
Impairment of assets $ 15,153
Exit costs 18,904
Employee termination costs 5,943
-------------
40,000
Utilization, primarily the write-off of refinery assets (15,370)
-------------
$ 24,630
=============
9. REVOLVING CREDIT FACILITY
The Company's revolving credit agreement (the "Revolving Credit
Facility") provides a $1,000,000,000 uncollateralized revolving credit facility
that is available for working capital and general corporate purposes, including
acquisitions. Facility A for $900,000,000 expires on January 14, 2002 and
Facility B for $100,000,000 expired on January 12, 1999 (Note 21). The Revolving
Credit Facility bears interest at the option of the Company 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. A commitment
fee on the unused portion of the facility is also due. The incremental margin
and commitment fee are dependent on the credit rating of the First Mortgage
Bonds (Note 10). Prior to January 14, 1997, the Revolving Credit Facility was a
$600,000,000 uncollateralized facility. Utilization of the Revolving Credit
Facility as of December 31, 1998 and 1997 was as follows:
(THOUSANDS OF DOLLARS) 1998 1997
------------- --------------
Cash borrowings 196,000 $ 166,000
Letters of credit 30,160 57,241
------------- --------------
Total utilization 226,160 223,241
Availability 773,840 776,759
------------- --------------
$ 1,000,000 $ 1,000,000
============= ==============
10. LONG-TERM DEBT
(THOUSANDS OF DOLLARS) 1998 1997
------------- --------------
Collateralized debt:
First Mortgage Bonds (a) $ 200,000 $ 200,000
Bayway Bonds (b) 150,000 150,000
Real estate installment purchase note (c) 52,563
Other 3,519 3,949
Uncollateralized debt:
7% Notes (d) 125,000 125,000
7.625% Notes (e) 240,000 240,000
Notes and Debentures (f) 600,000 600,000
Other 104 319
Capital leases (g) 41,538 55,334
------------- --------------
1,360,161 1,427,165
Less current installments 1,608 11,908
------------- --------------
$ 1,358,553 $ 1,415,257
============= ==============
(a) 9.625% first mortgage bonds due March 15, 2002 (the "First Mortgage
Bonds"), issued in March 1992. Interest on the First Mortgage Bonds is
payable each March 15 and September 15. The First Mortgage Bonds are
noncallable and are collateralized by the Avon Refinery and certain
related assets.
(b) In connection with the April 1993 acquisition of the Bayway Refinery, the
Company issued $150,000,000 of 8.25% mortgage bonds (the "Bayway Bonds")
due May 15, 2003. The Bayway Bonds are guaranteed by Bayway Refining
Company ("Bayway"), a wholly owned subsidiary of Tosco. Interest is
payable semi-annually on May 15 and November 15. The Bayway guarantee is
collateralized by the Bayway Refinery and related assets and a guarantee
of Tosco.
(c) In January 1998, the Company completed the purchase of approximately 200
convenience stores by paying off the outstanding balance of a real estate
installment purchase note for $64,622,000, including the settlement of
contingent payments.
(d) On July 12, 1995, $125,000,000 of registered debt securities were issued
as 7% uncollateralized, noncallable notes due July 15, 2000 (the "7%
Notes"). Semi-annual interest payments on the 7% Notes began January 15,
1996. The net proceeds from the public offering were used to repay debt.
(e) In May 1996, the Company issued $240,000,000 of 7.625% uncollateralized
notes due May 15, 2006 (the "7.625% Notes") in connection with the
acquisition of Circle K. Semi-annual interest payments on the 7.625% Notes
began November 15, 1996.
(f) On January 14, 1997, the Company issued $200,000,000 of 7.25% Notes due
on January 1, 2007, $300,000,000 of 7.8% Debentures due on January 1,
2027, and $100,000,000 of 7.9% Debentures due on January 1, 2047
(collectively the "Notes and Debentures"). Interest on the unregistered
Notes and Debentures was payable each January 1 and July 1, commencing on
July 1, 1997. The proceeds from the unregistered Notes and Debentures were
used to finance a portion of the 76 Products Acquisition. In August 1997,
the Company exchanged 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. The Notes and
Debentures are non-redeemable and uncollateralized.
(g) The Company's capital lease obligations are collateralized primarily by
retail marketing and related assets and mature at varying dates through
2019. The carrying value of the assets under capital lease arrangements
approximates the capital lease obligation.
At December 31, 1998 future maturities relating to long-term debt were
as follows:
CAPITAL
(THOUSANDS OF DOLLARS) DEBT LEASES TOTAL
------------- ------------ -------------
1999 (a) $ 874 $ 5,005 $ 5,879
2000 125,771 5,014 130,785
2001 771 4,924 5,695
2002 200,771 4,905 205,676
2003 150,771 4,974 155,745
Thereafter 839,665 74,285 913,950
------------- ------------ -----------
Total future maturities 1,318,623 99,107 1,417,730
Less imputed interest 57,569 57,569
------------- ------------ -----------
Present value of future maturities $ 1,318,623 $ 41,538 $ 1,360,161
============= ============ =============
(a) Current maturities of long-term obligations, excluding imputed interest,
are $1,608,000 at December 31, 1998.
The debt agreements, including the Revolving Credit Facility (Note 9),
contain covenants that limit the Company's ability to incur additional
indebtedness, pay dividends, acquire its own equity securities, make investments
in certain subsidiaries, and make discretionary capital expenditures. They also
require the maintenance of minimum financial ratios and net worth levels. At
December 31, 1998, the Company was in compliance with all debt covenants.
11. ACCRUED ENVIRONMENTAL COSTS
The Company is subject to extensive federal, state, and local
environmental laws and regulations relating to its petroleum refining,
distribution, and marketing operations. These laws and regulations (which are
complex, change frequently, and are subject to differing interpretations)
regulate the discharge of materials into the environment. The Company is
currently involved in a number of environmental proceedings and discussions
regarding the removal and mitigation of the environmental effects of subsurface
liquid hydrocarbons and alleged levels of hazardous waste at certain of its
refineries and other locations, including a site on the Superfund National
Priorities List.
In July 1993, outstanding litigation concerning environmental issues
was settled with the predecessor owners of the Avon Refinery (the "Settlement
Agreement"). Under the Settlement Agreement, the former owners agreed 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 the Company with a $6,000,000
credit for past expenses (which the Company uses to reduce its one-half share of
costs). After the $36,000,000 shared cost maximum is expended, the parties may
elect to continue the Settlement Agreement or to reinstate litigation. The
Company and the former owners have established a committee to review and approve
expenditures for environmental investigative and remediation actions at the Avon
Refinery. Through December 31, 1998, the committee has spent $5,300,000 on such
matters.
By agreement, Exxon Corporation ("Exxon") is responsible for
environmental obligations related to or arising out of its ownership and
operation of the Bayway Refinery, purchased by the Company in April 1993. The
Company has also received similar environmental indemnifications for periods
prior to the respective acquisition dates of the Ferndale Refinery, the Trainer
Refinery, retail assets in the Pacific Northwest and Northern California from BP
Exploration & Oil, Inc., and Arizona retail properties from Exxon.
Through March 31, 2022, Unocal is responsible for all environmental
liabilities at the acquired refineries, gasoline stations, oil storage
terminals, and pipelines 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.
During 1998 and 1997, the Company incurred environmental costs at the 76
Products sites as follows:
(THOUSANDS OF DOLLARS) 1998 1997 (a)
------------- --------------
Total costs incurred $ 17,981 $ 7,553
Less costs reimbursed by Unocal 5,085 351
------------ --------------
Costs charged to the environmental accrual $ 12,896 $ 7,202
=========== ==============
(a) Costs and reimbursements are for the nine-month period ended
December 31, 1997.
A refinery in Duncan, Oklahoma, formerly owned by the Company, is
subject to investigation by the Oklahoma Department of Environmental Quality
(the "ODEQ"). In 1995, the Company entered into a Consent Agreement and Final
Order with the ODEQ to investigate the extent of contamination at the refinery,
conduct certain interim remedial actions, and prepare a remedial action plan. In
January 1998, the Company entered into a Settlement Agreement with Sun Company
Inc. ("Sun"), a former owner of the refinery, pursuant to which Sun agreed to
pay the Company $7,000,000 in exchange for a release from liability with respect
to the site. In early 1998, a trial was held on the Company's claim against Koch
Industries ("Koch"), another former owner. In March 1998, the court ruled that
Koch was responsible for a portion of past and future investigation and
remediation costs at the site. Koch has appealed the judgement. In view of the
probable costs of remediation of the Duncan refinery site, the settlement with
Sun and the judgement against Koch were not recognized in results of operations.
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. The Company believes that it has adequately
provided for environmental exposures. However, should these matters be resolved
unfavorably to the Company, they could have a material adverse effect on its
long-term consolidated financial position and results of operations.
12. COMPANY-OBLIGATED, MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED SECURITIES
In December 1996, Tosco Financing Trust (the "Trust"), a Delaware
business trust, whose common securities are owned by Tosco, issued, in a private
placement, 6,000,000 shares of 5.75% company-obligated, mandatorily redeemable,
convertible preferred securities (the "Trust Preferred Securities"). The net
proceeds of approximately $291,000,000 were used to purchase an equal amount of
5.75% convertible junior subordinated debentures of Tosco due on December 15,
2026 (the "Convertible Debentures"). The sole assets of the Trust are the
Convertible Debentures, guaranteed by Tosco. The Trust Preferred Securities
represent preferred undivided interests in the Trust's assets, with a
liquidation preference of $50 per security, for a total liquidation preference
of $300,000,000.
Distributions on the Trust Preferred Securities, cumulative and
payable quarterly in arrears at the annual rate of 5.75% of the liquidation
amount, commenced on March 15, 1997. The Company has the option to defer payment
of the distributions for an extension period of up to five years if it is in
compliance with the terms of the Trust Preferred Securities. Interest at 5.75%
will accrue on such deferred distribution throughout the extension period. The
Trust Preferred Securities are convertible, at the option of the holder, into
1.51899 shares of Common Stock, equivalent to a conversion price of
approximately $32.92 per share of Common Stock, subject to adjustment in certain
events. The Trust Preferred Securities do not have a stated maturity date,
although they are mandatorily redeemable upon the repayment of the Convertible
Debentures, but not before December 18, 1999. The redemption price decreases
from 104.025% in 1999 to 100% of the liquidation preference in 2006 and
thereafter.
13. CAPITAL STOCK
The Company is authorized to issue 12,000,000 shares of preferred
stock, par value $1.00 per share, ("Preferred Stock"). No shares of Preferred
Stock are issued or outstanding. At a special stockholder meeting on February
12, 1997, an amendment to increase the number of authorized shares of Common
Stock from 50,000,000 to 250,000,000 was approved. The Company subsequently
declared and distributed a 3-for-1 Common Stock split, in the form of a 200
percent stock dividend. The number of shares, per share prices, and earnings per
share amounts for all periods reflect this 3-for-1 stock split.
In January 1997, the Company filed a shelf registration statement
providing for the issuance of up to $1,500,000,000 aggregate principal amount of
its securities. The securities may consist of (1) one or more series of
debentures, notes or other uncollateralized forms of indebtedness, (2) Common
Stock, (3) Preferred Stock, and (4) preferred stock represented by depository
shares. The 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 December 31, 1998, the Company may issue up to
$778,950,000 of securities pursuant to this shelf registration statement.
On March 31, 1997, the Company issued 14,092,482 shares of Common
Stock to Unocal (the "Unocal Shares"), for aggregate value of $396,880,000. On
May 1, 1997, the Company 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 $697,396,000. The net proceeds were used to
repurchase, as treasury shares, the Unocal Shares for $393,708,000 and to repay
borrowings under revolving credit facilities (Note 9).
During 1998, the Company repurchased 4,258,000 shares of Common Stock
for $101,089,000 pursuant to a $300,000,000 Board of Directors approved stock
repurchase program.
The Company has paid a regular quarterly cash dividend on Common Stock
since the third quarter of 1989. Effective with the first quarter of 1997, the
Company increased its quarterly cash dividend from $0.0567 per share to $0.06
per share.
14. STOCK OPTION PLANS
The Company has three stock option plans, the 1989 Stock Incentive
Plan (the "1989 Plan"), the 1992 Stock Incentive Plan (the "1992 Plan"), and the
1998 Stock Incentive Plan (the "1998 Plan"), that reserve Common Stock for
issuance to key employees, consultants, and non-employee directors. The 1989
Plan, 1992 Plan, and 1998 Plan (collectively the "Option Plans") provide for the
grant of a maximum of 3,840,000, 6,600,000, and 1,500,000 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 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 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 Plan may no longer be granted. Awards under the 1992 Plan and 1998 Plan may
be granted until March 13, 2002 and March 18, 2009, respectively. Subject to
severance agreements with certain employees (Note 18), options may be exercised
at any time after vesting, currently one to five years. Information regarding
the Option Plans as of December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996
------------------------- ------------------------- -------------------------
SHARES PRICE (a) SHARES PRICE (a) SHARES PRICE (a)
Options outstanding, beginning
of year 7,175,535 $ 12.31 7,034,649 $ 10.14 7,149,498 $ 9.09
Granted - 1992 Plan (b) 227,000 33.72 812,750 30.24 949,500 16.58
Granted - 1998 Plan (b) 361,250 33.11
Exercised (149,918) 9.51 (551,459) 10.02 (1,045,446) 8.79
Expired or canceled (46,350) 24.34 (120,405) 16.56 (18,903) 11.41
------------- -------------- -------------
Options outstanding, end of year 7,567,517 13.93 7,175,535 12.31 7,034,649 10.14
============= ============== =============
Options exercisable, end of year 6,129,393 10.50 5,237,362 9.25 4,467,837 8.54
============= ============ ===============
Shares available for future grant 1,255,662 297,562 989,907
============= ============ ===============
(a) Weighted average price per share.
(b) All options granted had exercise prices equal to the average market
price of Common Stock on the grant date.
Additional information regarding the Option Plans as of December 31,
1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
SHARES PRICE (a) LIFE (B) SHARES PRICE (a)
Exercise price range:
$4.94 per share to $10.00 per share 3,806,758 $ 8.23 53 months 3,806,758 $ 8.23
$10.01 per share to $15.00 per share 1,873,009 11.29 88 months 1,743,650 11.21
$15.01 per share to $33.94 per share 1,887,750 28.03 113 months 578,985 23.31
---------- ------------
7,567,517 13.93 77 months 6,129,393 10.50
=========== ============
(a) Weighted average price per share.
(b) Weighted average remaining contractual life.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Had the Company
elected to adopt the recognition provisions of SFAS No. 123, net income and
earnings per share would have been reduced by $3,563,000, ($0.02 per share),
$2,968,000 ($0.02 per share), and $1,622,000 ($0.01 per share) for 1998, 1997,
and 1996, respectively.
The fair value of options granted in 1998, 1997, and 1996 was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997 1996
----------- -------------- ----------
Assumed risk-free interest rate 5.6% 6.5% 6.2%
Expected life 5.7 years 7.2 years 8.3 years
Expected volatility 30.6% 28.7% 26.3%
Assumed dividend yield 0.8% 0.8% 1.5%
In late 1996, the Company adopted the Tosco Corporation 1996 Long-Term
Incentive Plan (the "LTIP") which replaced the granting of incentive awards
under the Option Plans to participants in the LTIP. Under the LTIP, the
Compensation Committee of the Board of Directors may grant performance units to
participants, the payment of which is contingent on the meeting of performance
goals as defined and continued employment by the participant. Under certain
circumstances, payments in a calendar year may not exceed 400% of the
participant's total annual compensation for the year of the award. Based on
performance goals achieved, the participants received $30,533,000 on January 4,
1999 and are scheduled to receive approximately 50% of this amount on January 1,
2000 and January 1, 2001. If a participant voluntarily terminates employment
with the Company or retires prior to age 65, all unpaid amounts will be
forfeited. The Company accrues for such amounts on a ratable basis over the
required service period.
15. EMPLOYEE BENEFIT, SAVINGS, AND INCENTIVE COMPENSATION PLANS
PENSION PLANS
The Company has non-contributory, defined benefit pension plans
covering substantially all employees located at the Bayway Refinery, the Los
Angeles Area Refinery System, and the San Francisco Area Refinery System, its
union employees at the Ferndale Refinery, and store employees meeting minimum
service periods (collectively, the "Pension Plans"). Benefits under the Pension
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. Benefits are payable at the
normal retirement age of 65, with reduced benefits for early retirement (as
defined). Contributions to the Pension 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. The assets of the Pension
Plans are held by a major financial institution and invested in a stock index
fund, a Treasury bond index fund, short-term investment funds, and a real estate
equity fund.
The Company's change in benefit obligation, change in plan assets, and
funded status, using end of year actuarial assumptions, consist of the following
at December 31, 1998 and 1997:
(THOUSANDS OF DOLLARS) 1998 1997
------------- ----------
Benefit obligation at beginning of year $ 137,041 $ 90,849
Service cost (without load for expenses) 15,293 9,669
Interest cost 9,867 8,067
Actuarial loss 4,975 14,061
Benefits paid (3,008) (2,588)
76 Products Acquisition (a) 16,983
------------ ----------
Benefit obligation at end of year 164,168 137,041
------------ ----------
Fair value of plan assets at beginning of year 106,842 78,115
Actual return on plan assets 26,351 19,577
Employer contributions 14,500 12,000
Benefits paid (3,008) (2,588)
Administrative expenses (287) (262)
-------------- ----------
Fair value of plan assets at end of year 144,398 106,842
-------------- ----------
Funded status at end of year (19,770) (30,199)
Unrecognized transition obligation 861 1,149
Unrecognized net actuarial (gain) loss (9,585) 3,340
Unrecognized prior service cost 7,614 8,374
------------- ----------
Accrued benefit liability at end of year $ (20,880) $ (17,336)
============= ===========
(a) In connection with the 76 Products Acquisition, pension benefits and
recognition of prior service were extended to substantially all
employees located at the acquired refineries. Accrued pension benefits
for these employees through March 31, 1997 are the obligation of
Unocal.
Net pension cost, using beginning of the year actuarial assumptions,
for the years ended December 31, 1998, 1997, and 1996 consists of the following:
(THOUSANDS OF DOLLARS) 1998 1997 1996
------------ ------------ --------
Service cost $ 15,558 $ 9,669 $ 6,336
Interest cost 9,867 8,067 5,626
Expected return on plan assets (8,432) (6,177) (4,932)
Amortization of transition obligation 288 288 288
Amortization of prior service cost 759 759 759
------------ ------------ -------
$ 18,040 $ 12,606 $ 8,077
============= ============ =======
The major assumptions used to calculate the Company's pension
obligations and pension costs for the years ended December 31, 1998, 1997, and
1996 are as follows:
1998 1997 1996
-------- --------- --------
Assumed discount rate 6.75% 7.00% 7.50%
Assumed rate of future compensation increase 5.00% 5.00% 5.00%
Expected rate of return on plan assets 7.50% 7.50% 7.50%
The Company has a Senior Executive Retirement Plan ("SERP") that
provides retirement benefits to selected senior executives and their
beneficiaries. SERP provisions of $2,176,000, $1,908,000, and $2,079,000, are
included in selling, general, and administrative expenses in 1998, 1997, and
1996, respectively.
EMPLOYEE AND RETIREE BENEFIT PLANS
The Company provides health care and life insurance benefits for its
employees. The Company also provides postretirement health care and life
insurance benefits for certain employees (primarily refinery employees). Health
care benefits for eligible employees and retirees are provided through insurance
companies and health maintenance organizations 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.
The Company's change in benefit obligation, change in plan assets, and
funded status, using end of year actuarial assumptions, consists of the
following at December 31, 1998 and 1997:
(THOUSANDS OF DOLLARS) 1998 1997
------------- --------------
Benefit obligation at beginning of year $ 26,663 $ 15,693
Service cost 1,240 952
Interest cost 1,903 1,634
Amendment 3,166 4,171
Actuarial loss 2,026 57
Benefits paid (1,167) (1,241)
76 Products Acquisition (a) 5,397
------------- --------------
Benefit obligation at end of year 33,831 26,663
------------- --------------
Fair value of plan assets at beginning of year 4,888 5,039
Actual return on plan assets 344 317
Benefits paid (444) (468)
------------- --------------
Fair value of plan assets at end of year 4,788 4,888
------------- --------------
Funded status at end of year (29,043) (21,775)
Unrecognized transition obligation 12,139 13,073
Unrecognized net actuarial gain (4,317) (7,452)
Unrecognized prior service cost 6,614 3,812
------------- --------------
Accrued benefit liability at end of year $ (14,607) $ (12,342)
============== ===============
(a) Postretirement benefits were extended to substantially all refinery
employees acquired in the 76 Products Acquisition. Accrued
postretirement benefits for these employees through March 31, 1997 are
the obligation of Unocal.
Net postretirement benefit cost, using beginning of the year actuarial
assumptions, for the years ended December 31, 1998, 1997, and 1996 consists of
the following:
(THOUSANDS OF DOLLARS) 1998 1997 1996
------------- -------------- -------------
Service cost $ 1,240 $ 952 $ 202
Interest cost 1,903 1,634 1,085
Expected return on plan assets (327) (329) (251)
Amortization of transition obligation over 20 years 934 934 934
Net amortization and deferral (762) (759) (955)
-------------- -------------- -------------
$ 2,988 $ 2,432 $ 1,015
============= ============== =============
The major assumptions used to calculate the benefit obligation and net
postretirement benefit cost for the years ended December 31, 1998, 1997, and
1996 are as follows:
1998 1997 1996
------------- -------------- -------------
Assumed discount rate 6.75% 7.00% 7.50%
Current year health care cost trend rate 9.00% 6.80% 7.80%
Ultimate health care cost trend rate 4.75% 5.50% 5.50%
Year ultimate trend rate is achieved 2008 2002 2002
Expected rate of return on plan assets 7.00% 5.50% 5.50%
A 1% increase and decrease in the health care cost trend rate would
have the following effect on the benefit obligation at December 31, 1998 and
aggregate of service and interest cost for 1998, 1997, and 1996:
(THOUSANDS OF DOLLARS) 1% INCREASE 1% DECREASE
------------ -----------
Benefit obligation at December 31, 1998 $ 1,465 $ (1,783)
Benefit obligation at December 31, 1997 1,511 (1,839)
Aggregate interest and service cost for 1998 202 (240)
Aggregate interest and service cost for 1997 183 (217)
Aggregate interest and service cost for 1996 88 (105)
SAVINGS PLANS
The Tosco Corporation Capital Accumulation Plan (the "CAP") and the
Tosco Store Savings Plan (the "TSSP"), have been established for all eligible
non-store and store employees, respectively. Participants may make, within
certain limitations, voluntary contributions under Section 401(k) of the
Internal Revenue Code of a percentage of their compensation. The Company makes
matching contributions to the CAP based upon years of contributory
participation, as defined, for employees who elect to make certain specified and
minimum contributions. In addition, eligible employees of the CAP receive an
additional contribution equal to 5% of their compensation, up to $150,000, in
lieu of pension plan benefits. Participants of the CAP and TSSP (collectively
the "Savings Plan") are immediately vested in their voluntary contributions.
Participants in the CAP are immediately vested in the Company contributions.
Contributions by the Company to the Savings Plans for the years ended December
31, 1998, 1997, and 1996 were $20,357,000, $17,766,000, and $9,517,000,
respectively.
MANAGEMENT INCENTIVE PLAN
The Tosco Corporation Cash Incentive Plan (the "CIP") has been
established for members of middle and senior management. The CIP sets forth
discretionary and other awards computed as a variable percentage of a
participant's base salary, which percentage is dependent upon pre-tax income, as
defined, of the respective participant's operating division. The Company also
has a bonus plan for senior executives, who are not participants in the CIP,
based on pre-tax income per share, as defined. Results of operations for the
years ended December 31, 1998, 1997, and 1996 include incentive compensation of
$54,300,000, $56,100,000, and $33,028,000, respectively, of which $5,945,000,
$5,845,000, and $3,102,000 were special bonuses awarded to union and other
employees not covered by management incentive plans.
16. INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1998, 1997, and 1996 is as follows:
(THOUSANDS OF DOLLARS) 1998 (a) 1997 1996
------------- -------------- -------------
Current:
Federal $ (45,477) $ 87,463 $ 50,720
State (4,981) 23,785 16,959
Foreign 366 233 246
------------- -------------- -------------
(50,092) 111,481 67,925
------------- -------------- -------------
Deferred:
Federal 108,069 37,200 29,577
State 17,366 2,190 3,294
------------- -------------- -------------
125,435 39,390 32,871
------------- -------------- -------------
$ 75,343 $ 150,871 $ 100,796
============= ============== =============
(a) The current Federal and state income tax benefits relate primarily to
the inventory writedown.
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:
(THOUSANDS OF DOLLARS) 1998 1997 1996
------------- -------------- -------------
Income taxes at the statutory rate $ 63,543 127,241 $ 86,479
State income taxes, net of credits and Federal benefit 8,050 16,884 13,164
Permanent differences 10,804 11,258 2,339
Federal credits, adjustments, and other (7,054) (4,512) (1,186)
-------------- --------------- ------------
$ 75,343 $ 150,871 $ 100,796
============== =============== =============
Temporary differences between financial and income tax reporting and
tax credit carryforwards that give rise to deferred income tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
(THOUSANDS OF DOLLARS) 1998 1997
------------- --------------
Deductible temporary differences:
Accounts receivable $ 19,860 $ 13,354
Accrued expenses and other current liabilities 152,921 103,684
Capital leases 50,208 41,741
Accrued environmental costs 251,455 260,219
Accrued postretirement benefit liability 35,742 28,989
Noncurrent liabilities 110,533 118,983
Other 45,331 47,423
Deferred state income taxes (a) 44,169 11,600
------------- --------------
710,219 625,993
------------- --------------
Taxable temporary differences:
Inventories (191,779) (633)
Property, plant, and equipment (837,383) (661,183)
Deferred turnarounds (116,661) (70,841)
Intangible assets (primarily tradenames) (43,719) (40,968)
Other deferred charges and assets (17,644) (17,644)
Other (38,306) (72,998)
------------- --------------
(1,245,492) (864,267)
-------------- --------------
Net temporary differences $ (535,273) $ (238,274)
============== ==============
Federal income taxes at 35% $ (187,346) $ (83,396)
Alternative minimum tax ("AMT") credit carryforward (b) 22,678 12,207
Research and experimentation and other tax credit carryforwards (c) 6,050
--------------- --------------
Net Federal deferred tax liability (158,618) (71,189)
Net state deferred tax liability (a) (44,169) (11,600)
-------------- --------------
Total deferred tax liability (d) (202,787) (82,789)
Current portion, deferred tax asset (liability) (23,334) 57,646
-------------- ---------------
Noncurrent portion, deferred tax liability $ (179,453) $ (140,435)
============== ================
(a) Deferred state income tax liabilities are provided for temporary
differences, primarily differences between the book and tax bases of
property, plant, and equipment.
(b) The AMT credit carryforwards may be carried forward indefinitely.
(c) The research and experimentation and other tax credit carryforwards
expire on various dates from 2004 to 2018.
(d) The Company believes that it is more likely than not that deferred tax
assets will be realized based upon future reversals of existing taxable
temporary differences and the expected continuation of profitable
operating results.
17. OPERATING LEASES
The Company distributes petroleum products throughout its marketing
areas through a combination of owned and leased terminals. Leases for product
distribution terminals are generally for short periods of time and continue in
effect until canceled by either party with contracted days of notice, generally
30 to 60 days. Most product distribution terminal leases are subject to
escalations based on various factors. The Company subleases portions of its
owned and leased product distribution terminals. During December 1997, the
Company purchased the Riverhead Terminal pursuant to a purchase option in the
lease.
The Company has long-term leases with special purpose entities for
land and equipment at the Company's BP California, Exxon Arizona, and certain 76
Products service stations, two refining processing units, and an office
building. These leases provide the Company the option to purchase, at
agreed-upon contracted prices, (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. The Company may cancel
the leases provided that lessors receive minimum sales values for the assets.
Minimum annual rentals vary with commercial paper interest rates and the
reference interest rate (LIBOR). These leases are accounted for as operating
leases and extend, with renewal options, through 2003.
The Company leases certain of its stores and other property and
equipment. The store leases generally have primary terms of up to 25 years with
varying renewal provisions. Under certain of these leases, the Company is
subject to additional rentals based on store sales as well as escalations in the
minimum future lease amount. The leases for other property and equipment are for
terms of up to 15 years. Most of the Company's lease arrangements provide the
Company an option to purchase the assets at the end of the lease term. The
Company may also cancel certain of its leases provided that the lessor receives
minimum sales values for the leased assets. Most of the leases require that the
Company provide for the payment of real estate taxes, repairs and maintenance,
and insurance.
Net rental expense for the years ended December 31, 1998, 1997, and
1996 consists of the following:
(THOUSANDS OF DOLLARS) 1998 1997 1996
------------- -------------- -------------
Minimum rental and warehousing charges $ 188,176 $ 153,775 $ 98,863
Contingent rental and warehousing charges 7,082 11,803 25,746
----------- ------------ -------------
195,258 165,578 124,609
Less sublease rental income 19,748 39,183 35,001
------------- -------------- -------------
$ 175,510 $ 126,395 $ 89,608
============= ============== =============
At December 31, 1998, future minimum obligations under non-cancelable
operating leases and warehousing agreements are as follows:
(THOUSANDS OF DOLLARS)
1999 $ 145,209
2000 130,075
2001 (a) 112,068
2002 (a) 93,499
2003 (a) 70,685
Thereafter 399,587
-------------
951,123
Less future minimum sublease income 86,089
-------------
$ 865,034
=============
(a) Excludes guaranteed residual payments totaling $29,222,000 (2001),
$191,501,000 (2002), and $190,250,000 (2003) due at the end of the
lease term, which will be reduced by the fair market value of the
leased assets.
18. 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 not covered by
insurance that in the aggregate would be material to the business or operations
of the Company.
As a condition of the 76 Products Acquisition, Unocal is entitled to
receive contingent participation payments over the seven year period following
the acquisition, 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 1998
and the nine month period ended December 31, 1997, the Company's contingent
participation obligation was not material to its consolidated financial
position.
Litigation between Unocal Corp. 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's potential minimum obligation to eight
officers was $6,365,000 at December 31, 1998.
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 or unit shutdowns 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. Cost of sales was reduced by
insurance coverage accruals for property damage and business interruption
claims, net of insurance policy deductibles and asset write-offs, related to the
unscheduled shutdowns of the Bayway Refinery cat cracker and Avon Refinery
hydrocracker in 1997.
In the normal course of business, the Company has entered into
numerous crude oil and feedstock supply contracts, finished product sale and
exchange agreements, and transportation contracts. Because of the market related
pricing structure and/or generally short-term nature of these contracts, they
are not expected to negatively impact the Company's future operating results.
19. BUSINESS SEGMENTS
The Company has two operating business segments: refining and
marketing. The refining segment includes the acquisition of crude oil and other
feedstocks, the production of petroleum products, and the distribution and sale
of petroleum products to wholesale customers. The marketing segment includes the
sale of petroleum products and merchandise through company owned gasoline
stations and convenience stores and branded dealers and jobbers. The
nonoperating segment consists of corporate activities and certain nonoperating
subsidiaries. Summarized financial information by segment for 1998, 1997, and
1996 is as follows:
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
1998 (THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
-------------- ------------- -------------- -------------
Total sales $ 8,608,457 $ 5,234,712 $ $ 13,843,169
Intersegment sales (1,812,626) (9,016) (1,821,642)
-------------- ------------- -------------- -------------
Third party sales $ 6,795,831 $ 5,225,696 $ $ 12,021,527
============== ============= ============== =============
Operating contribution (a) $ 682,328 $ 533,356 $ $ 1,215,684
============== ============= ============== =============
Depreciation and amortization $ 180,214 $ 132,007 $ 1,643 $ 313,864
=============== ============== ============== =============
Inventory writedown / restructuring charge $ 280,000 $ $ $ 280,000
=============== ============== ============== =============
Net interest expense (income) $ 79,281 $ 46,062 $ (2,636) $ 122,707
=============== ============== ============= ============
Income (loss) before income taxes and
distributions on Trust Preferred Securities $ 60,228 $ 153,913 $ (15,339) $ 198,802
=============== ============== ============= =============
Total assets at year-end $ 3,436,007 $ 2,319,272 $ 87,537 $ 5,842,816
============== ============= ============== =============
Capital expenditures (b) $ 337,237 $ 216,387 $ 52 $ 553,676
============== ============= ============== =============
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
1997 (THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
-------------- ------------- -------------- -------------
Total sales $ 9,707,311 $ 5,643,476 $ $ 15,350,787
Intersegment sales (2,053,373) (15,794) (2,069,167)
-------------- ------------- -------------- -------------
Third party sales $ 7,653,938 $ 5,627,682 $ $ 13,281,620
============== ============= ============== =============
Operating contribution (a) $ 628,227 $ 539,901 $ $ 1,168,128
============== ============= ============== =============
Depreciation and amortization $ 175,489 $ 126,470 $ 1,580 $ 303,539
=============== ============== =============== =============
Inventory writedown $ 53,000 $ $ $ 53,000
============== ============= ============== =============
Net interest expense (income) $ 80,215 $ 55,832 $ (1,592) $ 134,455
============== ============= ============== =============
Income (loss) before income taxes and
distributions on Trust Preferred Securities $ 233,107 $ 163,170 $ (15,481) $ 380,796
============== ============== ============== =============
Total assets at year end $ 3,567,898 $ 2,263,893 $ 143,061 $ 5,974,852
============== ============= ============== =============
Capital expenditures (b) $ 384,842 $ 131,314 $ 5,907 $ 522,063
============== ============= ============== =============
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
1996 (THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
-------------- ------------- -------------- -------------
Total sales $ 7,814,267 $ 2,962,934 $ $ 10,777,201
Intersegment sales (854,590) (854,590)
-------------- ------------- -------------- ------------
Third party sales $ 6,959,677 $ 2,962,934 $ $ 9,922,611
============== ============= ============== ============
Operating contribution (a) $ 473,295 $ 252,318 $ $ 725,613
============== ============= ============== ============
Depreciation and amortization $ 110,891 $ 72,859 $ 755 $ 184,505
============== ============= ============== ============
Restructuring charge $ $ 13,500 $ $ 13,500
============== ============= ============== =============
Net interest expense (income) $ 39,052 $ 44,994 $ (622) $ 83,424
============== ============= ============== =============
Income (loss) before income taxes and
distributions on Trust Preferred Securities $ 243,095 $ 18,892 $ (14,138) $ 247,849
============== ============== ============== =============
Total assets at year-end $ 1,625,107 $ 1,807,380 $ 122,338 $ 3,554,825
============== ============= ============== ============
Capital expenditures (b) $ 123,702 $ 97,503 $ 248 $ 221,453
============== ============= ============== ============
(a) Operating contribution is calculated as sales minus cost of
sales.
(b) Capital expenditures include the purchase of property, plant, and
equipment and deferred turnaround spending.
20. SUPPLEMENTAL CASH FLOW INFORMATION
(THOUSANDS OF DOLLARS) 1998 1997 1996
------------- -------------- -------------
Cash paid during the year for:
Interest, net of amounts capitalized $ 134,359 $ 113,240 $ 87,349
Income taxes, net of refunds received (a) (27,085) 105,182 72,213
Detail of cash paid for acquisitions:
Fair value of assets acquired $ 2,035,415 $ 1,598,108
Liabilities assumed (441,012) (794,545)
Common Stock issued (396,880) (327,039)
--------------- -------------
Net cash paid for acquisitions 1,197,523 476,524
Cash acquired in acquisitions 2,952 32,466
-------------- -------------
$ 1,200,475 $ 508,990
============== =============
(a) A $51,670,000 refund of federal income taxes was received in September
1998.
21. SUBSEQUENT EVENTS
POLYPROPYLENE JOINT VENTURE
In February 1999, Tosco signed a memorandum of understanding to create
a 50/50 joint venture with Union Carbide Corporation ("Union Carbide") for the
marketing of polypropylene. A 775 million pounds per year polypropylene plant is
planned to be constructed at the Bayway Refinery over the next two years. When
completed, the joint venture is expected to be one of the top five suppliers of
polypropylene in North America. The production from this new plant and Union
Carbide's plants in Seadrift, Texas and Norco, Louisiana, estimated to be 1.6
billion pounds per year, will be committed to the joint venture and marketed by
Union Carbide. Completion of the joint venture is subject to execution of
definitive documents and satisfactory compliance with various conditions.
REVOLVING CREDIT FACILITY
In order to reduce financing costs, Tosco elected not to renew its
$100 million Facility B under the Revolving Credit Facility when it expired on
January 12, 1999.
AVON REFINERY INCIDENT
On February 23, 1999, a fire occurred at a crude unit at the San
Francisco Area Refinery, Avon facility and resulted in four fatalities. The fire
was quickly isolated and extinguished with no offsite impacts or health risks to
the community. On March 2, 1999, Tosco announced that the Avon Refinery would be
shutdown for at least 30 days, while a thorough safety review is conducted. As a
result of this incident, management is assessing various strategies for the Avon
Refinery. While such developments do not materially alter the restructuring
accrual recorded in 1998 (Note 8), depending on the outcome of such assessment,
the restructuring accrual may be modified in 1999.
22. NEW ACCOUNTING STANDARD
During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company plans to adopt SFAS No. 133 on January 1, 2000. The
Company is currently evaluating the effect SFAS No. 133 will have on its
financial position and results of operations.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (A) TOTAL
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1998
Sales $ 3,047,055 $ 3,168,389 $ 2,964,510 $ 2,841,573 $ 12,021,527
Operating contribution (b) 258,742 362,765 315,031 279,146 1,215,684
Net income (loss) 41,541 100,304 80,281 (115,917) 106,209
Earnings (loss) per share (c):
Basic $ 0.27 $ 0.64 $ 0.52 $ (0.76) $ 0.69
Diluted (d) 0.26 0.61 0.49 (0.76) 0.67
1997
Sales $ 2,410,273 $ 3,196,431 $ 3,758,589 $ 3,916,327 $ 13,281,620
Operating contribution (b) 137,427 326,558 380,023 324,120 1,168,128
Net income 3,563 67,112 100,933 41,067 212,675
Earnings per share (c):
Basic $ 0.03 $ 0.44 $ 0.65 $ 0.26 $ 1.43
Diluted 0.03 0.42 0.61 0.26 1.37
(a) Results of operations for the fourth quarter of 1998 include a
$240,000,000 ($140,400,000 after tax, $0.92 per share) non-cash
writedown of raw materials and product inventories to their fair value
and a $40,000,000 ($23,400,000 after tax, $0.15 per share)
restructuring charge primarily related to the reconfiguration of the
San Francisco Area Refinery System. Results of operations for the
fourth quarter of 1997 include a non-cash inventory writedown of
$53,000,000 ($31,001,000 after tax, $0.18 per share) as a result of
declining raw material and product prices in late 1997.
(b) Operating contribution is calculated as sales minus cost of sales. To
conform to the 1998 presentation, the 1997 amounts have been
reclassified to exclude depreciation and amortization.
(c) Earnings per share calculations are based on the weighted average
number of shares outstanding for each quarter. The sum of the quarters
may not be equal to the full year amount.
(d) For the three-month period ended December 31, 1998, conversion of stock
options and Trust Preferred Securities was not assumed due to the
anti-dilutive impact of the conversion. For the year ended December 31,
1998, conversion of Trust Preferred Securities was not assumed due to
the anti-dilutive impact of the conversion.
TOSCO CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(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
of Year Expenses Accounts Deductions Year
Allowance for uncollectible receivables:
1998 $19,018 $10,380 $- $12,560 $16,838
1997 (a) 8,291 8,234 7,238 4,745 19,018
1996 8,523 (265) - (33) 8,291
Inventory net realizable value reserve:
1998 $53,000 $240,000 $- $- $293,000
1997 - 53,000 - - 53,000
(a) The 1997 Charged to Other Accounts amount represents the allowance for
uncollectible credit card receivables acquired in the 76 Products
Acquisition. See Note 3 to the Consolidated Financial Statements.