SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 31, 1997.
TOSCO CORPORATION
(Exact name of registrant as specified in charter)
NEVADA 1-7910 95-1865716
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
72 CUMMINGS POINT ROAD, STAMFORD, CT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-977-1000
- -----------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 31, 1997, Tosco acquired from Union Oil Company of California
("Unocal") its West Coast petroleum refining, marketing and related supply and
certain transportation assets (the "Acquisition") for a purchase price of
approximately $1.4 billion, plus inventory preliminarily valued at approximately
$396 million as of the closing date. In addition, Unocal is entitled to receive
contingent participation payments over the next seven years, up to a maximum
amount of $250 million, if the margin on sales to branded dealers exceeds a base
index and/or the differential between California Air Resources Board Phase II
gasoline and conventional gasoline exceeds a base index. For a period of 25
years, Unocal will be responsible for environmental liabilities arising out of
or relating to the period prior to the closing, except that Tosco will pay the
first $7 million of such environmental liabilities each year, plus 40% of any
amounts in excess of $7 million per year, with Unocal paying the remaining 60%
each year. The aggregate maximum amount that Tosco may have to pay in total for
the 25 year period for such environmental liabilities is limited to $200
million.
The assets which were acquired from Unocal include the following: two
petroleum refining systems comprised of four sites in California with an
aggregate throughput capacity of 250,000 barrels per day; a retail gasoline
system, consisting of approximately 1,325 76-branded gasoline stations,
approximately 1,100 of which are company-controlled, which currently sells over
130,000 barrels per day of gasoline and diesel fuel; a distribution system
comprised of 13 company-owned oil storage terminals, three modern American-flag
40,000 deadweight-ton tankers and rights with respect to 1,500 miles of crude
oil and product pipelines; the worldwide rights to the "76" and "Union" brands,
together with the distinctive orange ball logo, in the petroleum refining and
marketing businesses, except for pre-existing license grants relating to 76
Truckstops and to Uno-Ven; and Unocal's lubricants manufacturing, distribution
and marketing business. Tosco has entered into an agreement to sell the three
tankers it acquired from Unocal.
The purchase price paid pursuant to the Acquisition consisted of
approximately $1.4 billion of cash (including inventories) and 14,092,482 shares
of Common Stock of Tosco having an aggregate value of approximately $397
million. The shares of Common Stock which Unocal received (the "Unocal Shares")
were valued at $28.1625 per share, which was the average of the high and low
Tosco stock prices for the ten trading days preceding the closing date. Tosco's
cash portion of the purchase price for the Acquisition, including working
capital, was obtained from a combination of Tosco's available cash, borrowings
under Tosco's amended and restated revolving credit agreement (the "New Credit
Agreement"), borrowings under a $250 million credit agreement entered into on
March 31, 1997 (the "Additional Credit Agreement") and proceeds received from
Tosco's sale of $600 million unsecured term debt securities on January 14, 1997.
The New Credit Agreement and Additional Credit Agreement are each with a group
of bank lenders, for which The First National Bank of Boston acts as agent.
Service stations were purchased directly from Unocal for approximately $250
million by a special purpose entity which leased the service stations to Tosco
pursuant to a long-term operating lease which provides Tosco with the option to
purchase the service stations at agreed upon prices.
In connection with the Acquisition, Tosco and Unocal entered into a
Stock Purchase and Shareholder Agreement, as amended, relating to Unocal's
disposition and voting of Unocal Shares. Tosco has the right to repurchase the
Unocal Shares at various prices in connection with a public offering by Tosco of
shares of its Common Stock. The agreement provides certain registration rights
with respect to the Unocal Shares and restricts Unocal's rights to sell the
Unocal Shares or acquire additional shares of Tosco, requires Unocal to vote the
Unocal Shares at all shareholder meetings in proportion to the votes of other
shareholders and prohibits Unocal from taking or influencing the control of
Tosco.
The purchase price and all negotiations relating to the transaction
were on an arm's length basis. The assets acquired by Tosco will continue to be
used for the same purposes.
The foregoing description of the Acquisition is qualified in its
entirety by reference to the complete text of the acquisition agreement which
was filed as an exhibit to Tosco's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
FINANCIAL STATEMENTS
The financial statements of 76 Products Company, a division of Unocal,
are attached hereto.
PRO FORMA FINANCIAL INFORMATION
It is impracticable to file with this Report the pro forma financial
information required to be filed in connection with the Acquisition pursuant to
Article 11 of Regulation S-X. Such pro forma financial information will be filed
by amendment as soon as practicable and not later than 60 days after this Report
must be filed.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: April 11, 1997
TOSCO CORPORATION
By:/S/ Jefferson F. Allen
Jefferson F. Allen,
Executive Vice President
and Chief Financial Officer
<PAGE>
COOPERS & LYBRAND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of directors of Union Oil Company of California
We have audited the accompanying consolidated balance sheets of 76 Products
Company and subsidiaries (a division of Union Oil Company of California, dba
Unocal) as of December 31, 1996 and 1995 and the related consolidated statements
of operations, cash flows and parent company investment for the years ended
December 31, 1996, 1995 and 1994. These consolidated financial statements are
the responsibility of the 76 Products Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 76 Products Company
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
February 14, 1997
<TABLE>
<CAPTION>
76 Products Company
Consolidated Balance Sheets
(Dollars in Millions)
December 31, December 31,
1996 1995
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $16.0 $24.9
Accounts and notes receivable (net) 243.7 252.6
Inventories 256.1 249.3
Other current assets 3.7 4.0
--------- ---------
Total current assets 519.5 530.8
Property, plant and equipment at cost 3,535.0 3,330.2
Less accumulated depreciation and amortization (1,358.3) (1,253.0)
----------- ----------
Property, plant and equipment (net) 2,176.7 2,077.2
Other assets 43.8 32.4
----------- ----------
Total assets $2,740.0 $2,640.4
=========== ==========
Liabilities and Parent Company Investment
Current liabilities:
Trade accounts payable $355.3 $327.1
Accrued liabilities 12.4 11.7
Taxes payable 63.8 69.5
Other current liabilities 21.2 18.7
---------- ----------
Total current liabilities 452.7 427.0
Long-term debt and capital lease obligations 2.3 2.7
Accrued environmental and other deferred
liabilities 14.3 26.3
Deferred income taxes 176.9 144.5
----------- ----------
Total liabilities 646.2 600.5
Parent company investment
Excess of assets over liabilities 2,093.8 2,039.9
----------- ----------
Total liabilities and parent company
investment $2,740.0 $2,640.4
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
76 Products Company
Consolidated Statements of Operations
(Dollars in Millions)
Years Ended December 31,
1996 1995 1994
Revenues
<S> <C> <C> <C>
Sales and services-unrelated parties* $ 4,854.6 $4,018.0 $3,672.6
Sales and services-related parties 14.1 18.2 7.8
---------- ---------- ----------
Total revenues 4,868.7 4,036.2 3,680.4
Costs and Expenses
Cost of products sold and operating expenses 2,936.3 2,267.9 1,865.4
Cost of products purchased from related parties 372.9 462.1 425.0
Selling, administrative, and general expenses 341.0 310.0 346.0
Excise, property, and other operating taxes* 1,040.5 940.9 931.4
Depreciation and amortization 145.3 110.4 114.2
Interest expense 1.2 0.3 0.3
----------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes 31.5 (55.4) (1.9)
Provision (benefit) for income taxes 17.6 (38.0) (0.2)
---------- ---------- ----------
Net income (loss) $ 13.9 $ (17.4) $(1.7)
============ =========== ==========
* Includes consumer excise taxes of $ 1,011.2 $ 897.7 $892.9
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
76 Products Company
Consolidated Statement of Parent Company Investment
(Dollars in Millions)
<S> <C>
Excess of assets over liabilities at December 31, 1993 $1,618.1
Net loss for the year ended December 31, 1994 (1.7)
Net change in parent company advances 228.4
-----------
Excess of assets over liabilities at December 31, 1994 1,844.8
Net loss for the year ended December 31, 1995 (17.4)
Net change in parent company advances 212.5
-----------
Excess of assets over liabilities at December 31, 1995 2,039.9
Net income for the year ended December 31, 1996 13.9
Net change in parent company advances 40.0
------------
Excess of assets over liabilities at December 31, 1996 $2,093.8
=============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
76 Products Company
Consolidated Statements of Cash Flows
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income (loss) $13.9 $(17.4) $(1.7)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 145.3 110.4 114.2
Gain on sale of assets (pre-tax) (5.2) (2.2) (0.9)
Expense provisions (uninsured loss,
environmental and litigation) 27.6 31.8 33.5
Provision (benefit) for deferred income taxes 32.3 (13.0) (6.4)
Equity in earnings of affiliates, net of dividends 9.2 1.1 (0.1)
Provision for doubtful accounts 2.7 0.3 (1.6)
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes receivable 6.3 (118.9) (45.4)
Decrease (increase) in inventories (6.8) (16.0) (31.0)
Decrease (increase) in other current assets 0.3 0.6 4.9
Decrease (increase) in other assets (16.8) 6.0 (0.1)
Increase (decrease) in trade accounts payable 28.2 105.9 58.2
Increase (decrease) in accrued liabilities 0.7 0.3 0.9
Increase (decrease) in taxes payable (5.7) 9.6 (4.9)
Increase (decrease) in accrued environmental
/other deferred liabilities (37.1) (39.1) (12.8)
------------ ------------ --------
Net cash provided by operating activities 194.9 59.4 106.8
------------ ------------- ---------
Cash Flows from Investing Activities
Capital expenditures (223.6) (404.4) (366.8)
Proceeds from sale of assets 7.7 2.6 4.0
(Increase) decrease in investment in joint venture affiliates (3.7) (0.5) 9.7
------------- ------------ ----------
Net cash used in investing activities (219.6) (402.3) (353.1)
------------- ------------ ----------
Cash Flows from Financing Activities
Increase (decrease) in other long-term liabilities (0.3) (0.5) -
Net change in parent company advances 16.1 342.1 261.3
------------ ------------ -----------
Net cash provided by financing activities 15.8 341.6 261.3
Net Increase (Decrease) in cash and cash equivalents (8.9) (1.3) 15.0
Cash and cash equivalents at Beginning of Year 24.9 26.2 11.2
------------- ------------ ----------
Cash and cash equivalents at End of Year $16.0 $24.9 $26.2
============= ============ ===========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1.2 $ 0.3 $ 0.3
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
76 PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
NOTE 1 - BUSINESS OPERATIONS AND BASIS OF PRESENTATION
76 Products Company and its consolidated subsidiaries (76 Products or the
Company) operate as a business division of Union Oil Company of California (dba
Unocal) which is also referred to as the parent company. This division is
engaged primarily in the manufacture, purchase, transportation and marketing of
petroleum products in the western United States. Operating assets primarily
consist of three refineries in California, service stations, various terminals,
bulk plants, pipelines, tankers and trucks.
On December 14, 1996, Unocal signed a sale and purchase agreement to sell its
refining, marketing and transportation assets to Tosco Corporation. The
anticipated closing date is March 31, 1997. The accompanying consolidated
financial statements do not include any adjustments that might result from the
proposed sale.
The accompanying consolidated financial statements are presented as if 76
Products had existed as an entity separate from Unocal, during the years
presented. They include expenses, net of recoveries, attributable to the Company
that were not recorded in the accounts of the business division. In addition,
they include allocations and estimates of direct and indirect corporate
administrative costs attributable to the Company. The methods by which such
amounts are attributed or allocated are deemed reasonable by management.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company
include the accounts of subsidiaries more than 50 percent owned. Investments in
affiliates owned 50 percent or less are accounted for by the equity method.
Under the equity method, the investments are stated at cost plus the Company's
equity in undistributed earnings after acquisition. Income taxes estimated to be
payable when earnings are distributed are included in deferred income taxes.
USE OF ESTIMATES The consolidated financial statements are prepared in
conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the amounts of assets
and liabilities and the disclosures of contingent liabilities as of the
financial statement date and the amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS The Company participates in Unocal's centralized
funding and cash management system. Under this system, the Company utilizes
Unocal's banks for cash deposits and withdrawals. Cash equivalents consist of
highly liquid investments, such as time deposits and commercial paper issued by
Unocal. At times, bank balances may be in excess of the federally insured limit.
ACCOUNTS RECEIVABLE AND CREDIT RISK The Company grants credit terms in the
normal course of business to its credit card customers, service station dealers,
airlines and other oil companies. As part of its ongoing control procedures, the
Company monitors the credit worthiness of its customers. The Company requires
collateral from service station dealers to support credit sales. An estimated
provision for returns and credit losses has been provided for in the
consolidated financial statements. There were no significant concentrations of
credit risk at December 31, 1996 or 1995.
INVENTORIES Crude oil and refined product inventories are valued at the lower of
cost or market. Cost is determined on the last-in, first-out (LIFO) inventory
method. Materials and supplies are valued at cost, not in excess of market
value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost.
Depreciation and amortization are generally provided using the straight-line
method based on estimated useful lives ranging from 20-30 years for refinery
facilities and from 3-30 years for all other property, plant and equipment.
Replacements and major improvements are capitalized. Expenditures for
maintenance and repairs, including those for refinery turnarounds, are expensed.
Upon retirement of property, plant and equipment, remaining book values are
charged to depreciation expense. Gains or losses on sales of properties are
included in current income.
IMPAIRMENT A long-lived asset is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable. Impairment charges are made for the write-down of long-lived
assets when it is determined that the carrying values of the assets may not be
recoverable.
INCOME TAXES The Company's results of operations are included in the
consolidated U.S. federal and state income tax returns of Unocal. Income taxes
are computed on a separate-return basis using the liability method as prescribed
in Statement of Financial Accounting Standards ( SFAS) No. 109, "Accounting for
Income Taxes." Any resulting current tax liability or refund is settled with
Unocal through the parent company's investment in 76 Products on a current
basis. Under the liability method, the amount of deferred tax liabilities or
assets at the end of each period is determined using the tax rate expected to be
in effect when taxes are actually paid or recovered. Deferred income taxes are
provided for the estimated income tax effect of temporary differences between
financial reporting and tax bases in assets and liabilities. Deferred tax assets
are also provided for certain tax credit carryforwards. A valuation allowance to
reduce deferred tax assets is established, if appropriate.
For purposes of these separate consolidated financial statements, the
stand-alone tax provision has been reduced by California business tax credits,
which would be utilized in the consolidated return, even where such credits
could not be used by the Company on a separate-return basis.
ENVIRONMENTAL EXPENDITURES Environmental expenditures that create future
benefits or contribute to future revenue generation are capitalized.
Expenditures that relate to existing conditions caused by past operations are
expensed.
Liabilities related to environmental assessments and future remediation costs
are recorded when such liabilities are probable and the amounts can be
reasonably estimated . The Company considers a site to present a probable
liability when an investigation has identified environmental remediation
requirements for which the Company is responsible. Other than for assessments,
the timing of accruing for remediation costs generally coincides with the
Company's completion of investigation or feasibility work and the recommendation
of remedy or commitment to an appropriate plan of action. Environmental
liabilities are not discounted or reduced by possible recoveries from third
parties.
FINANCIAL INSTRUMENTS The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. Gains and
losses arising from commodity futures contracts are deferred and included in the
basis of the underlying transactions.
RECLASSIFICATION
Certain items in the 1994 and 1995 financial statements have been reclassified
to conform to the 1996 presentation.
NOTE 3 - RELATED PARTY TRANSACTIONS
For purposes of these separate consolidated financial statements, payables and
receivables related to transactions between 76 Products and Unocal, as well as
liabilities and refunds related to income taxes (See Note 2), are included as a
component of parent company investment. Non-cash transfers of properties between
76 Products and Unocal are offset to the parent company investment account on
the consolidated balance sheets.
NOTE 4 - WRITE-DOWN OF ASSETS
During 1996, the Company wrote down $8.1 for costs related to its Point Arguello
Pipeline investment, $4.9 for costs related to its Pacific Pipeline investment
and $0.7 related to terminal operations. During 1994, the Company wrote off $3.7
for certain pipeline related assets and $7.0 for costs related to the
reformulated fuels program at the Company's Los Angeles refinery due to project
modifications.
NOTE 5 - EXCISE, PROPERTY AND OTHER OPERATING TAXES
<TABLE>
<CAPTION>
Taxes other than income taxes consist of the following:
Years Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Consumer excise taxes $ 1,011.2 $ 897.7 $ 892.9
Real and personal property taxes 23.6 28.4 23.9
Other taxes and duties 5.7 14.8 14.6
----------- ---------- --------
Total $ 1,040.5 $ 940.9 $ 931.4
============ ========== ========
</TABLE>
NOTE 6 - INCOME TAXES
<TABLE>
<CAPTION>
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Current
Federal $ 13.7 $ (23.0) $ 6.2
State (28.4) ( 2.0) -
---------- ---------- --------
Total (14.7) (25.0) 6.2
---------- ---------- --------
Deferred
Federal ( 3.1) 14.3 (6.4)
State (a) 35.4 (27.3) -
---------- ---------- --------
Total 32.3 (13.0) (6.4)
---------- ---------- --------
Total provision (benefit) for income taxes $ 17.6 $(38.0) $(0.2)
=========== ========== ========
(a) 1995 includes state business tax
credits of $28.0.
</TABLE>
The following table is a reconciliation of income taxes at the federal statutory
rates to income taxes as reported in the consolidated statements of operations:
<TABLE>
<CAPTION>
Year Ended December, 31,
1996 1995 1994
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
Provision (benefit) for income taxes
on book income at statutory rate $ 11.0 $(19.4) $(0.7)
California business tax credits,
net of federal tax effect (18.2)
Other 6.6 ( 0.4) 0.5
----------- ----------- ---------
$ 17.6 $(38.0) $(0.2)
=========== =========== ==========
The Company's net deferred income tax assets (liabilities) consist of the
following:
December 31, December 31,
1996 1995
<S> <C> <C>
Deferred tax assets (liabilities)
Properties $ (185.6) $ (168.7)
Inventories ( 13.0) (12.0)
Other deferred tax liabilities (1.1) (4.0)
Other deferred tax assets 22.8 40.2
-------------- -------------
Total $ (176.9) $ (144.5)
-------------- --------------
</TABLE>
NOTE 7 - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
December 31, December 31,
1996 1995
Trade accounts receivable (a) $ 255.0 $ 251.8
Notes receivable 1.5 10.9
---------- ----------
Total receivables 256.5 262.7
Less allowance for doubtful accounts (12.8) (10.1)
---------- -----------
Net $ 243.7 $ 252.6
========== ============
(a) Excludes $178.3 of trade accounts receivable that were securitized
by Unocal.
On December 15, 1995 Unocal entered into an agreement to sell, on a revolving
basis, an undivided interest in a defined pool of Unocal's trade receivables. 76
Products' portion of the defined pool is $178.3. As collections reduce the
amount of receivables included in the pool, Unocal sells new receivables to
bring the amount sold up to $178.3. Under the terms of the agreement, Unocal
retains the risk of credit loss and the collection and administrative
responsibilities for the receivables sold. The receivable amounts reported in
the accompanying consolidated balance sheets are net of receivables sold.
NOTE 8 - INVENTORIES
Inventories consist of the following:
December 31, December 31,
1996 1995
Crude oil and other feedstocks $ 33.0 $ 40.1
Refined products 181.6 171.7
Materials and supplies 39.8 34.2
Other 1.7 3.3
----------- -----------
Total $ 256.1 $ 249.3
=========== ===========
The current replacement cost of inventories exceeded the LIFO inventory value
included above by $148.1 and $126.8 at December 31, 1996 and 1995, respectively.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, December 31,
1996 1995
Refining $ 2,289.7 $ 2,197.0
Marketing 613.6 605.1
Supply & Transportation 566.3 487.4
Other 65.4 40.7
----------- -----------
3,535.0 3,330.2
Less accumulated depreciation and amortization (1,358.3) (1,253.0)
Net $2,176.7 $2,077.2
============ ===========
NOTE 10 - INVESTMENTS IN AFFILIATES
The Company's investments in joint venture affiliates are $16.2 and $21.6 at
December 31, 1996 and 1995, respectively, and are classified as other assets on
the accompanying consolidated balance sheets. The earnings related to these
investments are included in revenues on the accompanying consolidated statements
of operations in the amounts of $(6.2), $2.4, and $3.5 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 11- FINANCIAL INSTRUMENTS
The Company uses commodity futures contracts with maturities of one year or less
to hedge the impact of fluctuations in prices of crude oil and refined products.
Realized and unrealized changes in the market value of futures contracts are
deferred until the hedged transaction is recognized. At December 31, 1996,
contracts covering 100 thousand barrels of crude oil and 6.3 million gallons of
heating oil with a notional amount of $6.9 were outstanding. At December 31,
1995, contracts covering 75 thousand barrels of crude oil and 4.2 million
gallons of heating oil with a notional amount of $4.0 were outstanding. The fair
values of the contracts, based on quoted market prices, approximate the notional
amount.
NOTE 12 - COMMITMENTS
The Company leases service stations, office space and other assets under
operating leases with terms expiring at various dates through the year 2053.
Certain leases contain renewal options, escalation clauses and require the
Company to pay property taxes, insurance and maintenance costs. Certain service
station leases provide for the payment of incremental rentals, in addition to
any established minimums, contingent upon the achievement of specified levels of
sales volumes.
Future minimum rental payments for operating leases, including estimated amounts
for property taxes and maintenance costs under such leases, having initial or
remaining noncancelable lease terms in excess of one year are as follows:
1997 $23.0
1998 20.7
1999 18.8
2000 15.9
2001 13.0
Balance 54.0
--------
$145.4
=========
Net operating rental expense included in consolidated earnings is as follows:
Years Ended December 31,
1996 1995 1994
Fixed rentals $ 29.2 $ 25.1 $ 30.4
Contingent rentals (based primarily
on sales and usage) 9.3 9.7 10.9
Less sublease rental income (17.1) (18.7) (18.1)
--------- --------- ---------
Net expense $ 21.4 $ 16.1 $ 23.2
========== ========== ==========
Unocal has guaranteed certain obligations of the Company's service station
operators amounting to $8.3 at December 31, 1996. Also, the Company purchases
crude oil from a number of suppliers. During 1996, Unocal sold certain oil
producing properties in California to another company. In connection with that
sale, the Company entered into a purchase agreement to purchase the crude oil
produced by such properties with various expiration dates through December 31,
1998. During the year ended December 31, 1996, such purchases accounted for
approximately 11.4% of total crude purchases. In addition, the Company entered
into a one year crude purchase contract with another entity effective November
1, 1996 through October 31, 1997, which is expected to approximate 10% of future
crude purchases.
NOTE 13 - EMPLOYEE BENEFITS EXPENSES
76 Products' employees are included in the various employee benefit plans of
Unocal. These plans include the Unocal Retirement Plan, employee and retiree
medical, dental and life insurance plans, 401(k) and other such benefits. For
the purposes of these separate consolidated financial statements, 76 Products
Company is considered to be participating in multiemployer benefit plans.
76 Products' allocated share of employee benefit expenses is $49.8, $46.8 and
$46.0 for the years ended December 31, 1996, 1995 and 1994, respectively. No
charges have been made to 76 Products by Unocal for the qualified Unocal
Retirement Plan as the plan is in an overfunded position for the years stated
above.
NOTE 14 - ACCRUED ENVIRONMENTAL LIABILITIES
At December 31, 1996 and 1995, the Company had accrued $33.4 and $44.1,
respectively, for estimated future environmental liabilities, of which $21.2 and
$18.7 were included in other current liabilities. The accrued environmental
liabilities on the accompanying consolidated balance sheet included $27.9 for
the remediation of retail marketing sites as of December 31, 1996. Some of the
remediation is performed as a result of the Company's programs to replace
underground storage tank systems and upgrade its service stations. The Company
estimates it could incur additional remediation costs for similar work
aggregating approximately $17.6.
NOTE 15 - CONTINGENT LIABILITIES
The Company has certain contingent liabilities with respect to material existing
or potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. The Company accrues liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and its experience in contesting, litigating and
settling other matters. As the scope of the liabilities becomes better defined,
there will be changes in the estimates of future costs, which could have a
material effect on the Company's future results of operations and financial
condition or liquidity.
ENVIRONMENTAL MATTERS The Company is subject to loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and possible future obligations to investigate the effects of the
release or disposal of certain chemical and mineral substances at various sites;
to remediate or restore these sites; to compensate others for damage to property
and natural resources, for remediation and restoration costs and for personal
injuries; and to pay civil penalties and, in some cases, criminal penalties and
punitive damages. These obligations relate to sites owned by the Company or
others and associated with past and present operations. Liabilities are accrued
when it is probable that future costs will be incurred and such costs can be
reasonably estimated. However, in many cases, investigations are not yet at a
stage where the Company is able to determine whether it is liable or, if
liability is probable, to quantify the liability or estimate a range of possible
exposure. In such cases, the amount of the Company's liabilities is
indeterminable due to the potentially large number of claimants for any given
site or exposure, the unknown magnitude of possible contamination, the imprecise
and conflicting engineering evaluations and estimates of proper cleanup methods
and costs, the unknown timing and extent of the corrective actions that may be
required, the uncertainty attendant to the possible award of punitive damages,
the recent judicial recognition of new causes of action, and the present state
of the law. As discussed in Note 14, the Company has accrued $33.4 and $44.1 for
estimated future liabilities at December 31, 1996 and 1995, respectively.
Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the Company's San Francisco Refinery near
Rodeo, California. Persons in the surrounding area have claimed that they were
exposed to the chemical in varying degrees. As a result, lawsuits have been
filed by or on behalf of all persons, alleged to be approximately eight
thousand, claiming that they or their property were adversely affected by the
releases. Unocal has adequately provided in its accounts for the Catacarb
litigation. Such amounts are not included in 76 Product's separate consolidated
financial statements.
OTHER MATTERS The Company also has certain other contingent liabilities with
respect to litigation, claims and contractual agreements arising in the ordinary
course of business. Although these contingencies could result in expenses or
judgments that, if aggregated and assumed to occur within a single fiscal year,
could be material to the Company's results of operations, the likelihood of such
occurrence is considered remote. On the basis of management's best assessment of
the ultimate amount and timing of these events, such expenses or judgments are
not expected to have a material adverse effect on the Company's consolidated
financial condition or liquidity.
NOTE 16 - STOCK-BASED COMPENSATION
The Company's key employees receive certain stock-based compensation under
Unocal's Long-Term Incentive Plans of 1991 and 1985. The Financial Accounting
Standards Board has issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective for 1996 financial statements. Under
the new standard, companies must either expense the value of stock-based
compensation or disclose in a footnote what the earnings and earnings per share
would be had the value been expensed.
The Company has adopted the disclosure method and the effect on earnings is
immaterial.
NOTE 17 - FUTURE ACCOUNTING CHANGES
In 1996, the American Institute of Certified Public Accountants issued Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities", covering the
reporting of environmental remediation liabilities effective for fiscal years
beginning after December 15, 1996. The initial application of this statement
will be reflected as a change in accounting estimate. Revisions of previously
issued financial statements are not permitted. The Company is reviewing the
potential financial statement impact of adopting the provisions of the SOP.
In 1996, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement is to be
applied prospectively to transactions occurring after December 31, 1996. The
Company is reviewing the potential financial statement impact of adopting the
new accounting standard.
