ITEM 3. LEGAL PROCEEDINGS
On July 19, 1995, the Washington Department of Ecology ("WDOE") issued an Enforcement Order identifying Tosco, along with approximately seventeen other parties, as a potentially liable party ("PLP") 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. Ninety-five PLPs, including the companies in the Cameron-Yakima Working Group of which Tosco is a member, have settled with the WDOE, pursuant to four separate consent decrees in connection with this site. Court approval of the Cameron-Yakima Working Group decree was obtained in May 1997. Under that decree, the Working Group will perform additional investigation of the site under an agreed-upon work plan, and make a cash contribution to a trust fund for future work at the site.
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, conduct certain interim remedial actions, and prepare a remedial action plan. On April 10, 1995, Tosco filed a complaint for declaratory relief against Sun (TOSCO CORPORATION V. SUN COMPANY, INC. (R&M)), U.S. District Court, Western District of Oklahoma, Case No. Civ. 95 556M) to recover the costs of complying with the ODEQ order, and seeking an order determining Tosco's and Sun's rights and legal relations under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA") and the Oil Pollution Act ("OPA"), and under the Purchase Agreement through which Tosco purchased the Duncan Refinery, relating to the costs of environmental investigation and potential remediation at the site. The complaint was subsequently amended to name Koch Industries ("Koch"), another former owner, as another defendant. On February 14, 1996, Tosco obtained default judgments against some of the current owners of the refinery. In January 1998, Tosco entered into a Settlement Agreement with Sun, pursuant to which Sun agreed to pay $7 million in exchange for a release from liability with respect to the site. In early 1998, a trial was held on Tosco's claim against Koch. In March 1998, the court ruled that Koch was responsible for 19% of past and future investigation and remediation costs at the site.
Circle K entered into Consent Orders with the Arizona Department of Environmental Quality on September 20, 1994, and September 23, 1994, for sites in Springerville and Phoenix, Arizona, respectively. The sites had releases of petroleum products from USTs or lines. Tosco is subject to these Orders as a result of its 1996 acquisition of the Circle K Corporation. Remediation on the sites is ongoing. Expenses for the remediation are eligible for reimbursement under the Arizona UST Trust Fund.
In a case filed in 1996 by private litigants against all major petroleum refiners, distributors and retailers in California, including Tosco, alleging that the defendants have restrained trade and restricted the supply of a certain type of cleaner burning gasoline sold in California, AGUILAR, ET AL. V. ATLANTIC RICHFIELD CORPORATION, ET AL. (Superior Court of California, County of San Diego, Case No. 00700810), the court granted the Defendants' Motions for Summary Judgment in October 1997; however, on January 29, 1998, the court reversed itself and ordered a new trial. This ruling is in the process of being appealed. On January 28, 1998, a plaintiff allegedly representing a class of all wholesale purchasers of gasoline in the State of California sued nine petroleum refineries, including Tosco, making essentially the same allegations as those made in the AGUILAR case, GILLEY V. ATLANTIC RICHFIELD CORP., ET AL., (U.S. District Court, Southern District of California, Case No. 93-CVU132BTM).
The costs of remedial actions are highly uncertain due to, among other items, the complexity and evolving nature of governmental laws and regulations and their interpretations as well as the varying costs and effectiveness of alternative cleanup technologies. However, Tosco presently believes that any cost in excess of the amounts already provided for in the financial statements should not have a materially adverse effect upon Tosco's operations or financial condition. Tosco further believes that a portion of future environmental costs, as well as environmental expenditures previously made, will be recovered from other responsible parties under contractual agreements and existing laws and regulations. See Notes 11 and 18 to the Consolidated Financial Statements.
There are various other suits and claims pending against Tosco and its subsidiaries, which in the opinion of Tosco are not material or meritorious or are substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, Tosco believes the aggregate amount of such liabilities will not result in monetary damages that in the aggregate would be material to the business or operations of Tosco.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Served Name Age as an Principal Occupation and Officer Positions Held Since
Thomas D. O'Malley 56 1989 Chairman of the Board and Chief Executive Officer of Tosco since January 1990; President of Tosco from May 1993 to May 1997 and from October 1989 to May 1, 1990.
Jefferson F. Allen 52 1990 President of Tosco since May 1997 and Chief Financial Officer since June 1990; Executive Vice President from June 1990 to May 1997; Treasurer of Tosco from June 1990 to October 1995; various positions, including Chairman and CEO, with Comfed Bancorp, Inc. and related entities from November 1988 to June 1990.
Robert J. Lavinia 51 1993 Executive Vice President of Tosco and President of Tosco Marketing Company (a division of Tosco) since February 1996; Senior Vice President of Tosco from May 1994 to February 1996; Vice President of Tosco from 1993 to May 1994; President, Tosco Energy Corporation during 1992; prior to 1992, various positions with Phibro Energy for a period in excess of five years.
Dwight L. Wiggins 57 1993 Executive Vice President of Tosco and President of Tosco Refining Company (a division of Tosco) since February 1996; Senior Vice President of Tosco from May 1994 to February 1996; Vice President of Tosco from January 1993 to May 1994; President of Bayway Refining Company since January 1993; New Jersey Area Manager for Exxon Company U.S.A. 1990 to 1993.
Wilkes McClave III 50 1989 Senior Vice President of Tosco since May 1996 and General Counsel of Tosco since May 1990; Vice President of Tosco from May 1990 to May 1996; Secretary of Tosco since August 1989; Assistant General Counsel of Tosco from January 1986 to May 1990.
Duane B. Bordvick 52 1997 Vice President of Tosco for environmental and external affairs since February 1997; Vice President of Tosco Refining Company for a period in excess of five years.
Craig R. Deasy 53 1986 Vice President and Treasurer of Tosco since October 1995; Vice President and Treasurer of Bayway Refining Company since April 1993; various other positions with Tosco for a period in excess of five years.
Ann Farner Miller 46 1996 Vice President of Tosco for governmental relations since May 1996; director of governmental relations of Tosco Refining Company for a period in excess of five years.
George E. Ogden 55 1994 Senior Vice President of Tosco since December 1997; Vice President for Tosco from May 1994 to December 1997; President of Tosco Distribution Company (a division of Tosco) from August 1996 to December 1997; Vice President of Tosco Refining Company from March 1992 to March 1994; Independent Petroleum Consultant from 1984 to 1992.
Richard W. Reinken 41 1994 Vice President and Chief Information Officer of Tosco since November 1994; Senior Vice President of Tosco Marketing Company since June 1996; Consultant, Andersen Consulting from 1985 to 1994.
Peter A. Sutton 52 1992 Vice President of Tosco since January 1992; Senior Vice President of Tosco Refining Company since May 1990; various other positions with Tosco for a period in excess of five years.
Wanda Williams 51 1996 Vice President of Tosco for human resources since May 1996; Vice President of Tosco Marketing Company since May 1996; Vice President of Circle K for human resources from June 1993 to May 1996; various other positions with Circle K from July 1992 to May 1996; various human resources positions in the oil industry and convenience store industry from 1971 to 1992.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Tosco's Common Stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange. Set forth below are the high and low sales prices as reported on the NYSE Composite Tape. All share and per-share data have been adjusted to reflect the 3-for-1 stock split distributed on February 25, 1997 to shareholders of record on February 13, 1997 and have been rounded to the nearest sixteenth.
DIVIDEND POLICY
Tosco has paid a regular quarterly cash dividend on its Common Stock since the third quarter of 1989. Pursuant to the terms of Tosco's Revolving Credit Facility and its bond indentures, dividends on Tosco's Common Stock are permitted to the extent Tosco satisfies certain defined criteria. Continued payment of such quarterly dividend is also subject to profitable results of operations, which are primarily dependent on the continued favorable performance of Tosco's operating facilities and favorable operating margins. There can be no assurance that Tosco will be able to continue payment of such quarterly dividend.
ITEM 6.
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, 1997, 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 (Thousands of Dollars, Except Per Share Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
1997 was another year of growth for Tosco and its most successful year in terms of revenues, operating contribution, and net income. On March 31, 1997, Tosco acquired Union Oil Company of California's ("Unocal") West Coast petroleum refining, marketing, and related supply and transportation assets (the "76 Products Acquisition"). During the balance of 1997, this acquisition, Tosco's largest to date, was successfully integrated into Tosco's organization.
ACQUISITIONS
76 PRODUCTS - The 76 Products Acquisition purchase price (including environmental and other liabilities assumed) was approximately $1.541 billion, plus inventories valued at $361 million and credit card receivables valued at $131 million. In addition, Unocal is entitled to receive contingent participation payments over the next seven years if gasoline margins increase above specified levels. The assets acquired from Unocal are comprised of two petroleum refining systems, a retail gasoline system consisting of 76-branded gasoline service stations, a distribution system comprised of 13 company-owned oil storage terminals, rights with respect to 1,300 miles of crude oil and product pipelines, the world-wide rights to the "76" and "Union" brands, and Unocal's lubricants manufacturing, distribution, and marketing business. Tosco is now the largest independent refiner and marketer of petroleum products in the United States. See Notes 3, 11, and 18 to the Consolidated Financial Statements.
CIRCLE K - Tosco completed its acquisition of The Circle K Corporation ("Circle K") on May 30, 1996 (the "Circle K Acquisition") for total consideration of $444 million in cash and approximately 19.5 million shares of Tosco Common Stock. Circle K has approximately 2,300 company-controlled convenience stores, of which some 1,900 sell gasoline. Tosco is now the largest operator of company-controlled convenience stores in the United States.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Tosco earned record net income of $213 million ($1.37 per share) in 1997 compared to $146 million ($1.16 per share) in 1996. Results of operations for 1997 include a $53 million ($31 million after tax, $0.19 per share) non-cash inventory writedown as a result of higher levels of inventories from the 76 Products Acquisition and the start-up of the Trainer Refinery combined with declining raw material and product prices in late 1997. Results of operations for 1996 include a pre-tax charge of $13 million ($8 million after-tax, $0.06 per share) for the consolidation of the retail marketing division following the acquisition of Circle K.
Operating contribution (sales less cost of sales) was $880 million in 1997 compared to $551 million in 1996, an increase of $329 million, $92 million for refining and $237 million for marketing.
Refining operating contribution for 1997 increased by $92 million to $457 million due primarily to increased production (793,400 barrels per day ("B/D") in 1997 compared to 535,000 B/D in 1996). This increase was due to the acquisition of the 76 Product refineries and the start-up of the Trainer Refinery, partially offset by reduced production at the Avon Refinery during the 1997 first and second quarters and an unscheduled shutdown of the Bayway Refinery cat cracker in the 1997 first quarter. Lower production at the Avon Refinery was due to the scheduled turnaround of the coker unit and the unscheduled hydrocracker shutdown. The 1997 refining operating contribution per barrel, which fluctuated significantly during the year, averaged $4.89, consistent with the 1996 average. Refinery operating contribution for 1997 includes insurance recovery accruals related to the Avon hydrocracker and the Bayway cat cracker.
Retail operating contribution for 1997 increased by $237 million to $423 million primarily due to the 76 Products and Circle K Acquisitions and higher blended fuel margins. The volume of fuel sales approximately doubled to 4.16 billion gallons and the blended fuel margin increased by 1.2 cents per gallon, despite a higher proportion of dealer/jobber sales resulting from the 76 Products Acquisition. Fuel margins at dealer/jobber sites are typically lower than company-operated sites. The increase in blended fuel margins occurred in the fourth quarter due to declining wholesale product prices without a corresponding decline in retail prices. The retail operating contribution also increased in 1997 due to increased merchandise sales ($2.003 billion in 1997 compared to $1.173 billion in 1996) with reasonably consistent margins.
Selling, general, and administrative expenses were $307 million in 1997 compared to $203 million in 1996. The increase of $104 million was primarily attributable to the 76 Products and Circle K Acquisitions, including nonrecurring transition expenses of $18 million related to the integration of 76 Products into Tosco's operations. Incentive compensation also increased in 1997 due to higher levels of operating income.
Net interest expense for 1997 increased by $53 million compared to 1996. This increase is primarily due to higher debt levels incurred to finance Tosco's expanded operations and acquisitions.
Income taxes, including the benefit associated with the distributions on company-obligated, mandatorily redeemable, convertible preferred securities ("Trust Preferred Securities"), were $151 million for 1997 compared to $101 million in 1996. The increase was due to higher taxable income in 1997. The effective income tax rate also reflects the effect of the nondeductibility of amortization of certain intangible assets acquired in the Circle K Acquisition.
1996 COMPARED TO 1995
Tosco earned $146 million in 1996 ($1.16 per share) compared to $77 million in 1995 ($0.69 per share). Results of operations for 1996 include a pre-tax charge of $13 million ($8 million after-tax, $0.06 per share) for the consolidation of the retail marketing division following the acquisition of Circle K. Results of operations for 1995 include a restructuring charge of $5 million.
Operating contribution (sales less cost of sales) was $551 million in 1996 compared to $285 million in 1995, an increase of $266 million due to improved refinery operations ($155 million) and expanded retail operations ($111 million).
Refinery operating contribution increased by $155 million to $365 million for 1996 due to improved refining margins, partially offset by higher refinery operating costs and lower production volumes. Refining operating contribution per barrel, which fluctuated significantly during the year, averaged $4.89 for the year, an improvement of $1.12 from 1995. Operating contribution for 1996 benefited from the strong East Coast refining margins due to cold weather in the first quarter of 1996, while operating contribution for 1995 was negatively impacted by extremely weak refining margins and extensive scheduled refinery turnaround maintenance at the Avon and Ferndale Refineries. The improved operating contribution of 1996 was partially offset by higher refinery operating costs and declines in 1996 production levels. Higher refinery operating costs were primarily due to the Trainer Refinery (acquired in a shutdown state in February 1996), increased energy costs, and higher depreciation costs. Although raw material throughput for 1996 declined by 5,900 B/D to 535,000 B/D, production of clean products increased by 1,100 B/D to 433,900 B/D. Production of clean products was aided by the completion of the solvent deasphalting unit ("SDA") at the Bayway Refinery in August 1996. The SDA processes low-value residual fuel to produce feedstock for the cat cracker, the refinery's principal gasoline manufacturing unit, and reduces the amount of high-cost, partially refined feedstocks that Bayway purchases from third parties.
Operating contribution from Tosco's retail operations increased by $111 million to $186 million for 1996, primarily because of the acquisition of Circle K. Retail volume of fuel sales approximately doubled to 2.06 billion gallons, and the blended fuel margin increased by 1.6 cents per gallon to 11.6 cents per gallon. The fuel margin improvement was primarily attributable to the higher proportion of sales from company-operated stores. Operating contribution from retail operations also improved due to expanded merchandise sales of approximately $1.173 billion for 1996 (with margins of 29.7%). These improved margins were reduced by station operating and other costs of the approximately 2,400 convenience stores acquired in the Circle K acquisition.
Selling, general, and administrative expenses were $203 million in 1996 compared to $96 million in 1995. This increase of $107 million was due to Tosco's expanded operations and higher levels of incentive compensation due to improved operating results.
Interest expense increased in 1996, despite the reduction in interest costs resulting from the Receivable Transfer Agreement, due to higher debt levels related to Tosco's expanded operations and higher price levels of raw materials and products. See Note 5 to the Consolidated Financial Statements.
Income taxes in 1996 increased by $51 million to $101 million due to improved pre-tax income and a higher effective tax rate primarily due to the Circle K Acquisition.
OUTLOOK
Results of operations are primarily determined by the operating efficiency of the refineries, and refining and retail fuel margins. Normal levels of maintenance are scheduled for 1998 and Tosco expects, given reasonable margins, to operate its refineries at high levels during 1998. Refining and retail fuel margins in early 1998 are weak. While margins are expected to improve during the balance of 1998, Tosco is not able to predict the level or timing of refinery and retail fuel operating margins for the year because of the uncertainties associated with oil markets. In view of uncertain operating margins and highly competitive markets, Tosco is committed to improving its results by lowering costs in all areas of operation without compromising safety, reliability, or environmental compliance.
In February 1998, Tosco entered into a long-term contract with Occidental Petroleum Company ("Occidental") to buy a substantial portion of Occidental's crude oil production from the Elk Hills oil and gas field in California at market-related pricing. Tosco plans to build a 14 mile pipeline from the Elk Hills field to existing lines that serve the San Francisco Area Refinery System. This domestic supply of light crude oil will reduce the need for Tosco to purchase waterborne crude oil.
CASH FLOWS
During 1997, cash and cash equivalents decreased by $60 million, as cash used in investing activities of $1.632 billion exceeded cash provided by operating and financing activities of $686 million and $886 million, respectively.
Net cash provided by operating activities of $686 million was from cash earnings of $609 million (net income plus depreciation, amortization, deferred income taxes, and inventory writedown) and an increase in working capital of $80 million less $3 million for other expenditures. The increase in working capital, net of the acquired 76 Products assets, is primarily due to the opening of the Trainer Refinery.
Net cash used in investing activities of $1.632 billion included the acquisition of 76 Products assets ($1.189 billion), capital additions ($404 million), and a net increase in deferred turnarounds, deferred charges and other assets ($118 million), partially offset by net proceeds from the sale of 76 Products assets ($73 million) and other items ($6 million).
Net cash provided by financing activities totaled $886 million as proceeds from a notes and debentures offering of $600 million, a Common Stock offering of $697 million, and net borrowings under the Revolving Credit Facility of $166 million exceeded the repayments under long-term debt agreements and Circle K pre-acquisition debt of $137 million, funds used to repurchase Common Stock issued to Unocal of $394 million, dividend payments of $36 million, and other items of $10 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity (as measured by cash, cash equivalents, marketable securities, deposits, and availability under the Revolving Credit Facility) increased by $237 million during 1997, to $855 million at December 31, 1997. Increases in availability under the Revolving Credit Facility of $289 million and marketable securities and deposits of $8 million were partially offset by a decrease in cash and cash equivalents of $60 million.
At December 31, 1997, total shareholders' equity was $1.944 billion, a $874 million increase from the December 31, 1996 balance of $1.070 billion. This increase was due to the issuance of 25.3 million shares of Common Stock for $697 million and net income of $213 million less dividends and other items of $36 million. Debt, including current maturities, increased by $654 million to $1.593 billion at December 31, 1997 as cash flows from operating activities were used to reduce the higher levels of debt resulting from the 76 Products Acquisition. The ratio of long-term debt (Revolving Credit Facility and non-current portion of long-term debt) to total capitalization (long-term debt, Trust Preferred Securities, and Shareholders' Equity) increased from 38% at December 31, 1996 to 41% at December 31, 1997.
In January 1997, Tosco filed a shelf registration statement providing for the issuance of up to $1.5 billion aggregate principal amount of debt and equity securities. Such securities may be offered, separately or together, in amounts and at prices and terms to be set forth in one or more supplements to the shelf registration statement. On May 30, 1997, Tosco issued 25.3 million shares of Common Stock pursuant to this shelf registration statement for gross proceeds of $721 million. At December 31, 1997, Tosco may issue up to $779 million of securities pursuant to this shelf registration statement.
The Revolving Credit Facility, as well as funds potentially available from the issuance of securities, provides Tosco with adequate resources to meet its expected liquidity demands for at least the next twelve months.
CAPITAL EXPENDITURES
On March 31, 1997, Tosco completed the 76 Products Acquisition. Additionally, Tosco spent $404 million primarily on budgeted capital projects in 1997. The Trainer Refinery, acquired in a shut-down mode in February 1996, was started up in May 1997 after an approximate $100 million modernization and upgrading program. Other refinery capital spending programs were for compliance with environmental regulations and permits, personnel/process safety programs, and operating flexibility and reliability projects. Retail capital spending was focused on rationalizing and rebranding of the retail system, integrating operations, enhancing existing sites, and underground storage tank upgrades and replacements.
During January 1998, Tosco completed the purchase of approximately 200 convenience stores by paying off the outstanding balance on a real estate installment purchase note, including the settlement of contingent payments, for $64 million. See Note 10 to the Consolidated Financial Statements.
Tosco expects to fund its 1998 refinery and retail capital expenditures from cash provided by operations, available credit, and other resources. Capital spending for retail operations in 1998 will be focused on enhancing existing retail sites, integrating operations, and the completion of Tosco's program to upgrade or replace underground storage tanks to meet federal and state regulatory deadlines. The rebranding of BP service stations in Northern California to the 76 tradename is expected to be completed in the first quarter of 1998.
RISK MANAGEMENT
Tosco uses a variety of strategies to reduce commodity price, interest, and operational risks. Tosco, at times and when able, uses futures and forward contracts to lock in what it believes to be favorable margins on a varying portion of refinery production by taking offsetting long (obligation to buy at a fixed price) positions in crude oil and short (obligation to deliver at a fixed price) positions in gasoline and heating oil. This strategy hedges Tosco's exposure to fluctuations in refining margins and therefore tends to reduce the volatility of operating results. In addition, Tosco enters into swap contracts with counterparties to hedge sales prices of residual fuels production. Futures and forward contracts are also used to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of domestic and foreign crude oil.
Tosco uses a value-at-risk ("VAR") model to assess the market risk of its derivative instruments. VAR represents the potential losses for an instrument or portfolio from adverse changes in market factors, for a specified time period and confidence level. Tosco estimates VAR across its derivative instruments using a model with historical volatilities and correlations calculated using a one day interval. Tosco's measured VAR from holding such derivative instruments, using a VAR model with a 95% confidence level and assuming normal market conditions at December 31, 1997, was immaterial.
Tosco's calculated VAR exposure represents an estimate of reasonably possible net losses that would be recognized on its derivative instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results which may occur. The calculated VAR does not represent the maximum possible loss nor any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in Tosco's holdings of derivative instruments during the year.
Tosco manages its interest rate risk by maintaining a mix of fixed rate and floating rate debt. Floating rate debt, primarily borrowings under the Revolving Credit Facility, which currently provides up to $1 billion of uncollateralized revolving credit availability, is used to finance Tosco's working capital requirements. Tosco issued $600 million of notes and debentures in connection with the 76 Products Acquisition at fixed interest rates. Other fixed rate debt consists of $125 million uncollateralized noncallable notes issued in July 1995 to repay indebtedness under the previously outstanding Collateralized Revolving Credit Facility, $350 million of mortgage bonds issued in 1992 and 1993 to refinance previously outstanding floating rate bank debt and to finance the acquisition of capital assets including the acquisition of the Bayway Refinery, and $240 million uncollateralized noncallable notes issued in May 1996 to finance a portion of the Circle K purchase price.
Tosco carries insurance policies on insurable risks, which it believes to be appropriate at commercially reasonable rates. While Tosco believes that it is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would have to be paid out of general corporate funds, if available. See Note 4 to the Consolidated Financial Statements for a discussion of Tosco's strategy to reduce credit risk.
IMPACT OF INFLATION
The impact of inflation has been less significant during recent years because of the relatively low rates experienced in the United States. Raw material, energy, and labor 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.
IMPACT OF THE YEAR 2000 ISSUE
Tosco recognizes the need to ensure that its computer operations and operating systems will not be adversely affected by the Year 2000 Issue and is cognizant of the time-sensitive nature of the problem. Since 1996, Tosco has been proactively upgrading and replacing its business systems while integrating the Circle K and 76 Products acquisitions. Tosco has assessed how its critical business systems may be affected by the Year 2000 Issue and has formulated and is implementing plans to address the known Year 2000 Issues. That plan, as it relates to business systems, involves a combination of additional software upgrades, replacements, and modifications. Tosco believes the cost of Year 2000 compliance for its business systems will not have a material adverse effect on Tosco's future operating results. Tosco is currently assessing the impact of the Year 2000 Issue on its field systems and software suppliers. Accordingly, Tosco is unable to estimate the costs related to these Year 2000 Issues. However, Tosco does not believe its Year 2000 costs related to its field systems and software suppliers will have a material adverse effect on Tosco's future operating results.
NEW ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (net income plus all other nonowner changes in equity). SFAS No. 131 establishes disclosure standards regarding information about operating segments in interim and annual financial statements. During February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132"). SFAS No. 132 changes the disclosure requirements for pension and other postretirement benefits but does not change any existing measurement or recognition provisions. The Company will comply with the expanded disclosure requirements of these accounting standards with its 1998 financial statements.
FORWARD LOOKING STATEMENTS
TOSCO HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS WITH RESPECT TO ITS FINANCIAL POSITION, BUSINESS STRATEGY, PROJECTED COSTS, PROJECTED SAVINGS, AND PLANS AND OBJECTIVES OF MANAGEMENT. SUCH FORWARD- LOOKING STATEMENTS ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS "ANTICIPATES," "INTENDS," "EXPECTS," "PLANS," "BELIEVES," "ESTIMATES," OR WORDS OR PHRASES OF SIMILAR IMPORT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS, AND UNCERTAINTIES, AND THE STATEMENTS LOOKING FORWARD BEYOND 1998 ARE SUBJECT TO GREATER UNCERTAINTY BECAUSE OF THE INCREASED LIKELIHOOD OF CHANGES IN UNDERLYING FACTORS AND ASSUMPTIONS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS.
IN ADDITION TO FACTORS PREVIOUSLY DISCLOSED BY TOSCO AND FACTORS IDENTIFIED ELSEWHERE HEREIN, CERTAIN OTHER FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO TOSCO, OR PERSONS ACTING ON BEHALF OF TOSCO, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FACTORS.
TOSCO'S FORWARD-LOOKING STATEMENTS REPRESENT ITS JUDGMENT ONLY ON THE DATES SUCH STATEMENTS ARE MADE. BY MAKING ANY FORWARD-LOOKING STATEMENTS, TOSCO ASSUMES NO DUTY TO UPDATE THEM TO REFLECT NEW, CHANGED, OR UNANTICIPATED EVENTS OR CIRCUMSTANCES.
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) 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 Tosco's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. See also the information appearing under the caption "Executive Officers of the Registrant" in Part I.
Tosco is not aware of any family relationship between any Director or executive officer. Each officer is generally elected to hold office until the next Annual Meeting of the Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in Tosco's definitive Proxy Statement relating to its 1998 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 Tosco's definitive Proxy Statement relating to its 1998 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 Tosco's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) AND (A)(2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The consolidated financial statements and financial statement schedules of Tosco Corporation and subsidiaries, required by Part II, Item 8, are included in Part IV of this report. See Index to Consolidated Financial Statements and Financial Statement Schedules on page.
(A)(3). EXHIBITS
3(a) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
3(b) By-laws of Registrant as currently in effect. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
4(a) Form of Indenture between Registrant and IBJ Schroder and Trust Company, as Trustee, relating to 9% Series A First Mortgage Bonds due March 15, 1997, and 9 5/8% Series B First Mortgage Bonds due March 15, 2002. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-3 dated March 4, 1992.
4(b) Form of Indenture among Registrant, Bayway Refining Company, and the First National Bank of Boston, as Trustee, relating to 8 1/4% First Mortgage Bonds due 2003. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-4 dated April 29, 1993.
4(c) Form of Indenture dated as of July 7, 1995, between Registrant and The First National Bank of Boston, as Trustee, relating to 7% Notes due 2000. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-3 dated May 18, 1995 (No. 33-59423).
4(d) Form of Indenture dated as of May 1, 1996, between Registrant and State Street Bank and Trust Company. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-3 dated April 15, 1996 (No. 333-521).
10(a) Fourth Amended and Restated Credit Agreement dated as of January 14, 1997, among Tosco Corporation, as Borrower, and the Banks named therein, as Banks, and The Chase Manhattan Bank as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent, and the First National Bank of Boston, as Agent. Incorporated by reference to Exhibit 10(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10(b) Severance Agreement dated May 8, 1996, between Registrant and Thomas D. O'Malley, including schedule identifying similar agreements between Registrant, or its subsidiaries, and two of its employees.
10(c) Indemnification Agreement dated September 30, 1987, between Registrant and Thomas D. O'Malley, including schedule identifying similar agreements between Registrant and its Directors and/or officers, together with related Trust Agreement. Incorporated by reference to Exhibit 10(aa) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
10(d) Trademark License Agreement dated December 28, 1993, between British Petroleum Company p.l.c. and Tosco Corporation. Incorporated by reference to Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Schedule identifying (i) Amended and Restated Trademark License Agreement between British Petroleum Company p.l.c. and Tosco Corporation dated as of August 1, 1994, and (ii) Trademark License Agreement (California) between BP Oil Marketing, Inc. and Tosco Corporation dated as of August 1, 1994. These agreements extended the term of the original agreement and expanded the territory of the original agreement.
10(e) Stock Sale Agreement dated February 16, 1996, by and among Tosco and various stockholders of The Circle K Corporation. Incorporated by reference to Exhibit 1 to Registrant's Schedule 13D dated February 23, 1996, filed with respect to The Circle K Corporation.
10(f) Agreement and Plan of Merger dated as of February 16, 1996, by and among Tosco, Tosco Acquisition Sub, Inc., and The Circle K Corporation. Incorporated by reference to Exhibit 2 to Registrant's Schedule 13D dated February 23, 1996, filed with respect to the Circle K Corporation.
10(g) Sale and Purchase Agreement for 76 Products Company between Union Oil Company of California and Registrant, dated December 14, 1996. Incorporated by reference to Exhibit 10(k) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10(h) 1996 Long Term Incentive Plan, as amended.
10(i) Tosco Corporation Senior Executive Retirement Plan of 1990, as amended and restated as of May 15, 1996.
10(j) Tosco Corporation Senior Executive Retirement Plan of 1990, as amended and restated as of September 23, 1993.
10(k) Severance Agreements dated January 1, 1993, as amended, between Registrant and Robert J. Lavinia and Dwight L. Wiggins. Incorporated by reference to Exxhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 11. Statement regarding computation of per-share earnings. See Exhibit 11 to Financial Statements, 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 L.L.P.
27. Financial Data Schedule.
99. Condensed Consolidating Financial Information and Report of Independent Accountants.
(B). REPORTS ON FORM 8-K
Report dated October 16, 1997, reporting pursuant to Item 5 on recent publicity concerning patent litigation between Unocal Corporation and certain petroleum refineries.
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, and the State of Connecticut, on March 19, 1998.
TOSCO CORPORATION (Registrant)
BY /S/ THOMAS D. O'MALLEY (Thomas D. O'Malley) Chairman of the Board of Directors,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE
/s/ Thomas D. O'Malley Chairman of the Board and March 19, 1998 - ----------------------- Chief Executive Officer (Thomas D. O'Malley)
/s/ Jefferson F. Allen President, Principal March 19, 1998 - ------------------------- Financial Officer, (Jefferson F. Allen) and Director
/s/ Robert I. Santo Principal Accounting March 19, 1998 - ------------------------- Officer (Robert I. Santo)
/s/ Patrick M. de Barros Director March 19, 1998 - -------------------------- (Patrick M. de Barros)
/s/ Wayne A. Budd Director March 19, 1998 - ---------------------- (Wayne A. Budd)
/s/ Houston I. Flournoy Director March 19, 1998 - ------------------------- (Houston I. Flournoy)
/s/ Edmund A. Hajim Director March 19, 1998 - ------------------------- (Edmund A. Hajim)
/s/ Joseph P. Ingrassia Director March 19, 1998 - ------------------------- (Joseph P. Ingrassia)
/s/ Charles J. Luellen Director March 19, 1998 - ------------------------- (Charles J. Luellen)
/s/ Eija Malmivirta Director March 19, 1998 - ------------------------- (Eija Malmivirta)
/s/ Mark R. Mulvoy Director March 19, 1998 - ------------------------- (Mark R. Mulvoy)
TOSCO CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND FINANCIAL EXHIBITS FILED WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
PAGE(S)
Report of Independent Accountants
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Common Shareholders' Equity for the years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements -F-23
Financial Statement Schedule (a):
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996, and 1995
Financial Exhibits:
Exhibit 11 - Computation of Earnings Per Share for the years ended December 31, 1997, 1996, and 1995 Exhibit 12 - Ratio of Earnings to Fixed Charges for the years ended December 31, 1997, 1996, and 1995 Exhibit 23 - Consent of Independent Accountants Report of Independent Accountants on Exhibit 99 Exhibit 99 - Condensed Consolidating Financial Information as of December 31, 1997 and for the year then ended (b) Exhibit 99 - Condensed Consolidating Financial Information as of December 31, 1996 and for the year then ended (b) Exhibit 99 - Condensed Consolidating Financial Information for the year ended December 31, 1995 (b)
(a) Financial statement schedules, other than Schedule II, have been omitted since they are either not required, are not applicable, or the required information is presented in the consolidated financial statements and related notes.
(b) The condensed consolidating financial information presents the financial position, operating results, and cash flows of Tosco, Bayway and Tosco's Nonguaranteeing Subsidiaries. This information is provided to meet the reporting and informational requirements of Bayway as guarantor of the 8.25% Bayway Bonds. See Note 10 to the Consolidated Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors 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, 1997, and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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.
Phoenix, Arizona February 26, 1998
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars, Except Par Value)
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars, Except Per Share Data)
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Thousands of Dollars)
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars)
TOSCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1. NATURE OF BUSINESS
Tosco Corporation ("Tosco" or the "Company") through divisions and subsidiaries is the largest independent refiner and marketer of petroleum products and the largest operator of company-controlled convenience stores in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Tosco and its wholly-owned subsidiaries, including The Circle K Corporation ("Circle K"). All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management estimates and assumptions that affect the reported amounts of assets and liabilities, the reported results of operations, and the disclosure of contingent assets and liabilities.
CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND DEPOSITS
Cash in excess of operating requirements is used to pay down cash borrowings under the Company's Revolving Credit Facility or invested in highly liquid cash equivalents. Margin deposits, based on a percentage of the value of the futures contracts, are maintained with commodity brokers in accordance with the requirements of commodity exchanges. Margin deposits are included in marketable securities and deposits on the balance sheet.
At December 31, 1997 and 1996, the Company had approximately $15,000,000 of director and officer liability insurance coverage with a wholly-owned subsidiary (amounts approximately equal to the fair value of marketable securities held in trust by the subsidiary). The subsidiary's trust assets are restricted to payment of directors and officers liability defense costs and claims. Marketable securities held by the subsidiary, classified as available for sale, consist of highly liquid debt and equity securities. The cost of the marketable securities approximates fair value. Accordingly, unrealized gains and losses, net of the related tax effect, are not significant. Debt securities with original maturities of three months or less at the date of purchase are classified as cash equivalents, while debt securities with maturities of twelve months or less from the balance sheet date are included in marketable securities and deposits on the balance sheet.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of refinery inventories is determined on the last-in, first-out ("LIFO") basis. The net realizable value of LIFO inventories is measured by aggregating similar pools on a consolidated basis. The cost of retail fuel inventories is determined on the first-in, first-out ("FIFO") basis. The cost of retail merchandise inventories is determined under the retail method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, including capitalized interest, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided over the estimated useful lives of the respective classes of assets utilizing the straight-line method. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. Routine maintenance and repairs are expensed. Gains and losses on disposition of assets are reflected in results of operations.
DEFERRED TURNAROUNDS
Refinery processing units are periodically shut down for major scheduled maintenance (turnarounds). Turnaround costs are deferred and amortized on a straight-line basis over the expected period of benefit, which generally ranges from 24 to 48 months.
INTANGIBLE ASSETS (PRIMARILY TRADENAMES)
Tradenames acquired in the 76 Products and Circle K acquisitions are amortized on a straight-line basis over 40 years. Other tradenames and intangible assets are amortized on a straight-line basis over periods of up to 15 years.
OTHER DEFERRED CHARGES AND ASSETS
Financing charges related to the acquisition or refinancing of debt are deferred and amortized over the term of the related debt using the effective interest method. Direct third party costs of computer software developed for internal use are deferred and amortized over their useful lives, not to exceed five years. Production costs of future media advertising are deferred until the advertising occurs.
SELF-INSURANCE
The Company is self-insured up to certain limits for workers' compensation (in certain states), property damage, and general liability claims. Accruals for loss incidences are made based on the Company's claims experience and actuarial assumptions followed in the insurance industry. Actual losses could differ from accrued amounts.
EXCISE TAXES
Excise taxes collected on behalf of governmental agencies are excluded from sales, cost of sales, and other expenses. Excise taxes totaled $1,768,078,000, $1,382,020,000, and $1,167,477,000 for 1997, 1996, and 1995, respectively.
ENVIRONMENTAL COSTS
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals are generally based on the completion of investigations or other studies or a commitment to a formal plan of action. The gross amount of the liability is based on the Company's best estimate of undiscounted future costs using currently available technology, and applying current regulations, as well as the Company's own internal environmental policies. Estimated reimbursements of remediation costs of petroleum releases from underground storage tanks are recorded as assets when reimbursements from state trust fund programs are probable.
DEFERRED REVENUE
Advances received in connection with long-term supplier marketing or display allowances are amortized to income over the terms of the respective arrangements based on projected purchase levels.
EARNINGS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" ("SFAS No. 128"). Under the provisions of SFAS No. 128, basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing income before distributions on company-obligated, mandatorily redeemable, convertible preferred securities by the weighted average number of common shares and dilutive potential common shares outstanding during the year. Earnings per share for all periods have been restated to conform with the provisions of SFAS No. 128.
3. 76 PRODUCTS ACQUISITION
On March 31, 1997, the Company acquired Union Oil Company of California's ("Unocal") West Coast petroleum refining, marketing, and related supply and transportation assets (the "76 Products Acquisition"). The purchase price (including environmental and other liabilities assumed) was approximately $1,541,000,000, plus inventories valued at $361,249,000, and credit card receivables valued at $131,044,000. In addition, Unocal is entitled to receive contingent participation payments if gasoline margins increase above specified levels (Note 18).
The acquired assets include two petroleum refining systems with an aggregate throughput capacity of approximately 250,000 barrels per day; a retail gasoline system consisting of 76-branded gasoline service stations (most of which are company-controlled); a distribution system comprised of 13 company-owned oil storage terminals; three 40,000 deadweight-ton tankers; rights with respect to approximately 1,300 miles of crude oil and product pipelines; the worldwide rights to the "76" and "Union" tradenames, together with the distinctive orange ball logo, (except for pre-existing license grants relating to 76 Truckstops and to Uno-Ven); and Unocal's lubricants manufacturing, distribution, and marketing business.
The purchase price paid consisted of cash and 14,092,482 shares of Tosco common stock ("Common Stock") (Note 13). The cash portion was paid on April 1, 1997 from a combination of available cash, borrowings under the Revolving Credit Facilities (Note 9), and proceeds from the sale of $600,000,000 of unsecured debt securities (Note 10). In addition, certain gasoline service stations were purchased directly from Unocal for $235,000,000 by a special purpose entity which has leased the service stations to the Company pursuant to a long-term lease (Note 17).
The Company intends to sell certain non-strategic assets acquired from Unocal. Through December 31, 1997, the tankers, a heating oil distributorship, and certain retail and distribution sites were sold for $72,689,000 (an amount equal to their allocated purchase cost).
The 76 Products Acquisition has been accounted for as a purchase. Accordingly, the acquired assets and liabilities are included in the accompanying balance sheet at values based on a preliminary purchase price allocation. The purchase price allocation will be finalized by March 31, 1998 based upon appraisals and other evaluations currently in process. The preliminary purchase price allocation is summarized below:
(Thousands of Dollars) Cash and cash equivalents $ 2,952 Credit card receivables 131,044 Inventories 361,249 Prepaid expenses and other current assets 11,373 Property, plant, and equipment 1,414,816 Intangible assets 88,611 Other deferred charges and assets 23,033 Accrued expenses and other current liabilities (196,822) Accrued environmental costs (190,000) Other liabilities (57,275) ------------- $ 1,588,981 ================
Consolidated operating results include the operations of the 76 Products Acquisition subsequent to March 31, 1997. Unaudited pro-forma results of operations for the years ended December 31, 1997 and 1996, assuming the 76 Products Acquisition had occurred at the beginning of each year, are as follows:
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1997 1996 ----------- ----------- (UNAUDITED) Sales $ 14,236,220 $ 13,780,111 Net income 174,308 164,708 Basic earnings per share $ 1.11 $ 1.11 Diluted earnings per share 1.08 1.09
The unaudited pro-forma results of operations are presented for informational purposes only and do not fully reflect the improvement in operating contribution anticipated from the 76 Products Acquisition or the reduction in operating and administrative costs expected from the consolidation of operations. Accordingly, it is not necessarily indicative of the operating results that would have occurred nor of future operating results.
4. FINANCIAL INSTRUMENTS
DERIVATIVES
The Company utilizes commodity-based derivative instruments, at times and when able, to reduce a portion of its exposure to price volatility. Commodity futures are used to lock in what the Company considers to be acceptable margins between the sales value of refined products produced and the cost of raw materials purchased on a varying percentage of production, generally for periods not exceeding one year. In addition, the Company enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of residual fuels production. Futures and forward contracts are also used to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign and domestic crude oil. Gains and losses related to qualifying hedges are deferred and recognized in cost of sales, or as adjustments of the carrying amounts, when the underlying physical transaction occurs.
At December 31, 1997 and 1996, the Company had 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) as follows:
(THOUSANDS OF DOLLARS) 1997 1996 ------------- --------- Open long contracts $ 142,376 $ 258,648 Open short contracts 95,442 352,226
The unrecognized net gain on such open contracts, as well as deferred gains and losses on closed futures and swap contracts totaled $3,648,000 and $1,306,000 at December 31, 1997 and 1996, respectively, and will be recognized or reversed in the following year as an offset to realized margins on refined products sold.
FAIR VALUES
The carrying value of cash, cash equivalents, marketable securities, short-term deposits, trade accounts receivable, accounts payable, and other current liabilities approximates their fair value due to the relatively short maturity of these financial instruments. The carrying value of the revolving credit facility approximates fair value due to its variable interest rate. Estimated fair values of other financial instruments at December 31, 1997 and 1996 are as follows:
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, marketable securities, short-term deposits, trade receivables, and derivative instruments. The Company places its cash equivalents, marketable securities, and short-term deposits with several high-quality financial institutions. The Company's customer base consists of a large number of diverse customers. The Company conducts ongoing evaluations of its customers and requires letters of credit or other collateral arrangements as appropriate. Accordingly, trade receivable credit losses have not been significant. The Company does not believe that it has a significant credit risk on its derivative instruments which are transacted through the New York Mercantile Exchange, or with counterparties meeting established collateral and credit criteria.
5. ACCOUNTS RECEIVABLE
In June 1995, the Company entered into a three-year agreement with a financial institution to sell on a revolving basis up to $100,000,000 of an undivided percentage ownership interest in a designated pool of accounts receivable (the "Receivable Transfer Agreement"). The Receivable Transfer Agreement was amended in May 1996, December 1996, and May 1997 to increase the program to $175,000,000, $200,000,000, and $300,000,000, respectively. In October 1997, the Company entered into a three-year agreement with a financial institution to sell on a revolving basis up to $100,000,000 of an undivided percentage ownership interest in a designated pool of credit card accounts receivable (the "Credit Card Receivable Transfer Agreement"). Under the Receivable Transfer Agreement and Credit Card Receivable Transfer Agreement, the Company retains substantially the same risk of credit loss as if the receivables had not been sold. The Company also retains collection and administrative responsibilities on the participating interest sold as agent for the financial institution. At December 31, 1997 and 1996, accounts receivable were reduced by $400,000,000 and $199,600,000, respectively, for receivables sold under these programs. Sales of accounts receivables under these programs averaged $984,216,000, $506,455,000, and $432,000,000 per month in 1997, 1996, and 1995, respectively.
6. INVENTORIES
(THOUSANDS OF DOLLARS) 1997 1996 ------------- --------- Refineries (LIFO): Raw materials $ 468,515 $ 227,211 Intermediates 181,414 79,831 Finished products 440,525 174,277 Retail (FIFO): Merchandise 121,082 116,618 Gasoline and diesel 39,901 39,681 Other 2,255 2,142 ------------- ----------- $ 1,253,692 $ 639,760 ============= =============
The 1997 results of operations and LIFO inventories at December 31, 1997 are reduced by a $53,000,000 non-cash inventory valuation reserve recorded in December 1997. At December 31, 1996, the excess of replacement cost over the carrying value of LIFO inventories was $177,653,000.
7. PROPERTY, PLANT, AND EQUIPMENT
Expenditures for maintenance and repairs (excluding the amortization of turnaround costs) during 1997, 1996, and 1995 were $210,443,000, $135,006,000, and $102,552,000, respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(THOUSANDS OF DOLLARS) 1997 1996 ------------- --------- Accrued taxes, other than income taxes $ 173,115 $106,852 Accrued compensation and related benefits 120,221 67,382 Acquisition-related liabilities 37,326 Dividends payable 9,375 7,424 Other 280,393 184,526 ------------- ------------ $ 620,430 $ 366,184 ============= ============
9. REVOLVING CREDIT FACILITY
On April 8, 1996, the Company entered into a new revolving credit agreement (the "Revolving Credit Facility"). The Revolving Credit Facility was amended and restated on January 14, 1997 to provide the Company with a $1,000,000,000 ($900,000,000 expiring on January 14, 2002 and $100,000,000 expiring on January 12, 1999) uncollateralized revolving credit facility that is available for working capital and general corporate purposes, including acquisitions. The Revolving Credit Facility bears interest at the option of the Company at one of three alternative rates (a federal funds rate, a Eurodollar rate, or a base rate related to prime) plus an incremental margin for each rate option. A commitment fee on the unused portion of the facility is also due. The incremental margin and commitment fee are dependent on the credit rating of the First Mortgage Bonds (Note 10). Prior to January 14, 1997, the Revolving Credit Facility was a $600,000,000 uncollateralized facility and prior to April 8, 1996 the Revolving Credit Facility was a $450,000,000 collateralized facility. Utilization of the Revolving Credit Facility as of December 31, 1997 and 1996 was as follows:
(THOUSANDS OF DOLLARS) 1997 1996 ------------- --------- Cash borrowings outstanding $ 166,000 $ Letters of credit 57,241 112,113 ------------- -------------- Total utilization 223,241 112,113 Availability 776,759 487,887 ------------- -------------- $ 1,000,000 $ 600,000 ============= ==============
On March 31, 1997, the Company entered into a second revolving credit agreement (the "Additional Credit Facility"). The Additional Credit Facility was scheduled to mature on January 14, 2002 and provided the Company with a $250,000,000 uncollateralized revolving credit facility for working capital and general corporate purposes. On May 15, 1997, the Company terminated the Additional Credit Facility.
10. LONG-TERM DEBT
(THOUSANDS OF DOLLARS) 1997 1996 ------------- --------- Collateralized debt: First Mortgage Bonds (a) $ 200,000 $ 300,000 Bayway Bonds (b) 150,000 150,000 Real estate installment purchase note (c) 52,563 54,821 Other 3,949 4,378 Uncollateralized debt: 7% Notes (d) 125,000 125,000 7.625% Notes (e) 240,000 240,000 Notes and Debentures (f) 600,000 Other 319 522 Capital leases (g) 55,334 65,311 ------------ ------------- 1,427,165 940,032 Less current installments 11,908 113,200 -------------- ------------- $ 1,415,257 $ 826,832 ============= ==============
(a) In March 1992, the Company issued $300,000,000 of mortgage bonds (the "First Mortgage Bonds"), comprised of $100,000,000 of 9% Series A Bonds due March 15, 1997 and $200,000,000 of 9.625% Series B Bonds due March 15, 2002. Interest on the First Mortgage Bonds is payable each March 15 and September 15. The First Mortgage Bonds are noncallable and are collateralized by the Avon Refinery and certain related assets. On March 15, 1997, the Company repaid the $100,000,000 9% Series A Bonds
(b) In connection with the April 1993 acquisition of the Bayway Refinery, the Company issued in a private placement $150,000,000 of 8.25% mortgage bonds (the "Bayway Bonds") due May 15, 2003, guaranteed by the Bayway Refining Company ("Bayway"), a wholly-owned subsidiary of Tosco, with interest payable semi-annually on May 15 and November 15. The Bayway guarantee is collateralized by the Bayway Refinery and related assets and a guarantee of Tosco. Effective July 7, 1993, the Bayway Bonds were exchanged for a new series of publicly traded bonds having substantially identical terms, including the same interest rate and maturity dates.
(c) Real estate installment purchase note pursuant to which the Company will receive title to approximately 200 convenience stores that it currently operates in various states. Future payments through 2007 totaling $82,401,000, at December 31, 1997, excluding contingent amounts based on a percentage of sales over specified minimums, have been discounted at 9%.
(d) On July 12, 1995, $125,000,000 of registered debt securities were issued as 7% uncollateralized, noncallable notes due July 15, 2000 (the "7% Notes"). Semi-annual interest payments on the 7% Notes began January 15, 1996. The proceeds from the public offering, net of costs, were used to repay debt.
(e) In May 1996, the Company issued $240,000,000 of 7.625% uncollateralized notes due May 15, 2006 (the "7.625% Notes") in connection with the acquisition of Circle K. Semi-annual interest payments on the 7.625% Notes began November 15, 1996.
(f) On January 14, 1997, the Company issued $200,000,000 of 7.25% Notes due on January 1, 2007, $300,000,000 of 7.8% Debentures due on January 1, 2027, and $100,000,000 of 7.9% Debentures due on January 1, 2047 (collectively the "Notes and Debentures"). Interest on the unregistered Notes and Debentures was payable each January 1 and July 1, commencing on July 1, 1997. The proceeds from the unregistered Notes and Debentures were used to finance a portion of the 76 Products Acquisition. In August 1997, the Company exchanged the unregistered Notes and Debentures for fully registered and freely salable notes and debentures having identical terms, including the same interest rates and maturity dates. The Notes and Debentures are non-redeemable and uncollateralized.
(g) The Company's capital lease obligations are collateralized primarily by retail marketing and related assets and mature at varying dates through 2019. The carrying value of the assets under capital lease arrangements approximates the capital lease obligation.
The debt agreements, including the Revolving Credit Facility (Note 9), contain covenants that limit the Company's ability to incur additional indebtedness, pay dividends, acquire its own equity securities, make investments in certain subsidiaries, and make discretionary capital expenditures. They also require the maintenance of minimum financial ratios and net worth levels. At December 31, 1997, the Company was in compliance with all debt covenants.
At December 31, 1997 future maturities relating to long-term debt were as follows:
11. ACCRUED ENVIRONMENTAL COSTS
The Company is subject to extensive federal, state, and local environmental laws and regulations relating to its petroleum refining, distribution, and marketing operations. These laws and regulations (which are complex, change frequently, and are subject to differing interpretations) regulate the discharge of materials into the environment. The Company is currently involved in a number of environmental proceedings and discussions regarding the removal and mitigation of the environmental effects of subsurface liquid hydrocarbons and alleged levels of hazardous waste at certain of its refineries and other locations, including a site on the Superfund National Priorities List.
In July 1993, outstanding litigation concerning environmental issues was settled with the predecessor owners of the Avon Refinery (the "Settlement Agreement"). Under the Settlement Agreement, the former owners agreed to pay up to $18,000,000 for one-half of the costs that may be incurred for compliance with certain environmental orders and to provide the Company with a $6,000,000 credit for past expenses (which the Company uses to reduce its one-half share of costs). After the $36,000,000 shared cost maximum is expended, the parties may elect to continue the Settlement Agreement or to reinstate litigation. The Company and the former owners have established a committee to review and approve expenditures for environmental investigative and remediation actions at the Avon Refinery. Through December 31, 1997, the committee has spent $4,192,000 on such matters.
By agreement, Exxon is responsible for environmental obligations related to or arising out of its ownership and operation of the Bayway Refinery, purchased by the Company in April 1993. The Company has also received indemnifications with respect to environmental obligations arising out of or relating to the period prior to the respective acquisition dates of the Ferndale Refinery, the Trainer Refinery, and retail assets in the Pacific Northwest and Northern California from BP, and the Arizona retail properties from Exxon.
Through March 31, 2022, Unocal will be responsible for all environmental liabilities at the acquired refineries, gasoline stations, oil storage terminals, and pipelines arising out of or relating to the period prior to closing, except that the Company will pay the first $7,000,000 of such environmental liabilities each year, plus 40% of any amount in excess of $7,000,000 per year, with Unocal paying the remaining 60% each year. The aggregate maximum amount that the Company may have to pay in total for the 25 year period for such environmental liabilities is limited to $200,000,000. During the nine months ended December 31, 1997, the Company incurred environmental costs at the 76 Products sites of $9,497,000, of which $2,438,000 is reimbursable by Unocal and $7,059,000 was charged to the environmental accrual.
Environmental exposures are difficult to assess and estimate for numerous reasons including the complexity and differing interpretations of governmental regulations, the lack of reliable data, the number of potentially responsible parties and their financial capabilities, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and the identification of new sites. The Company believes that it has adequately provided for environmental exposures. However, should these matters be resolved unfavorably to the Company, they could have a material adverse effect on its long-term consolidated financial position and results of operations.
12. COMPANY-OBLIGATED, MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED SECURITIES
In December 1996, Tosco Financing Trust (the "Trust"), a Delaware business trust, all of whose common securities are owned by Tosco, issued, in a private placement, 6,000,000 shares of 5.75% company-obligated, mandatorily redeemable, convertible preferred securities (the "Trust Preferred Securities"). The net proceeds from the Trust Preferred Securities of approximately $291,000,000 were used to purchase an equal amount of 5.75% convertible junior subordinated debentures of Tosco due on December 15, 2026 (the "Convertible Debentures"). The sole assets of the Trust are the Convertible Debentures, guaranteed by Tosco. The Trust Preferred Securities represent preferred undivided interests in the Trust's assets, with a liquidation preference of $50 per security, for a total liquidation preference of $300,000,000.
Distributions on the Trust Preferred Securities, cumulative and payable quarterly in arrears at the annual rate of 5.75% of the liquidation amount, commenced on March 15, 1997. The Company has the option to defer payment of the distributions for an extension period of up to five years if it is in compliance with the terms of the Trust Preferred Securities. Interest at 5.75% will accrue on such deferred distribution throughout the extension period. The Trust Preferred Securities are convertible, at the option of the holder, at any time after March 15, 1997 into 1.51899 shares of Common Stock, equivalent to a conversion price of approximately $32.92 per share of Common Stock, subject to adjustment in certain events. The Trust Preferred Securities do not have a stated maturity date, although they are mandatorily redeemable upon the repayment of the Convertible Debentures to the Trust, but not before December 18, 1999. The redemption price decreases from 104.025% of the liquidation preference in 1999 to 100% of the liquidation preference in 2006 and thereafter.
13. CAPITAL STOCK
The Company is presently authorized to issue 12,000,000 shares of preferred stock, par value $1.00 per share, ("Preferred Stock"). No shares of Preferred Stock are issued or outstanding. At a special meeting of the Company's Shareholders on February 12, 1997, an amendment to increase the number of authorized shares of Common Stock from 50,000,000 to 250,000,000 was approved. The Company subsequently declared and distributed a 3-for-1 Common Stock split, in the form of a 200 percent stock dividend. The number of shares, per share prices, and earnings per share amounts for all periods reflect this 3-for-1 stock split.
In January 1997, the Company filed a shelf registration statement providing for the issuance of up to $1,500,000,000 aggregate principal amount of its securities. The securities may consist of (1) one or more series of debentures, notes or other uncollateralized forms of indebtedness, (2) Common Stock, (3) Preferred Stock, and (4) preferred stock represented by depository shares. The securities may be offered, separately or together, in amounts and at prices and terms to be set forth in one or more supplements to the shelf registration statement. At December 31, 1997, the Company may issue up to $778,950,000 of securities pursuant to this shelf registration statement.
On March 31, 1997, the Company issued 14,092,482 shares of Common Stock to Unocal (the "Unocal Shares"). The Unocal Shares had an aggregate value of $396,880,000, based on a per-share value of $28.1625 per share, which was the average of the high and low Tosco stock prices for the ten trading days preceding the closing date. On May 1, 1997, the Company issued 25,300,000 shares of Common Stock pursuant to a prospectus supplement to the shelf registration statement. The net proceeds from this Common Stock offering were $697,396,000, based on an offering price of $28.50 per share. The net proceeds were used to repurchase, as treasury shares, the Unocal Shares for approximately $393,708,000 and to repay borrowings under the Revolving Credit Facility and Additional Credit Facility (Note 9).
The Company has paid a regular quarterly cash dividend on its Common Stock since the third quarter of 1989. Effective with the first quarter of 1997, the Company increased its quarterly cash dividend from $0.0567 per share to $0.06 per share.
14. STOCK OPTION PLANS
The Company has two stock option plans, the 1989 Stock Incentive Plan (the "1989 Plan") and the 1992 Stock Incentive Plan (the "1992 Plan"), that reserve shares of Common Stock for issuance to key employees, consultants, and non- employee directors. The 1989 Plan and 1992 Plan (collectively the "Option Plans") provide for the grant of a maximum of 3,840,000 and 6,600,000 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 Plan and 1992 Plan may be granted until March 7, 1999 and March 13, 2002, respectively. Subject to severance agreements with certain employees (Note 18), 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.
Additional information regarding the Option Plans as of December 31, 1997 is as follows:
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been recognized for the Option Plans. Had the Company elected to adopt the recognition provisions of SFAS No. 123, net income and earnings per share would have been reduced by $2,968,000 ($0.02 per share), $1,622,000 ($0.01 per share), and $626,000 ($0.01 per share) for 1997, 1996, and 1995, respectively.
The fair value of options granted in 1997, 1996, and 1995 was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
1997 1996 1995 ---------- ----------- --------- Assumed risk-free interest rate 6.5 % 6.2 % 6.6 % Expected life 7.2 years 8.3 years 7.5 years Expected volatility 28.7 % 26.3 % 27.7 % Assumed dividend yield 0.8 % 1.5 % 2.2 %
In late 1996, the Company adopted the Tosco Corporation 1996 Long-Term Incentive Plan ("LTIP") which replaced the granting of incentive awards under the 1992 Plan to participants in the LTIP. Under the LTIP, the Compensation Committee of the Board of Directors may grant performance units to participants, the payment of which is contingent on the meeting of performance goals as defined and continued employment by the participant. Under certain circumstances, payments to any participant in a calendar year may not exceed 400% of such participant's total annual compensation for the year of the award. At December 31, 1997, based on performance goals achieved to date, the participants will be entitled to receive approximately $29,000,000 on January 1, 1999, and payment of approximately one- half of such amount on January 1, 2000 and January 1, 2001. If a participant, prior to scheduled payment dates of the award, voluntarily terminates employment with the Company or retires prior to age 65 all unpaid amounts will be forfeited. The Company accrues for such amounts on a ratable basis over the required service period.
15. EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
PENSION PLANS
The Company has non-contributory, defined benefit pension plans covering substantially all employees located at the Bayway Refinery, Los Angeles Area Refinery System, and the San Francisco Area Refinery System and its union employees at the Ferndale Refinery (collectively, the "Pension Plans"). Benefits under the Pension Plans are generally based on the employee's years of service and average earnings for the three highest consecutive calendar years of compensation during the ten years immediately preceding retirement. Benefits are payable at the normal retirement age of 65, with reduced benefits for early retirement (as defined). Contributions to the Pension Plans are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than the amount deductible for federal income tax purposes. The Pension Plans' assets are held by a major financial institution and invested in a stock index fund, a treasury bond index fund, short-term investment funds, and a real estate equity fund.
The Company's funded status and pension (liability) asset, using end of year actuarial assumptions, consist of the following at December 31, 1997 and 1996:
Net pension cost, using beginning of the year actuarial assumptions, for the years ended December 31, 1997, 1996, and 1995 consists of the following:
The Company has a Senior Executive Retirement Plan ("SERP") that provides retirement benefits to selected senior executives and their beneficiaries. SERP provisions of $1,908,000, $2,079,000, and $1,265,000, were included in selling, general, and administrative expenses in 1997, 1996, and 1995, respectively.
EMPLOYEE AND RETIREE BENEFIT PLANS
The Company 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 and, effective January 1, 1997 and April 1, 1997, at the Bayway Refinery and the acquired 76 Products refineries, respectively). 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.
The Company's accrued postretirement benefit liability, using end of year actuarial assumptions, consists of the following at December 31, 1997 and 1996:
Net postretirement benefit cost, using beginning of the year actuarial assumptions, for the years ended December 31, 1997, 1996, and 1995 consists of the following:
A 1% increase in the health care cost trend rate would increase the APBO at December 31, 1997 and 1996 by $1,511,000 and $907,000, respectively, and increase the aggregate of service and interest cost for 1997, 1996, and 1995 by $183,000, $88,000, and $80,000, respectively.
SAVINGS PLANS
The Tosco Corporation Capital Accumulation Plan (the "CAP") and the Circle K Kash Plus Plan (the "Kash Plus Plan") have been established for all eligible employees of Tosco and Circle K, respectively. Participants may make, within certain limitations, voluntary contributions under Section 401(k) of the Internal Revenue Code of a percentage of their compensation. The Company makes matching contributions based upon years of contributory participation, as defined under the CAP and Kash Plus Plan (collectively the "Savings Plans"), for employees who elect to make certain specified and minimum contributions. In addition, eligible employees of the CAP receive an additional contribution equal to 5% of their compensation, up to $150,000 in 1997, 1996, and 1995, in lieu of pension plan benefits. Participants of the CAP are immediately vested in both their voluntary and the Company contributions. Participants of the Kash Plus Plan are immediately vested in their voluntary contributions and, effective December 31, 1997, the Company's contribution. Contributions by the Company to the Savings Plans for the years ended December 31, 1997, 1996, and 1995 were $17,766,000, $9,517,000, and $7,837,000, respectively.
Effective January 1, 1998, all non-store employee participants in the Kash Plus Plan were made eligible for the CAP. Participants electing to transfer to the CAP were given a one time option to transfer not less than 100% of their Kash Plus Plan balances to the CAP. Additionally, certain store employees formerly participating in the CAP were transferred to the Kash Plus Plan (renamed the Tosco Store Savings Plan).
MANAGEMENT INCENTIVE PLAN
The Tosco Corporation Cash Incentive Plan (the "CIP") has been established for members of middle and senior management. The CIP sets forth discretionary and other awards computed as a variable percentage of a participant's base salary, which percentage is dependent upon pre-tax income, as defined, of the respective participant's operating division. The Company also has a bonus plan for senior executives, who are not participants in the CIP, based on the Company's per share pre-tax income, as defined. Results of operations for the years ended December 31, 1997, 1996, and 1995 include incentive compensation of $55,800,000, $33,028,000, and $13,175,000, respectively, of which $4,641,000, $3,102,000 and $2,200,000 were special bonuses awarded to union and other employees not covered by management incentive plans.
16. 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:
Temporary differences between financial and income tax reporting and tax credit carryforwards that give rise to deferred income tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
17. LEASES
The Company distributes petroleum products throughout its marketing areas through a combination of owned and leased terminals. Leases for product distribution terminals are generally for short periods of time and continue in effect until canceled by either party with contracted days of notice, generally 30 to 60 days. Most product distribution terminal leases are subject to escalations based on various factors. The Company subleases a portion of its leased product distribution terminals. During December 1997, the Company purchased the Riverhead Terminal pursuant to a purchase option in the lease. Additionally, the Company leases two of its refining processing units pursuant to long-term operating leases.
The Company has long-term leases with special purpose entities for land and equipment at the Company's BP California, Exxon Arizona, and certain 76 Products sites. These leases provide the Company the option to purchase, at agreed-upon contracted prices, (a) not less than all of the leased assets at annual anniversary dates, and (b) a portion of the leased assets for resale to unaffiliated parties at quarterly lease payment dates. The Company may cancel the leases provided that lessors receive minimum sales values for the assets. The contracted purchase option price and minimum guaranteed sales values decline over the term of the leases. Minimum annual rentals vary with a reference interest rate (LIBOR).
The Company leases the majority of its stores and certain other property and equipment. The store leases generally have primary terms of up to 25 years with varying renewal provisions. Under certain of these leases, the Company is subject to additional rentals based on store sales as well as escalations in the minimum future lease amount. The leases for other property and equipment are for terms of up to 15 years. Most of the Company's lease arrangements provide the Company an option to purchase the assets at the end of the lease term. The Company may also cancel certain of its leases provided that the lessor receives minimum sales values for the leased assets. Most of the leases require that the Company provide for the payment of real estate taxes, repairs and maintenance, and insurance.
At December 31, 1997, future minimum obligations under non-cancelable operating leases and warehousing agreements are as follows:
(THOUSANDS OF DOLLARS) 1998 $ 159,441 1999 147,674 2000 134,432 2001 (a) 107,610 2002 (a) 44,023 Thereafter 390,376 ------------- 983,556 Less future minimum sublease income 110,855 --------------- $ 872,701 ==============
(a) Excludes guaranteed residual payments, totaling $123,221,000 (2001) and $191,522,000 (2002) due at the end of the lease term, which will be reduced by the fair market value of the leased assets.
Net rental expense for the years ended December 31, 1997, 1996, and 1995 consists of the following:
18. COMMITMENTS AND CONTINGENCIES
There are various legal proceedings and claims pending against the Company that are common to its operations. While it is not feasible to predict or determine the ultimate outcome of these matters, it is the opinion of management that these suits will not result in monetary damages that in the aggregate would be material to the business or operations of the Company.
As a condition of the 76 Products Acquisition, Unocal is entitled to receive contingent participation payments over the next seven years, up to a maximum of $250,000,000, if retail market conditions and/or California Air Resources Board ("CARB") gasoline margins increase above specified levels. The contingent participation payments will be capitalized, when incurred, as an additional cost of the 76 Products Acquisition. For the nine month period ended December 31, 1997, the Company's contingent participation payment is not material to its consolidated financial position.
The Company has employment agreements with certain of its executive officers that provide for lump sum severance payments and accelerated vesting of options upon termination of employment under certain circumstances or a change of control, as defined. The Company's potential minimum obligation to eight officers was $6,225,000 at December 31, 1997.
Litigation between Unocal Corp. and certain petroleum refiners has contested the validity of patents held by Unocal covering certain formulations for clean burning fuels meeting California fuel specifications and, in turn, alleged infringement of those patents by certain refiners. The Company is not a party to the patent litigation. Under the terms of the 76 Product Acquisition, the Company has no liability to Unocal for any possible past infringement of the patents, including to the date of final resolution of the matter, which, considering appeals, could take several years.
The Company, in keeping with industry practice, schedules periodic maintenance of major processing units for significant non-routine repairs and replacements (turnarounds) as the units reach the end of their normal operating cycles. Unscheduled turnarounds also occur because of operating difficulties or external factors. Throughput and earnings are lowered, and deferred turnaround expenditures increased, during such periods.
The Company carries insurance policies on insurable risks which it believes to be appropriate at commercially reasonable rates. While management believes the Company is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would have to be paid out of general corporate funds. Cost of sales for 1997 was reduced by insurance coverage accruals for property damage and business interruption claims, net of insurance policy deductibles and asset write- offs, related to the unscheduled shutdown of the Bayway Refinery cat cracker and an accident at the Avon Refinery hydrocracker in January 1997. During 1997, the Company settled the Bayway insurance claim for approximately the accrued amount.
In the normal course of business, the Company has entered into numerous purchase contracts and transportation agreements. The majority of these contracts and agreements are short term and none are expected to negatively impact the Company's future results of operations.
19. SUPPLEMENTAL CASH FLOW INFORMATION
20. NEW ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (net income plus all other nonowner changes in equity). SFAS No. 131 establishes disclosure standards regarding information about operating segments in interim and annual financial statements. During February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132"). SFAS No. 132 changes the disclosure requirements for pension and other postretirement benefits but does not change any existing measurement or recognition provisions. The Company will comply with the expanded disclosure requirements of these accounting standards with its 1998 financial statements.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
TOSCO CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Thousands of Dollars)
EXHIBIT 11
TOSCO CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (a) (Thousands of Dollars, Except Per Share Data)
EXHIBIT 12
TOSCO CORPORATION AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars, Except Ratio Data)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Tosco Corporation
Our report on the consolidated financial statements and financial statement schedule of Tosco Corporation and Subsidiaries is included on page of this Form 10-K. In connection with our audits of such financial statements and financial statement schedule, we have also audited Exhibit 99 presentd on pages through of this Form 10-K.
In our opinion, the Exhibit 99 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 herein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona February 26, 1998
TOSCO CORPORATION AND SUBSIDIARIES EXHIBIT 99 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Thousands of Dollars)
TOSCO CORPORATION AND SUBSIDIARIES EXHIBIT 99 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Thousands of Dollars)
TOSCO CORPORATION AND SUBSIDIARIES EXHIBIT 99 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Thousands of Dollars)