ITEM 3. LEGAL PROCEEDINGS
A refinery in Duncan, Oklahoma, formerly owned by Tosco, is subject to investigation by the Oklahoma Department of Environmental Quality ("ODEQ"). The ODEQ requested that Tosco participate with the former owner, Sun Company, Inc. (R&M) ("Sun"), from whom Tosco purchased the site, and the subsequent owners, including those to whom Tosco sold the site, in the investigation and potential remediation of alleged environmental contamination. On September 29, 1995, Tosco entered into a Consent Agreement and Final Order with ODEQ to investigate the extent of contamination at the refinery, conduct certain interim remedial actions, and prepare a remedial action plan. On April 10, 1995, Tosco filed a complaint for declaratory relief against Sun (TOSCO CORPORATION V. SUN COMPANY, INC. (R&M)), U.S. District Court, Western District of Oklahoma, Case No. Civ. 95 556M) to recover the costs of complying with the ODEQ order, and seeking an order determining Tosco's and Sun's rights and legal relations under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA") and the Oil Pollution Act ("OPA"), and under the Purchase Agreement through which Tosco purchased the Duncan Refinery, relating to the costs of environmental investigation and potential remediation at the site. The complaint was subsequently amended to name Koch Industries, Inc. ("Koch"), another former owner, as another defendant. On February 14, 1996, Tosco obtained default judgments against some of the current owners of the refinery. In January 1998, Tosco entered into a Settlement Agreement with Sun, pursuant to which Sun agreed to pay $7 million in exchange for a release from liability with respect to the site. In early 1998, a trial was held on Tosco's claim against Koch. The court ruled in Tosco's favor that Koch was responsible for effectively 15% of past and future investigation and remediation costs at the site. In November 1999, Koch's May 4, 1998 appeal to the 10th Circuit Court of Appeals, seeking review of the trial court decision, was argued.
In a case filed in 1996 by private litigants against all major petroleum refiners, distributors, and retailers in California, including Tosco, alleging that the defendants restrained trade and restricted the supply of a certain type of cleaner burning gasoline sold in California, AGUILAR, ET AL. V. ATLANTIC RICHFIELD CORPORATION, ET AL. (Superior Court of California, County of San Diego, Case No. 00700810), the court granted the Defendants' Motions for Summary Judgment in October 1997. In late January 2000, the California Court of Appeals affirmed the lower court's summary judgment in favor of the defendants, including Tosco (reversing the lower court's January 29, 1998, ruling in which the lower court had reversed itself and ordered a new trial.) On January 28, 1998, a plaintiff allegedly representing a class of all wholesale purchasers of gasoline in the State of California sued nine petroleum refineries, including Tosco, making essentially the same allegations as those made in the Aguilar case, GILLEY V. ATLANTIC RICHFIELD CORP., ET AL., (U.S. District Court, Southern District of California, Case No. 93-CVU132BTM). The court has stayed all proceedings in this matter pending the decision of the Court of Appeals in the AGUILAR case.
On October 22, 1998, a complaint was filed by a private litigant, purportedly on behalf of a class of all direct or indirect purchasers of California diesel fuel between March 19, 1996 and December 31, 1997, against all California refiners of California diesel fuel (CAL-TEX CITRUS JUICE, ET AL. V. ATLANTIC RICHFIELD COMPANY, ET AL. Superior Court of California, County of Sacramento, Case No. 98AS05227). The complaint alleges violations of various state statutes by the defendants' alleged conspiracy to fix prices of California diesel fuel. Tosco has filed an Answer.
In October 1998, a complaint was filed against gasoline refiners and wholesalers in Hawaii, including Tosco, by the State of Hawaii alleging that defendants fixed the price of gasoline and allocated market share and seeking damages and injunctive relief (BRONSTER V. CHEVRON CORPORATION, ET AL., U.S. District Court, District of Hawaii, Case No. CV9800792SPK). Tosco filed a Motion to Dismiss. In 1999, in response to Tosco's Motion to Dismiss, which was granted in part and denied in part, the State amended its complaint to make essentially the same allegations.
In four cases, complaints were filed by private litigants, a water company, and a municipality against numerous defendants, including Tosco, alleging violation of state law in the production and sale of gasoline which included an additive, methyl tertiary butyl ether, (KUBAS, ET AL. V. UNOCAL CORPORATION, ET AL., Superior Court of California, County of Los Angeles, Case No. BC191876, COMMUNITIES FOR A BETTER ENVIRONMENT V. UNOCAL CORPORATION, ET AL., Superior Court of California, County of San Francisco, Case No. 997013, SOUTH TAHOE PUBLIC UTILITY DISTRICT V. ATLANTIC RICHFIELD COMPANY, ET AL., U.S. District Court, District of Delaware, Civil Action No. 98-336; THE CITY OF DINUBA V. UNOCAL CORPORATION, ET AL., Superior Court of California, County of San Francisco, Case No. 305450). It is alleged that the additive contaminated water supplies. Tosco has filed Answers in all cases.
The costs of remedial actions in environmental cases 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 20 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 as an Principal Occupation Name Age Officer Since and Positions Held ---- --- ------------- --------------------
Thomas D. O'Malley 58 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 54 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 53 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 59 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 52 1989 Senior Vice President of Tosco since May 1996 and General Counsel of Tosco since May 1990; Vice President of Tosco from May 1990 to May 1996; Secretary of Tosco since August 1989; Assistant General Counsel of Tosco from January 1986 to May 1990.
Peter A. Sutton 54 1992 Senior Vice President of Tosco since August 1998; Vice President of Tosco from January 1992 to August 1998; Senior Vice President of Tosco Refining Company since May 1990; various other positions with Tosco for a period in excess of five years.
Duane B. Bordvick 54 1997 Senior Vice President of Tosco for safety, health, and the environment since February 2000; Vice President of Tosco for environmental and external affairs from February 1997 to February 2000; Vice President of Tosco Refining Company for a period in excess of five years.
Craig R. Deasy 55 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.
William E. Hantke 52 1999 Vice President of Tosco for development since May 1999; various other positions with Tosco since 1990; various finance and accounting positions in oil and other commodity industries since 1975.
Ann Farner Miller 48 1996 Vice President of Tosco for governmental relations since May 1996; director of governmental relations of Tosco Refining Company for a period in excess of five years.
Richard W. Reinken 43 1994 Vice President and Chief Information Officer of Tosco since November 1994; Senior Vice President of Tosco Marketing Company since June 1996; Consultant, Andersen Consulting from 1985 to 1994.
Robert I. Santo 56 1992 Vice President of Tosco since January 1998; Chief Accounting Officer of Tosco since January 1992; various other positions with Tosco for a period in excess of five years.
Wanda Williams 53 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.
PRICE RANGE OF COMMON STOCK
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, 1999, are derived from the Consolidated Financial Statements of Tosco audited by PricewaterhouseCoopers LLP, independent accountants.
TOSCO CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (Millions of Dollars, Except Per Share and Ratio Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Tosco's mix of refining and marketing businesses allowed it to post good results for 1999 in a weak market. Income from operations (before special items) for 1999 increased over 1998, despite the volatility in product prices throughout 1999. Special items for 1999 include a $240 million inventory write-up, a $40 million gain on the sale of retail sites, an $8 million LIFO inventory liquidation gain, and non-recurring costs of $43 million related to the restart of the Avon Refinery. Tosco upgraded its marketing division during 1999 through the acquisition of over 200 quality sites from BP/Amoco and Boardman Petroleum in the Southeast. In addition, Tosco sold 372 convenience stores in non-core markets during 1999. On February 29, 2000, Tosco acquired and began operating retail systems consisting of 1,740 gasoline and convenience outlets from Exxon Corporation and Mobil Oil Corporation (collectively "ExxonMobil"). These outlets comprise Exxon's Northeast and Mobil's Middle Atlantic systems. During 1999, Tosco was added to the S&P 500 Index and its credit rating was further upgraded within the investment grade category by S&P Rating Service. The S&P 500 Index is one of the most widely used benchmarks for U.S. equity performance.
RESULTS OF OPERATIONS
REFINING DATA SUMMARY (A):
RETAIL DATA SUMMARY:
1999 COMPARED TO 1998
Tosco earned net income before special items of $297 million ($1.92 per share) during 1999. These results, which include insurance recoveries related to the Avon Refinery incident which replaced otherwise lost operational profit, represent a 10% increase in net income before special items of $270 million ($1.66 per share) for 1998. Special items for 1999 include a $240 million ($142 million after-tax and $0.89 per share) write-up of LIFO inventories previously written-down to their net realizable value, a $40 million ($24 million after-tax and $0.15 per share) gain on the sale of 372 retail sites in non-core markets, an $8 million ($5 million after-tax and $0.03 per share) LIFO inventory liquidation gain, and non-recurring costs of $43 million ($25 million after-tax and $0.16 per share) related to the restart of the Avon Refinery following its stand-down for a safety review. After special items, Tosco earned net income of $442 million ($2.83 per share) in 1999 compared to $106 million ($0.67 per share) in 1998. Results of operations for 1998 included a $240 million ($140 million after tax, $0.88 per share) non-cash inventory writedown and a $40 million ($23 million after tax, $0.15 per share) restructuring charge. Sales in 1999 were $14.4 billion compared to $12.0 billion in 1998. This increase of $2.4 billion was attributable to increased product prices partially offset by lower refinery production and retail merchandise sales. Production declines were primarily due to the stand-down of the Avon Refinery and the turnaround of the Bayway Refinery cat cracker in March and April 1999.
On February 23, 1999, a fire occurred at a crude unit at the San Francisco Area Refinery, Avon facility. The fire was quickly isolated and extinguished with no offsite effects or health risks to the community. In March, the Avon Refinery was shutdown while a thorough safety review and extensive employee safety training were conducted. In May, Tosco began the process of restarting the refinery and all major processing units were restarted by the end of July. See Note 16 to the Consolidated Financial Statements.
Operating contribution of $1.3 billion for 1999 increased by $43 million compared to 1998. The increase was from refining ($45 million) partially offset by a decrease from marketing ($2 million).
The increase in refining operating contribution of $45 million for the 1999 year compared to 1998 was primarily due to increased operating margins per charge barrel ($5.11 in 1999 compared to $4.61 in 1998). This was partially offset by lower production rates in 1999 (850,900 barrels per day ("B/D") in 1999 compared to 944,800 B/D in 1998). The improvement in consolidated operating margins during 1999 were the result of improved West Coast margins, due to increased demand coupled with reduced production, partially offset by lower East Coast margins. West Coast throughputs were reduced at several California refineries, including Tosco's Avon Refinery, during 1999 due to unscheduled outages of major processing units. East Coast operating margins were among the lowest levels in recent history. Cost of sales for 1999 was reduced by $42 million ($25 million after-tax and $0.16 per diluted share) for insurance recoveries related to the Avon Refinery incident and an $8 million LIFO inventory liquidation gain.
Marketing operating contribution for 1999 was $531 million compared to $533 million in 1998. The decrease of $2 million was primarily due to lower blended fuel margins for 1999. As a result of reduced store counts, fuel volumes and merchandise sales for 1999 were lower than 1998, but both amounts increased in 1999 compared to 1998 on a per store basis.
Depreciation and amortization for 1999 was $308 million compared to $314 million in 1998. The decrease of $6 million was due to a $24 million reduction in depreciation attributable to Tosco's January 1, 1999 extension of its refinery and distribution assets' useful lives. This was partially offset by 1999 depreciation on assets placed in service throughout 1999. See Note 6 to the Consolidated Financial Statements.
In December 1999, Tosco reversed (based on December 31, 1999 price levels) $240 million of net realizable value write-downs of its raw material and product inventories. These inventories had been written-down to their net realizable value at December 31, 1998. The 1998 writedown was the result of the steep market decline in crude oil and product prices in 1998 lowering the value of inventories acquired in connection with Tosco's acquisitions since 1993.
During 1999, Tosco incurred non-recurring expenses of $43 million related primarily to the restart of the Avon Refinery. These start-up costs did not include any normal recurring expenses for maintaining the refinery or training employees during the stand-down period. See Note 16 to the Consolidated Financial Statements.
During 1998, Tosco recorded a $40 million charge primarily related to the restructuring of its San Francisco Area Refinery System. In April 1999, management announced that layoffs and consolidation of functions planned for 1999 would not occur as originally contemplated. Accordingly, remaining employee termination cost accruals totaling $2 million were reversed in 1999. See Note 8 to the Consolidated Financial Statements.
Tosco has completed its present program of divestiture of convenience stores in non-core markets. In 1999, Tosco realized a gain of $40 million from the sale of 372 convenience stores. Operations from these convenience stores did not significantly impact operating contribution during 1999.
Net interest expense during 1999 was $4 million less than 1998 due primarily to lower levels of borrowings partially offset by increases in interest rates under the Revolving Credit Facility.
Income taxes, including the benefit associated with the distributions on company-obligated, mandatorily redeemable, convertible preferred securities ("Trust Preferred Securities"), were $307 million for 1999 compared to $75 million in 1998. The increase was due to higher taxable income in 1999. During 1999, Tosco reduced its effective income tax rate to 41.0% from 41.5% used in 1998 based on an evaluation of state income taxes given Tosco's current mix of profits.
1998 COMPARED TO 1997
Tosco earned net income of $106 million ($0.67 per share) in 1998 compared to $213 million ($1.37 per share) in 1997. Results of operations for 1998 include a $240 million ($140 million after tax, $0.88 per share) non-cash inventory writedown and a $40 million ($23 million after tax, $0.15 per share) restructuring charge. Results of operations for 1997 include a $53 million ($31 million after tax, $0.19 per share) non-cash inventory writedown. Sales in 1998 were $12.0 billion compared to $13.3 billion in 1997. This decrease of $1.3 billion was attributable to lower product prices partially offset by higher refinery throughput and retail fuel sales volumes. The higher throughput and sales volumes resulted from the 76 Products Acquisition (twelve months in 1998 versus nine months in 1997) and the full year operation of the previously shutdown Trainer Refinery, which was reopened on May 8, 1997.
Operating contribution of $1.2 billion for 1998 increased by $47 million over 1997. The increase was from refining ($54 million) partially offset by a decrease from marketing ($7 million).
Refining operating contribution for 1998 increased by $54 million to $682 million due primarily to increased throughput (944,800 barrels per day ("B/D") in 1998 compared to 793,400 B/D in 1997) partially offset by lower operating margin per charge barrel ($4.61 in 1998 compared to $4.89 in 1997). The increase in throughput volumes was primarily due to the acquisition of refineries from Unocal, the start-up of the Trainer Refinery, and to a lesser degree to increases at the Avon and Bayway refineries, both of which experienced no unscheduled shutdowns in 1998. The decrease in operating margin per charge barrel was primarily due to lower product prices experienced throughout 1998. Refining operating contribution includes insurance recoveries related to the unscheduled shutdowns in 1997 of the Bayway Refinery cat cracker and Avon Refinery hydrocracker.
Marketing operating contribution for 1998 was $533 million compared to $540 million in 1997. The decrease of $7 million was due to lower blended fuel margins (12.1 cents per gallon in 1998 versus 12.8 in 1997) partially offset by higher fuel sales volumes from the 76 Products Acquisition and higher merchandise sales volumes and profit margins.
Tosco recorded a $240 million charge for the write-down of raw material and product inventories to their fair value at December 31, 1998. The inventory writedown was the result of the steep market decline in crude oil and product prices in 1998 lowering the value of inventories acquired in connection with Tosco's acquisitions since 1993. During 1997, Tosco recorded a $53 million inventory write-down also as a result of declining prices.
During 1998, Tosco recorded a $40 million charge primarily related to the restructuring of its San Francisco Area Refinery System. The key component of the restructuring plan revolves around the continued integration of the Avon Refinery and the Rodeo-Santa Maria complex acquired in 1997.
Selling, general, and administrative ("SG&A") expenses for 1998 include the recognition of a $10 million gain on the sale of the Revere distribution terminal in Massachusetts, and approximately $3 million of non-recurring costs related to the consolidation of Tosco's offices. SG&A expenses for 1997 include non-recurring transition expenses of $18 million related to the integration of the 76 Products assets into Tosco's operations. Excluding these 1998 and 1997 non-recurring items, SG&A expenses increased by $29 million in 1998, due primarily to the 76 Products Acquisition.
Net interest expense, as restated, for 1998 was $12 million less than 1997 due to lower levels of borrowings and interest rates under the Revolving Credit Facility.
Income taxes, including the benefit associated with the Trust Preferred Securities, were $75 million for 1998 compared to $151 million in 1997. The decrease was due to lower taxable income in 1998.
OUTLOOK
On February 29, 2000, Tosco acquired and began operating retail systems consisting of approximately 1,740 retail gasoline and convenience outlets from ExxonMobil for $860 million (the "ExxonMobil Acquisition"). Tosco is also acquiring certain undeveloped sites and distribution terminals, all of which ExxonMobil is divesting under a Federal Trade Commission consent decree. The acquired outlets comprise the Exxon system from New York through Maine (the "Northeast Territory") and the Mobil system from New Jersey through Virginia (the "Middle Atlantic Territory"). The outlets include approximately 685 owned or leased sites and 1,055 open dealer and branded distributor sites. Tosco has exclusive rights to the "Exxon" brand in the Northeast Territory and the "Mobil" brand in the Middle Atlantic Territory for ten years. The acquisition is expected to be accretive to earnings. See Note 23 to the Consolidated Financial Statements. Tosco continues to review acquisition opportunities. However, Tosco plans to continue its disciplined approach to acquisitions, which requires an acquisition to be accretive to earnings.
Results of operations are primarily determined by the operating efficiency of the refineries and by refining and retail fuel margins. Tosco expects, given reasonable margins, to operate its refineries at high levels through the balance of 2000. Tosco is not able to predict the level or timing of operating margins for 2000 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 becoming more efficient in all areas of operation without compromising safety, reliability, or environmental compliance.
Tosco estimates that its effective income tax rate for 2000 will decrease to 40.5% based on an evaluation of Tosco's projected state income taxes after factoring in the ExxonMobil Acquisition.
CASH FLOWS
As summarized in the Consolidated Statement of Cash Flows, cash and cash equivalents decreased by $3 million during 1999. Cash used in investing activities of $473 million and financing activities of $346 million exceeded cash provided by operating activities of $816 million.
Net cash provided by operating activities of $816 million was from cash earnings (net income plus depreciation and amortization, and other non-cash operating gains and losses) of $632 million, a net decrease in operating assets and liabilities (primarily working capital) of $176 million, and other items of $8 million. The change in working capital reflects the increase in crude and product prices that occurred in 1999 and Tosco's liquidation of LIFO inventories.
Net cash used in investing activities totaled $473 million due to capital additions of $451 million, spending for turnarounds of $85 million, and acquisitions of retail systems of $118 million less proceeds on asset sales of $156 million and a net decrease in deferred charges and other assets of $25 million.
Net cash used in financing activities totaled $346 million due to net repayments under the Revolving Credit Facility totaling $90 million, Common Stock repurchases of $216 million, and dividend payments of $40 million.
Tosco completed its previously announced Common Stock repurchase program in August 1999. In September 1999, Tosco's Board of Directors approved an additional $300 million for the repurchase of Tosco Common Stock as opportunities arise and financial ability permits. Through February 29, 2000, no repurchases had been made pursuant to this program. See Note 13 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity (as measured by cash, cash equivalents, marketable securities, deposits, and availability under the Revolving Credit Facility) totaled $813 million at December 31, 1999, a $42 million decrease from the December 31, 1998 balance of $855 million. Cash and cash equivalents, marketable securities, and deposits increased by $1 million, and availability under the Revolving Credit Facility decreased by $43 million. The decrease in availability under the Revolving Credit Facility reflects Tosco's election not to renew its $100 million Facility B under the Revolving Credit Facility when it expired on January 12, 1999.
At December 31, 1999, total shareholders' equity was $2.1 billion; a $195 million increase compared to the December 31, 1998 balance. This increase was due to net income of $442 million and other items of $10 million exceeding Common Stock repurchases of $217 million and dividends of $40 million. Debt (current and long-term debt and the Revolving Credit Facility) decreased by $96 million to approximately $1.5 billion at December 31, 1999 due primarily to net Revolving Credit Facility repayments. The ratio of debt (Revolving Credit Facility and non-current portion of long-term debt) to total capitalization (Revolving Credit Facility, non-current portion of long-term debt, Trust Preferred Securities, and Shareholders' Equity) was 38% at December 31, 1999, compared to the December 31, 1998 ratio of 41%.
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 February 8, 2000, Tosco issued $400 million of 8.125% Notes due in 2030 in a public offering pursuant to the shelf registration statement. At February 29, 2000, Tosco has $379 million remaining and available pursuant to this shelf registration statement.
In February 2000, Tosco amended and restated its Revolving Credit Facility (the "Amended Revolving Credit Facility"). See Note 9 to the Consolidated Financial Statements.
The Amended 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, including repayment of the $125 million notes payable on July 15, 2000.
CAPITAL EXPENDITURES
During 1999, Tosco spent $451 million on property, plant, and equipment additions and $85 million for turnarounds. With the exception of certain turnarounds at the Avon Refinery during the stand-down period, these additions were budgeted for 1999. Refining additions of $309 million were primarily for turnarounds at the Avon and Bayway Refineries and projects related to compliance with environmental regulations and permits, personnel/process safety programs, and operating flexibility and reliability projects.
Marketing capital additions of $227 million were primarily for improvements at existing sites. Tosco's marketing division also acquired 174 retail gasoline and convenience store sites and 20 raw land parcels in the Southeast and 27 gasoline service stations in Pittsburgh, Pennsylvania during 1999. Tosco divested 372 non-core convenience store properties during 1999. See Notes 3, 6, and 18 to the Consolidated Financial Statements.
Construction of a 775 million pounds per year polypropylene plant at the Bayway Refinery, currently in progress, is expected to be completed in two years.
Tosco intends to finance its 2000 capital additions, including construction of the polypropylene plant, through cash flows from operations and, if needed, by borrowings under the Amended Revolving Credit Facility. Tosco financed the ExxonMobil Acquisition, including working capital, through a combination of available cash, borrowings under the Amended Revolving Credit Facility, operating lease financing, and the sale of debt securities.
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 certain price) positions in crude oil and short (obligation to deliver at a certain price) positions in gasoline and heating oil. This strategy is intended to hedge Tosco's exposure to fluctuations in refining margins and therefore should tend to reduce the volatility of operating results. In addition, Tosco enters into swap contracts with counterparties to hedge sales prices of residual fuels production. To a lesser extent, future and forward contracts may also be used to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of domestic and foreign crude oil.
Tosco uses a value-at-risk ("VAR") model to assess the market risk of its derivative instruments. VAR represents the potential losses for an instrument or portfolio from adverse changes in market factors, for a specified time period and confidence level. Tosco estimates VAR across its derivative instruments using a model with historical volatilities and correlations calculated using a one-day interval. Tosco's measured VAR, using a VAR model with a 95% confidence level and assuming normal market conditions at December 31, 1999 and 1998, was not material.
Tosco's calculated VAR exposure represents an estimate of reasonably possible net losses assuming hypothetical movements in future market rates and is not necessarily indicative of actual results that may occur. The calculated VAR does not represent the maximum possible loss nor any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in Tosco's holdings of derivative instruments during the year.
Tosco manages its interest rate risk by maintaining a mix of fixed rate and floating rate debt. Floating rate debt, primarily borrowings under the Amended Revolving Credit Facility that currently provides up to $750 million of uncollateralized revolving credit availability, is used to finance Tosco's working capital requirements. The balance of Tosco's debt is at acceptable fixed rates. See Notes 9 and 10 to the Consolidated Financial Statements.
Tosco carries insurance policies on insurable risks, which it believes to be appropriate at commercially reasonable rates. While Tosco believes that it is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future costs, if any, incurred under such circumstances would have to be paid out of general corporate funds, if available. See Note 19 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
Historically, certain computer programs used two rather than four digits to define a given calendar year. Computer programs that used two digits to define the year could recognize a date using "00" as the year 1900 rather than 2000. This practice could have resulted in business and field system failures or miscalculations that could have caused serious disruptions of operations. This was generally referred to as the "Year 2000 Issue." For several years, Tosco has been proactively upgrading and replacing its information systems. In early 1998, Tosco formed a Year 2000 Program Office to coordinate the efforts of Tosco's operating units and administrative departments. During 1998 and 1999, Tosco committed significant resources to address its Year 2000 Issues. Tosco has not experienced any meaningful disruptions related to the Year 2000 Issue.
Tosco's Year 2000 compliance costs included external consultants and contractors, compensation costs of internal employees working directly on Year 2000 Issues, purchases of software and hardware, and system upgrades and modifications which were accelerated to address the Year 2000 Issue. Tosco's Year 2000 compliance costs did not have a material effect on its 1999 or 1998 operating results or financial position.
NEW ACCOUNTING STANDARD
During June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company plans to adopt SFAS No. 133 on January 1, 2001. Tosco is currently evaluating the effect SFAS No. 133 will have on its financial position and results of operations.
FORWARD LOOKING STATEMENTS
TOSCO HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS WITH RESPECT TO ITS FINANCIAL POSITION, BUSINESS STRATEGY, PROJECTED COSTS, PROJECTED SAVINGS, AND PLANS AND OBJECTIVES OF MANAGEMENT. SUCH FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS "ANTICIPATES," "INTENDS," "EXPECTS," "PLANS," "BELIEVES," "ESTIMATES," OR WORDS OR PHRASES OF SIMILAR IMPORT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS, AND UNCERTAINTIES, AND THE STATEMENTS LOOKING FORWARD BEYOND 2000 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 2000 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 2000 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 2000 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 2000 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).
4(e) Rights agreement dated as of November 19, 1998, between Registrant and Bank of Boston, N.A., as Rights Agent. Incorporated by reference to Exhibit 4 to Registrant's current report on Form 8-K dated November 30, 1998.
10(a) Fifth Amended and Restated Credit Agreement dated as of February 8, 2000, among Tosco Corporation, as Borrower, and the Banks named therein, as Banks, and BankBoston, N.A., Administrative Agent, Royal Bank of Canada, as Syndication Agent, and PNC Bank, National Association, as Documentation Agent.
10(b) Severance Agreement dated January 26, 2000, between Registrant and Thomas D. O'Malley, including schedule identifying similar agreements between Registrant 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(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
10(d) 1996 Long-term Incentive Plan, as amended. Incorporated by reference to Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
10(e) Tosco Corporation Senior Executive Retirement Plan of 1990, as amended and restated as of May 15, 1996. Incorporated by reference to Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10(f) Tosco Corporation Senior Executive Retirement Plan of 1990, as amended and restated as of September 23, 1993. Incorporated by reference to Exhibit 10(j) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10(g) Severance Agreements dated January 1, 1993, as amended, between Registrant and Robert J. Lavinia and Dwight L. Wiggins. Incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(h) Agreement of Purchase, Sale and Assignment of Marketing Assets between Exxon Corporation and Tosco Corporation, dated as of December 1, 1999.
10(i) Agreement of Purchase, Sale and Assignment of Marketing Assets between Mobil Oil Corporation and Tosco Corporation, dated as of December 1, 1999.
21. A list of all subsidiaries of the Registrant.
23. Consent of PricewaterhouseCoopers LLP.
27. Financial Data Schedule.
99. Condensed Consolidating Financial Information and Report of Independent Accountants.
(B). REPORTS ON FORM 8-K
None
(C). Financial Statement schedules required by Regulation S-X are excluded from the Annual Report to Shareholders by Rule 14a-3(b)(1). See Schedule II to the Financial Statements, as required by Item 8, and appearing under Item 14 hereof.
TOSCO CORPORATION AND 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, 1999
PAGE(S)
Report of Independent Accountants
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements -
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998, and 1997 (a)
Financial Exhibits:
Exhibit 23 - Consent of Independent Accountants
Exhibit 99 - Condensed Consolidating Financial Information (b):
Report of Independent Accountants on Exhibit 99
Condensed Consolidating Financial Information as of December 31, 1999 and for the year then ended
Condensed Consolidating Financial Information as of December 31, 1998 and for the year then ended
Condensed Consolidating Financial Information for the year ended December 31, 1997
(a) Financial statement schedules, other than Schedule II, have been omitted since they are either not required or applicable, or the required information is presented in the consolidated financial statements and related notes.
(b) The condensed consolidating financial information presents the financial position, operating results, and cash flows of Tosco Corporation ("Tosco"), Bayway Refining Company ("Bayway"), and Tosco's Nonguaranteeing Subsidiaries. This information is provided to meet the reporting and informational requirements of Bayway as guarantor of the 8.25% Bayway Bonds. See Note 10 to the Consolidated Financial Statements.
Report of Independent Accountants
To the Board of Directors and Shareholders of Tosco Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index on page of this Form 10-K present fairly, in all material respects, the financial position of Tosco Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule also listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP Phoenix, Arizona March 1, 2000
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Millions, Except Par Value)
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Millions, Except Per Share Data)
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Millions)
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions)
The accompanying notes are an integral part of these financial statements.
TOSCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. Nature of Business
Tosco Corporation ("Tosco") is one of the nation's largest independent refiners and marketers of petroleum products operating principally on the East and West Coasts of the United States. Tosco is also one of the largest operators of company-controlled convenience stores in the United States.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Tosco and its wholly-owned subsidiaries and affiliates (collectively the "Company"). 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, 1999 and 1998, the Company had approximately $17.5 million of director and officer liability insurance coverage with a 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. Their cost approximates fair value. Accordingly, unrealized gains and losses are not significant. Debt securities with original maturities of three months or less at the date of purchase are classified as cash equivalents, while debt securities with maturities of twelve months or less from the balance sheet date are included in marketable securities and deposits on the balance sheet.
Inventories
Inventories are stated at the lower of cost or market. The cost of refinery inventories is determined on the last-in, first-out ("LIFO") basis. The cost of retail fuel inventories is determined on the first-in, first-out ("FIFO") basis. The cost of retail merchandise inventories is determined under the retail method.
Property, Plant, and Equipment
Property, plant, and equipment, including capitalized interest, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided over the estimated useful lives of the respective classes of assets utilizing the straight-line method. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. Routine maintenance and repairs are expensed. Gains and losses on disposition of assets are reflected in results of operations.
Computer software costs are deferred and amortized over their useful lives, generally not to exceed five years. Certain enterprise-wide information systems are amortized over periods of up to ten years.
Deferred Turnarounds
Refinery processing units are periodically shut down for major scheduled maintenance ("Turnarounds"). Turnaround costs are deferred and amortized on a straight-line basis over the expected period of benefit, which generally ranges from 24 to 48 months.
Intangible Assets (Primarily Tradenames)
The Company's "76" and "Circle K" tradenames are amortized on a straight-line basis over 40 years. Other tradenames and intangible assets are amortized on a straight-line basis over periods of up to 15 years.
Other Deferred Charges and Assets
Financing charges related to the acquisition or refinancing of debt are deferred and amortized over the term of the related debt using the effective interest method. Production costs of media advertising are deferred until the advertising occurs. Advertising expense for 1999, 1998, and 1997 was $51.3 million, $48.3 million, and $43.9 million, respectively.
Self-Insurance
The Company is self-insured up to certain limits for workers' compensation (in certain states), property damage, and general liability claims. Accruals for loss incidences are made based on the Company's claims experience and actuarial assumptions followed in the insurance industry. Actual losses could differ from accrued amounts.
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. Environmental liabilities are based on best estimates of probable 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.
Revenue Recognition
Revenue is recognized upon transfer of title to products sold, based on the terms of delivery.
Excise Taxes
Excise taxes collected on behalf of governmental agencies are excluded from sales, cost of sales, and other expenses. Excise taxes totaled $2.628 billion, $2.316 billion, and $1.768 billion for 1999, 1998, and 1997, respectively.
Derivatives
In the normal course of business, the Company, to reduce its exposure to fluctuations in the price of crude oil and other petroleum products, is party to commodity-based derivative financial instruments with off-balance sheet risk (Notes 19 and 24). Such contracts, which are designated as hedges, are recorded using hedge accounting. Gains and losses on these financial instruments are deferred until the underlying physical transaction occurs. The gains and losses are then recognized and reported as a component of the related transaction. Any cash flow recognition resulting from holding these financial instruments is treated in the same manner as the underlying physical transaction.
3. Acquisitions
Boardman Petroleum Service Stations
On October 1, 1999, the Company completed the purchase of 43 "Smile" retail gasoline service stations and convenience stores plus 20 vacant lots from Boardman Petroleum, Inc for $69.5 million, including inventories and other current assets (the "Boardman Acquisition"). An additional 24 service station sites were purchased by a special purpose entity that leased the sites to the Company (Note 18). These sites are located principally in five Southeastern states and will be operated under the Company's "76" gasoline and "Circle K" convenience store brands.
BP/Amoco Service Stations
During June and July 1999, the Company completed the purchase of 48 retail gasoline and convenience store sites (21 located principally in seven major Southeastern urban areas and 27 located in Pittsburgh, Pennsylvania) from BP Amoco for $48.9 million, including inventories and other current assets (the "BP Amoco Acquisition"). An additional 89 service station sites were acquired by a special purpose entity that leased the sites to the Company (Note 18). These sites will also be rebranded and operated under the Company's "76" gasoline and "Circle K" convenience store brands.
4. Accounts Receivable
In March 1998, the Company entered into a three-year agreement with a financial institution to sell on a revolving basis up to $300.0 million of an undivided percentage ownership interest in a designated pool of accounts receivable (the "Receivable Transfer Agreement"). The Receivable Transfer Agreement replaced a similar agreement with another financial institution. In December 1999, the Receivable Transfer Agreement was amended to allow for receivable sales of up to $400.0 million. In October 1997, the Company entered into a three-year agreement with a financial institution to sell on a revolving basis up to $100.0 million 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, 1999 and 1998, accounts receivable were reduced by $485.0 million and $375.0 million, respectively, for receivables sold under these programs. Sales of accounts receivables under these programs averaged $1.112 billion, $903.2 million, and $984.2 million per month in 1999, 1998, and 1997, respectively.
5. Inventories
(Millions of Dollars) 1999 1998 Refinery (LIFO at December 31, 1999 and market value at December 31, 1998): Raw materials $ 419.7 $ 418.8 Intermediates 231.9 191.6 Finished products 348.8 302.2 Retail (FIFO): Merchandise 125.3 129.2 Gasoline and diesel 47.3 35.4 Other 0.4 0.1 --------- -------- $1,173.4 $1,077.3 ========= ========
Cost of sales for 1999 has been reduced by $8.0 million due to the liquidation of LIFO inventories. At December 31, 1999, the excess of replacement cost (FIFO) over the carrying value (LIFO) of refinery inventories was $304.7 million. At December 31, 1998, the excess of cost (LIFO) over market value for these inventories was $293.0 million.
6. Property, Plant, and Equipment
During 1999, the Company realized a gain of $40.5 million from the sale of 372 convenience stores in markets the Company is exiting. Operations from these convenience stores did not significantly impact operating contribution for 1999.
Effective January 1, 1999, the Company prospectively extended the useful lives of its refinery and distribution assets. This change was made to better represent the remaining useful lives of the assets, as determined by a third party appraisal. The impact of this change in accounting estimate, which was partially offset by additional depreciation of assets placed in service in late 1998 and early 1999, was an increase in net income during 1999 of $14.2 million ($0.09 per diluted share).
Expenditures for maintenance and repairs (excluding the amortization of Turnarounds) during 1999, 1998, and 1997 were $271.9 million, $257.8 million, and $210.4 million, respectively.
7. Intangible Assets
In connection with the BP Amoco Acquisition (Note 3), the Company entered into an agreement with BP Amoco for the return of the Company's license to use the "BP" tradename at the end of an approximate two-year period. The consideration received approximated the expected unamortized value of the "BP" tradename at the end of the two-year period.
In conjunction with the sale of convenience stores (Note 6), the Company wrote-off the unamortized balance of its "Stax" tradename, which was used only in markets which the Company exited.
8. Accrued Expenses and Other Current Liabilities
(Millions of Dollars) 1999 1998 ---- ---- Accrued taxes, other than income taxes $ 222.2 $ 192.0 Accrued compensation and related benefits 113.9 130.0 Restructuring accrual (a) 16.7 24.6 Dividends payable 10.8 9.9 Other 310.0 371.9 -------- ------- $ 673.6 $ 728.4 ======== =======
(a) During 1998, Tosco recorded a $40.0 million charge primarily related to the restructuring of its San Francisco Area Refinery System.
Restructuring accrual activity for 1999 and 1998 is summarized below:
9. Revolving Credit Facility
The Company's revolving credit agreement (the "Revolving Credit Facility") provides a $900.0 million 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 Company's First Mortgage Bonds (Note 10). Prior to January 1999, the Revolving Credit Facility was a $1.000 billion uncollateralized facility.
Utilization of the Revolving Credit Facility as of December 31, 1999 and 1998 was as follows:
(Millions of Dollars) 1999 1998 ---- ---- Cash borrowings $ 106.0 $ 196.0 Letters of credit 63.3 30.2 --------- --------- Total utilization 169.3 226.2 Availability 730.7 773.8 --------- --------- $ 900.0 $ 1,000.0 ========= =========
On February 8, 2000, the Company amended and restated the Revolving Credit Facility (Note 23).
10. Long-Term Debt
(Millions of Dollars) 1999 1998 ---- ---- Collateralized debt: First Mortgage Bonds (a) $ 200.0 $ 200.0 Bayway Bonds (b) 150.0 150.0 Other 3.1 3.5 Uncollateralized debt: 7% Notes (c) 125.0 125.0 7.625% Notes (d) 240.0 240.0 Notes and Debentures (e) 600.0 600.0 Other 0.2 Capital leases (f) 36.2 41.5 --------- ---------- 1,354.3 1,360.2 Less current installments 1.4 1.6 --------- ---------- $ 1,352.9 $ 1,358.6 ========= =========
(a) 9.625% first mortgage bonds due March 15, 2002 (the "First Mortgage Bonds"), issued in March 1992. Interest on the First Mortgage Bonds is payable each March 15 and September 15. The First Mortgage Bonds are noncallable and are collateralized by the Avon Refinery and certain related assets.
(b) In connection with the April 1993 acquisition of the Bayway Refinery, the Company issued $150.0 million of 8.25% mortgage bonds (the "Bayway Bonds") due May 15, 2003. The Bayway Bonds are guaranteed by Bayway Refining Company ("Bayway"), a wholly owned subsidiary of Tosco. Interest is payable semi-annually on May 15 and November 15. The Bayway guarantee is collateralized by the Bayway Refinery and related assets and a guarantee of Tosco.
(c) On July 12, 1995, $125.0 million of registered debt securities were issued as 7% uncollateralized, noncallable notes due July 15, 2000 (the "7% Notes"). Semi-annual interest payments on the 7% Notes began January 15, 1996. The net proceeds from the public offering were used to repay debt.
(d) In May 1996, the Company issued $240.0 million 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.
(e) On January 14, 1997, the Company issued $200.0 million of 7.25% Notes due on January 1, 2007, $300.0 million of 7.8% Debentures due on January 1, 2027, and $100.0 million 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 1997 purchase of assets from Union Oil Company of California ("Unocal"). 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.
(f) The Company's capital lease obligations are collateralized primarily by retail marketing and related assets and mature at varying dates through 2019. The carrying value of the assets under capital lease arrangements approximates the capital lease obligation.
At December 31, 1999 future maturities relating to long-term debt were as follows:
Capital (Millions of Dollars) Debt Leases Total -------- ------- ------- 2000 (a) $ 125.8 $ 4.2 $ 130.0 2001 0.8 4.2 5.0 2002 200.8 4.1 204.9 2003 150.8 4.1 154.9 2004 4.0 4.0 Thereafter 839.9 66.2 906.1 --------- ------ --------- Total future maturities 1,318.1 86.8 1,404.9 Less imputed interest 50.6 50.6 --------- ------ --------- Present value of future maturities $ 1,318.1 $ 36.2 $ 1,354.3 ========= ====== =========
(a) The $125.0 million 7% Notes are expected to be repaid in July 2000 from the Revolving Credit Facility. Accordingly, the 7% Notes are classified as noncurrent at December 31, 1999. Current maturities of long-term obligations, excluding imputed interest on capital leases, are $1.4 million at December 31, 1999.
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, 1999, the Company was in compliance with all debt covenants.
11. Accrued Environmental Costs
The Company is subject to extensive federal, state, and local environmental laws and regulations relating to its petroleum refining, distribution, and marketing operations. These laws and regulations (which are complex, change frequently, and are subject to differing interpretations) regulate the discharge of materials into the environment. The Company is currently involved in a number of environmental proceedings and discussions regarding the removal and mitigation of the environmental effects of subsurface liquid hydrocarbons and alleged levels of hazardous waste at certain of its refineries and other locations, including a site on the Superfund National Priorities List.
In July 1993, outstanding litigation concerning environmental issues was settled with the predecessor owners of the Avon Refinery (the "Settlement Agreement"). Under the Settlement Agreement, the former owners agreed to pay up to $18.0 million for one-half of the costs that may be incurred for compliance with certain environmental orders and to provide the Company with a $6.0 million credit for past expenses (which the Company uses to reduce its one-half share of costs). After the $36.0 million 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, 1999, the committee has spent $6.4 million on such matters.
By agreement, Exxon Corporation ("Exxon") is responsible for environmental obligations related to or arising out of its ownership and operation of the Bayway Refinery, purchased by the Company in April 1993. The Company has also received similar environmental indemnifications for periods prior to the respective acquisition dates of the Ferndale Refinery, the Trainer Refinery, retail assets in the Pacific Northwest and Northern California from BP Exploration & Oil, Inc., and Arizona retail properties from Exxon.
On March 31, 1997, the Company acquired Unocal's West Coast petroleum refining, marketing, and related supply and transportation assets (the "76 Products Acquisition"). Through March 31, 2022, Unocal is responsible for all environmental liabilities at the acquired sites arising out of or relating to the period prior to closing, except that the Company will pay the first $7.0 million of such environmental liabilities each year, plus 40% of any amount in excess of $7.0 million per year, with Unocal paying the remaining 60% each year. The Company's aggregate maximum obligation for the 25-year period is $200.0 million. During 1999, 1998, and the nine-month period ended December 31, 1997 the Company incurred environmental costs at the acquired sites as follows:
(Millions of Dollars) 1999 1998 1997 ---- ---- ---- Total costs incurred $ 19.2 $ 18.0 $ 7.5 Less costs reimbursed by Unocal 8.9 5.1 0.3 ------ ------ ----- Costs charged to the environmental accrual $ 10.3 $ 12.9 $ 7.2 ====== ====== =====
Environmental exposures are difficult to assess and estimate for numerous reasons including the complexity and differing interpretations of governmental regulations, the lack of reliable data, the number of potentially responsible parties and their financial capabilities, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and the identification of new sites. The Company believes that it has adequately provided for environmental exposures. However, should these matters be resolved unfavorably to the Company, they could have a material adverse effect on its long-term consolidated financial position and results of operations.
12. Company-Obligated, Mandatorily Redeemable, Convertible Preferred Securities
In December 1996, Tosco Financing Trust (the "Trust"), a Delaware business trust, whose common securities are owned by Tosco, issued, in a private placement, 6,000,000 shares of 5.75% company-obligated, mandatorily redeemable, convertible preferred securities (the "Trust Preferred Securities"). The net proceeds 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 $300.0 million.
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 distributions for an extension period of up to five years if it is in compliance with the terms of the Trust Preferred Securities. The Trust Preferred Securities are convertible, at the option of the holder, into 1.51899 shares of Common Stock, equivalent to a conversion price of approximately $32.92 per share of Common Stock, subject to adjustment in certain events. The Trust Preferred Securities do not have a stated maturity date, although they are mandatorily redeemable upon the repayment of the Convertible Debentures. The redemption price decreases from 104.025% in 1999 to 100% of the liquidation preference in 2006 and thereafter.
13. Capital Stock
The Company is authorized to issue 12,000,000 shares of preferred stock, par value $1.00 per share, ("Preferred Stock"). No shares of Preferred Stock are issued or outstanding. At a special stockholder meeting on February 12, 1997, an amendment to increase authorized shares of Common Stock from 50,000,000 to 250,000,000 was approved. In 1997, the Company 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 $1.5 billion 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, 1999, the Company had available for issue $778.9 million of securities pursuant to this shelf registration statement (Note 23).
On August 5, 1999, the Company announced the completion of its previously authorized Common Stock repurchase program. Pursuant to this program, the Company repurchased 13,157,862 shares of Common Stock for $317.6 million (8,899,862 shares in 1999 for $216.5 million and 4,258,000 shares in 1998 for $101.1 million). On September 10, 1999, an additional $300,000,000 for the repurchase of Tosco Common Stock was authorized. Through December 31, 1999, no shares had been repurchased pursuant to this program.
Under the terms of a Shareholders' Rights Plan, adopted in 1998, shareholders received rights to purchase shares of a new preferred stock. The rights expire on December 6, 2008 and are exercisable only if a person or group acquires beneficial ownership of 15% or more of Common Stock, a person commences a tender or exchange offer for more than 15% of Common Stock, or if an adverse person (as defined by Tosco's Board of Directors) acquires beneficial ownership of 10% or more of Common Stock.
The Company has paid a regular quarterly cash dividend on Common Stock since the third quarter of 1989. Effective with the second quarter of 1999, the Company increased its quarterly cash dividend from $0.06 per share to $0.07 per share.
14. Stock Option Plans
The Company has three stock option plans, the 1998 Stock Incentive Plan (the "1998 Plan"), the 1992 Stock Incentive Plan (the "1992 Plan"), and the 1989 Stock Incentive Plan (the "1989 Plan"), that reserve Common Stock for issuance to key employees, consultants, and non-employee directors. The 1998 Plan, 1992 Plan, and 1989 Plan (collectively the "Option Plans") provide for the grant of a maximum of 1.5 million, 6.6 million, and 3.8 million 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) or as nonqualified options. Options may be exercised as determined by the Compensation Committee of the Board of Directors (the "Compensation Committee") but in no event after ten years from the date of grant. The exercise price of stock options is determined by the Compensation Committee. Awards under the 1998 Plan and 1992 Plan may be granted until March 18, 2009 and March 13, 2002, respectively. Awards under the 1989 Plan may no longer be granted. Subject to severance agreements with certain employees (Note 20), options may be exercised at any time after vesting, currently one to five years.
Information regarding the Option Plans as of December 31, 1999, 1998, and 1997 is as follows:
Additional information regarding the Option Plans as of December 31, 1999 is as follows:
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Had the Company elected to adopt the recognition provisions of SFAS No. 123, net income and earnings per share would have been reduced by $3.4 million ($0.02 per share), $3.6 million, ($0.02 per share), and $3.0 million ($0.02 per share) for 1999, 1998, and 1997, respectively.
The fair value of options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Assumed risk-free interest rate 5.25% 5.60% 6.50% Expected life 5.9 years 5.7 years 7.2 years Expected volatility 30.99% 30.60% 28.70% Assumed dividend yield 1.12% 0.80% 0.80%
In late 1996, the Company adopted the Tosco Corporation 1996 Long-Term Incentive Plan (the "LTIP") which replaced the granting of incentive awards under the Option Plans to participants in the LTIP. Under the LTIP, the Compensation Committee may grant performance units to participants, the payment of which is contingent on the meeting of performance goals as defined and continued employment by the participant. Under certain circumstances, payments in a calendar year may not exceed 400% of the participant's total annual compensation for the year of the award. The participants received $14.0 million on January 4, 2000 and $30.5 million on January 4, 1999. In addition, the participants are scheduled to receive a total of $18.0 million on various dates through July 2003 based on performance goals achieved to date. If a participant voluntarily terminates employment with the Company or retires prior to age 65, all unpaid amounts are forfeited. The Company accrues for such amounts on a ratable basis over the required service period.
15. Employee Benefit, Savings, and Incentive Compensation Plans
Pension Plans
The Company has non-contributory, defined benefit pension plans covering substantially all employees located at the Bayway Refinery, the Los Angeles Area Refinery System, and the San Francisco Area Refinery System, and its union employees at the Ferndale Refinery (the "Refinery Pension Plan"), and store employees (the "Marketing Pension Plan") meeting minimum service periods (collectively, the "Pension Plans"). Benefits under the Refinery Pension Plan 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). Benefits under the Marketing Pension Plan are generally based upon a percentage of the employee's covered earnings for each year of service and interest credits on these amounts. Benefits are payable at the normal retirement age of 65, or upon earlier termination of employment after five years of service. Contributions to the Pension Plans are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than the amount deductible for federal income tax purposes. The assets of the Pension Plans are held by a major financial institution and invested in a stock index fund, a Treasury bond index fund, short-term investment funds, and a real estate equity fund. The change in benefit obligation, plan assets, and funded status, using end of year actuarial assumptions, consist of the following at December 31, 1999 and 1998:
Net pension cost, using beginning of year actuarial assumptions, for the years ended December 31, 1999, 1998, and 1997 consists of the following:
Major assumptions used to calculate pension obligations and pension costs for the years ended December 31, 1999, 1998, and 1997 are as follows:
The Company has a Senior Executive Retirement Plan ("SERP") that provides retirement benefits to selected senior executives. SERP provisions of $1.9 million, $2.2 million, and $1.9 million are included in selling, general, and administrative expenses in 1999, 1998, and 1997, respectively.
Employee and Retiree Benefit Plans
The Company provides health care and life insurance benefits for its employees. The Company also provides postretirement health care and life insurance benefits for certain employees (primarily refinery employees). Health care benefits for eligible employees and retirees are provided through insurance companies and health maintenance organizations whose premiums are based on the benefits paid during the year. The health care plans are contributory (with employee/retiree contributions adjusted periodically) and contain other cost-sharing features such as deductibles and coinsurance. The life insurance plans are noncontributory.
The change in benefit obligation, plan assets, and funded status, using end of year actuarial assumptions, consists of the following at December 31, 1999 and 1998:
Net postretirement benefit cost, using beginning of year actuarial assumptions, for the years ended December 31, 1999, 1998, and 1997 consists of the following:
Major assumptions used to calculate the benefit obligation and net postretirement benefit cost for the years ended December 31, 1999, 1998, and 1997 are as follows:
A 1% change in the health care cost trend rates would have had the following effect on benefit obligations and aggregate of service and interest costs:
(Millions of Dollars) 1% Increase 1% Decrease Benefit obligation at December 31, 1999 $ 1.8 $ (2.1) Benefit obligation at December 31, 1998 1.5 (1.8) Aggregate interest and service cost for 1999 0.2 (0.3) Aggregate interest and service cost for 1998 0.2 (0.2) Aggregate interest and service cost for 1997 0.2 (0.2)
Savings Plans
The Tosco Corporation Capital Accumulation Plan (the "CAP") and the Tosco Store Savings Plan (the "TSSP"), have been established for eligible employees. Participants may make, within certain limitations, voluntary contributions under Section 401(k) of the Internal Revenue Code of a percentage of their compensation. The Company makes matching contributions to the CAP based upon years of contributory participation, as defined, for employees who elect to make certain specified and minimum contributions. In addition, eligible employees of the CAP receive an additional contribution equal to 5% of their compensation, up to $150,000, in lieu of pension plan benefits. Participants of the CAP and TSSP (collectively the "Savings Plan") are immediately vested in their voluntary contributions. Participants in the CAP are immediately vested in the Company contributions. Contributions by the Company to the Savings Plans for the years ended December 31, 1999, 1998, and 1997 were $21.0 million, $20.4 million, and $17.8 million, respectively.
Management Incentive Plan
The Tosco Corporation Cash Incentive Plan (the "CIP") has been established for members of middle and senior management. The CIP sets forth discretionary and other awards computed as a variable percentage of a participant's base salary, which percentage is dependent upon pre-tax income, as defined, of the respective participant's operating division. The Company also has a bonus plan for senior executives, who are not participants in the CIP, based on pre-tax income per share, as defined. Results of operations for the years ended December 31, 1999, 1998, and 1997 include incentive compensation of $56.3 million, $54.3 million, and $56.1 million, respectively, of which $6.2 million, $5.9 million, and $5.8 million were special bonuses awarded to union and other employees not covered by management incentive plans.
16. Avon Refinery Start-up Costs
On February 23, 1999, a fire at a crude unit at the San Francisco Area Refinery, Avon facility resulted in four fatalities. The fire was quickly isolated and extinguished with no offsite impacts or health risks to the community. In March 1999, the Avon Refinery was shutdown while a thorough safety review and extensive employee safety training were conducted. In May 1999, the Company began the process of restarting the refinery and all major processing units were restarted by the end of July 1999. The Company incurred non-recurring expenses of $43.1 million primarily related to the restart of the Avon Refinery. The start-up and related expenses consist primarily of safety and maintenance projects, implementation of regulatory and independent safety consultant recommendations, and the early write-off of Turnarounds. These start-up costs do not include any normal recurring expenses for maintaining the refinery or training employees during the stand-down period.
17. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 1999, 1998, and 1997 is as follows:
(Millions of Dollars) 1999 1998 (a) 1997 Current: Federal $ 115.3 $ (45.5) $ 87.5 State 36.2 (5.0) 23.8 Foreign 0.2 0.4 0.2 -------- -------- ------- 151.7 (50.1) 111.5 -------- -------- ------- Deferred: Federal 140.8 108.1 37.2 State 14.4 17.3 2.2 -------- ------- -------- 155.2 125.4 39.4 -------- ------- -------- $ 306.9 $ 75.3 $ 150.9 ======== ======= ========
(a) Current federal and state income tax benefits for 1998 relate primarily to the inventory writedown.
A reconciliation of the provision for income taxes to income taxes computed by applying the statutory federal income tax rate to earnings before income taxes is as follows:
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, 1999 and 1998 are as follows:
18. Operating Leases
The Company distributes petroleum products throughout its marketing areas through a combination of owned and leased terminals. Leases for product distribution terminals are generally for short periods of time and continue in effect until canceled by either party with contracted days of notice, generally 30 to 60 days. Most product distribution terminal leases are subject to escalations based on various factors. The Company subleases portions of its owned and leased product distribution terminals.
The Company has long-term leases with special purpose entities for land and equipment at certain of the Company's service stations, refining processing units, and an office building. These leases provide the Company the option to purchase, at agreed-upon prices, (a) a portion of the leased assets for resale to unaffiliated parties during the lease terms and (b) not less than all of the leased assets at the end of the leases. The Company may cancel the leases subject to the lessors receiving certain guaranteed minimum sales values for the assets. Minimum annual rentals vary with commercial paper interest rates and the reference interest rate (LIBOR). These leases are accounted for as operating leases and extend, with renewal options, through 2004.
The Company leases certain of its stores and other property and equipment. The store leases generally have primary terms of up to 25 years with varying renewal provisions. Under certain of these leases, the Company is subject to additional rentals based on store sales as well as escalations in the minimum future lease amount. The leases for other property and equipment are for terms of up to 15 years. Most of the Company's lease arrangements provide the Company an option to purchase the assets at the end of the lease term. The Company may also cancel certain of its leases provided the lessor receives minimum sales values for the leased assets. Most of the leases require that the Company provide for the payment of real estate taxes, repairs and maintenance, and insurance.
Net rental expense for the years ended December 31, 1999, 1998, and 1997 consists of the following:
At December 31, 1999, future minimum obligations under non-cancelable operating leases and warehousing agreements are as follows:
(Millions of Dollars) 2000 $ 159.8 2001 144.5 2002 (a) 126.5 2003 (a) 100.8 2004 (a) 108.1 Thereafter 369.1 -------- 1,008.8 Less future minimum sublease income 134.2 -------- $ 874.6 (b) ========
(a) Excludes guaranteed residual payments totaling $180.6 million (2002), $189.8 million (2003), and $155.5 million (2004) due at the end of the lease term, which would be reduced by the fair market value of the leased assets.
(b) The Company has contingent obligations for certain lease payments totaling $10.9 million for convenience stores previously sold. The Company believes it is unlikely that it will be required to perform under these contingent obligations.
19. Financial Instruments
Fair Values
The carrying value of cash, cash equivalents, marketable securities, short-term deposits, trade accounts receivable, accounts payable, and other current liabilities approximates their fair value due to the relatively short maturity of these financial instruments. The carrying value of the Revolving Credit Facility approximates fair value due to its variable interest rate. The fair value (based on quoted market prices and estimates) of long (obligation to purchase) and short (obligation to deliver) derivative financial instruments were $473.6 million and $381.0 million, respectively at December 31, 1999. Estimated fair values of other financial instruments at December 31, 1999 and 1998 are as follows:
Derivatives
The Company utilizes commodity-based derivative instruments, at times and when able, to reduce a portion of its exposure to price volatility. Commodity futures are used to lock in what the Company considers to be acceptable margins between the sales value of refined products produced and the cost of raw materials purchased on a varying percentage of production, generally for periods not exceeding one year. In addition, the Company enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of residual fuels production. Futures and forward contracts are also used to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign and domestic crude oil.
At December 31, 1999 and 1998, the Company had open long and short futures, swap and forward contracts for crude oil and products with a notional volume (number of barrels under contract) and value (number of barrels under contract multiplied by the per-barrel contract value) as follows:
The net deferred gain / (loss) on futures and swap contracts totaled $1.2 million and $(7.3) million at December 31, 1999 and 1998, respectively. These amounts will be recognized in the following year as an offset to realized margins on refined products sold (Note 24).
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 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.
20. Commitments and Contingencies
There are various legal proceedings and claims pending against the Company that are common to its operations. While it is not feasible to predict or determine the ultimate outcome of these matters, it is the opinion of management that these suits will not result in monetary damages not covered by insurance that in the aggregate would be material to the business or operations of the Company.
Under the terms of the 76 Products Acquisition, Unocal could have received up to $250.0 million of contingent participation payments over the seven year period following the acquisition if retail market conditions and/or California Air Resources Board ("CARB") gasoline margins increased above specified levels. For completed participation periods, the Company's obligation was not material to its consolidated financial position. In December 1999, Tosco agreed to pay Unocal $50.0 million in settlement of retail participation obligations for prior and future periods. In addition, the remaining maximum contingent payment, related to improvements in CARB gasoline margins, was reduced to $100.0 million. The $50.0 million participation payment, paid in December 1999 and January 2000, was capitalized and will be depreciated and amortized over the remaining useful lives of the acquired assets.
Litigation between Unocal and certain petroleum refiners has contested the validity of patents held by Unocal covering certain formulations for clean burning fuels meeting California fuel specifications and, in turn, alleged infringement of those patents by certain refiners. The Company is not a party to the patent litigation. Under the terms of the 76 Product Acquisition, the Company has no liability to Unocal for any possible past infringement of the patents, including to the date of final resolution of the matter, which, considering appeals, could take several years.
The Company has employment agreements with certain of its executive officers that provide for lump sum severance payments and accelerated vesting of options upon termination of employment under certain circumstances or a change of control, as defined. The Company's potential minimum obligation to seven officers was $6.3 million at December 31, 1999.
The Company, in keeping with industry practice, schedules Turnarounds as the units reach the end of their normal operating cycles. Unscheduled Turnarounds or unit shutdowns also occur because of operating difficulties or external factors. Throughput and earnings are lowered, and Turnaround expenditures increased, during such periods.
The Company carries insurance policies on insurable risks, which it believes to be appropriate at commercially reasonable rates. While management believes the Company is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would have to be paid out of general corporate funds. Cost of sales was reduced by insurance coverage recoveries of $42.4 million in 1999 for property damage and business interruption claims, net of insurance policy deductibles and asset write-offs, related to the Avon Refinery incident (Note 16). The Company is pursuing additional claims for insurance recoveries from its carriers.
In the normal course of business, the Company has entered into numerous crude oil and feedstock supply contracts, finished product sale and exchange agreements, and transportation contracts. Because of the market related pricing structure and/or generally short-term nature of these contracts, they are not expected to negatively impact the Company's future operating results.
21. Business Segments
The Company has two operating business segments: refining and marketing. The refining segment includes the acquisition of crude oil and other feedstocks, the production of petroleum products, and the distribution and sale of petroleum products to wholesale customers. The marketing segment includes the sale of petroleum products and merchandise through company-owned gasoline stations and convenience stores and branded dealers and jobbers. The nonoperating segment consists of corporate activities and certain nonoperating subsidiaries. Summarized financial information by segment for 1999, 1998, and 1997 is as follows:
22. Supplemental Cash Flow Information
23. Subsequent Events
Exxon Mobil Acquisition
On February 29, 2000, the Company acquired and began operating retail systems consisting of approximately 1,740 retail gasoline and convenience outlets from Exxon Corporation and Mobil Oil Corporation (collectively "ExxonMobil") for $860.0 million, plus transaction costs. Tosco is also acquiring certain undeveloped sites and distribution terminals, all of which ExxonMobil is divesting under a Federal Trade Commission consent decree (collectively the "ExxonMobil Acquisition"). The acquired outlets comprise the Exxon system from New York through Maine (the "Northeast Territory") and the Mobil system from New Jersey through Virginia (the "Middle Atlantic Territory"). The outlets include approximately 685 owned or leased sites and 1,055 open dealer and branded distributor sites. Tosco has exclusive rights to the "Exxon" brand in the Northeast Territory and the "Mobil" brand in the Middle Atlantic Territory for ten years.
Certain of the acquired gasoline and convenience outlets were purchased directly from ExxonMobil by a special purpose entity that leased the sites to the Company pursuant to a long-term operating lease. The lease provides the Company the option to purchase, at agreed-upon contracted prices, (a) a portion of the leased assets for resale to unaffiliated parties during the term of the lease and (b) not less than all of the leased assets at the end of the lease. The Company may cancel the lease subject to the lessor receiving certain guaranteed minimum sales values for the assets. A portion of minimum annual rentals vary with commercial paper interest rates. This lease extends through February 2010.
Revolving Credit Facility
On February 8, 2000, the Company amended and restated its Revolving Credit Facility (the "Amended Revolving Credit Facility"). The Amended Revolving Credit Facility provides the Company with a $750.0 million uncollateralized revolving credit facility that is available for working capital and general corporate purposes, including acquisitions. Facility A (for $375.0 million) matures on February 8, 2005 and Facility B (for $375.0 million) matures on February 7, 2001. At the Company's option and the lenders consent, Facility B may be renewed annually until February 7, 2005. At the Company's option, any outstanding balance under Facility B can be converted into a two-year non-amortizing term note.
Long-Term Debt
On February 8, 2000, the Company issued $400.0 million of 8.125% Notes due on February 15, 2030 (the "8.125% Notes"). Interest on the 8.125% Notes is payable each February 15 and August 15, commencing on August 15, 2000. The proceeds from the 8.125% Notes of $392.3 million were used to finance a portion of the ExxonMobil Acquisition. After this debt offering, the Company may issue up to $378.9 million of securities pursuant to its shelf registration statement (Note 13).
24. New Accounting Standard
During June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company plans to adopt SFAS No. 133 on January 1, 2001. The Company is currently evaluating the effect SFAS No. 133 will have on its financial position and results of operations.
25. Quarterly Financial Data (Unaudited)
TOSCO CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (Millions of Dollars)