Item 3. Legal Proceedings
Tosco's Spokane, Washington terminal is located within a site being investigated by the United States Environmental Protection Agency (the "EPA") and the Washington Department of Ecology (the "WDOE") for suspected hydrocarbon and lead contamination. Tosco has been notified by the WDOE that it, and the major oil company from which it purchased the facility, are included in the list of six parties potentially liable for cleanup of the site under state law. The area identified by the WDOE was included on the Superfund National Priorities List (the "Superfund List"). The source, extent and nature of the contamination have not been determined but are the subject of investigations. Tosco and other potentially liable parties are working with the WDOE with regard to the investigation of the site. The extent of Tosco's liability, if any, is unknown.
In 1990 the EPA and the California Regional Water Quality Control Board, San Francisco Bay Region ("RWQCB") issued Orders ("Orders") identifying suspected releases of hazardous constituents at a number of hazardous waste and solid waste management units on the Avon Refinery property, including several older inactive units which were used by Phillips Petroleum Company ("Phillips"), a former owner, but not by Tosco, and directed Tosco to investigate the identified releases and determine the need for corrective action. In July 1992, the RWQCB issued Waste Discharge Requirements which, among other things, ordered Tosco to submit a plan of corrective action ("Corrective Action Plan") to deal with the suspected releases of hazardous waste at the Avon Refinery. The Corrective Action Plan was submitted on January 4, 1993. This Plan was subsequently modified through submission of a Perimeter Groundwater Monitoring Plan ("PGMP") which received conditional approval by the RWQCB in September 1995. The PGMP is currently under review by EPA. The RWQCB also issued an Order in June 1990 which required Tosco to expand programs monitoring groundwater quality throughout the Avon Refinery and to investigate the presence of subsurface liquid hydrocarbons. In 1992, Tosco received an Order from the RWQCB that among other things, set a date by which significant amounts of subsurface liquid hydrocarbons were to be removed. Pursuant to a lawsuit that was settled in July 1993, Phillips and Texaco, the former owners of the refinery, for the next four years or until the funds provided under the agreement are expended (whichever is later), will pay up to an aggregate of $18 million for one-half of the costs that may be incurred for compliance with certain environmental orders, and in addition, provide Tosco a $6 million credit for past expenses. After the initial term of the agreement, the parties would be free to reinstate the suit. Tosco has not relinquished any of its rights to make claims for reimbursement for costs incurred after the date of settlement and would not be required to reimburse amounts received under the agreement.
On September 4, 1992, Tosco received a Report of Violation ("ROV") from the California Department of Toxic Substances Control ("DTSC"), alleging violations of hazardous waste regulations identified during an inspection of a parcel of land owned by Tosco that was used for petroleum coke storage in connection with operations of Tosco's former Bakersfield Refinery, which was sold in 1986. The ROV, without specifying dates, orders Tosco to comply with various hazardous waste handling practices in connection with the site. Tosco has entered into discussions with DTSC concerning required actions.
On July 19, 1995, the WDOE issued an Enforcement Order identifying Tosco, along with approximately 17 other parties, as a potentially liable party under state law for the investigation and remediation of a site known as the Yakima Railroad Area to which the parties allegedly sent carbon containing chlorinated solvents for regeneration. The source, extent and nature of the contamination has not been determined and the extent of Tosco's liability, if any, is unknown.
A refinery in Duncan, Oklahoma, formerly owned by Tosco, is subject to investigation by the Oklahoma Department of Environmental Quality ("ODEQ"). The ODEQ has requested that Tosco participate with the former owner, Sun Company, Inc. (R&M) ("Sun"), from whom Tosco purchased the site, and the subsequent owners, including those to whom Tosco sold the site, in the investigation and potential remediation of alleged environmental contamination. On September 29, 1995, Tosco entered into a Consent Agreement and Final Order with ODEQ to investigate the extent of contamination at the refinery, and conduct certain interim remedial actions and prepare a remedial action plan. On April 10, 1995, Tosco filed a complaint for declaratory relief against Sun (Tosco Corporation v. Sun Company, Inc. (R&M), U.S. District Court, Western District of Oklahoma, Case No. Civ 95 556M) to recover the costs of complying with the ODEQ order, and seeking an order determining Tosco's and Sun's rights and legal relations under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA") and the Oil Pollution Act ("OPA"), and under the Purchase Agreement through which Tosco purchased the Duncan Refinery, relating to the costs of environmental investigation and potential remediation at the site.
On November 18, 1992, the RWQCB issued an order requiring Tosco, Phillips and Wickland Oil Company ("Wickland") to investigate the presence of petroleum hydrocarbons and other substances in the soil and groundwater at an oil terminal owned by Wickland. On the basis of this investigation, on January 17, 1996, the RWQCB approved a remedial work plan identifying Wickland as the party solely responsible for implementing remedial actions at the site.
On June 14, 1994, Lion Oil Company ("Lion") filed a Complaint against Tosco (Lion Oil Company v. Tosco Corporation, United States District Court, Western District of Arkansas, Case No. 94-1072) as amended on August 22, 1994, seeking an order for reimbursement under CERCLA, contribution and declaratory relief in connection with the investigation and remediation of alleged environmental contamination of a refinery formerly owned by Tosco located in El Dorado, Arkansas. Tosco sold the property to Lion pursuant to an Asset Purchase & Sale Agreement of March 22, 1985 which included specific provisions limiting Tosco's liability with respect to environmental matters. On August 10, 1995, Tosco's motion to dismiss the suit for failure to state a claim was granted. Lion Oil has appealed.
The operator of a landfill to which it is alleged Tosco sent hazardous waste has sued numerous alleged waste generators, including Tosco, municipalities and transporters, under CERCLA and other environmental laws, (ACME Landfill Corporation v. Althin CD Medical, Inc. et al., United States District Court, Northern District of California, Case No. C91444268 SBA) to recover the costs for closure/post closure of the site. The extent of Tosco's liability is yet unknown.
The Department of Toxic Substances Control, Region 1 ("DTSC"), notified Tosco Corporation that DTSC was preparing an Imminent and Substantial Endangerment Order ("Order") naming Tosco and numerous other companies as PRPs for the remediation of the Environmental Protection Corporation ("EPC") Eastside Landfill located ten miles northeast of Bakersfield, California. On January 4, 1996, after extensive negotiations, Tosco and 12 other companies entered into a Consent Agreement with DTSC, under which the companies agreed to conduct an investigation of the Landfill, to be funded in part by a trust fund created by EPC and administered by DTSC.
The costs of remedial actions are highly uncertain due to, among other items, the complexity and evolving nature of governmental laws and regulations and their interpretations as well as the varying costs and effectiveness of alternative cleanup technologies. However, Tosco presently believes that any cost in excess of the amounts already provided for in the financial statements should not have a materially adverse effect upon Tosco's operations or financial condition. Tosco further believes, as discussed with respect to the Phillips case above, that a portion of future environmental costs, as well as environmental expenditures previously made, will be recovered from other responsible parties under contractual agreements and existing laws and regulations. See Note 15 to the Consolidated Financial Statements.
There are various other suits and claims pending against Tosco and its subsidiaries, which in the opinion of Tosco are not material or meritorious or are substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, Tosco believes the aggregate amount of such liabilities will not result in monetary damages which in the aggregate would be material to the business or operations of Tosco.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Tosco's Common Stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange. Set forth below are the high and low sales prices as reported on the NYSE Composite Tape.
Price Range of Common Stock
The number of Tosco shareholders of record on February 29, 1996 was 10,465.
Dividend Policy
Tosco has paid a regular quarterly cash dividend on its Common Stock since the third quarter of 1989. Pursuant to the terms of Tosco's working capital facility and its bond indentures, dividends on Tosco's Common Stock are permitted to the extent Tosco satisfies certain defined criteria. Continued payment of such quarterly dividend is also subject to profitable results of operations, which are primarily dependent on the continued favorable performance of Tosco's operating facilities and favorable operating margins. There can be no assurance that Tosco will be able to continue payment of such quarterly dividend.
Item 6.
Item 6. Selected Financial Data
The following Selected Financial Data are qualified in their entirety by the more detailed Consolidated Financial Statements and related Notes at the end of this report. The Selected Financial Data for each of the five years ended December 31, 1995 are derived from the Consolidated Financial Statements of Tosco audited by Coopers & Lybrand L.L.P., independent accountants.
TOSCO CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA(a) (Millions of dollars except per share and ratio data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
1995 was a year of progress for Tosco. Excluding special items, operating results improved over 1994 despite lower refinery operating margins, a testament to Tosco's successful strategy to diversify the company's asset base by expanding downstream into retail. Tosco increased the number of company operated stations, acquired under long-term lease 28 Brown Bear car wash sites in the Puget Sound area, and entered into an agreement to acquire BP Oil's Northeast marketing and refining assets which was completed in February 1996. Tosco's balance sheet was also strengthened as the ratio of long-term debt to total capitalization dropped below 50% for the first time since 1993 when Tosco entered into its period of rapid growth. Tosco took initial steps in transitioning to an unsecured debt structure through the issuance of $125 million of unsecured 7% notes to pay down collateralized floating rate bank debt and through an agreement to sell receivables to a financial institution. West Coast administrative operations were also consolidated to achieve efficiencies.
Tosco earned $77.1 million, or $2.04 per fully diluted share, on sales of $7.3 billion for 1995 compared to $83.8 million, or $2.24 per fully diluted share, on sales of $6.4 billion for 1994. Results of operations for 1995, include a restructuring charge totaling $5.2 million ($3.1 million after tax, $.08 per share) related to a major expense reduction program at the Avon Refinery. Results of operations for 1994 include the reversal of 1993's $17.7 million ($10.7 million after tax, $.29 per share) writedown of LIFO inventories due to the recovery of prices during 1994, and a $6 million ($3.6 million after tax, $.10 per share) environmental cost accrual for probable investigative and remedial liabilities at former operating locations.
Excluding special items, Tosco generated an operating contribution (income before selling, general and administrative expense, net interest expense and income taxes) for 1995 of $285 million, an increase of $24 million over 1994. The increase was primarily attributable to the excellent production operations of the Avon and Bayway Refineries, lower production costs, moderately higher East Coast operating margins, and the continued strong performance of expanded retail operations which more than offset declines in West Coast refinery operating margins and reduced production from the Ferndale Refinery.
(a)Bayway's margins include the results of hedges designed to lock in a predetermined level of operating margins on a varying percentage of Bayway's production.
(b)Avon's catcracker (the principal gasoline production unit) and the processing units at the Ferndale Refinery were shut down for scheduled maintenance during the first quarter of 1995.
(c)Bayway's production results for 1995 reflect the benefit of expanded crude distillation capacity completed in the third quarter of 1994.
(d) Avon's fluid coker (the refinery's principal conversion unit) and Bayway's fluid catcracker were shut down for scheduled turnaround maintenance in 1994.
(e) As illustrated by the table, operating margins vary significantly by refinery. This variance is due to a number of reasons including marketing conditions in the principal areas served by the refineries, their configuration and complexity (ability to convert raw material into clean product) and maintenance schedules.
(f) Restated to reflect operating contribution per charge barrel (sales minus cost of sales, excluding refinery operating costs and non-operating items divided by total refinery charges).
The Avon Refinery's operating contribution declined from 1994 due to poor operating margins that overshadowed record production. The fluid catalytic cracking unit (catcracker), Avon's principal gasoline production unit, was shutdown for major scheduled maintenance for 55 days in the first quarter of 1995, negatively impacting clean product yields for the year. Despite the catcracker shutdown, crude oil processed averaged 167,700 barrels per day (B/D), an increase of 6,900 B/D over 1994 and the highest in Avon's history. Production of clean transportation fuels (gasoline, diesel and jet fuel) increased by 4,100 B/D to 136,800 B/D. However, Avon's operating margin per charge barrel declined by $.67 to $5.56 per barrel for 1995 as excess supply in highly competitive markets depressed product prices, particularly in the first quarter of 1995. In response to continuing poor operating margins, Tosco implemented a restructuring program to reduce costs and increase efficiency. The restructuring cost of $5.2 million, recorded in the first and second quarters of 1995, was primarily for the then anticipated severance costs of approximately 175 people at the Avon Refinery and related support locations.
Bayway's operating contribution for 1995 improved over 1994 due to record refinery production rates, higher margins, and lower production costs. Raw material throughput increased 39,300 B/D to a record 291,600 B/D, while production of clean transportation fuels and heating oil also increased 36,700 B/D to a record 241,500 B/D. Expanded crude distillation capacity completed in 1994 and record production unit rates of the fluid catalytic cracking unit, the world's largest and Bayway's principal gasoline production unit, were the principal reasons for the record production rates. The catcracker was shutdown for scheduled turnaround maintenance in 1994. Bayway's operating margin per charge barrel improved $.25 per barrel for the year, primarily during the second half of 1995 as a result of increased sale prices. Operating margins for the year were hurt by the exceptionally weak market conditions of the first quarter of 1995 caused by the combined impact of a surplus of heating oil and poor gasoline markets. Operating margins improved during the balance of the year as demand strengthened and uncertainty over the introduction of reformulated gasoline (RFG) subsided.
Operating contribution from Tosco Northwest, whose operations encompass retail marketing operations and the Ferndale Refinery, declined from 1994. The decrease was primarily due to poor refining margins and the shutdown of the refinery for 33 days for turnaround maintenance during the first quarter of 1995. Ferndale's operating margin per charge barrel declined $.37 per barrel and refinery throughput declined 9,000 B/D to 81,600 B/D. Retail operations generated an operating contribution of $75 million for 1995, an increase of $11 million from 1994. Retail volumes sold increased 18,000 B/D to 68,000 B/D due to the acquisitions of retail operations in Northern California and Arizona in August 1994 and December 1994, respectively. Retail gasoline margins remained approximately the same at $.10 per gallon for 1995 and 1994.
Selling, general, and administrative expense (SG&A) for 1995 increased by $11.7 million to $95.9 due to Tosco's expanded retail operations and higher levels of incentive compensation (due to higher levels of operating income before special items) which was partially offset by certain benefit recoveries. SG&A expense for 1994 was reduced by insurance recoveries of $3.5 million (related to now-settled litigation with the predecessor owners of the Avon Refinery over environmental matters) and $1.0 million (related to a retroactive adjustment of prior year medical costs based on favorable claim experience). See Note 15 to the Consolidated Financial Statements.
In June 1995, Tosco entered into a three year agreement with a financial institution to sell on a revolving basis up to $100 million of an undivided percentage ownership interest in a designated pool of accounts receivable (Receivable Transfer Agreement). Costs of the Receivable Transfer Agreement, which totaled $3.1 million for six months (less than interest costs would have been on equivalent cash borrowings under Tosco's Revolving Credit Agreement), are included in cost of sales. See Note 3 to the Consolidated Financial Statements. Interest expense increased in 1995, despite the reduction in interest costs resulting from the Receivable Transfer Agreement, due to higher debt levels related to Tosco's expanded operations.
The provision for income taxes for 1995 increased by $.4 million despite lower pre-tax income because the tax provision for 1994 included recognition of revised income tax benefits of $2.9 million related to Tosco's discontinued fertilizer operations.
RESULTS OF OPERATIONS - 1994
Tosco earned $83.8 million, or $2.24 per fully diluted share, on sales of $6.4 billion for 1994 compared to $80.6 million or $2.33 per fully diluted share, on sales of $3.6 billion for 1993. Despite income rising $3.3 million, earnings per fully diluted share for 1994 fell by $.09 per share because of the issuance of 2,990,000 shares of Common Stock in December 1993. Results of operations for 1994 include the reversal of 1993's $17.7 million writedown of LIFO inventories due to the recovery of prices during 1994. Tosco also recorded a $6 million environmental cost accrual for probable investigative and remedial liabilities at former operating locations.
Tosco's acquisitions and expanded wholesale operations were the principal reasons for the increase in sales and cost of sales for 1994 compared to 1993. In April 1993, Tosco purchased the Bayway Refinery and related assets from Exxon Corporation. In December 1993, Tosco acquired, through long-term lease, Northville Industries' Long Island, New York oil distribution system and purchased the Ferndale Refinery and retail marketing operations in the Pacific Northwest from BP Exploration & Oil Inc. (BP). In August 1994 and mid-December 1994, Tosco expanded its retail system through the acquisition, under long-term lease arrangements, of the retail marketing operations of BP in Northern California and Exxon in Arizona, respectively.
Tosco generated an operating contribution before special items for 1994 of $260 million from its three refineries and retail marketing operations, an increase of $8 million over 1993.
Tosco Northwest produced an operating contribution of $118.6 million in its initial year of operations due to strong retail margins, good production results from the Ferndale Refinery, and good refining margins in the Pacific Northwest. The Ferndale Refinery processed 90,600 B/D of raw materials for 1994, a 17,100 B/D improvement over 1993 production results under previous management. Operating margins per charge barrel were $3.62 for 1994 due to strong product prices, especially for residual fuels, while retail margins averaged $.10 per gallon on sales volume of 2.1 million gallons per day.
The Avon Refinery and its related commercial operations experienced a decline in operating contribution from 1993 due to reduced production levels and poor operating margins. Raw material throughput rates for 1994 fell by 5,700 B/D to 160,800 B/D while production of clean transportation fuels fell by 4,900 B/D to 132,700 B/D. Scheduled turnaround maintenance on the fluid coker, which was completed during the second quarter of 1994, was the primary reason for the fall in production. Tosco also reduced production levels in early December 1994 in response to poor operating margins and to prepare for an early start of the major upgrade and turnaround of the catcracker which occurred in January 1995. Avon's operating margins per charge barrel for 1994 declined by $1.17 to $6.23, the lowest since 1987. Increases in raw material costs were not matched by increases in product prices because of excess supply, highly competitive markets, and the lingering effects of the recession in California, Avon's principal market, which lagged the improvement in the national economy.
Bayway's operating contribution for 1994 includes the reversal of the $17.7 million writedown of LIFO inventories recorded in 1993. Excluding the inventory valuation, Bayway's operating contribution for 1994 declined from the approximate nine month operating period of 1993. The decline in operating contribution was primarily due to reduced production, weak operating margins and higher distribution costs. Raw materials processed declined by 7,000 B/D to 252,200 B/D while production of clean transportation fuels and heating oil declined by 9,100 B/D to 204,800 B/D due to scheduled turnaround maintenance of the catcracker, during the third quarter of 1994. Bayway also reduced production runs in early December in response to weak operating margins in the Northeast and to perform some minor but necessary maintenance of production units.
Operating margins per charge barrel averaged $2.63 for the year, a decline of $.55 from 1993. Bayway, like Avon, was not able to match increases in raw material costs with comparable increases in product prices, due to excess supply in highly competitive markets. In addition, fourth quarter margins were negatively impacted by mild winter weather and market uncertainty over the introduction of cleaner burning but higher cost reformulated gasoline (RFG). Certain areas in the Northeast elected to opt out, and were permitted to do so by the federal government, of their voluntary participation in the RFG program (mandated by federal regulations for the largest metropolitan areas of the United States). Operating costs were also impacted by higher distribution costs as Bayway expanded its terminal distribution network and commercial operations.
Selling, general and administrative expense for 1994 increased by $25.9 million to $84.1 million due to Tosco's expanded operations.
The increase in net interest expense for 1994 is primarily due to higher levels of debt related to Tosco's acquisitions and their associated working capital requirements and higher short-term interest rates.
The provision for income taxes for 1994 reflects a 1.5% reduction in the annual effective income tax rate and recognition of $2.9 million of revised income tax benefits related to Tosco's former activities. The effective rate reduction is attributable to revised state income tax allocation factors and estimated California investment tax credits. The provision for income taxes for 1993 included prior year tax credits of approximately $2.5 million which were finalized in tax returns filed in October 1993.
RESULTS OF OPERATIONS - 1993
Tosco's continuing operations earned $80.6 million, or $2.33 per fully diluted share, on sales of $3.56 billion for 1993 as compared to income from continuing operations of $30.2 million, or $.68 per fully diluted share, on sales of $1.86 billion for 1992. Continuing operations exclude the results of Tosco's former phosphate fertilizer operations.
Tosco's operating contribution of $234.1 million for 1993, after an inventory writedown of $17.7 million, increased by $126.4 million over 1992 due to a $74.8 million increase in operating contribution from Avon and its related commercial activities and an operating contribution of $51.6 million from Bayway and its related commercial activities. Avon's improvement in operating contribution was primarily attributable to record production rates, improved operating margins and lower environmental cost accruals, partially offset by the increased refinery and product distribution costs associated with higher levels of production. Raw material throughput rates averaged a then record 166,310 B/D for 1993 (versus 152,510 B/D for 1992) and production of clean transportation fuels also averaged a record 137,610 B/D (versus 126,570 B/D for 1992). Operating margins improved by $.37 to $7.40 per barrel as per barrel costs of raw materials fell by more than the sales value of refined products produced. The improved margins (achieved despite the sluggish economy, especially in California) were assisted by the completion and start up of facilities for the production of low-sulfur, low-aromatic diesel fuel meeting the California Air Resources Board's (CARB) cleaner burning fuel standards effective October 1, 1993.
Bayway achieved an operating contribution of $51.6 million, after an inventory writedown of $17.7 million, for the period April 8, 1993 to December 31, 1993 due to strong refinery performance in a period of lackluster margins. Raw material throughput averaged 259,250 B/D while production of clean transportation fuels and heating oil, and total production averaged 213,980 and 264,490 B/D, respectively. Operating margins, including net realized results of hedges, averaged $3.18 per barrel.
Consolidated selling, general and administrative expense of $58.2 million for 1993 increased by $19.4 million over 1992 primarily due to the acquisition of Bayway (including approximately $7.5 million of non-recurring costs incurred in establishing commercial, accounting and general and administrative functions at Bayway).
Consolidated net interest expense for 1993 of $44.1 million increased by $26.2 million over 1992. Net interest expense for 1992 includes $12.8 million of intercompany interest income from discontinued operations and the writeoff of approximately $3.6 million of deferred financing costs related to previously outstanding indebtedness. Without the effect of these two items, consolidated net interest expense for 1993 increased by $17 million as the costs of higher levels of debt (resulting from the purchase of Bayway and its associated working capital requirements) more than offset the benefits of lower interest rates.
The provision for income taxes for 1993 includes the 1% increase in federal income tax rates effective January 1, 1993 as well as tax credits of approximately $2.5 million which were finalized in tax returns filed in October 1993.
ACQUISITIONS
On February 2, 1996, Tosco completed the purchase of the U.S. Northeast marketing and refining assets from BP for $59 million, excluding the value of inventories. Under the purchase agreement, Tosco obtained an exclusive license valid for 15 years, with various renewal options, to market retail gasoline and diesel fuels under the BP brand. The license covers Delaware, Maryland, the Washington D. C. metropolitan area, Pennsylvania, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire and Maine. Portions of western Pennsylvania and Maryland are excluded. The term of Tosco's exclusive license in nine Western states was also extended to 15 years from the closing date. The purchase also included the 180,000 B/D Marcus Hook Refinery near Philadelphia (which was taken over in a non-operating mode), petroleum product terminals and certain associated pipeline interests (some of which are surplus to Tosco's needs and will be sold). Tosco has also offered to buy BP's one-third interest in the Harbor pipeline on which BP's partners have a right of first refusal to acquire BP's interest. BP retains environmental obligations relating to the Marcus Hook Refinery and other properties included in the sale.
On February 16, 1996, Tosco announced an agreement to purchase all outstanding shares of the Circle K Corporation (Circle K) for $29 per share and to merge Circle K with a subsidiary of Tosco. Circle K is a large gasoline retailer and operator of company-owned convenience stores. A definitive agreement was signed with the holders of approximately 68% of Circle K's outstanding shares (Selling Shareholders) and a merger agreement was approved by the Board of Directors of both companies. Under the stock purchase agreement, Selling Shareholders will receive a combination of cash and common stock of Tosco (Common Stock). Under the merger agreement the remaining shareholders will receive Common Stock. Payment of the total acquisition price of approximately $710 million, not including transaction and certain other costs, will consist of approximately 6.5 million shares of Common Stock and cash. The common stock to be issued is subject to adjustment if the price of Common Stock fluctuates outside an agreed range and for shares issued with respect to stock options held by certain employees of Circle K. Tosco expects to finance the cash requirements from borrowings under contemplated new debt arrangements and from available cash and credit facilities. Completion of the transaction is subject to certain conditions including the approvals of regulatory authorities and the shareholders of Circle K. The acquisition is expected to close prior to mid-year.
OUTLOOK
Results of operations are determined by two principal factors: the operating efficiency of the refineries and refining and retail operating margins. Scheduled major maintenance of Avon's cat cracker and the processing units at Ferndale in the first quarter of 1995 completed a cycle of heavy turnaround maintenance. Accordingly, Tosco's currently operating refineries are expected to operate at high production levels for 1996. The Marcus Hook Refinery is expected to remain in a non-operating mode in 1996. Margins at the beginning of 1996 were satisfactory but Tosco is not able to predict the level or trend of refinery and retail operating margins because of the uncertainties associated with oil markets.
Tosco, and other refiners, made significant capital expenditures to meet the cleaner burning RFG gasoline standards of the California Air Resources Board (CARB) effective March 1, 1996 (CARB Phase II gasoline). Tosco also entered into a 7 year arrangement with Chevron Products Company which provides Tosco 35,000 B/D of CARB Phase II gasoline for 35,000 B/D of conventional gasoline plus differentials. Tosco is not certain that the higher cost of CARB Phase II gasoline will be fully recovered in higher sales prices. In November 1995, the 22 year ban on the export of Alaskan North Slope (ANS) crude oil, a primary source of raw material for West Coast refineries, was lifted. This action may lead to higher costs for ANS and other domestic crude oils.
In January 1996, Atlantic Richfield Company (ARCO) informed Tosco that it would not extend its ten year exchange agreement when it expires at the end of 1996. Under the exchange agreement, ARCO presently delivers 50,000 B/D of ANS crude oil to the Avon Refinery in exchange for a variable quantity of gasoline. The economic effects of the termination are uncertain. However, Tosco expects to acquire alternative suppliers and customers (including its own expanded retail operations) to replace ARCO when the exchange agreement expires.
In view of uncertain operating margins and highly competitive markets, Tosco is committed to improving its results by lowering costs in all areas of operation. Restructuring efforts taken in the first half of 1995 produced reductions in unit operating costs at the Avon Refinery. These efforts are continuing. West Coast operating and administrative functions were consolidated in late 1995 and the company was reorganized into functional organizations in February 1996. The acquisition of Circle K will also allow further economies of scale.
To reduce Tosco's exposure to fluctuations in refinery operating margins, Tosco has at times used futures contracts and other derivatives to lock in what it considered to be acceptable refinery operating margins on a varying percentage of future production. At December 31, 1995, Tosco had hedged approximately 3% of Bayway's expected first quarter and annual 1996 production at acceptable historical margins.
Tosco's expansion and diversification into retail marketing has been successful in providing earnings growth and stability. The acquisition of Circle K, which Tosco expects to be additive to Tosco's per share earnings after the combined operations are fully integrated, advances Tosco's goal of becoming a major gasoline retailer. It adds convenient store operations, a third major related component to Tosco's petroleum refining and gasoline retail business.
CASH FLOWS AND LIQUIDITY - 1995
As summarized in the Statement of Cash Flows, cash decreased by $5 million during 1995 as cash used in investing and financing activities of $301 million and $111 million, respectively, exceeded cash provided by operating activities of $407 million.
Cash provided by operating activities of $407 million was from cash earnings of $226 million (net income plus depreciation, amortization, and deferred income taxes) plus a decrease in working capital of $180 million and $1 million from other sources.
Net cash used in investing activities totaled $301 million, primarily for capital additions and deferred turnaround expenditures of $203 million and $48 million, respectively and increases in other assets (primarily trademarks) of $51 million.
Cash used in financing activities totaled $111 million as net repayments under short-term bank lines and the revolving credit facility of $210 million, dividend payments of $24 million and debt and other payments totaling $2 million exceeded proceeds from the 7% Notes of $125 million.
Liquidity (as measured by cash, short-term investments and deposits and unused credit facilities) increased by $150 million during 1995 due to an increase of $156 million in unused credit facilities partially offset by a decrease in cash, cash equivalents, short-term deposits and investments of $6 million. At December 31, 1995, liquidity totaled $363 million (an amount when supplemented by cash borrowings under contemplated new debt arrangements to finance the Circle K acquisition, Tosco believes is adequate to meet its expected liquidity demands for at least the next twelve months).
CAPITAL EXPENDITURES AND CAPITALIZATION
Tosco spent $203 million on budgeted capital projects in 1995. Tosco and BP also entered into an agreement to settle contingent participation payments related to the acquisition of BP's Pacific Northwest refining and retail assets for $35 million. See Note 8 to the Consolidated Financial Statements.
A large portion of capital spending on refinery projects was related to the Avon Refinery's clean fuels program to meet the CARB Phase II specifications. The multi-year project, which was completed on time and on budget, converts a significant portion of Avon's gasoline production to CARB Phase II gasoline. With the exchange of conventional gasoline for CARB Phase II gasoline with Chevron, approximately 85% of Avon's gasoline production will meet CARB Phase II specifications. Other refinery capital expenditures continued to address required environmental and safety programs. The balance of Tosco's refinery capital investments targeted discretionary low cost, high return projects to lower operating costs, improve refinery throughput or yields, or increase operating flexibility and reliability. Bayway's fuel products controls were improved with the installation of a modern "state of the art" refinery control system. The new computer system, which monitors and directs all refinery production processes, has resulted in better production levels and yields with greater reliability, safety and environmental compliance.
Bayway Refining Company has entered into a contract to acquire a Solvent Deasphalter for approximately $32.5 million, plus the cost of agreed upon modifications and interest, at mechanical completion (as defined). Construction of this unit began in 1995 and mechanical completion is expected in the third quarter of 1996. Tosco is responsible for other capital improvements to tie in the Solvent Deasphalter into the Bayway Refinery system raising the total expected cost of the unit to approximately $48 million. When completed, this unit will process approximately 20,000 B/D of lower-valued residual fuel to produce feedstock for the refinery's fluid catalytic cracker and reduce the amount of higher-cost, partially refined feedstocks that Bayway currently purchases from third parties.
In May 1995, Tosco announced a three-year, $200 million capital program to expand its western retail operations through the development of new, and enhancement of existing, retail facilities in existing and new markets, the acquisition of existing stations or systems, and development of new jobber business. In August 1995, Tosco entered into an agreement to expand an existing lease facility to finance the acquisition and improvement of up to $15 million of service station properties in Arizona. At December 31, 1995, Tosco, as agent for the lessor, had spent approximately $3.6 million but had not yet entered into leases pending completion of construction. In November 1995, Tosco acquired under long-term lease the Brown Bear car wash facilities in the Puget Sound area. The pending acquisition of Circle K has curtailed further expansion plans. Capital spending will now be focused on improving present sites that can be financed from internal cash flows.
Tosco expects to fund its 1996 capital expenditures for its refineries from cash provided by operations, available credit, and other resources. In view of the pending acquisition of Circle K, capital spending for retail operations will be refocused on the enhancement of existing retail sites and the intergration, after the acquisition, of both operations. To increase financial flexibility and reduce interest costs, Tosco amended its working capital agreement in April 1995, entered into a Receivable Transfer Agreement in June 1995, and issued $125 million of unsecured 7% Notes in July 1995. Tosco is contemplating other financing alternatives to improve its financial capacity and flexibility, including a new unsecured credit facility to be used for general corporate purposes and, to partially fund the Circle K acquisition, a $200 million public debt offering.
At December 31, 1995, total shareholders' equity was $627 million, an increase from December 31, 1994 of $52 million due to net income ($77 million) less dividend and other payments ($25 million). Debt, including current maturities and short-term bank borrowings, decreased by $85 million to $645 million at the end of 1995.
IMPACT OF INFLATION
The impact of inflation has been less significant during recent years because of the relatively low rates of inflation experienced in the United States. Raw material costs, energy costs, and labor costs are important components of Tosco's costs. Any or all of these components could be increased by inflation, with a possible adverse effect on profitability, especially in high inflation periods when raw material and energy cost increases generally lead finished product prices. In addition, a rapid escalation of raw material and finished products prices could result in credit restrictions if working capital requirements exceed the maximum availability under Tosco's working capital facilities.
RISK MANAGEMENT
Tosco uses a variety of strategies to reduce commodity price, interest and operational risks.
As discussed in Note 2 to the Consolidated Financial Statements, Tosco, at times and when able, uses futures contracts to lock in what it believes to be favorable margins on a varying portion of Bayway's production by taking offsetting long (obligation to buy at a fixed price) positions in crude oil and short (obligation to deliver at a fixed price) positions in gasoline and heating oil futures and forward contracts. This strategy hedges Bayway's exposure to fluctuations in refining margins and therefore reduces the volatility of operating results. In addition, Tosco enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of the Bayway Refinery's residual fuels production. At December 31, 1995, Bayway had hedged approximately 3% of its expected first quarter and annual 1996 production, respectively, at acceptable historical margins. Tosco utilizes futures and forward contracts to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign crude oil that Bayway refines and the cost of domestic crude oil.
Tosco manages its interest rate risk by maintaining a mix of fixed rate and floating rate debt. Currently, floating rate debt, primarily borrowings under the Revolving Credit Facilities which provide up to $450 million of revolving credit availability, is used to finance Tosco's working capital requirements. Existing fixed rate debt consists primarily of $125 million unsecured non-callable notes issued in July 1995 to repay indebtedness under the Revolving Credit Facilities and $450 million of mortgage bonds issued in 1992 and 1993 to refinance previously outstanding floating rate bank debt and to finance the acquisition of capital assets including the acquisition of the Bayway Refinery. As required by the previously outstanding bank debt agreement, Tosco entered into an interest rate swap agreement which converted a predetermined percentage of floating rate bank term debt ($31.5 million at December 31, 1995) to fixed rate term debt. The interest rate swap expires in the second quarter of 1996.
Tosco carries insurance policies on insurable risks, which it believes to be appropriate at commercially reasonable rates. While Tosco believes that it is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would have to be paid out of general corporate funds, if available. See Note 2 to the Consolidated Financial Statements for a discussion of Tosco's strategy to reduce credit risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Part II, Item 8, are included in Part IV, as indexed at Item 14(a)(1) and (a)(2).
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information appearing under the caption "Nominees for Election" in the registrant's definitive Proxy Statement relating to its 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. See also the information appearing under the caption "Executive Officers of the Registrant" appearing in Part I.
Tosco is not aware of any family relationship between any Director or executive officer. Each officer is generally elected to hold office until the next Annual Meeting of the Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in the registrant's definitive Proxy Statement relating to its 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing under the caption "Stock Ownership of Officers and Directors" and "Other Matters - Certain Security Holdings" in the registrant's definitive Proxy Statement relating to its 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in the registrant's definitive Proxy Statement relating to its 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) AND (A)(2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The consolidated financial statements and financial statement schedules of Tosco Corporation and subsidiaries, required by Part II, Item 8, are included in Part IV of this report. See Index to Consolidated Financial Statements and Financial Statement Schedules on page.
(A)(3). EXHIBITS.
3(a). Restated Articles of Incorporation of Registrant as currently in effect, including Certificates of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Special Rights of Preferred Stock. Incorporated by reference to Exhibit 28.2 to Registrant's Current Report on Form 8-K dated July 29, 1991.
3(b). By-laws of Registrant as currently in effect. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
4(a). Form of Indenture between Registrant and IBJ Schroder Bank and Trust Company, as Trustee, relating to 9% Series A First Mortgage Bonds due March 15, 1997 and 9 5/8% Series B First Mortgage Bonds due March 15, 2002. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-3 dated March 4, 1992.
4(b). Form of Indenture among Registrant, Bayway Refining Company and the First National Bank of Boston, as Trustee, relating to 8 1/4% First Mortgage Bonds due 2003. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-4 dated April 29, 1993.
4(c). Form of Indenture dated as of July 7,1995 between Registrant and The First National Bank of Boston, as Trustee, relating to 7% Notes due 2000. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form s-3 dated May 18, 1995 (No- 33-59423).
10(a). Second Amended and Restated Credit Agreement dated as of April 7, 1995 among Tosco Corporation, Tosco Europe Limited and Bayway Refining Company, as Borrowers, and the Banks names therein, as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston. as Agent and Arranger.
10(b). Exchange Agreement dated October 2, 1986, between Registrant and Atlantic Richfield Company. Incorporated by reference to Exhibit 10(aa) to Registration Statement filed by Registrant on Form S-1 under the Securities Act of 1933 (No. 33-9578).
10(c) Severance Agreement dated November 15, 1989, between Registrant and James M. Cleary. Incorporated by reference to Exhibit l0(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. Schedule identifying similar agreement between Registrant, or its subsidiaries, and another employee. Amendments, effective as of January 1 and February 1, 1993, to said Agreements. Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1993.
10(d). Severance Agreement dated January 1, 1993 between Registrant and Thomas D. O'Malley including schedule identifying similar agreements between Registrant, or its subsidiaries, and four of its employees. Incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(e). Indemnification Agreement dated September 30, 1987, between Registrant and James M. Cleary, including schedule identifying similar agreements between Registrant and its Directors and/or officers, together with related Trust Agreement. Incorporated by reference to Exhibit 10(aa) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
10(f). Sale and Purchase Agreement for Bayway Refinery and Related Facilities dated December 10, 1992 between Exxon Corporation and Bayway Refining Company. Incorporated by reference to Exhibit 10(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(g). Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No. 35P73, dated February 22, 1990 between Texaco Trading and Transportation Inc. and Tosco Refining Company. Incorporated by reference to Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(h). Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No. 17P77, dated April 13, 1988 between Texaco Trading and Transportation Inc. and Tosco Refining Company. Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(i). Crude Oil Supply Agreement dated December 28, 1993 between BP Oil Supply Company and Tosco Corporation. Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(j). Trademark License Agreement dated December 28, 1993 between British Petroleum Company p.l.c. and Tosco Corporation. Incorporated by reference to Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Schedule Identifying (i) Amended and Restated Trademark License Agreement between British Petroleum Company p.l.c. and Tosco Corporation dated as of August 1, 1994 and (ii) Trademark License Agreement (California) between BP Oil Marketing Inc. and Tosco Corporation dated as of August 1, 1994. These agreements extended the term of the original agreement and expanded the territory of the original agreement.
10(k). Agreement for the Purchase and Sale of Assets dated as of the 9th day of November, 1993 by and between BP Exploration & Oil Inc. and Registrant. Incorporated by reference to Exhibit 1 to Registrant's current Report on Form 8-K dated November 9, 1993.
10(l). Stock Sale Agreement dated February 16, 1996 by and among Tosco and various stockholders of the Circle K Corporation. Incorporated by reference to Exhibit 1 to Registrant's Schedule 13D dated February 23, 1996, filed with respect to The Circle K Corporation.
10(m) Agreement and Plan of Merger dated as of February 16, 1996 by and among Tosco, Tosco Acquisition Sub, Inc. and The Circle K Corporation. Incorporated by reference to Exhibit 2 to Registrant's Schedule 13D dated February 23, 1996, filed with respect to The Circle K Corporation.
11. Statement regarding computation of per share earnings. See Exhibit 11 to Financial Statements (page), as required by Item 8 and appearing in Item 14 hereof.
21. A list of all subsidiaries of the Registrant.
. 23. Consent of Coopers & Lybrand. . 27. Financial Data Schedule
99. Condensed Consolidating Financial Information and Report of Independent Accountants
(B). REPORTS ON FORM 8-K
None
(C). Financial Statement schedules required by Regulation S-X are excluded from the Annual Report to Shareholders by Rule 14a-3(b)(1). See Schedule II to the Financial Statements, as required by Item 8, and appearing under Item 14 hereof.
TOSCO CORPORATION AND SUBSIDARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K YEAR ENDED DECEMBER 31, 1995
PAGE(S)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended December 31, 1995,1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Common Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements -
Financial Statements Schedules: II - Valuation and Qualifying Accounts
Financial Exhibits -
Financial statement schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements and related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Tosco Corporation
We have audited the consolidated financial statements and the financial statement schedule of Tosco Corporation and subsidiaries listed in the index on page of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tosco Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Oakland, California January 25,1996, except as to the information in Note 16, for which the date is February 16, 1996
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS thousands of Dollars
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars Except Per Share Data)
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars)
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Cash Flow Information (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Tosco Corporation and its wholly owned subsidiaries (Tosco), including Seminole Fertilizer Corporation (Seminole), a discontinued operation whose principal operating assets were sold in 1993.
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management estimates and assumptions that affect the reported amounts of assets and liabilities and the reported result of operations and disclosure of contingent assets and liabilities .
Nature of Business
Tosco is an independent oil refiner and marketer of petroleum products with related distribution facilities and domestic and international commercial activities.
Reclassifications
Certain previously reported amounts have been reclassified to conform to classifications adopted in 1995.
Cash, Cash Equivalents, Short-term Investments and Deposits
Cash in excess of operating requirements is invested in certificates of deposit, government securities, commercial paper and other highly liquid investments. Investments with original maturities of more than three months and less than 12 months are classified as short-term investments and carried at cost which approximates market.
Tosco purchased director and officer liability insurance coverage from its wholly owned subsidiary Loil Group Ltd. (Loil), with limits of liability coverage of approximately $14,000,000 at December 31, 1995 and 1994, (an amount approximately equal to the amount of cash and investments of Loil). The assets of Loil are restricted to payment of defense costs and claims made against the directors and officers of Tosco. At December 31, 1995 the portfolio's carrying value of marketable investments, considered "available for sale" in accordance with SFAS No. 115 - "Accounting for Certain Investments in Debt and Equity Securities", approximated fair value. Unrealized holding gains and losses and proceeds from any sale of these securities and any resulting gains and losses were not material for 1995.
Inventories
Inventories of raw materials and products are valued at the lower of cost, determined on the last-in, first-out (LIFO) basis, or market. The net realizable value of LIFO inventories is measured by aggregating similar pools on a consolidated basis.
Deferred Charges and Turnarounds
Financing charges related to the acquisition or refinancing of debt are deferred and amortized over the term of the related debt using the effective interest method.
Refinery processing units are periodically shut down for major maintenance (turnarounds). Turnaround costs are deferred and amortized on a straight-line basis over the expected period of benefit (which generally ranges from 24 to 48 months, to the next scheduled shutdown of the unit).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including capitalized interest, are carried at cost less accumulated depreciation. Depreciation and amortization are provided over the estimated useful lives of the respective classes of assets utilizing the straight-line method. Expenditures which materially increase values, change capacities or extend useful lives are capitalized. Routine maintenance, repairs, and replacement costs are expensed. Gains and losses on disposition of assets are reflected in results of operations.
Trademarks and Licenses
Trademarks and licenses are stated at cost and are amortized on a straight-line basis over their estimated useful life (predominantly 15 years).
Excise Taxes
Excise taxes collected on behalf of governmental agencies of $1,168,000,000 for 1995 were not included in sales, cost of sales or other expenses.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessment and/or remedial efforts are probable and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with completion of investigations and other studies or Tosco's commitment to a formal plan of action.
Earnings Per Share
Primary earnings per share is computed by dividing net income less preferred stock dividend requirements by the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share computations for 1994 and 1993 assumed that all shares of previously outstanding convertible preferred stock were converted to common stock of Tosco (Common Stock) at the beginning of each period and that no preferred dividends were paid.
The weighted average number of shares used in computing earnings per share are as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993 ------ -------- ------ (IN THOUSANDS)
Primary........... 37,481 34,214 29,679 Fully Diluted..... 37,738 37,408 34,641
2. FINANCIAL INSTRUMENTS
Tosco, at times and when able, uses commodity futures to lock in what it considers to be acceptable margins between the sales value of refined products produced and the cost of raw materials purchased, on a varying percentage of Bayway Refinery production, generally for periods not exceeding one year. In addition, Tosco enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of Bayway's residual fuels production. Realized gains and losses on liquidated raw material futures contracts are deferred in inventory until the related refined products are sold. Tosco also utilizes commodity futures and forward contracts to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign crude oil that Bayway refines and the cost of domestic crude oil.
At December 31, 1995, Tosco had, as part of its hedging program, open long (obligation to purchase) and short (obligation to deliver) futures, swap and forward contracts for crude oil and products with a notional value (number of barrels under contract multiplied by the per barrel contract value) of approximately $380,000,000 and $408,000,000 respectively. The unrecognized net loss on such open contracts as well as deferred gains and losses on closed futures and swap contracts totaling approximately $901,000 will be recognized or reversed in 1996 as an offset to realized margins on refined products sold.
Pursuant to the requirements of the commodity exchanges, margin deposits for a percentage of the value of the futures contracts have been placed with commodity brokers. The margin deposits are classified as short-term deposits on the balance sheet.
Fair Values
The carrying value of cash and cash equivalents, short-term investments and deposits, trade accounts receivable, and accounts payable and other current liabilities approximates fair value due to the relatively short maturity of these financial instruments. Estimated fair values of other financial instruments are as follows:
Credit Risk
Financial instruments which potentially subject Tosco to concentrations of credit risk consist principally of temporary cash investments, trade receivables and commodity futures, swap and forward contracts. Tosco does not believe that it has a significant credit risk on its futures, swap and forward contracts. Futures contracts are transacted through the New York Mercantile Exchange (NYMEX) and other large commodity exchanges with established collateral and credit criteria for participants. To reduce credit risk, temporary cash investments are spread among several high quality financial institutions. In addition, Tosco conducts ongoing evaluations of its broad base of customers and counter parties and requires letters of credit or other collateral arrangements as appropriate. Tosco's actual trade receivable credit losses have not been significant.
3. ACCOUNTS RECEIVABLE
In June 1995, as part of its ongoing program to reduce interest costs, Tosco entered into a three year agreement with a financial institution to sell on a revolving basis up to $100,000,000 of an undivided percentage ownership interest in a designated pool of accounts receivable (Receivable Transfer Agreement). Under the Receivable Transfer Agreement, Tosco retains substantially the same risk of credit loss as if the receivables had not been sold. Tosco also retains collection and administrative responsibilities on the participating interest sold as agent for the financial institution. Sales of accounts receivable averaged $432,000,000 per month in 1995. At December 31, 1995 accounts receivable was reduced by approximately $99,800,000 for receivables sold under the Receivable Transfer Agreement. Expenses of $3,052,000 related to this program are included in cost of sales.
4. DISCONTINUED OPERATIONS
On May 4, 1993, Seminole completed the sale of its principal operating assets to Cargill Fertilizer Inc. (Cargill). The loss on disposition was accounted for as discontinued operations in 1992 and current financial statements reflect the phosphate fertilizer segment as a discontinued segment.
Net liabilities of the discontinued segment are as follows:
The excess of replacement cost over the value of inventories based upon the LIFO method was $43,304,000 and $5,821,000 at December 31, 1995 and 1994, respectively.
Results of operations for 1994 include the reversal (based on price levels at the end of 1994) of the $17,651,000 market valuation reserve recorded at December 31, 1993.
Expenditures for maintenance and repairs (excluding the amortization of turnaround costs) were $102,552,000, $89,513,000, and $74,596,000 for 1995, 1994 and 1993, respectively.
(a) In December 1993, Tosco acquired the Ferndale Refinery, retail marketing assets in the Pacific Northwest, and the right to market under the BP brand (Tosco Northwest) from BP Exploration and Oil Inc (BP). The purchase price for Tosco Northwest included annual contingent participation payments over the five years following the acquisition of up to $50,000,000 and $100,000,000 based on the performance of the refining and retail marketing segments, respectively. In December 1995, Tosco and BP agreed to settle all contingent participation payments, including participation payments due for 1995, for $35,000,000, payable no later than April 2, 1996. The payment was allocated to trademarks and fixed assets.
(b) Cash borrowings of $20,000,000 (unsecured) and $41,500,000 (partially collateralized) were outstanding at December 31, 1995 and 1994, respectively, under short-term lines of credit with interest at alternative rates at Tosco's option. The weighted average interest rate was 6.6% and 6.9% for 1995 and 1994.
(a) In March 1992, Tosco issued $300,000,000 of First Mortgage Bonds (Bonds), comprised of $100,000,000 of 9% Series A Bonds due March 15, 1997 and $200,000,000 of 9-5/8% Series B Bonds due March 15, 2002. Interest on the Bonds is payable each March 15th and September 15th. The Bonds are non-callable and are collateralized by the Avon Refinery and certain related assets.
(b) In connection with the acquisition of the Bayway Refinery, Tosco issued in a private placement $150,000,000 of 8-1/4% First Mortgage Bonds due May 15, 2003, guaranteed by Bayway, with interest payable semi-annually on May 15th and November 15th (Bayway Bonds). Proceeds for the sale of the Bayway Bonds, net of $2,325,000 of costs, were contributed as an equity investment to Bayway. The Bayway guarantee is collateralized by the Bayway Refinery and related assets and a guarantee of Tosco. Effective July 7, 1993, the Bayway Bonds were exchanged, pursuant to a registration statement, for a new series of publicly traded 8-1/4% First Mortgage Bonds (Exchange Bonds), the terms of which are substantially identical to the Bayway Bonds.
(c) Tosco amended its collateralized credit facility effective April 7, 1995 (Amended Revolving Credit Facilities). The amendment extended the maturity of the credit facility by one year to April 1998 and reduced the cost of borrowing. Cash borrowings under the Amended Revolving Credit Facilities now bear interest at the option of Tosco at one of three alternative rates (a federal funds rate, a Eurodollar rate, or a base rate related to prime) plus an incremental margin for each rate option. The incremental margin is dependent on the credit rating of the First Mortgage Bonds. A commitment fee of approximately 3/8% per annum on the unused portion of the commitment is also due. The Amended Revolving Credit Facilities is collateralized by investments, accounts receivable and inventory.
(d) On December 17, 1987, The Oil Shale Corporation, a subsidiary of Tosco, exercised options to acquire certain oil shale mining claims (Ertl and Paraho oil shale properties in Rio Blanco County, Colorado) for a cash payment of $1,150,000 and execution of a promissory note of $11,562,000, payable in fifteen equal annual principal installments beginning on December 17, 1990. The promissory note, with a stated interest rate of 5%, was discounted, based upon long-term market rates, to a value of $6,356,000 at the date of issue.
(e) In July 1995, Tosco filed a registration statement for the issuance, from time to time, of up to $250,000,000 of unsecured debt securities on terms determined by market conditions at the time of issuance. On July 12, 1995 $125,000,000 of authorized debt securities were issued under the registration statement as 7% unsecured, non-callable notes due July 15, 2000 (7% Notes). The proceeds from the public offering, net of costs, were used to repay indebtedness under the Amended Revolving Credit Facilities. Interest on the 7% Notes is payable each January 15 and July 15, beginning January 15, 1996.
(f) The debt agreements contain covenants which limit Tosco's ability to incur additional indebtedness, pay dividends, acquire equity securities of Tosco, and make investments in certain subsidiaries and discretionary capital expenditures. In addition, the Amended Revolving Credit Agreement requires the maintenance of specified ratios and net worth. At December 31, 1995, Tosco was in compliance with all debt covenants.
Future Installments of Long-Term Debt
Maturities relating to long-term debt during the next five years are as follows:
YEARS ENDING THOUSANDS DECEMBER 31, OF DOLLARS
1996...................... $ 771 1997...................... 100,771 1998...................... 45,771 (a) 1999...................... 771 2000...................... 125, 771
(a) Includes cash borrowings of $45,000,000 at December 31, 1995 under the revolving credit facility.
10. CAPITAL STOCK
Common Stock
Tosco has paid a regular quarterly cash dividend on its Common Stock since the third quarter of 1989. Tosco increased its quarterly dividend payment by $.01 to $.16 per share effective with the third quarter of 1994. Dividends of $.16 per share for the fourth quarter of 1995 were paid on January 2, 1996.
11. STOCK OPTIONS AND SHARES RESERVED FOR ISSUANCE
Tosco had two stock option plans in effect at December 31, 1995: the 1992 Stock Incentive Plan (1992 Plan) and the 1989 Stock Incentive Plan (1989 Plan).
The 1989 and 1992 Stock Incentive Plans provide for the issuance to key employees, consultants, and non-employee directors of a maximum of 1,280,000 and 2,200,000 shares of Common Stock, respectively, in the form of stock options, restricted stock awards and/or stock appreciation rights. Stock options may be granted as "Incentive Stock Options" (as defined by the Internal Revenue Code of 1986), or as nonqualified options, including nonqualified stock options whose purchase price or vesting requirements are based on the employee's achievement of established performance objectives. Options may be exercised only within ten years from the date of grant. The exercise price of nonqualified stock options is determined by the Compensation Committee of the Board of Directors and may be less than the fair value of Common Stock on the date of grant. Awards under the 1989 and 1992 Plan may be granted until March 7, 1999 and March 13, 2002, respectively.
Options to acquire an aggregate of 651,583 shares of Common Stock at prices ranging from $29.19 to $35.88 per share (the fair value of Common Stock on the respective dates of grant) were granted during 1995. Subject to the severance agreements with certain employees (Note 15), one-third of the options may be exercised at any time following the first anniversary of the date of grant and an additional one-third after each of the second and third anniversaries.
12. INCOME TAXES
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:
Effective January 1, 1992 Tosco adopted Statement of Financing Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of " temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
Temporary differences and carry forwards which give rise to deferred tax assets and liabilities are as follows:
13. EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
Pension Plans
Tosco has non-contributory, defined benefit pension plans covering substantially all employees located at the Avon and Bayway Refineries and its union employees at the Ferndale Refinery (collectively, the Plans). Benefits under the Plans are generally based on the employee's years of service and average earnings for the three highest consecutive calendar years of compensation during the ten years immediately preceding retirement. Contributions to the Plans are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than the amount deductible for federal income tax purposes. Assets of the Plans are managed by major financial institutions and invested in high quality equity securities, guaranteed investment contracts, corporate and government debt securities and real estate equity funds. The funded status of the Plans and amounts recognized in Tosco's balance sheet are as follows:
In connection with Tosco's acquisition of the Bayway and Ferndale refineries in 1993, pension coverage was extended to certain acquired employees. Pension benefits granted provide for recognition of past employees' service but benefits accrued through the respective acquisition dates will be paid by their former employers. Benefits are payable at the normal retirement age of 65 with reduced benefits for early retirement (as defined).
In 1990, Tosco adopted a Senior Executive Retirement Plan to provide retirement benefits to selected senior executives of Tosco and their beneficiaries. A provision of $1,265,000, $1,855,000 and $1,267,000 was recorded in 1995, 1994 and 1993, respectively.
Employee and Retiree Benefit Plans
Tosco provides health care and life insurance benefits for all employees and postretirement health care and life insurance benefits for certain employees (primarily employees at the Avon Refinery). Beginning January 1, 1988, new employees, including employees acquired in Tosco's acquisitions but excluding new employees at the Avon Refinery, are not eligible for postretirement benefits. Health care benefits for eligible employees and retirees are provided through insurance companies whose premiums are based on the benefits paid during the year. The health care plans are contributory, with employee/retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The life insurance plans are noncontributory.
Tosco elected to prospectively recognize its accumulated postretirement benefits obligation (APBO) other than pensions of $32,661,000 as of January 1, 1992, the effective date of Tosco's adoption of SFAS No. 106. In view of the escalating costs of medical care, Tosco revised its retiree benefit plans to, among other things, limit its future obligation to absorb health care increases. These revisions as well as favorable changes in experience and cost trends reduced Tosco's APBO to $16,191,000 and $14,209,000 at December 31, 1995 and 1994, respectively. The total cost of postretirement benefits, including the amortization of the transition obligation, was $582,000 for 1995, an increase of $291,000 over the amount which would have been expensed under the pay as you go approach.
The funded status of the postretirement plans and the amounts recognized in Tosco's balance sheet are as follows:
(a) The negative trend rate for 1994 was a result of premium rate reductions.
The changes in assumptions as well as changes in circumstances and experience resulted in a net gain of $11,461,000 in 1994 which is being recognized as a reduction in postretirement benefit expense on a straight line basis over the average remaining employee service period of 6 years Postretirement benefit expense for 1993 was $2,541,000.
SAVINGS PLAN
A savings plan has been established for all eligible employees (Tosco Corporation Capital Accumulation Plan (CAP)) to encourage long-term savings and to provide additional funds for retirement. Participants may make, within certain limitations, voluntary contributions under Section 401(k) of the Internal Revenue Code of a percentage of their compensation. Tosco makes matching contributions based upon years of contributory participation (as defined under the CAP) for employees who elect to make certain specified and minimum contributions. In addition, eligible employees receive an additional contribution equal to 5% of their compensation (up to $150,000 in 1994 and 1995) in lieu of pension plan benefits. Participants are immediately vested in both their voluntary and Tosco contributions.
Contributions by Tosco to the savings plan for the years ended December 31 were $7,837,000 (1995), $7,146,000 (1994), and $5,524,000 (1993).
Management Incentive Plans
A Cash Incentive Plan (CIP) has been established for members of middle and senior management. The CIP sets forth discretionary and other awards which are computed as a variable percentage of a participant's base salary, which percentage is dependent upon the pretax income (as defined) of the business unit. A bonus plan was adopted in 1990 for senior executives who are not participants in the CIP based on Tosco's per share pretax income (as defined).
Results of operations for the years ended December 31, 1995, 1994 and 1993 include incentive compensation of $13,175,000, $6,800,000 and $9,531,000 respectively, of which $10,203.000, $5,350,000 and $7,458,000, respectively, were included in selling, general and administrative expense. Special bonuses totalling $2,200,000 were also awarded to certain employees, including union employees and other employees not covered by management incentive plans.
14. LEASE COMMITMENTS
Tosco distributes petroleum products throughout its marketing areas through a combination of owned and leased terminals. Leases for the Riverhead product distribution terminal and Northville Industries oil distribution system, both in Long Island, New York, expire in 1997 and 2002 and ten year leases for two major West Coast product distribution terminals expire in 2001. Tosco has an option to purchase the Riverhead Terminal at its fair market value at the end of the lease. Other product distribution terminal leases are generally for short periods of time and continue in effect until canceled by either party with contracted days of notice. The product distribution terminal leases, other than the Long Island leases, are subject to escalation either based on increases in annual average wage rates or as allowed by the Public Utilities Commission (PUC). A portion of the product distribution terminals' storage and handling facilities is subleased to others. Tosco has a five year lease expiring in 1999, with options to renew for two additional five year periods, with Statia Terminals for approximately 3,600,000 barrels of storage capacity at Point Tupper, Nova Scotia. The facility will be used primarily to store crude oil destined for the Bayway Refinery. At December 31, 1995, minimum annual rentals for product distribution and oil storage terminals totalled $25,339,000 for 1996, including $4,800,000 for the Point Tupper facility. Thereafter, annual rentals total $30,920,000, (including an $11,500,000 payment due at the end of the Riverhead terminal lease), $14,921,000 and $11,755,000 and $9,370,000 for the years 1997 to 2000, respectively.
In conjunction with the acquisition of the BP California retail system in August 1994, Tosco entered into long-term leases with a special purpose entity established to purchase land and equipment in the BP California retail system. The leases provide Tosco with options to purchase at agreed upon contracted values (a) not less than all of the leased assets at annual anniversary dates and (b) a portion of the leased assets for resale to unaffiliated parties at quarterly lease payment dates. Tosco may also cancel the leases at the second through sixth anniversary dates provided that the lessor receives minimum sales values for the leased assets. The purchase option price and guaranteed sales values decline over the applicable periods of the leases. Minimum annual rentals, which vary with a reference interest rate (LIBOR) and assume that Tosco exercises its lease renewal options, approximate $5,100,000 for the years 196 thru 1998, $4,500,000 for 1999 and 2000 and $3,000,000 for 2001. Final payments totaling $55,000,000 are due at the end of the leases. Tosco entered into similar leases in conjunction with the acquisition of Exxon's retail marketing assets in Arizona in December 1994 (Original Arizona Lease). In August 1995, Tosco entered into a $15 million expansion of the Arizona lease facility to finance, for a one year period, the acquisition and improvement of service station properties in Arizona (Additional Arizona Lease). At December 31, 1995, Tosco, as agent for the lessor, had spent approximately $3,600,000 under this facility but had not yet entered into leases pending completion of construction. Minimum annual rentals therefore currently approximate $5,600,000 over the remaining term of the Original Arizona Lease with a final payment of $44,000,000 due in December 2001 (the end of the lease). In addition, Tosco also assumed existing leases of property, with expiration dates through 2011, and subleases of retail properties, with expiration dates through 1998, in connection with the acquisitions of retail assets in Northern California and Arizona.
In November 1995, Tosco acquired under long-term lease the 28-site car wash operations of Brown Bear Car Wash located in the Puget Sound region. Quarterly lease payments of $670,000 are escalated over the initial fifteen year term of the lease. In connection with the transaction, Tosco acquired the right to use the Brown Bear trademark and to acquire the trademark for additional specified payments.
Tosco leases sulfuric acid and MTBE manufacturing facilities, both located at the Avon Refinery. The initial term of the leases of the sulfuric acid and MTBE facilities expire in 1998 and 2007, respectively. The leases may be extended or the facilities purchased at their estimated fair market values at the end of the lease terms. Tosco also leases transportation equipment, including railcars and trucks, as well as computer and office equipment primarily at leased office space at various locations in the United States.
Future minimum obligations under non-cancelable operating leases and warehousing agreements at December 31, 1995 were as follows:
YEARS ENDING THOUSANDS DECEMBER 31, OF DOLLARS
1996....... $ 60,623 1997....... 62,546 1998....... 39,649 1999....... 37,400 2000....... 33,870 2001 and subsequent..... 208,843 ---------- 442,931 Less future minimum sublease income...... ( 43,921) Total minimum lease payments .............$ 399,010
15. COMMITMENTS AND CONTINGENCIES
Tosco is subject to extensive federal, state and local regulation of environmental and permitting matters relating to its petroleum refining and marketing operations. These regulations are complex and subject to differing interpretations, and Tosco is currently involved in a number of proceedings and discussions regarding the removal and mitigation of the environmental effects of subsurface liquid hydrocarbons and alleged levels of hazardous waste at the Avon Refinery and other locations, including Tosco's Spokane, Washington terminal which is located in a site on the Superfund National Priorities List. Environmental cost accruals were recorded in prior years based upon a determination that investigative work and remedial actions would be required.
In July 1993, outstanding litigation concerning environmental issues was settled with the predecessor owners of the Avon Refinery (Settlement Agreement). Under the Settlement Agreement, the former owners agree to pay up to $18,000,000 for one-half of the costs that may be incurred for compliance with certain environmental orders and to provide Tosco with a $6,000,000 credit for past expenses (which Tosco uses to reduce its one-half share of costs). After the initial term of the Settlement Agreement (the later of four years or until the $36,000,000 shared cost maximum is expended), the parties may elect to continue the Settlement Agreement or to reinstate litigation. Tosco and the former owners have established a committee to review and approve expenditures for environmental investigative and remedial actions at the Avon Refinery. Through December 31, 1995, the committee has spent approximately $2,100,000 on such matters. Remedial actions are subject to negotiation with governmental agencies and therefore the timing and amount of future cash expenditures is uncertain. In addition, further investigative work and negotiations with the governmental agencies may result in additional remedial actions which Tosco cannot presently predict. Tosco has not relinquished its right to make claims for reimbursement of future costs and is not required to reimburse amounts received under the Settlement Agreement. Tosco received $3,474,000 in 1994 in partial settlement of litigation cost reimbursement claims from its insurance carriers and is pursuing additional recoveries and reimbursement under insurance policies in effect during the applicable periods of coverage.
By agreement, Exxon is responsible for environmental obligations related to or arising out of its ownership and operation of the Bayway Refinery, purchased by Tosco in April 1993, as will be set forth in a list to be prepared under administrative consent orders between Exxon and the state of New Jersey. Bayway has the right, for a period of one year following the expected 1997 completion date of such list, to add additional items to the list. Responsibility for clean-up projects thereafter identified will be shared by Exxon and Tosco based on their respective length of ownership. Tosco has also received indemnifications with respect to environmental obligations arising out of or relating to the period prior to the respective acquisition dates of the Ferndale Refinery and retail assets in the Pacific Northwest and Northern California from BP, and the Arizona retail properties from Exxon.
Environmental exposures are difficult to assess and estimate for numerous reasons including the complexity and differing interpretations of governmental regulations, the lack of reliable data, the number of potentially responsible parties and their financial capabilities, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and the identification of new sites. While Tosco believes that it has adequately provided for environmental exposures, should these matters be resolved unfavorably to Tosco, they could have a material adverse effect on its long-term consolidated financial position and results of operations.
There are various other legal proceedings and claims pending against Tosco which are common to its operations. While it is not feasible to predict or determine the ultimate outcome of these matters, it is the opinion of management that these suits will not result in monetary damages which in the aggregate would be material to the business or operations of Tosco.
In October 1986, Tosco and Atlantic Richfield Co.(ARCO) entered into an agreement pursuant to which ARCO agreed for ten years (with two five-year renewal options exercisable by ARCO) to deliver to Tosco an average of 50,000 barrels per day of Alaskan North Slope crude oil in exchange for a quantity of gasoline that is a variable percentage of the amount of crude oil delivered, based upon the prices of certain crude oils (ARCO Exchange Agreement). ARCO has informed Tosco that it will not seek to extend the exchange agreement when it expires at the end of 1996. The end of the ARCO Exchange Agreement will also end Tosco's obligation to first offer the Avon Refinery for sale to ARCO if Tosco desired to sell the Avon Refinery.
Tosco has employment agreements with certain of its executive officers which provide for lump sum severance payments and accelerated vesting of options upon termination of employment under certain circumstances or a change of control, as defined. Tosco's potential obligation to nine officers was $6,418,000 at December 31, 1995.
Tosco, in keeping with industry practice, schedules periodic maintenance of major processing units for significant non-routine repairs and replacements as the units reach the end of their normal operating cycles (turnarounds). Unscheduled turnarounds also occur because of operating difficulties or external factors. Throughput and earnings are lowered, and deferred turnaround expenditures increased, during such periods.
Tosco's NOL, investment tax and AMT credit carryforwards (Note 12) are subject to various complex tax rules and regulations which may be subject to varying interpretations. These carryforwards may be adversely affected by changes in the rules and regulations or significant changes in the ownership of Tosco or its trade or business. Therefore, the future benefit of these carryforwards, although more likely than not realizable under current rules and regulations, is not assured.
Effective December 1993, the date commercial operation of a hydrogen production facility (Hydrogen Plant) commenced, Tosco entered into 15 year agreements to purchase up to 25 million cubic feet per day of hydrogen and steam (Hydrogen Supply Agreement) and to provide utilities, wastewater disposal and other services to the Hydrogen Plant. The Hydrogen Plant, located at the Avon Refinery on property leased from Tosco, is owned and operated by a third party. The Hydrogen Supply Agreement may be modified to provide for higher levels of hydrogen at prices to be negotiated and can be terminated under certain circumstances upon payment of a stipulated fee (which decreases over the term of the agreement).
To control costs and improve delivery reliability, Tosco entered into a twelve year time charter agreement with Neptune Orient Lines commencing after completion of construction of four 100,000 DWT crude oil tankers. The first tanker is scheduled to be delivered in June 1996 with the last tanker scheduled for delivery in the first quarter of 1997. The tankers are expected to be utilized for the movement of crude oil from the Point Tupper Storage facility to Bayway or other locations or in direct shipments from suppliers.
Bayway Refining Company has entered into a contract to acquire a Solvent Deasphalter for approximately $32.5 million, plus the cost of agreed modifications and interest, upon its mechanical completion (as defined). Construction of this unit began in 1995 and mechanical completion is expected in the third quarter of 1996. Tosco is responsible for other capital improvements to tie in the Solvent Deasphalter into the Bayway Refinery system raising the total expected cost of the unit to approximately $48 million.
16. SUBSEQUENT EVENTS
On February 2, 1996, Tosco completed the purchase of the U.S. Northeast marketing and refining assets from BP for $59 million, excluding inventories. Under the purchase agreement, Tosco obtained an exclusive license valid for 15 years, with various renewal options, to market retail gasoline and diesel fuels under the BP brand. The license covers Delaware, Maryland, the Washington D. C. metropolitan area, Pennsylvania, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire and Maine. Portions of western Pennsylvania and Maryland are excluded. The term of Tosco's exclusive license in nine Western states was also extended to 15 years from the closing date. The purchase also included the 180,000 B/D Marcus Hook Refinery near Philadelphia (which was taken over in a non-operating mode), petroleum product terminals and certain associated pipeline interests (some of which are surplus to Tosco's needs and will be sold). Tosco has also offered to buy BP's one-third interest in the Harbor pipeline on which BP's partners have a right of first refusal to acquire BP's interest. BP retains environmental obligations relating to the Marcus Hook Refinery and other properties included in the sale.
On February 16, 1996, Tosco announced an agreement to purchase all outstanding shares of the Circle K Corporation (Circle K) and to merge Circle K with a subsidiary of Tosco. Circle K is a large gasoline retailer and operator of company-owned convenience stores. A definitive agreement was signed with the holders of approximately 68% of Circle K's outstanding shares (Selling Shareholders) and a merger agreement was approved by the Board of Directors of both companies. Under the stock purchase agreement, Selling Shareholders of Circle K will receive a combination of cash and common stock of Tosco (Common Stock). Under the merger agreement the remaining shareholders will receive Common Stock. Payment of the total acquisition price of approximately $710 million, not including transaction and certain other costs, will consist of approximately 6.5 million shares of Common Stock and cash. The common stock to be issued is subject to adjustment if the price of Common Stock fluctuates outside an agreed range and for shares issued with respect to stock options held by certain employees of Circle K. Completion of the transaction is subject to certain conditions including the approvals of regulatory authorities and the shareholders of Circle K. The acquisition is expected to close prior to mid-year.
17. Quarterly Financial Data (Unaudited)