Item 3. Legal Proceedings
Tosco's Spokane, Washington terminal is located within a site being investigated by the United States Environmental Protection Agency (the "EPA") and the Washington Department of Ecology (the "WDOE") for suspected hydrocarbon and lead contamination. Tosco has been notified by the WDOE that it, and the major oil company from which it purchased the facility, are included in the list of six parties potentially liable for cleanup of the site under state law. The area identified by the WDOE was included on the Superfund National Priorities List (the "Superfund List"). The source, extent and nature of the contamination have not been determined but are the subject of investigations. Tosco and other potentially liable parties are working with the WDOE with regard to the investigation of the site. The extent of Tosco's liability, if any, is unknown.
In 1990 the EPA and the California Regional Water Quality Control Board ("RWQCB") issued Orders ("Orders") identifying suspected releases of hazardous constituents at a number of hazardous waste and solid waste management units on the Avon Refinery property, including several older inactive units which were used by Phillips Petroleum Company ("Phillips"), a former owner, but not by Tosco, and directed Tosco to investigate the identified releases and determine the need for corrective action. In July 1992, the RWQCB issued Waste Discharge Requirements which, among other things, ordered Tosco to submit a plan of corrective action "Corrective Action Plan" to deal with the suspected releases of hazardous waste at the Avon Refinery. The Corrective Action Plan was submitted on January 4, 1993. The RWQCB also issued an Order in June 1990 which required Tosco to expand programs monitoring groundwater quality throughout the Avon Refinery and to investigate the presence of subsurface liquid hydrocarbons. In the third quarter of 1992, Tosco received a "Tentative Order" (later finalized) from the RWQCB that among other things, set a date by which significant amounts of subsurface liquid hydrocarbons were to be removed. Pursuant to a lawsuit that was settled in July 1993, Phillips and Texaco, the former owners of the refinery, for the next four years or until the funds provided under the agreement are expended (whichever is later), will pay up to an aggregate of $18 million for one-half of the costs that may be incurred for compliance with certain environmental orders, and in addition, provide Tosco a $6 million credit for past expenses. After the initial term of the agreement, the parties would be free to reinstate the suit. Tosco has not relinquished any of its rights to make claims for reimbursement for costs incurred after the date of settlement and would not be required to reimburse amounts received under the agreement.
On September 4, 1992, Tosco received a Report of Violation ("ROV") from the California Department of Toxic Substances Control ("DTSC"), alleging violations of hazardous waste regulations identified during an inspection of a parcel of land owned by Tosco that was used for petroleum coke storage in connection with operations of Tosco's former Bakersfield Refinery, which was sold in 1986. The ROV, without specifying dates, orders Tosco to comply with various hazardous waste handling practices in connection with the site. Tosco has entered into discussions with DTSC concerning required actions.
On July 26, 1994, the Washington Department of Ecology notified Tosco that Tosco, along with approximately 150 other parties, may be a potentially liable person under state law for the environmental clean-up of a site known as Yakima Railroad Area. The source, extent and nature of the contamination has not been determined but is the subject of investigation. The extent of Tosco's liability, if any, is unknown.
A refinery in Duncan, Oklahoma, formerly owned by Tosco, is subject to investigation by the Oklahoma Department of Environmental Quality ("ODEQ"). The ODEQ has requested that Tosco participate with the former owner, Sun Company, Inc. (R&M) ("Sun"), from whom Tosco purchased the site, and the current owner, to whom Tosco sold the site, in the investigation and potential remediation of alleged environmental contamination. Tosco is discussing the investigation with the ODEQ. The extent of Tosco's liability, if any, is unknown. On December 6, 1994, Tosco filed a complaint for declaratory relief against Sun (Tosco v. Sun Company, Inc.(R&M), United States District Court, Northern District of California, Case No. 94 4190 FMS), as amended on February 6, 1995, seeking an order determining Tosco's and Sun's rights and legal relations under the Purchase Agreement through which Tosco purchased the Duncan Refinery, relating to the cost for environmental investigation and potential remediation.
On November 18, 1992, the RWQCB issued an order against Tosco, Phillips and Wickland Oil Company ("Wickland") as dischargers of waste, including petroleum hydrocarbons, into the soil and groundwater at an oil terminal owned by Wickland. The named parties are required to investigate the site and submit reports for the recovery of hydrocarbons and the remediation of contaminated soil and groundwater.
On May 24, 1994, the United States Environmental Protection Agency filed an Administrative Complaint and Opportunity to Request a Hearing and Conference against Tosco alleging that Tosco discharged oil into or upon the surface of the water adjacent to Tosco's Avon refinery and has failed to fully implement its Spill Prevention Control and Counter Measures Plan. On September 27, 1994, the State of California filed a complaint for violation of state law based on the same incident (People of the State of California v. Tosco, Superior Court, County of Contra Costa, California, Case No. C94-04239). These matters have been settled.
On June 14, 1994, Lion Oil Company ("Lion") filed a Complaint against Tosco (Lion Oil Company v. Tosco Corporation, United States District Court, Western District of Arkansas, Case No. 94-1072) as amended on August 22, 1994 seeking an order for reimbursement under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), contribution and declaratory relief in connection with the investigation and remediation of alleged environmental contamination of a refinery formerly owned by Tosco located in El Dorado, Arkansas. Tosco sold the property to Lion pursuant to an Asset Purchase & Sale Agreement of March 22, 1985 which included specific provisions limiting Tosco's liability with respect to environmental matters.
Tosco filed Answers to the Complaint and Amended Complaint denying generally the allegations made and denying specifically any liability to Lion. Tosco also filed a counter-claim asserting that Lion's suit is a breach of the Asset Purchase and Sale Agreement and if Tosco is liable to Lion in this case, then Lion is liable to Tosco for contribution under federal and state law.
The operator of a landfill to which it is alleged Tosco sent hazardous waste has sued numerous alleged waste generators, including Tosco, and municipalities under CERCLA (ACME Landfill Corporation v. Althin CD Medical, Inc. et al., United States District Court, Northern District of California, Case No. C91444268 SBA) to recover the costs for closure/post closure of the site. The source, extent and nature of any contamination is the subject of ongoing discovery. Tosco has sought indemnification from Phillips.
The costs of remedial actions are highly uncertain due to, among other items, the complexity and evolving nature of governmental laws and regulations and their interpretations as well as the varying costs and effectiveness of alternative cleanup technologies. However, Tosco presently believes that any cost in excess of the amounts already provided for in the financial statements should not have a materially adverse effect upon Tosco's operations or financial condition. Tosco further believes, as discussed with respect to the Phillips case above, that a portion of future environmental costs, as well as environmental expenditures previously made, will be recovered from other responsible parties under contractual agreements and existing laws and regulations. See Note 15 to the Consolidated Financial Statements.
There are various other suits and claims pending against Tosco and its subsidiaries, which in the opinion of Tosco are not material or meritorious or are substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these suits and claims, Tosco believes the aggregate amount of such liabilities will not result in monetary damages which in the aggregate would be material to the business or operations of Tosco.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
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
1994 High Low 1993 High Low
1st Quarter $35 $29 1st Quarter $24 5/8 $18 7/8 2nd Quarter 32 3/8 27 3/8 2nd Quarter 26 22 3/8 3rd Quarter 32 7/8 27 3/8 3rd Quarter 26 5/8 21 3/8 4th Quarter 32 26 3/4 4th Quarter 32 3/4 26 3/8
The number of Tosco shareholders of record on February 28, 1995 was 11,280.
Dividend Policy
Tosco has paid a regular quarterly cash dividend on its Common Stock since the third quarter of 1989. In the third quarter of 1994 the cash dividend was raised from $.15 to $.16 per share. Pursuant to the terms of Tosco's working capital facility and its bond indentures, dividends on Tosco's Common Stock are permitted to the extent Tosco satisfies certain defined criteria. Continued payment of such quarterly dividend is also subject to profitable results of operations, which are primarily dependent on the continued favorable performance of Tosco's operating facilities and favorable operating margins. There can be no assurance that Tosco will be able to continue payment of such quarterly dividend. Through August 15, 1994, Tosco paid all scheduled dividends on its outstanding preferred stock. In September 1994, substantially all the preferred stock was converted to common stock pursuant to a redemption call by Tosco. For the shares that were redeemed, Tosco paid the accumulated and unpaid dividend from August 16, 1994 to the Redemption Date of September 26, 1994.
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, 1994 are derived from the Consolidated Financial Statements of Tosco audited by Coopers & Lybrand L.L.P., independent accountants.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
1994 was an acceptable year for Tosco. Net income was $83.8 million including a $17.7 million inventory valuation recovery and a $6 million environmental cost accrual. Excluding these non-cash items, Tosco's results for 1994 declined from 1993 due to weak refining margins, reduced production levels, and higher costs. These negative factors overshadowed strong operating results from Tosco's entry into retail marketing and the achievement of investment grade credit ratings on its senior debt.
Tosco earned $83.8 million, or $2.24 per fully diluted share, on sales of $6.4 billion for 1994 compared to $80.6 million or $2.33 per fully diluted share, on sales of $3.6 billion for 1993. Earnings per fully diluted share for 1994 fell by $.09 per share while income rose by $3.3 million because of the issuance of 2,990,000 shares of Common Stock in December 1993. Tosco's acquisitions and expanded wholesale operations were the principal reasons for the increase in sales and cost of sales for 1994 compared to 1993. In April 1993, Tosco purchased the Bayway Refinery and related assets from Exxon Corporation. In December 1993, Tosco acquired, through long-term lease, Northville Industries' Long Island, New York oil distribution system and purchased the Ferndale Refinery and retail marketing operations in the Pacific Northwest from BP Exploration & Oil Inc. (BP). In August 1994 and mid-December 1994, Tosco expanded its retail system through the acquisition, under long-term lease arrangements, of the retail marketing operations of BP in Northern California and Exxon in Arizona, respectively.
Results of operations for 1994 include the reversal of the $17.7 million ($10.7 million after tax, $.29 per share) writedown of LIFO inventories incurred in 1993 due to the recovery of prices during 1994. Tosco also recorded a $6 million ($3.6 million after tax, $.10 per share) environmental cost accrual for probable investigative and remedial liabilities at former operating locations. See Note 15 to the Consolidated Financial Statements.
Tosco generated an operating contribution (income before selling, general and administrative expense, net interest expense and income taxes) for 1994 of $272.1 million from its three refineries and retail marketing operations, an increase of $38.0 million over 1993.
Tosco Northwest, whose operations encompass retail marketing operations, the Ferndale Refinery and related commercial activities, produced an operating contribution of $118.6 million in its initial year of operations due to strong retail margins, good production results from the Ferndale Refinery, and good refining margins in the Pacific Northwest. The Ferndale Refinery processed 90,600 barrels per day (B/D) of raw materials for 1994, a 17,100 B/D improvement over 1993 production results under previous management. Refining margins (the difference between the price of refined products produced for sale and raw material costs) were $4.54 for 1994 due to better than anticipated prices, especially for residual fuels, while retail margins averaged $.10 per gallon on sales volumes of 2.1 million gallons per day. Following the completion of the Northern California and Arizona transactions in August and December 1994, respectively, retail margins increased to $.12 per gallon on sales volumes of 2.7 million gallons per day.
The Avon Refinery and its related commercial operations experienced a decline in operating contribution from 1993 due to reduced production levels and poor refining margins. Raw material throughput rates for 1994 fell by 5,700 to 160,600 B/D while production of clean transportation fuels (gasoline, diesel, and jet fuel) fell by 4,900 B/D to 132,700 B/D. Scheduled turnaround maintenance on the fluid coker, which was completed during the second quarter of 1994, was the primary reason for the fall in production. Tosco also reduced production levels in early December 1994 in response to poor refining margins and to prepare for an early start of the major upgrade and turnaround of the fluid catalytic cracking unit (cat cracker) which occurred in January 1995.
Avon's refining margins for 1994 declined by $1.24 to $6.79, the lowest since 1987. Increases in raw material costs were not matched by increases in product prices because of excess supply, highly competitive markets and the lingering effects of the recession in California, Avon's principal market, which lagged the improvement in the national economy.
Bayway's operating contribution for 1994 includes the reversal of the $17.7 million writedown of LIFO inventories recorded in 1993. Excluding the inventory valuation, Bayway's operating contribution for 1994 declined from the approximate nine month operating period of 1993. The decline in operating contribution was primarily due to reduced production, weak refining margins and higher distribution costs. Raw materials processed declined by 7,000 B/D to 252,200 B/D while production of clean products declined by 9,100 B/D to 204,800 B/D due to scheduled turnaround maintenance of the fluid cat cracker, the world's largest and Bayway's principal gasoline production unit, during the third quarter of 1994. Bayway also reduced production runs in early December in response to weak refining margins in the Northeast and to perform some minor but necessary maintenance of production units.
Refining margins, including results of hedges designed to lock in a predetermined level of refining margins on a percentage of Bayway's production, averaged $3.02 for the year, a decline of $.45 from 1993. Bayway, like Avon, was not able to match increases in raw material costs with comparable increases in product prices, due to excess supply in highly competitive markets. In addition, fourth quarter margins were negatively impacted by mild winter weather and market uncertainty over the introduction of cleaner burning but higher cost reformulated gasoline (RFG). Certain areas in the Northeast elected to opt out, and were permitted to do so by the federal government, of their voluntary participation in the RFG program (mandated by federal regulations for the largest metropolitan areas of the United States). Operating costs were also impacted by higher distribution costs as Bayway expanded its terminal distribution network and commercial operations.
Selling, general and administrative (SG&A) expense for 1994 increased by $25.9 million to $84.1 million due to Tosco's expanded operations. SG&A expense for 1994 was reduced by insurance recoveries of $3.5 million (related to now-settled litigation with the predecessor owners of the Avon Refinery over environmental matters) and $1.0 million (related to a retroactive adjustment of prior year medical costs based on favorable claim experience). See Note 15 to the Consolidated Financial Statements.
The increase in net interest expense for 1994 is primarily due to higher levels of debt related to Tosco's acquisitions and their associated working capital requirements and higher short-term interest rates.
The provision for income taxes for 1994 reflects a 1.5% reduction in the annual effective income tax rate and recognition of $2.9 million of revised income tax benefits related to Tosco's former activities. The effective rate reduction is attributable to revised state income tax allocation factors and estimated California investment tax credits. The provision for income taxes for 1993 included prior year tax credits of approximately $2.5 million which were finalized in tax returns filed in October 1993.
Results of operations - 1993
Tosco's continuing operations earned $80.6 million, or $2.33 per fully diluted share, on sales of $3.56 billion for 1993 as compared to income from continuing operations of $30.2 million, or $.68 per fully diluted share, on sales of $1.86 billion for 1992. Continuing operations exclude the results of Tosco's former phosphate fertilizer operations.
Tosco's operating contribution of $234.1 million for 1993 increased by $126.4 million over 1992 due to a $74.8 million increase in operating contribution from Avon and its related commercial activities and an operating contribution of $51.6 million from Bayway and its related commercial activities. Avon's improvement in operating contribution was primarily attributable to record production rates, improved refining margins and lower environmental cost accruals, partially offset by the increased refinery and product distribution costs associated with higher levels of production. Raw material throughput rates averaged a record 166,310 B/D for 1993 (versus 152,510 B/D for 1992) and production of clean transportation fuels also averaged a record 137,610 B/D (versus 126,570 B/D for 1992). Refining margins improved by $.70 to $8.03 per barrel as per barrel costs of raw materials fell by more than the sales value of refined products produced. The improved margins (achieved despite the sluggish economy, especially in California) were assisted by the completion and start up of facilities for the production of low-sulfur, low-aromatic diesel fuel meeting the California Air Resources Board's (CARB) cleaner burning fuel standards effective October 1, 1993.
Bayway achieved an operating contribution of $51.6 million, after an inventory writedown of $17.7 million, for the period April 8, 1993 to December 31, 1993 due to strong refinery performance in a period of lackluster margins. Raw material throughput averaged 259,250 B/D while production of clean transportation fuels and total production averaged 213,980 and 264,490 B/D, respectively. Refining margins, including net realized results of hedges, averaged $3.47 per barrel while refinery and distribution expenses together averaged approximately $2.55 per barrel.
Consolidated selling, general and administrative expense of $58.2 million for 1993 increased by $19.4 million over 1992 primarily due to the acquisition of Bayway (including approximately $7.5 million of non-recurring costs incurred in establishing commercial, accounting and general and administrative functions at Bayway).
Consolidated net interest expense for 1993 of $44.1 million increased by $26.2 million over 1992. Net interest expense for 1992 includes $12.8 million of intercompany interest income from discontinued operations and the writeoff of approximately $3.6 million of deferred financing costs related to previously outstanding indebtedness. Without the effect of these two items, consolidated net interest expense for 1993 increased by $17 million as the costs of higher levels of debt (resulting from the purchase of Bayway and its associated working capital requirements) more than offset the benefits of lower interest rates.
The provision for income taxes for 1993 includes the 1% increase in federal income tax rates effective January 1, 1993 as well as tax credits of approximately $2.5 million which were finalized in tax returns filed in October 1993.
Results of operations - 1992
Tosco's continuing operations earned $30.2 million, or $.68 per fully diluted share, on sales of $1.86 billion for 1992 as compared to income from continuing operations of $68.1 million, or $2.12 per fully diluted share, on sales of $1.61 billion for 1991. After discontinued operations and the cumulative effect of accounting changes, a net loss of $74.5 million, or $2.85 per fully diluted share, was incurred for 1992. Continuing operations generated an operating contribution of $107.7 million for 1992, a decrease of $9.5 million from 1991. The decrease was attributable to the $25 million environmental cost accrual (an increase of $21 million over the $4 million accrual of 1991) which more than offset the $11.5 million improvement in operating margins. The improvement in operating margins was achieved through the then-record production rates at the Avon Refinery. Raw material throughput rates averaged 152,510 B/D in 1992 (versus 139,980 B/D in 1991), while production of petroleum products increased to 151,130 B/D (versus 137,150 B/D in 1991). Production of clean transportation fuels also achieved then-record levels, increasing from 110,550 B/D to 126,570 B/D for 1992. Despite these record production rates, refining margins declined by $.33 per barrel to $7.33 for 1992. In view of the poor margins, which averaged $6.23 for the fourth quarter, scheduled 1993 maintenance of refinery processing units was accelerated into 1992. Operating results for 1992 were also negatively impacted by higher distribution costs associated with expanded commercial activities and the use of additives and oxygenates in gasoline.
Selling, general, and administrative expense for 1992 increased by $8.5 million over 1991 primarily because of higher costs of professional services ($3.6 million, primarily legal costs related to litigation against the predecessor owners of the Avon Refinery concerning environmental issues), workers compensation and general liability insurance ($1.0 million), as well as the full year costs of expanded commercial activities.
Net interest expense for 1992 includes the writeoff of approximately $3.6 million of deferred financing costs related to the refinancing of previously outstanding Bank indebtedness. Without the writeoff, net interest expense for 1992 would have been approximately $2.1 million lower than 1991, as the benefits of lower interest rates and higher levels of invested cash more than offset the costs of higher levels of outstanding debt.
Tosco recorded a loss of $105 million for the estimated loss on disposition of Seminole Fertilizer Corporation (Seminole) including a provision for estimated future costs and operating results until expected disposition dates. Seminole sold its principal operating assets in April 1993 and entered into an agreement to sell the remainder in the first quarter of 1994. See Note 4 to the Consolidated Financial Statements.
Effective January 1, 1992, Tosco adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (electing to prospectively amortize its postretirement benefits obligation) and SFAS No. 109, "Accounting for Income Taxes," and changed its accounting policy for turnaround costs. The cumulative effect of the changes in accounting for income taxes and turnaround costs was $13 million or $.44 per share, and $3.2 million or $.11 per share, respectively.
Outlook
Results of operations continue to be determined principally by two factors: the operating efficiency of the refineries, and refining and retail marketing margins.
Tosco's processing units are periodically shut down for turnaround maintenance as the units reach the end of their normal operating cycle. The scheduled turnarounds of the Avon fluid coker and the Bayway cat cracker, the refineries' principal conversion and gasoline production units, were completed in 1994 and are not expected to undergo turnaround maintenance for three to four years. Avon's cat cracker and the processing units at the Ferndale Refinery were shutdown for turnaround maintenance beginning in January and February 1995, respectively. The Avon cat cracker returned to service in early March and the Ferndale Refinery is scheduled to be back in full operation by April 1995. Significant turnaround activity is not scheduled for the balance of 1995 at the three refineries and, assuming reasonable margins, Tosco expects to operate the refineries at high production levels for the balance of 1995.
Tosco is not able to predict the level or trend of refining and retail margins because of uncertainties with oil markets. However, Tosco is not optimistic about the level of refining margins for 1995 despite the strengthened national economy, in light of the present highly competitive market and the increasing costs of complying with government-mandated clean fuel standards. In addition, Congress is expected to reconsider the current ban on exports of crude oil from the Alaska North Slope (ANS) this year. If passed, the legislation would likely lead to higher crude oil costs for Tosco and other domestic refiners. Tosco may not be able to recover these higher crude costs in the market. Given this serious outlook, Tosco has implemented programs to lower operating and SG&A costs and enhance the productivity and reliability of its operations.
Tosco's expansion into retail marketing has been successful in providing earnings stability in a period of poor refining margins. Tosco expects to enhance its existing retail assets and continue to pursue acquisitions that allow an attractive rate of return and complement its existing refining and retail systems.
Cash flows and liquidity - 1994
As summarized in the Statement of Cash Flows, cash decreased by $31 million during 1994 as cash used in investing activities of $252 million exceeded cash provided by operating and financing activities of $126 million and $95 million, respectively.
Cash provided by operating activities of $126 million was from cash earnings of $192 million (net income plus depreciation, amortization, the environmental cost accrual and deferred income taxes minus the inventory valuation recovery), and from other sources of $6 million, partially reduced by an increase in working capital of $72 million.
Net cash used in investing activities totaled $252 million, primarily for capital additions and deferred turnaround expenditures of $160 million and $76 million, respectively, increases in other assets of $15 million and a net transfer to Tosco's former fertilizer operations for payment of liabilities of $9 million, partially offset by a $10 million return of Tosco's investment in Continental-Tosco Limited Partnership.
Cash generated from financing activities totaled $95 million as net borrowings under the revolving credit facility of $86 million and short-term bank borrowings of $42 million exceeded dividend payments of $28 million and debt and other payments totaling $5 million.
Liquidity (as measured by cash, short-term investments and deposits and unused credit facilities) increased by $67 million during 1994 due to an increase of $98 million in unused credit facilities partially offset by a decrease in cash and equivalents of $31 million. Tosco amended its revolving credit facility to support its expanded working capital requirements due to its acquisitions. At December 31, 1994, liquidity totaled $213 million (an amount which Tosco believes is adequate to meet its expected liquidity demands for at least the next twelve months).
Capital Expenditures and Capitalization
Capital spending programs continue to address compliance with environmental regulations and permits, operating flexibility and reliability, personnel/process safety, reformulated fuel specifications, and most recently, retail expansion and modernization. Tosco spent $160 million on budgeted capital projects in 1994 and accrued approximately $11 million of participation payments based on Tosco's interpretation of its agreement with BP. See Note 2 to the Consolidated Financial Statements. The Avon Refinery underwent several significant upgrades during 1994, including improvements and expansion of its cat feed hydrotreater and alkylation unit, and the Bayway Refinery increased its storage capacity with the construction of two 250,000-barrel crude tanks. Pump credit card readers and convenience store upgrades were implemented to enhance the efficiency and attractiveness of the retail stations.
During the second quarter of 1994, Tosco's Board of Directors approved a $25 million project for the refurbishment and improvement of the Avon Refinery's 65,000 B/D cat cracker. This expansion project, which is expected to produce a five percent volume increase in clean transportation fuels, was completed during the scheduled turnaround of the unit in the first quarter of 1995.
In 1996, gasoline sold in California must meet new specifications enacted by the California Air Resources Board (CARB) (CARB Phase II gasoline). The Avon Refinery's reformulated gasoline project, budgeted at $100 million, will convert a significant portion of its current production to CARB Phase II gasoline. Tosco entered into a long-term exchange agreement with Chevron USA Products Company which will provide Tosco, commencing in 1996, with 30,000 B/D of CARB Phase II gasoline in exchange for 30,000 B/D of conventional grade gasoline. The product exchange agreement extends to 2003. Tosco expects that the supply of CARB Phase II gasoline from this exchange, and from Tosco's own planned production, will equal approximately 80% of the Avon Refinery's current gasoline production.
Tosco's retail capital spending program will focus on building new stations, remodeling existing facilities, and acquiring new locations.
Tosco expects to fund its 1995 capital expenditures from cash provided by operations. Tosco may, depending upon market conditions, offer debt securities (to exchange existing debt and/or to pay down cash borrowings under its revolving credit agreement) or expand its revolving credit availability.
In 1994, Bayway entered into a twelve-year tanker agreement with Neptune Orient Lines, Ltd. for the charter of four 100,000 DWT crude oil tankers. The tankers will be built to maximize the use of the Bayway Refinery's dock receiving facilities as well as to meet the requirements of the U.S. Oil Pollution Act of 1990. The first tanker is expected to be delivered in the second half of 1996. Bayway also entered into a long-term lease agreement with Statia Terminals for 3,600,000 barrels of crude oil storage in Nova Scotia, Canada. The four tankers will be used to move crude oil from the Nova Scotia storage location to the Bayway Refinery or in direct shipments to other locations. In September 1994, Bayway announced that it had entered into a letter of intent pursuant to which the Huntsman Chemical Corporation (Huntsman) would build an ethylbenzene plant at the Bayway Refinery and purchase feedstocks produced by the Bayway Refinery. In January 1995, Huntsman delayed the proposed construction project. Bayway does not anticipate any significant impact on its results due to this delay.
At December 31, 1994, total shareholders' equity was $576 million, an increase from December 31, 1993 of $54 million due to net income ($84 million) less dividend and other payments ($30 million). In September 1994, Tosco increased its quarterly dividend by $.01 per share to $.16 per share. Debt, including current maturities and short-term bank borrowings, increased by $126 million to $730 million at the end of 1994, primarily due to the expansion of Tosco's operations.
Impact of Inflation
The impact of inflation has been less significant during recent years because of the relatively low rates of inflation experienced in the United States. Raw material costs, energy costs, and labor costs are important components of Tosco's costs. Any or all of these components could be increased by inflation, with a possible adverse effect on profitability, especially in high inflation periods when raw material and energy cost increases generally lead finished product prices. In addition, a rapid escalation of raw material and finished products prices could result in credit restrictions if working capital requirements exceed the maximum availability under Tosco's working capital facilities.
Risk Management
Tosco uses a variety of strategies to reduce commodity price, interest and operational risks.
As discussed in Note 3 to the Consolidated Financial Statements, Tosco, at times and when able, uses futures contracts to lock in what it believes to be favorable margins on a portion of Bayway's production by taking offsetting long (obligation to buy at a fixed price) positions in crude oil and short (obligation to deliver at a fixed price) positions in gasoline and heating oil futures and forward contracts. This strategy hedges Bayway's exposure to fluctuations in refining margins and therefore reduces the volatility of operating results. In addition, Tosco enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of the Bayway Refinery's residual fuels production. At December 31, 1994, Bayway had hedged approximately 12% and 6% of its expected first quarter and annual 1995 production, respectively, at acceptable historical margins. Tosco utilizes futures and forward contracts to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign crude oil that Bayway refines and the cost of domestic crude oil.
Tosco manages its interest rate risk by maintaining an appropriate mix of fixed rate and floating rate debt. Currently, floating rate debt, primarily borrowings under the Revolving Credit Facilities which provide up to $450 million of revolving credit availability, is used to finance Tosco's working capital requirements. Existing fixed rate debt consists primarily of $450 million of mortgage bonds issued in 1992 and 1993 to refinance previously outstanding floating rate bank debt and to finance the acquisition of capital assets including the acquisition of the Bayway Refinery. As required by the previously outstanding bank debt agreement, Tosco entered into an interest rate swap agreement which converted a predetermined percentage of floating rate bank term debt ($49.5 million at December 31, 1994) to fixed rate term debt. The interest rate swap expires in the second quarter of 1996.
Tosco carries insurance policies on insurable risks, which it believes to be appropriate at commercially reasonable rates. While Tosco believes that it is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would have to be paid out of general corporate funds, if available. See Note 3 to the Consolidated Financial Statements for a discussion of Tosco's strategy to reduce credit risk.
Item 8.
Item 8.Financial Statements and Supplementary Data
The financial statements and supplementary data required by Part II, Item 8, are included in Part IV, as indexed at Item 14(a)(1) and (a)(2).
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
There is hereby incorporated by reference the information appearing under the caption "Nominees for Election" in the registrant's definitive Proxy Statement relating to its 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. See also the information appearing under the caption "Executive Officers of the Registrant" appearing in Part I.
Tosco is not aware of any family relationship between any Director or executive officer. Each officer is generally elected to hold office until the next Annual Meeting of the Board of Directors.
Item 11.
Item 11. Executive Compensation
There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in the registrant's definitive Proxy Statement relating to its 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated by reference the information appearing under the caption "Stock Ownership of Officers and Directors" and "Other Matters - Certain Security Holdings" in the registrant's definitive Proxy Statement relating to its 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
Item 13.
Item 13. Certain Relationships and Related Transactions
There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in the registrant's definitive Proxy Statement relating to its 1995 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules
(a)(1) and (a)(2). Financial Statements and Financial Statement Schedules. The consolidated financial statements and financial statement schedules of Tosco Corporation and subsidiaries, required by Part II, Item 8, are included in Part IV of this report. See Index to Consolidated Financial Statements and Financial Statement Schedules on page.
(a)(3). Exhibits.
3(a). Restated Articles of Incorporation of Registrant as currently in effect, including Certificates of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Special Rights of Preferred Stock. Incorporated by reference to Exhibit 28.2 to Registrant's Current Report on Form 8-K dated July 29, 1991.
3(b). By-laws of Registrant as currently in effect. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
4(a). Form of Indenture between Registrant and IBJ Schroder Bank and Trust Company, as Trustee, relating to 9% Series A First Mortgage Bonds due March 15, 1997 and 9 5/8% Series B First Mortgage Bonds due March 15, 2002. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-3 dated March 4, 1992.
4(b). Form of Indenture among Registrant, Bayway Refining Company and the First National Bank of Boston, as Trustee, relating to 8 1/4% First Mortgage Bonds due 2003. Incorporated by reference to Exhibit 4.1 to Registration Statement filed by Registrant on Form S-4 dated April 29, 1993.
10(a). Amended and Restated Credit Agreement dated as of April 8, 1993 among Tosco Corporation, Seminole Fertilizer Corporation and Bayway Refining Company, as Borrowers, and the Banks named therein, as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger. Incorporated by reference to Exhibit 28 to Registrant's Current Report on Form 8-K dated April 8, 1993.
10(b). Amendatory Agreement No. 1 dated as of June 7, 1993 to Credit Agreement among Tosco Corporation, Seminole Fertilizer Corporation and Bayway Refining Company, as Borrowers, and the Banks named therein, as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger. Incorporated by reference to Exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(c). Amendatory Agreement No. 2 dated as of December 10, 1993 to Credit Agreement among Tosco Corporation, Seminole Fertilizer Corporation and Bayway Refining Company, as Borrowers, and the Banks named therein, as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger. Incorporated by reference to Exhibit 10(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(d). Amendatory Agreement No. 3 dated as of March 31, 1994 to Credit Agreement among Tosco Corporation, Seminole Fertilizer Corporation and Bayway Refining company, as Borrowers, and the Banks named therein , as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger.
10(e). Amendatory Agreement No. 4 dated as of May 9, 1994 to Credit Agreement among Tosco Corporation, Seminole Fertilizer Corporation and Bayway Refining Company, as Borrowers, and the Banks named therein , as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger.
10(f). Amendatory Agreement No. 5 dated as of August 16, 1994 to Credit Agreement among Tosco Corporation, Bayway Refining Company and Tosco Europe Limited, as Borrowers, and the Banks named therein , as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger.
10(g). Amendatory Agreement No. 6 dated as of December 28 1994 to Credit Agreement among Tosco Corporation, Bayway Refining Company and Tosco Europe Limited, as Borrowers, and the Banks named therein , as Banks, and The Chase Manhattan Bank (National Association) as Co-Agent, Bank of America National Trust and Savings Association, as Co-Agent and Co-Arranger, and the First National Bank of Boston, as Agent and Arranger.
10(h). Exchange Agreement dated October 2, 1986, between Registrant and Atlantic Richfield Company. Incorporated by reference to Exhibit 10(aa) to Registration Statement filed by Registrant on Form S-1 under the Securities Act of 1933 (No. 33-9578).
10(i) Severance Agreement dated November 15, 1989, between Registrant and James M. Cleary. Incorporated by reference to Exhibit l0(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. Schedule identifying similar agreement between Registrant, or its subsidiaries, and another employee. Amendments, effective as of January 1 and February 1, 1993, to said Agreements. Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(j). Severance Agreement dated January 1, 1993 between Registrant and Thomas D. O'Malley including schedule identifying similar agreements between Registrant, or its subsidiaries, and four of its employees. Incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(k). Indemnification Agreement dated September 30, 1987, between Registrant and James M. Cleary, including schedule identifying similar agreements between Registrant and its Directors and/or officers, together with related Trust Agreement. Incorporated by reference to Exhibit 10(aa) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
10(l) Consulting Agreement dated January 1, 1990 between the Registrant and Clarence G. Frame. Incorporated by reference to Exhibit 10(p) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
10(m). Sale and Purchase Agreement for Bayway Refinery and Related Facilities dated December 10, 1992 between Exxon Corporation and Bayway Refining Company. Incorporated by reference to Exhibit 10(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(n) Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No. 35P73, dated February 22, 1990 between Texaco Trading and Transportation Inc. and Tosco Refining Company. Incorporated by reference to Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(o) Amendment, dated April 30, 1992, to TTTI Buy/Sell Contract No. 17P77, dated April 13, 1988 between Texaco Trading and Transportation Inc. and Tosco Refining Company. Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(p). Crude Oil Supply Agreement dated December 28, 1993 between BP Oil Supply Company and Tosco Corporation. Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(q). Trademark License Agreement dated December 28, 1993 between British Petroleum Company p.l.c. and Tosco Corporation. Incorporated by reference to Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Schedule Identifying (i) Amended and Restated Trademark License Agreement between British Petroleum Company p.l.c. and Tosco Corporation dated as of August 1, 1994 and (ii) Trademark License Agreement (California) between BP Oil Marketing Inc. and Tosco Corporation dated as of August 1, 1994. These agreements extended the term of the original agreement and expanded the territory of the original agreement.
11. Statement regarding computation of per share earnings. See Exhibit 11 to Financial Statements (page), as required by Item 8 and appearing in Item 14 hereof.
21. A list of all subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand.
27. Financial Data Schedule
99. Condensed Consolidating Financial Information and Report of Independent Accountants.
(b). Reports on Form 8-K
None
(c). Financial Statement schedules required by Regulation S-X are excluded from the Annual Report to Shareholders by Rule 14a-3(b)(1). See Schedule VIII to the Financial Statements, as required by Item 8, and appearing under Item 14 hereof.
TOSCO CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedules Filed with the Annual Report of the Company on Form 10-K Year Ended December 31, 1994
Page
Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statement of Common Shareholders' Equity for the Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements to
Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts
Financial Exhibits -F-33
Financial statement schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements and related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Tosco Corporation
We have audited the consolidated financial statements and the financial statement schedule of Tosco Corporation and subsidiaries listed in the index on page of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tosco Corporation and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, in 1992 the Company changed its method of accounting for turnarounds, income taxes and postretirement benefits other than pensions.
COOPERS & LYBRAND L.L.P.
Oakland, California March 3, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Tosco Corporation and its wholly owned subsidiaries (Tosco), including Seminole Fertilizer Corporation (Seminole), a discontinued operation whose principal operating assets were sold in 1993.
All significant intercompany accounts and transactions have been eliminated.
Nature of Business
Tosco is an independent oil refiner and marketer of petroleum products with related distribution facilities and domestic and international commercial activities.
Reclassifications
Certain previously reported amounts have been reclassified to conform to classifications adopted in 1994.
Cash, Cash Equivalents, Short-term Investments and Deposits
Cash in excess of operating requirements is invested in certificates of deposit, government securities, commercial paper and other highly liquid investments. Investments with original maturities of more than three months and less than 12 months are classified as short-term investments and carried at cost which approximates market.
Tosco purchased director and officer liability insurance coverage from its wholly owned subsidiary Loil Group Ltd. (Loil), with limits of liability coverage of $14,000,000 and $13,200,000 at December 31, 1994 and 1993, respectively (an amount approximately equal to the amount of cash and investments of Loil). The assets of Loil are restricted to payment of defense costs and claims made against the directors and officers of Tosco. At December 31, 1994 the portfolio's carrying value of marketable investments which is considered "available for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" approximated fair value.
Inventories
Inventories of raw materials and products are valued at the lower of cost, determined on the last-in, first-out (LIFO) basis, or market. The market value of LIFO inventories is measured on a consolidated basis.
Deferred Charges and Turnarounds
Financing charges related to the acquisition or refinancing of debt are deferred and amortized over the term of the related debt using the effective interest method.
Refinery processing units are periodically shut down for major maintenance (turnarounds). To provide for a better matching of costs with revenues, Tosco changed its accounting for turnaround costs, effective January 1, 1992, to one that results in the deferral and subsequent amortization of turnaround costs incurred on all significant processing units. The cumulative effect of this accounting change was a benefit of $3,203,000 (net of income taxes of $2,138,000) or $.11 per share for 1992. The cost of turnarounds is deferred and amortized on a straight-line basis over the expected period of benefit (the period to the next scheduled shutdown of the unit, which generally ranges from 24 to 48 months).
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, are carried at cost less accumulated depreciation. Depreciation and amortization are provided over the estimated useful lives of the respective classes of assets utilizing the straight-line method. Expenditures which materially increase values, change capacities or extend useful lives are capitalized. Routine maintenance, repairs, and replacement costs are expensed. Cost of assets disposed of, less sales proceeds, is charged against accumulated depreciation unless extraordinary in nature or amount.
Excise Taxes
Excise taxes collected on the sale of products are remitted to governmental agencies and are not included in sales, cost of sales or other expenses.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with completion of investigations and other studies or Tosco's commitment to a formal plan of action.
Postretirement Benefits
Effective January 1, 1992 Tosco adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and elected to prospectively amortize its accumulated postretirement benefits liability.
Income Taxes
Effective January 1, 1992, Tosco adopted SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income tax liabilities and assets are adjusted for the estimated future tax effects attributable to "temporary differences" (differences between book and tax bases of assets and liabilities) at enacted tax rates. The cumulative effect of this accounting change was a benefit of $13,000,000 or $.44 per share for 1992.
Earnings Per Share
Primary earnings per share are computed by dividing net income (loss) less preferred stock dividend requirements by the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share computations assume, unless the effect is to increase earnings per share or reduce loss per share, that all shares of previously outstanding convertible preferred stock were converted to common stock of Tosco (Common Stock) at the beginning of each period and that no preferred dividends were paid.
The weighted average number of shares used in computing earnings per share are as follows:
Year Ended December 31 1994 1993 1992 (In Thousands)
Primary 34,214 29,679 29,618 Fully Diluted 37,408 34,641 29,618
2. Acquisitions
In April 1993, Bayway Refining Company (Bayway), a wholly owned subsidiary of Tosco, acquired the Bayway Refinery and related facilities (Bayway Refinery) from Exxon Corporation. The purchase price of approximately $175,000,000 (excluding acquired inventories of $164,630,000) plus related acquisition costs of $4,056,000 was fully allocated to the acquired assets based upon their fair values.
In December 1993, Tosco acquired the Ferndale Refinery, retail marketing assets in the Pacific Northwest, and the right to market under the BP brand for five years (Tosco Northwest) from BP Exploration & Oil Inc. (BP). The purchase price of Tosco Northwest was $125,230,000 (excluding acquired inventories of $39,615,000) plus annual contingent participation payments over the five years following the acquisition of up to $50,000,000 and $100,000,000 based on the performance of the refining and retail marketing segments, respectively. Participation payments of approximately $11,000,000, based upon Tosco's interpretation of the agreement, were accrued for 1994 and recorded as additional fixed asset value.
In August 1994, Tosco acquired additional retail marketing assets (primarily a 370 station system with approximately 130 company-controlled stations and a distribution terminal) in Northern California (BP California retail system) in purchase and long-term lease transactions. Tosco purchased improvements at the retail service station locations and entered into long-term operating leases for the balance of the assets, primarily land and equipment, with a special purpose entity which acquired such assets from BP (Note 14). In addition, Tosco entered into a trademark licensing agreement with British Petroleum which expanded Tosco's license to market under the BP brand to seven additional western states for at least twelve years. The previous five year trademark license agreement for Washington and Oregon was also extended to a term of at least twelve years.
In December 1994, Tosco acquired Exxon U.S.A.'s retail gasoline marketing assets (83 service station properties) in Arizona in purchase and long-term operating lease transactions similar to those used for the acquisition of the BP California retail system (Note 14). Tosco also entered into an Exxon branded distribution agreement with a minimum term of seven years.
3. Financial Instruments
Tosco, at times and when able, uses commodity futures contracts primarily to lock in what it believes to be favorable margins between the sales value of refined products produced and the cost of raw materials purchased, on a varying percentage of Bayway's production, generally for periods not exceeding one year. In addition, Tosco enters into swap and forward contracts with counterparties (typically agreeing to sell at fixed prices and to buy at variable market prices, stated volumes of residual fuels in future periods) to hedge sales prices of Bayway's residual fuels production. Realized gains and losses on liquidated raw material futures contracts are deferred in inventory until the related refined products are sold. Tosco also uses commodity futures contracts to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign crude oil that Bayway refines and the cost of domestic crude oil.
At December 31, 1994, Tosco had, as part of its hedging program, open long (obligation to purchase) and short (obligation to deliver) futures, swap and forward contracts for crude oil and products with a notional value (number of barrels under contract multiplied by the per barrel contract value) of approximately $200,000,000 and $311,000,000, respectively. The unrecognized net loss on open and closed futures and swap contracts of approximately $7,800,000 will be recognized or reversed in 1995 as an offset to realized margins on refined products sold.
Pursuant to the requirements of the commodity exchanges, margin deposits for a percentage of the value of the futures contracts have been placed with commodity brokers. The margin deposits are classified as short-term deposits on the balance sheet.
Fair Values
The carrying value of cash and cash equivalents, short-term investments and deposits, trade accounts receivable, and accounts payable and other current liabilities approximates fair value. Estimated fair values of other financial instruments and their method of determination, are as follows:
Credit Risk
Financial instruments which potentially subject Tosco to concentrations of credit risk consist principally of temporary cash investments, trade receivables and commodity futures, swap and forward contracts. Tosco does not believe that it has a significant credit risk on its futures, swap and forward contracts. Futures contracts are transacted through the New York Mercantile Exchange (NYMEX) and other large commodity exchanges with established collateral and credit criteria for participants. To reduce credit risk, temporary cash investments are spread among several high quality financial institutions, and Tosco conducts ongoing evaluations of its broad base of customers and counter parties and requires letters of credit or other collateral arrangements as appropriate.
4. Discontinued Operations
On May 4, 1993, Seminole completed the sale of its principal operating assets to Cargill Fertilizer Inc. for approximately $127,000,000. The cash proceeds, net of amounts used to extinguish outstanding revolving credit borrowings, of $91,217,000 were paid to Tosco to reduce intercompany debt. A 1992 loss of $105,000,000 was recorded for the estimated loss on sale of Seminole's principal operating assets including its 50% interest in the Fort Meade Chemical Products partnership (FMCP), and a provision for estimated operating losses during the phase-out period.
5. Inventories
6. Deferred Charges and Other Assets
7. Property, Plant and Equipment
8. Accrued Expenses and Other Liabilities
9. Long-term Debt
Future Installments of Long-Term Debt
Maturities relating to long-term debt during the next five years are as follows:
Years Ending Thousands December 31, of Dollars
1995 $ 783 1996 771 1997 333,771 (a) 1998 771 1999 771
(a) Includes cash borrowings of $233,000,000 at December 31, 1994 under the revolving credit facility and $100,000,000 First Mortgage Bonds.
Utilization of Revolving Credit Facility
10. Capital Stock
Series F Preferred Stock
In August 1994, Tosco called for the redemption on September 26, 1994 (the Redemption Date) of its shares of $4.375 Series F Cumulative Convertible Preferred Stock (Series F Stock). The redemption price was $53.0625 per share, plus $.486 per share in accumulated and unpaid dividends from August 16, 1994 to the Redemption Date. Of the 2,300,000 shares of Series F Stock outstanding, 2,296,644 shares were converted to shares of Common Stock and 3,356 were redeemed.
Common Stock
In December 1993, Tosco received net proceeds of $88,418,000 from a public offering of 2,990,000 shares of Common Stock. Dividends paid on Common Stock of $.16 per share for the third and fourth quarters of 1994 reflected an increase of $.01 per share over prior quarterly dividend payments.
11.Stock Options and Shares Reserved For Issuance
Tosco had three stock option plans in effect at December 31, 1994: the 1992 Stock Incentive Plan (1992 Plan), the 1989 Stock Incentive Plan (1989 Plan), and the Long Term Incentive Plan of 1979 (as amended) (LTIP). Grants may no longer be made under the LTIP; however, grants previously made may be exercised until they expire or terminate.
The 1989 and 1992 Stock Incentive Plans
The 1989 and 1992 Stock Incentive Plans provide for the issuance to key employees, consultants, and non-employee directors of a maximum of 1,280,000 and 1,200,000 shares of Common Stock, respectively, in the form of stock options, restricted stock awards and/or stock appreciation rights. Stock options may be granted as "Incentive Stock Options" (as defined by the Internal Revenue Code of 1986), or as nonqualified options, including nonqualified stock options whose purchase price or vesting requirements are based on the employee's achievement of established performance objectives. Options may be exercised only within ten years from the date of grant. The exercise price of nonqualified stock options is determined by the Compensation Committee of the Board of Directors and may be less than the fair value of Common Stock on the date of grant. Awards under the 1989 and 1992 Plan may be granted until March 7, 1999 and March 13, 2002, respectively.
Options to acquire an aggregate of 452,000 shares of Common Stock at prices ranging from $29.25 to $31.81 per share (the fair value of Common Stock on the respective dates of grant) were granted during 1994. Subject to the severance agreements with certain employees (Note 15), one-third of the options may be exercised at any time following the first anniversary of the date of grant and an additional one-third after each of the second and third anniversaries.
12. Income Taxes
Tosco believes that it is more likely than not that the federal deferred tax asset will be realized prior to the expiration of the carryforward period based upon the expected continuation of Tosco's profitable results of continuing operations since 1986 and resultant taxable income.
13.Employee Benefit and Incentive Compensation Plans
Pension Plans
Tosco has non-contributory, defined benefit pension plans covering substantially all of its employees located at the Avon and Bayway Refineries and its union employees at the Ferndale Refinery (collectively, the Plans). The benefits under the Plans generally are based on the employee's years of service and average earnings for the three highest consecutive calendar years of compensation during the ten years immediately preceding retirement. Contributions to the Plans are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than the amount deductible for federal income tax purposes. The assets of the Plans are managed by major financial institutions and invested in high quality equity securities, guaranteed investment contracts, corporate and government debt securities and real estate equity funds. The funded status of the Plans and amounts recognized in Tosco's balance sheet are as follows:
In connection with Tosco's acquisition of the Bayway and Ferndale refineries, pension coverage was extended to certain acquired employees. Pension benefits granted provide for recognition of past employees' service but benefits accrued through the respective acquisition dates will be paid by their former employers. Benefits are payable at the normal retirement age of 65 with reduced benefits for early retirement (as defined).
In 1990, Tosco adopted a Senior Executive Retirement Plan to provide retirement benefits to selected senior executives of Tosco and their beneficiaries. A provision of $1,855,000, $1,267,000 and $1,237,000 was recorded in 1994, 1993 and 1992, respectively.
Employee and Retiree Benefit Plans
Tosco provides health care and life insurance benefits for all of its employees and postretirement health care and life insurance benefits for certain employees (primarily employees at the Avon Refinery). Beginning January 1, 1988, new employees not employed at the Avon Refinery, including employees acquired in the Bayway and Tosco Northwest acquisition, are not eligible for postretirement benefits. Health care benefits for eligible employees and retirees are provided through insurance companies whose premiums are based on the benefits paid during the year. The health care plans are contributory, with employee/retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The life insurance plans are noncontributory.
Tosco elected to prospectively recognize its accumulated postretirement benefits obligation (APBO) other than pensions of $32,661,000 as of January 1, 1992, the effective date of Tosco's adoption of SFAS No. 106. In view of the escalating costs of medical care, Tosco revised its retiree benefit plans in 1993 and 1994 to, among other things, limit its future obligation to absorb health care increases. These revisions as well as favorable changes in experience and cost trends reduced Tosco's APBO to $25,797,000 and $14,209,000 as of December 31, 1993 and 1994, respectively. The total cost of postretirement benefits, including the amortization of the transition obligation, was $2,630,000 for 1994, an increase of $433,000 over the amount which would have been expensed under the pay as you go approach.
The changes in assumptions as well as changes in circumstances and experience resulted in a net gain of $11,461,000 which will be recognized as a reduction in postretirement benefit expense on a straight line basis over the average remaining employee service period of 6 years. Postretirement benefit expense for 1992 was $4,919,000.
Savings Plan
A savings plan has been established for all eligible employees (Tosco Corporation Capital Accumulation Plan (CAP)) to encourage long-term savings and to provide additional funds for retirement. Participants may make, within certain limitations, voluntary contributions under Section 401(k) of the Internal Revenue Code based upon a percentage of their compensation. Tosco makes matching contributions based upon years of contributory participation (as defined under the CAP) for employees who elect to make certain specified and minimum contributions. In addition, eligible employees receive an additional contribution equal to 5% of their compensation (up to $150,000 in 1994 and 1995) which is intended to replace Tosco's contribution under a terminated pension plan. Participants are immediately vested in both their voluntary and Tosco contributions.
Contributions by Tosco to the savings plan for the years ended December 31 were $7,146,000 (1994), $5,524,000 (1993), and $2,379,000 (1992).
Management Incentive Plans
A Cash Incentive Plan (CIP) was established for members of middle and senior management in 1987. The CIP sets forth awards which are computed as a variable percentage of a participant's base salary, which percentage is dependent upon the pretax income (as defined) of the business unit. Tosco also adopted a bonus plan in 1990 for senior executives who are not participants in the CIP based on Tosco's per share pretax income (as defined).
Results of operations for the years ended December 31, 1994, 1993 and 1992 include incentive compensation of $6,800,000, $9,531,000, and $5,616,000 respectively, of which $5,350,000, $7,458,000 and $4,393,000, respectively, were included in selling, general and administrative expense.
Employee Stock Ownership Plan (ESOP)
In 1992, Tosco's Board of Directors authorized the merger of the ESOP into the CAP. Effective January 1, 1993, contributions of 2% of eligible pay previously made to the ESOP were paid to the CAP for all eligible participants. ESOP expense for 1992 was $516,000.
14. Lease Commitments
Tosco distributes petroleum products throughout its marketing areas through a combination of owned and leased terminals. Ten year lease arrangements for two major West Coast product distribution terminals were renewed in 1991 and additional leases for the Riverhead product distribution terminal and Northville Industries oil distribution system, both in Long Island, New York, were added in 1992 and 1993 (for terms of 5-1/2 and 9 years, respectively). Tosco has options to purchase the Riverhead Terminal and the Northville distribution system at their fair market values at the end of their respective leases. Other product distribution terminal leases are generally for short periods of time and continue in effect until canceled by either party with contracted days of notice. The product distribution terminal leases, other than the Long Island leases, are subject to escalation either based on increases in annual average wage rates or as allowed by the Public Utilities Commission (PUC). A portion of the product distribution terminals' storage and handling facilities is subleased to others. In July of 1994, Tosco entered into a five year lease, with options to renew for two additional five year periods, with Statia Terminals for approximately 3,600,000 barrels of storage capacity at Point Tupper, Nova Scotia. The facility will be used primarily to store crude oil destined for the Bayway Refinery. Minimum annual rentals for distribution terminals currently under long-term lease total $23,700,000 for 1995, including approximately $4,400,000 for the Point Tupper facility. Thereafter, annual rentals total $18,900,000, $30,000,000 (including an $11,500,000 payment due at the end of the Riverhead terminal lease), $14,600,000 and $11,300,000 for the years 1996 to 1999, respectively.
In conjunction with the acquisition of the BP California retail system in August 1994, Tosco entered into long-term leases with a special purpose entity established to purchase land and equipment in the BP California retail system. The leases provide Tosco with options to purchase at agreed upon contracted values (a) not less than all of the leased assets at annual anniversary dates and (b) a portion of the leased assets for resale to unaffiliated parties at quarterly lease payment dates. Tosco may also cancel the leases at the second through sixth anniversary dates provided that the lessor receives minimum sales values for the leased assets. The purchase option price and guaranteed sales values decline over the applicable periods of the leases. Minimum annual rentals, which vary with a reference interest rate (LIBOR) and assume that Tosco exercises its lease renewal options, approximate $5,300,000 for the first four years, $4,700,000 for the fifth and sixth years, and $3,100,000 for the seventh year. Final payments totaling $55,000,000 are due at the end of the leases. Tosco entered into similar leases in conjunction with the acquisition of Exxon's retail marketing assets in Arizona in December 1994. Minimum annual rentals currently approximate $6,000,000 over the term of the lease with a final payment of $44,000,000 due at the end of the seventh year. In addition, Tosco also assumed existing leases of property, with expiration dates through 2011, and subleases of retail properties, with expiration dates through 1998, in connection with the acquisitions of retail assets in Northern California and Arizona.
Tosco leases sulfuric acid and MTBE manufacturing facilities, both located at the Avon Refinery. The leases of the sulfuric acid and MTBE facilities expire in 1998 and 2007, respectively, and the leases may be extended or the facilities purchased at their estimated fair market values at the end of the lease terms. Tosco also leases transportation equipment, including railcars and trucks, as well as computer and office equipment primarily at leased office space at various locations in the United States.
Future minimum obligations under non-cancelable operating leases and warehousing agreements at December 31, 1994 were as follows:
Years Ending Thousands December 31, of Dollars
1995 $ 57,890 1996 49,432 1997 57,599 1998 35,747 1999 33,033 2000 and subsequent 196,201 429,902 Less future minimum sublease income ( 49,282) Total minimum lease payments $ 380,620
15.Commitments and Contingencies
Tosco is subject to extensive federal, state and local regulation of environmental and permitting matters relating to its petroleum refining and marketing operations. These regulations are complex and subject to differing interpretations, and Tosco is currently involved in a number of proceedings and discussions regarding the removal and mitigation of the environmental effects of subsurface liquid hydrocarbons and alleged levels of hazardous waste at the Avon Refinery and other locations, including Tosco's Spokane, Washington terminal which is located in a site on the Superfund National Priorities List. Tosco recorded environmental cost accruals of $6,000,000 and $25,000,000 for 1994 and 1992, respectively, based upon a determination that investigative work and remedial actions would be required.
In July 1993, outstanding litigation concerning environmental issues was settled with the predecessor owners of the Avon Refinery (Settlement Agreement). Under the Settlement Agreement, the former owners agreed to pay up to $18,000,000 for one-half of the costs that may be incurred for compliance with certain environmental orders and to provide Tosco with a $6,000,000 credit for past expenses (which Tosco will use to reduce its one-half share of future costs). After the initial term of the Settlement Agreement (the later of four years or until the $36,000,000 shared cost maximum is expended), the parties may elect to continue the Settlement Agreement or to reinstate litigation. Tosco and the former owners have established a committee to review and approve expenditures for environmental investigative and remedial actions at the Avon Refinery. Through December 31, 1994, the committee has spent approximately $1,200,000 on such matters. Remedial actions are subject to negotiation with governmental agencies and therefore the timing and amount of future cash expenditures is uncertain. In addition, further investigative work and negotiations with the governmental agencies may result in additional remedial actions which Tosco cannot presently predict. Tosco has not relinquished its right to make claims for reimbursement of future costs and is not required to reimburse amounts received under the Settlement Agreement. Tosco received $3,474,000 in 1994 in partial settlement of litigation cost reimbursement claims from its insurance carriers and is pursuing additional recoveries and reimbursement under insurance policies in effect during the applicable periods of coverage.
By agreement, Exxon is responsible for environmental obligations related to or arising out of its ownership and operation of the Bayway Refinery, as will be set forth in a list to be prepared under administrative consent orders between Exxon and the State of New Jersey. Bayway has the right, for a period of one year following the expected 1997 completion date of such list, to add additional items to the list. Responsibility for clean-up projects thereafter identified will be shared by Exxon and Tosco based on their respective length of ownership. Tosco has also received indemnifications with respect to environmental obligations arising out of or relating to the period prior to the respective acquisition dates of the Ferndale Refinery and retail assets in the Pacific Northwest and Northern California from BP, and the Arizona retail properties from Exxon (Note 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. While Tosco believes that it has adequately provided for environmental exposures, should these matters be resolved unfavorably to Tosco, they could have a material adverse effect on its long-term consolidated financial position and results of operations.
There are various other legal proceedings and claims pending against Tosco which are common to its operations. While it is not feasible to predict or determine the ultimate outcome of these matters, it is the opinion of management that these suits will not result in monetary damages which in the aggregate would be material to the business or operations of Tosco.
In October 1986, Tosco and Atlantic Richfield Co. (ARCO) entered into an agreement pursuant to which ARCO has agreed for ten years (with two five-year renewal options exercisable by ARCO) to deliver to Tosco an average of 50,000 barrels per day of Alaskan North Slope crude oil in exchange for a quantity of gasoline that is a variable percentage of the amount of crude oil delivered, based upon the prices of certain crude oils (ARCO Exchange Agreement). Under the ARCO Exchange Agreement, Tosco has agreed that in the event it desires to sell the Avon Refinery, Tosco will first offer the Avon Refinery for sale to ARCO. If ARCO declines, Tosco will be free for a certain period of time to sell the Avon Refinery for consideration no less favorable to Tosco than was initially offered to ARCO, subject to the effect of possible continuing Tosco obligations of exchange under the ARCO Exchange Agreement. In addition, in any such subsequent sale ARCO has the right to participate in the bidding and to acquire the Avon Refinery as long as it agrees to pay a specified sum more than any other bidder. The ARCO Exchange Agreement is subject to renegotiation in the event conditions change to the extent that one of the parties has sustained significant losses for a substantial period of time, or structural changes make substantial losses likely. In the event such renegotiation is unsuccessful, the ARCO Exchange Agreement is subject to arbitration and possible termination.
Tosco has employment agreements with certain of its executive officers which provide for lump sum severance payments and accelerated vesting of options upon termination of employment under certain circumstances or a change of control, as defined. Tosco's potential obligation to its nine executive officers was $5,486,000 at December 31, 1994.
Tosco, in keeping with industry practice, schedules periodic maintenance of major processing units for significant non-routine repairs and replacements as the units reach the end of their normal operating cycles (turnarounds). Unscheduled turnarounds also occur because of operating difficulties or external factors. Throughput and earnings are lowered, and deferred turnaround expenditures increased, during such periods.
Tosco's NOL, investment tax and AMT credit carryforwards (Note 12) are subject to various complex tax rules and regulations which may be subject to varying interpretations. These carryforwards may be adversely affected by changes in the rules and regulations or significant changes in the ownership of Tosco or its trade or business. Therefore, the future benefit of these carryforwards, although more likely than not realizable under current rules and regulations, is not assured.
Effective December 1993, the date commercial operation of a hydrogen production facility (Hydrogen Plant) commenced, Tosco entered into 15 year agreements to purchase up to 25 million cubic feet per day of hydrogen and steam (Hydrogen Supply Agreement) and to provide utilities, wastewater disposal and other services to the Hydrogen Plant. The Hydrogen Plant, located at the Avon Refinery on property leased from Tosco, is owned and operated by a third party. The Hydrogen Supply Agreement may be modified to provide for higher levels of hydrogen at prices to be negotiated and can be terminated under certain circumstances upon payment of a stipulated fee (which decreases over the term of the agreement).
To control costs and improve delivery reliability, Tosco entered into a twelve year time charter agreement with Neptune Orient Lines commencing after completion of construction of four 100,000 DWT crude oil tankers. The first tanker is scheduled to be delivered in June 1996 with the last tanker scheduled for delivery in the first quarter of 1997. The tankers will be used to move crude oil from the Nova Scotia storage location to the Bayway Refinery or in direct shipments to other locations.
16. Quarterly Financial Data (Unaudited)
SCHEDULE VIII
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, and the State of California, on March 16, 1995.
TOSCO CORPORATION (Registrant)
By /s/ THOMAS D. O'MALLEY (Thomas D. O'Malley) Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title
/s/ THOMAS D. O'MALLEY Chairman of the Board of March16, 1995 (Thomas D. O'Malley) Directors, President and Chief Executive Officer
/s/ JEFFERSON F. ALLEN Principal Financial Officer, March 16,1995 (Jefferson F. Allen) Executive Vice President and Director
/s/ ROBERT I. SANTO Principal Accounting Officer March 16, 1995 (Robert I. Santo)
Director March 1995 (Joseph B. Carr)
/s/ HOUSTON I. FLOURNOY Director March 16, 1995 (Houston I. Flournoy)
/s/ CLARENCE G. FRAME Director March 16, 1995 (Clarence G. Frame)
/s/ EDMUND A. HAJIM Director March 16, 1995 (Edmund A. Hajim)
/s/ JOSEPH P. INGRASSIA Director March 16, 1995 (Joseph P. Ingrassia)
/s/ CHARLES J. LUELLEN Director March 16, 1995 (Charles J. Luellen)