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EXHIBIT 99.1
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of BHP Petroleum Americas Refining Inc.
and BHP Petroleum South Pacific Inc.:
We have audited the accompanying combined balance sheets of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific Inc. (the Company) as of
May 31, 1997 and 1996, and the related combined statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of BHP Petroleum Americas
Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996,
and the combined results of their operations and their cash flows for each of
the three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 31, 1998
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(Amounts in 000s)
ASSETS As of May 31,
-------------------------------
1997 1996
------------ ------------
CURRENT ASSETS
Cash $ 1,420 $ 1,043
Accounts receivable, net 47,675 43,913
Due from affiliates - trade 9,906 10,742
Due from affiliates - other 22,115 22,369
Inventories 83,864 52,354
Other current assets 4,802 5,712
------------ ------------
Total current assets 169,782 136,133
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization (Note 5) 303,442 378,235
------------ ------------
NON-CURRENT ASSETS
Goodwill, net of accumulated amortization (Note 5) -- 32,931
Other 4,220 7,653
------------ ------------
Total non-current assets 4,220 40,584
------------ ------------
Total Assets $ 477,444 $ 554,952
============ ============
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(Amounts in 000s)
LIABILITIES AND STOCKHOLDERS' EQUITY As of May 31,
-------------------------------
1997 1996
------------ ------------
CURRENT LIABILITIES:
Cash overdraft $ 6,840 $ 6,668
Accounts payable 12,287 7,557
Due to affiliates - trade 29,933 4,587
Capital lease obligations, current portion 1,055 685
Accrued liabilities 20,782 13,213
------------ ------------
Total current liabilities 70,897 32,710
------------ ------------
NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000
CAPITAL LEASE OBLIGATIONS, net of current portion 9,361 5,917
DEFERRED INCOME TAXES 30,659 66,014
OTHER LIABILITIES 28,540 31,746
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,500 shares
authorized, issued and outstanding 8,208 8,208
Additional paid-in capital 52,362 52,362
Retained earnings:
BHP Petroleum Americas Refining Inc. 122,378 204,205
BHP Petroleum South Pacific Inc. 10,039 8,790
------------ ------------
Total stockholders' equity 192,987 273,565
------------ ------------
Total Liabilities and Stockholders' Equity $ 477,444 $ 554,952
============ ============
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF OPERATIONS
(Amounts in 000s)
Years Ended May 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES
Sales and other revenue - trade $ 886,380 $ 741,631 $ 752,044
Sales and other revenue - affiliates 111,258 72,992 79,908
Other income 211 905 750
------------ ------------ ------------
Total Revenue 997,849 815,528 832,702
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 881,991 711,131 720,597
Operating and selling 43,363 43,661 42,148
Depreciation and amortization 30,596 29,507 27,745
Refinery assets write-down to fair value (Note 5) 88,813 -- --
Goodwill write-off (Notes 2 and 5) 30,351 -- --
------------ ------------ ------------
Total Operating Costs and Expenses 1,075,114 784,299 790,490
------------ ------------ ------------
OPERATING INCOME (LOSS) (77,265) 31,229 42,212
General and administrative (24,731) (21,238) (22,319)
Interest (9,976) (9,887) (11,274)
Capitalized interest 1,269 765 857
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (110,703) 869 9,476
Income tax benefit (provision) 30,125 (1,474) (4,673)
------------ ------------ ------------
NET INCOME (LOSS) $ (80,578) $ (605) $ 4,803
============ ============ ============
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
($ Amounts in 000s)
Common Stock Additional Total
------------------------------ Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------------- -------------- ---------------- ---------------- -----------------
Balance May 31,1994
BHP Petroleum Americas Refining Inc. 500 $ 8,008 $ 42,000 $ 200,219 $ 250,227
BHP Petroleum South Pacific Inc. 1,000,000 200 10,362 8,578 19,140
--------- ------- -------- --------- ---------
Total 1,000,500 8,208 52,362 208,797 269,367
Net income - - - 4,803 4,803
--------- ------- -------- --------- ---------
Balance May 31,1995 1,000,500 8,208 52,362 213,600 274,170
Net loss - - - (605) (605)
--------- ------- -------- --------- ---------
Balance May 31,1996 1,000,500 8,208 52,362 212,995 273,565
Net loss - - - (80,578) (80,578)
--------- ------- -------- --------- ---------
Balance, May 31, 1997 1,000,500 $ 8,208 $ 52,362 $ 132,417 $ 192,987
========= ======= ======== ========= =========
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in 000s)
Years Ended May 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (80,578) $ (605) $ 4,803
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Refinery assets write-down to fair value 88,813 -- --
Goodwill write-off 30,351 -- --
Depreciation and amortization 30,596 29,507 27,745
Deferred income taxes (35,355) 285 (6,067)
Changes in:
Accounts receivable, net (3,762) 7,767 (44,397)
Due from affiliates, trade and other 1,090 (786) 29,368
Inventories (31,510) 18,916 (6,803)
Other assets 4,343 (8,903) 2,569
Accounts payable and accrued liabilities 12,471 (4,343) 13,644
Due to affiliates, trade 25,346 (15,106) (1,274)
Other liabilities (3,206) 4,008 4,499
----------- ----------- -----------
Net cash provided by operating activities 38,599 30,740 24,087
CASH FLOWS FROM INVESTING ACTIVITIES --
Additions to property plant and equipment (37,467) (29,568) (23,461)
CASH FLOWS FROM FINANCING ACTIVITIES --
Repayment of principal on capital leases (755) (654) (527)
----------- ----------- -----------
Net increase in cash 377 518 99
Cash, beginning of period 1,043 525 426
----------- ----------- -----------
Cash, end of period $ 1,420 $ 1,043 $ 525
=========== =========== ===========
Supplemental disclosures:
Acquisition of equipment under capital lease $ 4,569 $ 1,900 $ --
Fixed assets from parent company, at book value $ -- $ 7,540 $ --
The accompanying notes are an integral part of these
combined financial statements.
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BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in 000s)
1. ORGANIZATION
BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP
Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively
referred to as "the Company," are affiliated companies and wholly-owned indirect
subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian
company. All capital and financing requirements of the Company are provided for
by BHP, except for capital and operating leases.
BHPPAR operates an oil refinery, product storage and distribution facilities,
and retail gasoline stations in the state of Hawaii. Crude oil is purchased
through other BHP affiliates and shipped to Hawaii by tanker. Refined product
exports usually are sold through other BHP affiliates. BHPPSP is a petroleum
products marketer in American Samoa, and operates the government-owned product
storage and distribution facilities. BHPPSP purchases most of its refined
products from BHPPAR.
The Companies were part of a consolidated group, Pacific Resources, Inc. and
Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was
allocated to assets and liabilities based on fair values at the acquisition
date. The purchase price in excess of fair values was reported as goodwill until
May 1997 when the refinery assets were written down to estimated fair value and
the unamortized goodwill was written off (see Note 5).
There have been changes in the former PRI group since 1989: certain subsidiaries
were liquidated, others were merged or became subsidiaries of other BHP
affiliates. In 1995 two affiliates, BHP Petroleum Americas Terminals Inc.
(Terminals), and BHP Petroleum Americas Gas Express Inc. (Gas Express), were
merged into BHPPAR. In connection with this reorganization, all employees of
Terminals, Gas Express and parent company, BHP Hawaii Inc., became employees of
BHPPAR. The 1995 financial statements reflect the results of operations of these
combined entities, consistent with the presentation in 1996 and 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements - The combined financial statements include the
accounts of BHPPAR and BHPPSP. These companies are combined to present the
financial position and results of operations of BHP's downstream petroleum
refining and marketing business. The combined financial statements have been
prepared using the historical costs and results of operations of the affiliated
entities. There were no significant differences in accounting methods or their
application among the combining entities. All significant intercompany balances
and transactions between the combined entities are eliminated.
Use of Estimates and Presentation - Preparation of the combined financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions which affect the amounts
of assets and liabilities, and disclosure of
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contingencies at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
Financial Instruments - The carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable, and certain other current
liabilities, approximate fair value because of the short maturity of these
instruments. The carrying amounts of the Company's long-term notes payable and
other obligations approximate the Company's estimate of fair values of such
items.
Hedging Activities - The Company periodically enters into hedging arrangements
through BHP affiliates to manage petroleum price risks and not for speculative
purposes. Gains and losses from hedging are recognized in income when the hedged
transaction occurs. Historically, gains and losses from hedging transactions
have not been material.
Inventories - Crude oil and refined products are valued at the lower of cost or
market (net realizable value). Cost is determined primarily on the last-in,
first-out (LIFO) basis. Other inventories held for sale, materials and supplies
are stated at the lower of average cost, not in excess of market.
Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Major replacements, renewals and improvements are capitalized. Maintenance,
repairs and replacements, which do not improve or extend the lives of assets,
are charged to expense. Depreciation and amortization, including amortization of
assets under capital leases, are computed using the straight-line method over
estimated useful lives or lease terms, if shorter. Estimated useful lives range
up to 20 years for buildings and up to 25 years for plant and equipment.
Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and
maintenance turnaround costs are included in other assets and amortized over the
estimated period of benefit, generally one to three years, depending on the
process unit.
Goodwill - Goodwill represents BHP's purchase price in excess of the fair values
of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred
tax liabilities on the difference between the assets' fair values and their
income tax basis. Goodwill was amortized on a straight-line, 20 year rate until
the goodwill was determined to be without further value and was written off in
May 1997 (see Note 5).
Income Taxes - Deferred tax assets and liabilities are recognized for future
income tax effects of temporary differences between financial statement carrying
amounts and the related income tax bases of assets and liabilities. Deferred
income tax assets and liabilities measurements are based on enacted tax rates
expected to apply when the temporary differences are expected to be settled. The
effect of tax rate changes on deferred tax assets and liabilities is recognized
when rate changes are enacted.
Income taxes are computed and recorded as if each company were filing separate
tax returns, although BHPPAR and BHPPSP are included in different federal and
state consolidated income tax returns which include other BHP companies in the
affiliated groups. Current income tax liabilities or refunds are settled with
BHP through intercompany accounts.
Environmental Expenditures - Environmental expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures are capitalized if
they extend the useful lives of
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assets, increase capacity, or mitigate or prevent environmental contamination.
Expenditures are expensed if they are for existing conditions caused by past
operations, and if the expenditures will not contribute to future revenue
generation. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and when costs can be estimated reasonably. Such
amounts are based on the estimated timing and extent of remedial actions
required by regulatory agencies, experience gained from other sites where
assessments and remediation have been completed, and the amount of the Company's
estimated liability, considering proportional liability and financial abilities
of other responsible parties. Adjustments to accrued liabilities are made as
changes in conditions and estimated costs become known.
Pension Plans and Other Post-Employment Benefits - Pension costs are accounted
for in conformity with Statements of Financial Accounting Standards No. 87 and
88. Funding is based on required contributions under the Employee Retirement
Income Security Act of 1974. Other post-employment benefits, primarily medical
insurance, are accounted for in conformity with Statement of Financial
Accounting Standards No. 106.
3. RECEIVABLES
The Company operates in a single industry, marketing refined petroleum products
in a limited geographic area, primarily Hawaii and American Samoa. The markets
are subject to economic and industry changes, including changes in market prices
and sources of supply. Concentration of credit risk in trade receivables is
limited by the numbers and variety of customers. In October 1997, BHP sold a
Hawaii gas services subsidiary (the Gas Company) to an unrelated company. The
Gas Company continues to purchase naphtha and propane (LPG) from the refinery.
Receivables from the Gas Company amounted to $3,886 and $3,243 at May 31, 1997
and 1996, respectively.
BHPPSP operates the government-owned fuel storage facilities and markets to a
wide range of customers in American Samoa. The facilities management contract
expired in 1997 and was awarded to a competitor. BHPPSP has contested the award,
but there is no assurance that the company will be able to continue as the
facilities operator and/or as a marketer in American Samoa. Transfer of
operations to a competitor could increase the collection risk of receivables in
that market. BHPPSP's receivables, net of allowance for doubtful accounts,
amounted to $4,273 and $3,331 at May 31, 1997 and 1996, respectively.
The company performs on-going credit evaluations of its customers financial
condition, and in some circumstances requires prepayment or letters of credit.
The allowance for doubtful accounts is included in the combined balance sheets
as a reduction of receivables. The allowance for doubtful accounts as of May 31,
1997, 1996 and 1995, was $698, $734 and $1,561, respectively.
4. INVENTORIES
Inventories at May 31 consisted of:
1997 1996
-------- --------
Crude oil and refined products $ 73,601 $ 42,107
Merchandise and packaged petroleum products 1,243 896
Materials and supplies 9,020 9,351
-------- --------
Total inventories $ 83,864 $ 52,354
======== ========
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At May 31, 1997 and 1996, crude oil and product inventories at LIFO cost
amounting to $71.5 million and $41.0 million, respectively, were below current
cost by approximately $7.0 million and $10.7 million, respectively.
5. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, AND RELATED WRITE-DOWNS
Principal assets include the oil refinery, its buildings and its property site
on the island of Oahu. The Company owns pipelines connecting the refinery to an
off-shore, single-point mooring, to a barge harbor near the refinery, and to
Honolulu International Airport and Honolulu Harbor. Marketing facilities include
product storage and distribution terminals on the islands of Maui and Hawaii, as
well as retail gas stations.
In 1997 BHP developed a plan to sell the Company, engaged an investment advisor,
completed an appraisal of assets, and began discussions with potential buyers.
Management determined that net book value of refinery assets had been impaired
based in part on the appraisal. The refinery property, plant and equipment were
written down to estimated fair value in May 1997, based on an evaluation of
these assets, related operating results, and in accordance with provisions of
Statement of Financial Accounting Standards No. 121. The write-down, net of
accumulated depreciation, amounted to $88.8 million ($54.2 million after a $34.6
million reduction in deferred income taxes), as summarized below. BHP reached an
agreement in March 1998 to sell the Company, and as a result of the sale, the
Company anticipates recognizing an estimated loss of approximately $120-125
million, in addition to the loss recognized in May 1997 (see Note 15).
Substantially all of the loss is expected to be allocated to a further reduction
in the fair value of the property, plant and equipment.
1997 1996
--------- ---------
Land and buildings $ 70,451 $ 67,708
Plant and equipment, including capital leases 582,076 548,067
--------- ---------
Total before revaluation write-down 652,527 615,775
Accumulated depreciation and amortization (260,272) (237,540)
--------- ---------
Property, plant and equipment, net before write-down 392,255 378,235
--------- ---------
Less write-down to estimated fair value:
Land and buildings (23,451) --
Plant and equipment (325,634) --
Accumulated depreciation and amortization 260,272 --
--------- ---------
Net write-down to estimated fair value (88,813) --
--------- ---------
Property, plant and equipment, net $ 303,442 $ 378,235
========= =========
In connection with management's determination that the carrying amount of
refinery assets had become impaired, it was also determined that goodwill had no
continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net
of accumulated amortization of $21,285) was also written off in May 1997. Annual
goodwill amortization expense included in statements of operations was $2,580
for each of the three years ended May 31, 1997.
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6. LEASES
The company leases equipment and some properties under various lease agreements
covering periods through 2024. Properties include the pipeline corridor from the
refinery to Honolulu International Airport and Honolulu Harbor, as well as land
underlying terminal facilities and most of the gas stations. The Company also
uses product terminals owned by others, including deliveries at Honolulu Harbor,
Honolulu International Airport, and all sales in American Samoa. Rent,
through-put fees, and storage fees are paid for use of these facilities. Certain
operating leases contain provisions for renegotiation or escalation of rents
based on operating costs or usage. Rent expense for operating leases, including
leases with terms of a month or less, was $13,330 in 1997, $13,125 in 1996 and
$13,696 in 1995.
Capital leases are for tugs and barges used in transportation of petroleum
products within Hawaii. Cost and accumulated amortization of capitalized leased
assets at May 31 amounted to:
1997 1996
---------- ----------
Capitalized leases - cost $ 15,023 $ 12,204
Accumulated amortization (5,123) (5,965)
---------- ----------
Capitalized leases included in property - net $ 9,900 $ 6,239
========== ==========
Minimum lease commitments under non-cancelable leases (excluding leases with
terms of one year or less) at May 31, 1997 are summarized below:
Fiscal Operating Capital
Year Leases Leases
----- ------ ------
1998 $ 12,186 $ 2,005
1999 10,763 1,884
2000 9,394 1,677
2001 9,441 1,634
2002 8,221 1,468
Thereafter 96,027 6,659
--------- --------
Total minimum lease payments $ 146,032 15,327
=========
Less amount representing interest (4,911)
--------
Present value of net minimum lease payments 10,416
Less current portion (1,055)
--------
Noncurrent portion $ 9,361
========
7. ACCRUED LIABILITIES
Accrued current liabilities at May 31 included the following:
1997 1996
------- -------
Environmental costs $ 3,950 $ 3,190
Accrued employee compensation 10,768 5,502
Taxes, other than income taxes 5,908 4,239
Other accrued liabilities 156 282
------- -------
Total accrued liabilities, current $20,782 $13,213
======= =======
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8. NOTES PAYABLE TO AFFILIATE
Noncurrent debt consists of two unsecured promissory notes totaling $145
million, payable to BHPPAR's parent company, BHP Hawaii Inc. The notes are
payable 395 days from demand, and interest is payable at the monthly average
short-term Applicable Federal Rate, as determined under Internal Revenue Code
Sec. 1274(d). Interest rates ranged from 5.63% to 6.23% in 1997, 5.05% to 6.37%
in 1996, and 5.56% to 7.43% in 1995. The rates for May 1997 and 1996 were 6.23%
and 5.76%, respectively. Interest is paid as accrued through settlement of
inter-company accounts. Interest expense on the notes was $8,734 in 1997, $8,364
in 1996, and $9,415 in 1995.
9. INCOME TAXES
The income tax provision (benefit) for the three years ended May 31, 1997,
included:
1997 1996 1995
---------- ---------- ----------
Current income tax provision $ 5,285 $ 1,990 $ 10,738
Deferred tax benefit (35,410) (516) (6,065)
---------- ---------- ----------
Total income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673
========== ========== ==========
The deferred income tax benefit in 1997 includes the deferred tax effect of the
fair value write-down of refinery property, plant and equipment.
The following table reconciles taxes on income at the normal 35% Federal income
tax rate with the effective tax rate:
1997 1996 1995
---------- ---------- ----------
Earnings (loss) before income taxes $ (110,703) $ 869 $ 9,476
---------- ---------- ----------
Tax provision (benefit) at U.S. corporate tax rate $ (38,746) $ 304 $ 3,317
Effect of:
Write-off / amortization of goodwill 11,526 903 900
State income taxes, net of Federal tax effects (3,027) 149 470
Other 122 118 (14)
---------- ---------- ----------
Income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673
========== ========== ==========
Effective combined income tax rate 27.2% 169.6% 49.3%
---------- ---------- ----------
The effective tax rates are significantly different than "normal" because of the
amortization and write-off of goodwill related to BHP's 1989 acquisition of
BHPPAR.
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Deferred income tax liabilities and assets, resulting from timing differences,
as of May 31, 1997 and 1996:
1997 1996
---------- ----------
Deferred Federal tax assets:
Accrued vacation pay, incentive compensation $ 692 $ 1,824
Accrued retirement benefits 4,417 4,376
Environmental provisions 7,236 7,862
Other 995 895
---------- ----------
Total deferred tax assets 13,340 14,957
---------- ----------
Deferred Federal tax liabilities:
Accelerated depreciation and other property items 39,410 71,844
Refinery turn-around costs 976 2,011
Other 525 525
---------- ----------
Total deferred tax liabilities 40,911 74,380
---------- ----------
Net Federal deferred tax liability 27,571 59,423
Net State deferred tax liability 3,088 6,591
---------- ----------
Deferred income tax liability - net $ 30,659 $ 66,014
========== ==========
10. RETIREMENT PLANS
Employees are covered by a qualified noncontributory defined benefit pension
plan. BHPPAR and BHPPSP participate with many other BHP affiliates in the BHP
(USA) Pension Plan, and the plan's actuary allocates assets and liabilities to
the participating entities, as well as determining annual costs and recommended
contributions. The plan's benefit formula is a final-pay formula. The plan
funding policy is to fund a contribution of at least the minimum funding
requirement, but no more than the maximum tax-deductible contribution.
The following plan information covers all the employees of the Company, as well
as certain employees and retirees of affiliates which were merged into BHPPAR or
disposed of during the three years ended May 31, 1997. Plan assets exceeded
projected benefit obligations, with respect to BHPPAR and BHPPSP, at May 31,
1997 and 1996. The following tables present pension expense, funded status and
major actuarial assumptions used to determine amounts.
Net Periodic Pension Cost 1997 1996 1995
- ------------------------- --------- --------- ---------
Service cost $ 1,550 $ 1,530 $ 1,330
Interest cost 1,660 1,470 1,420
Actual return on plan assets (4,920) (3,000) (2,600)
Net amortization and deferral 3,061 1,521 1,381
--------- --------- ---------
Net periodic pension cost $ 1,351 $ 1,521 $ 1,531
========= ========= =========
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Funded Status of Pension Plans as of May 31 1997 1996
- ------------------------------------------- ---------- ----------
Actuarial present value of accumulated benefit obligation:
Vested $ 14,380 $ 13,670
---------- ----------
Total $ 17,610 $ 16,490
---------- ----------
Projected benefit obligation $ 24,420 $ 22,060
Plan assets at fair value 27,120 22,540
---------- ----------
Plan assets in excess of projected benefit obligation 2,700 480
Unrecognized net gain (4,800) (2,590)
Unrecognized prior service cost 1,002 1,093
---------- ----------
Accrued net pension liability $ (1,098) $ (1,017)
========== ==========
The accrued net pension liability is included in other liabilities (noncurrent)
in the accompanying balance sheets.
Actuarial Assumptions 1997 1996 1995
- --------------------- ---- ---- ----
Discount rate 7.75% 7.75% 8.00%
Rate of increase in future compensation levels 5.00 5.00 5.00
Expected long-term rate of return on plan assets 8.50 8.50 8.50
In addition to the defined benefit plan, the Company is a participating sponsor
in a defined contribution plan. The BHP Retirement Savings Plan (RSP) is a
deferred compensation plan which covers employees of the Company and other BHP
entities in the U.S. The Company matches and contributes an amount equal to each
employee's contribution up to 6 percent of the employee's salary and incentive
compensation. Plan contributions charged to expense amounted to $1,421, $1,222
and $1,071 in 1997, 1996 and 1995, respectively.
Liabilities also are accrued for supplemental retirement benefits for
executives. The unfunded liabilities and expense are actuarially determined.
Payments are made for vested benefits after retirement.
11. OTHER RETIREMENT BENEFITS
Certain medical and life insurance benefits are provided for qualified retirees
and their qualified dependents. Employees who retire at ages 55-61 with at least
15 years of continuous service, or who retire at age 62, or later, with at
least 10 years of continuous service, become eligible for these benefits. The
health care plan is contributory with retiree contributions adjusted
periodically. The life insurance plan is noncontributory. Plan expense and
liabilities are accrued as actuarially determined and funded on a pay-as-you-go
basis. The following tables present the composition of post-retirement benefit
expense and the accumulated post-retirement benefit obligation.
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Components of Net Periodic Post-Retirement Benefit Cost 1997 1996 1995
- ------------------------------------------------------- ----- ----- -----
Service cost $ 83 $ 100 $ 108
Interest cost on accumulated benefit obligation 424 528 601
Amortization of unrecognized net transition asset (48) (48) (48)
Amortization of unrecognized (gain) loss (78) - 8
----- ----- -----
Net periodic post-retirement benefit cost $ 381 $ 580 $ 669
===== ===== =====
Accrued Post-Retirement Benefit Obligation as of May 31 1997 1996
- ------------------------------------------------------- ------- -------
Retirees and beneficiaries $ 4,553 $ 4,742
Active participants eligible to retire 282 264
Other active participants 873 733
------- -------
Total post-retirement benefit obligation 5,708 5,739
Unrecognized transition asset 728 776
Unrecognized gain 1,441 1,614
------- -------
Accrued post-retirement benefit obligation $ 7,877 $ 8,129
======= =======
The accrued obligation is included in other liabilities (noncurrent) in the
accompanying balance sheets. Amounts to be paid during the next twelve months
are included in current liabilities.
The weighted average rate of increase in the per capita cost of covered health
care benefits was assumed to be 8% for 1997, decreasing by 1/2% per year to 5.5%
in 2002 and thereafter. A 1% increase in the health care cost trend rate would
increase the accumulated post-retirement benefit obligation by $149 at May 31,
1997, and the net periodic service and interest cost by $13 for the year.
Actuarial assumptions used to measure the accrued post-retirement obligation at
May 31, 1997, 1996 and 1995 included a discount rate of 7.75% and a compensation
rate increase of 6%.
12. RELATED PARTY BALANCES AND TRANSACTIONS
The Company enters into transactions with BHP-affiliated companies primarily for
petroleum operations and general financing activities. Crude oil is purchased
through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil
transportation costs are either included in the purchase price or paid to an
affiliated BHP Transport company. Export products are sold through BHP Petroleum
affiliates. Amounts due to and from BHP-affiliated companies as of May 31 were:
1997 1996
-------- ---------
Due from affiliates:
Current - trade receivables $ 9,906 $ 10,742
Current - other 22,115 22,369
Due to affiliates:
Current - trade payables 29,933 4,587
Noncurrent notes payable, interest at variable rate 145,000 145,000
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Transactions with BHP-affiliated companies for the three years ended May 31,
1997 were:
1997 1996 1995
--------- -------- --------
Revenues:
Sales and other revenue $ 111,258 $ 72,992 $ 79,908
Operating Costs and Expenses:
Petroleum purchases, including freight 614,076 584,714 575,175
Guarantee fees, included in operating costs 617 1,539 1,213
Interest on noncurrent promissory notes 8,734 8,364 9,415
Securitization fees, included in interest - - 1,287
Sales of refined products to BHP affiliates are negotiated with reference to
current published market prices. Sales include export cargoes marketed primarily
in Asia. Also, naphtha and LPG are sold to a Hawaii gas utility affiliate (the
Gas Company) under term contracts. BHP sold the Gas Company to an unrelated
company effective October 31, 1997 (see Note 15).
Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum
affiliate at their cost, net of their price hedging transactions. BHPPAR also
imports crude oil, primarily from Australia and Asia, under term agreements with
BHP Petroleum affiliates, and purchase prices are determined by a formula using
current published market prices.
13. FUTURES CONTRACTS
BHPPAR has a term agreement with a third-party customer for the sale of physical
product in exchange for futures contracts (plus a cash location/quality
differential), which are settled through a BHP Petroleum affiliate. The futures
contracts are sold ratably over each month, and proceeds from selling the
futures contracts at current market prices (plus the cash differential)
determine the sales value of product delivered during the month. Futures
contracts at May 31,1997 and 1996, are summarized below (amounts in 000's):
1997 1996
---------- ----------
Contract barrels 240 250
Contract amounts $ 5,645 $ 5,597
Unrealized gains (losses) $ (19) $ (257)
Maturity dates June 1997 June 1996
14. COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims in the normal course of business.
The outcome of individual matters is not predictable. However, management
believes that the ultimate resolution of all of these matters, after considering
insurance coverages, is not likely to have a material adverse effect on the
Company's combined financial statements.
Environmental
The Company's operations are subject to various Federal and state environmental
laws and regulations. The Company has received notices of violation or potential
liability from the U.S. Environmental Protection Agency (EPA), the State of
Hawaii Department of Health (HDOH) and private parties relating to various
environmental matters associated with the Company's ownership and/or operations
of its assets. Generally, the timing of liability accruals corresponds
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with the completion of remedial investigations or feasibility studies, and are
adjusted as necessary. Although the amount of future environmental expenditures
cannot be determined with certainty, Company management believe that compliance
with present laws will not have a material adverse effect on its financial
statements. Environmental provisions as of May 31 were as follows:
1997 1996
------------ ------------
Accrued liabilities - current $ 3,950 $ 3,190
Other liabilities - noncurrent 16,724 19,785
------------ ------------
Total $ 20,674 $ 22,975
============ ============
Total environmental expense, including provisions, charged to cost of sales and
operating expense, amounted to $4,936, $7,198 and $9,003 in 1997, 1996, and
1995, respectively.
Refinery - Based on an inspection conducted by a U.S. EPA consultant, the EPA
issued a Notice of Violation (NOV) in June 1997 against BHP Hawaii and BHPPAR
pursuant to Section 311 of the Clean Water Act (CWA). The NOV alleged violations
of the Spill Prevention, Control and Countermeasures (SPCC) regulations of the
CWA. The Company has submitted information in response to EPA requests. The EPA
has subsequently dropped its allegations relating to the oil releases and the
parties remain engaged in settlement discussions over issues relating to the
refinery's SPCC plan.
In 1993, BHPPAR settled an administrative complaint filed by the EPA in May
1991. The complaint alleged various Resource Conservation and Recovery Act
(RCRA) violations at the refinery involving surface impoundment closure and
groundwater monitoring requirements. The settlement, embodied in a Consent
Agreement/Final Order (dated July 1993) required BHPPAR to pay a fine (which was
satisfied); conduct certain groundwater monitoring tasks and closure of the
surface impoundments (which have been done and for which final EPA approval was
received in January 1996); complete a supplemental environmental project (which
has been done); and investigate and, if required, implement Corrective Action
under RCRA in and about the refinery site (which is in progress). A report of
the investigation results, dated March 1997, was submitted to the EPA. The
majority of the costs related to the closure plans have been expended. At May
31, 1997, $1.9 million remained in other liabilities to provide for estimated
post-closure monitoring costs over a 30 year period.
Under authority of the Emergency Planning and Community Right-to-Know Act
(EPCRA), the EPA issued a Request for Information relating to past releases of
reportable quantities of regulated EPCRA substances and oil. Pertinent data and
documentation were transmitted to the EPA. A Notice of Violation (NOV) was
issued in June 1997 against BHP Hawaii and BHPPAR, alleging eight violations.
The Company has submitted further information in response. The matter remains
subject to EPA review. No penalty amounts have been assessed to date.
Under a permit application and required compliance certification submitted by
BHPPAR pursuant to Title V of the Clean Air Act (CAA), BHPPAR noted several
regulatory requirements that were not being met at the time of submission, and
included a schedule for addressing or correcting these in accordance with
application regulations. BHPPAR has implemented corrective measures to address
the foregoing items in accordance with its proposed compliance schedule. Under
authority of the CAA, the EPA asked for additional information relating to such
past non-compliance matters. BHPPAR provided the information and documents
requested. In 1996 the EPA issued a Finding of Violation (FOV) against BHP
Hawaii and BHPPAR. The parties
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have engaged in settlement negotiations and no penalty amount has been assessed.
It is not anticipated that any penalty imposed or settlement concluded will have
a material adverse effect on the Company's financial condition.
Honolulu Harbor - Properties adjacent to Honolulu Harbor have been impacted by
the conduct of a variety of industrial activities since the beginning of this
century. The HDOH, under the authority of the Hawaii Environmental Response Law,
requested information from various owners and operators in the area surrounding
the harbor to determine the extent of hydrocarbon contamination. A group of
owners and operators, including BHP Hawaii Inc., on behalf of the Company, have
entered into a voluntary agreement with the HDOH to undertake an initial phase
of environmental site investigation in exchange for certain commitments from the
HDOH, including the notification of additional potentially responsible parties
to participate in this activity. A provision of $600 was accrued for the
estimated costs of this initial phase. An additional $2.8 million was accrued to
perform hydrogeological studies and groundwater monitoring in the vicinity of
Pier 29 which was formerly leased and operated by the Company.
Honolulu International Airport - As a result of environmental site assessments
commissioned by the State of Hawaii Department of Transportation (HDOT) in
conjunction with the proposed development of properties in the vicinity of the
airport, the HDOT requested that costs be shared among certain facility owners
and operators to remedy an alleged hydrocarbon condition in the area. At the
time of the site assessment, BHPPAR operated certain aboveground fuel tanks
located near the development area. The HDOT subsequently deferred its
development plans indefinitely. BHPPAR sold its interests in the fuel tank
facilities and underlying real property to an adjacent tank farm operator which
continues to operate the facilities. To date no claims or demands have been made
against BHPPAR. The Company has accrued $1.6 million for estimated hydrocarbon
recovery and clean-up costs.
Gas Express Retail Gas Stations - The Company has sixteen stations which have
been subject to known petroleum product releases. Of these, eight have received
"no further action" determinations from the HDOH, and one has a "no further
action" request pending. Of the remaining stations, one site has been scheduled
for demolition and the reconstruction of a new gas station facility.
Contaminated soil is to be removed at the time of demolition. Another station
has been completely reconstructed and a request for "no further action" status
is in the process of being submitted. Five remaining stations are currently
still being investigated and/or remediated in accordance with regulatory
requirements. The Company is responsible to assure proper closure of the
underground storage tank systems in compliance with regulatory requirements when
each of its stations is eventually taken out of service. As closures occur, the
Company incurs costs for the excavation of soils, the removal and disposal of
tanks, environmental site assessments and media remediation, if necessary, as
well as costs to buy-out unexpired lease commitments and write-off any
unamortized improvements. The Company has prepared cost estimates for the
closure of each site. As of May 31, 1997, total closure costs were estimated to
be $14.3 million, of which $7.7 million has been provided for. Of this amount,
$2.7 million was provided for stations with known or suspected product leakage.
The remainder of the estimated closure costs are being accrued over the
remaining terms of stations' respective leases.
Capital Expenditure Commitments
The Company had capital projects in progress at May 31, 1997, which were
expected to require an additional $11.6 million to complete.
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15. SUBSEQUENT EVENTS
Sale of Company to Tesoro Petroleum Corporation - March 1998
On March 18, 1998, the Company's stockholders entered into a stock sale
agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will
purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is
expected to close by the end of May 1998, subject to regulatory review and other
customary conditions. The price to be paid at closing amounts to $275 million in
cash (including a $5 million escrow deposit). After closing, the cash price will
be increased by the amount that net working capital sold exceeds $100 million,
or reduced by the amount that net working capital is less than $100 million. In
addition, Tesoro will issue an unsecured, non-interest bearing, promissory note
for $50 million payable in five equal annual installments of $10 million each,
beginning in 2009. The note will provide for earlier payment, depending on
earnings performance of the acquired assets.
The parties will execute a separate environmental agreement at closing, whereby
the selling stockholders will indemnify Tesoro and the Company for environmental
costs arising out of conditions which exist at, or existed prior to, closing
subject to a maximum limit of $9.5 million. The environmental indemnity will
survive for a ten-year period. Certain environmental liabilities of the
Companies will be retained by BHP and are not subject to the $9.5 million
indemnity.
As a result of the sale, the Company anticipates recognizing an estimated loss
of approximately $120-125 million. This estimated loss will increase or decrease
based on results of operations and changes in noncurrent assets and liabilities
through the closing date. Substantially all of the loss is expected to be
allocated to a further reduction in the fair value of the property, plant and
equipment.
Sale of the Gas Company - October 1997
An affiliated Hawaii company, Gasco, Inc. (the Gas Company), was sold effective
October 31, 1997. The Gas Company provides public utility gas service and
non-utility propane (LPG) to residential and commercial customers throughout
Hawaii. The Gas Company continues to purchase naphtha, for the manufacture of
synthetic natural gas, and liquified petroleum gas from BHPPAR under term
contracts. Sales to the Gas Company are included in sales to affiliates in the
accompanying statements of operations and in related-party information (see Note
12). Sales to the Gas Company amounted to $21.8 million in 1997, $21.4 million
in 1996, and $ 21.3 million in 1995.
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