FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to______________________
COMMISSION FILE NUMBER 1-7910
TOSCO CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-1865716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
72 CUMMINGS POINT ROAD
STAMFORD, CONNECTICUT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 977-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes ___ No
Registrant's Common Stock outstanding at April 30, 1999 was 152,375,519 shares.
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL AND OTHER INFORMATION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
PAGE(S)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 2
Consolidated Statements of Income for the three month
periods ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K: 15
Signature 16
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, Except Par Value)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $6,002 $31,302
Marketable securities and deposits 59,953 49,594
Trade accounts receivable, less allowance for uncollectibles
of $17,536 (1999) and $16,838 (1998) 209,220 265,439
Inventories, net 983,614 1,077,302
Prepaid expenses and other current assets 95,658 95,349
Deferred income taxes 31,413
------------- -------------
Total current assets 1,385,860 1,518,986
Property, plant, and equipment, net 3,378,065 3,379,404
Deferred turnarounds, net 160,620 156,310
Intangible assets (primarily tradenames), less accumulated
amortization of $56,819 (1999) and $51,907 (1998) 633,630 638,542
Other deferred charges and assets 159,104 149,574
------------- -------------
$5,717,279 $5,842,816
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $524,804 $651,408
Accrued expenses and other current liabilities 710,638 728,352
Current maturities of long-term debt 1,580 1,608
Deferred income taxes 23,334
------------- -------------
Total current liabilities 1,237,022 1,404,702
Revolving credit facility 216,000 196,000
Long-term debt 1,358,444 1,358,553
Accrued environmental costs 260,290 253,691
Deferred income taxes 176,630 179,453
Other liabilities 234,879 237,427
------------- -------------
Total liabilities 3,483,265 3,629,826
------------- -------------
Company-obligated, mandatorily redeemable, convertible preferred
securities of Tosco Financing Trust, holding solely 5.75%
convertible junior subordinated debentures of Tosco Corporation
(Trust Preferred Securities) 300,000 300,000
------------- -------------
Shareholders' equity:
Common stock, $.75 par value, 250,000,000 shares authorized,
177,823,514 shares issued 133,596 133,596
Additional paid-in capital 2,029,968 2,029,969
Retained earnings 342,210 323,476
Treasury stock, at cost (571,760) (574,051)
------------- -------------
Total shareholders' equity 1,934,014 1,912,990
------------- -------------
$5,717,279 $5,842,816
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------------- -----------
<S> <C> <C>
Sales $2,637,710 $3,047,055
Cost of sales 2,394,977 2,788,313
Depreciation and amortization 82,604 75,970
Selling, general, and administrative expenses 77,500 72,731
Interest expense 32,291 36,138
Interest income (1,213) (1,420)
-------------- -------------
Income before income taxes and distributions on Trust Preferred Securities 51,551 75,323
Income taxes 21,136 31,259
-------------- -------------
Income before distributions on Trust Preferred Securities 30,415 44,064
Distributions on Trust Preferred Securities, net of income tax benefit
of $1,768 (1999) and $1,790 (1998) 2,545 2,523
-------------- -------------
Net income $27,870 $41,541
============== =============
BASIC EARNINGS PER SHARE
Earnings used for computation of basic earnings per share $27,870 $41,541
Weighted average common shares outstanding 152,328,601 156,325,535
-------------- -------------
Basic earnings per share $ 0.18 $ 0.27
============== =============
DILUTED EARNINGS PER SHARE
Net income $ 27,870 $ 41,541
Distributions on Trust Preferred Securities, net of income tax benefit (a) 2,523
-------------- -------------
Earnings used for computation of diluted earnings per share $ 27,870 $ 44,064
============== =============
Weighted average common shares outstanding 152,328,601 156,325,535
Assumed conversion of dilutive stock options 3,293,529 4,601,636
Assumed conversion of Trust Preferred Securities (a) 9,113,940
-------------- -------------
Weighted average common and common equivalent shares used for
computation of diluted earnings per share 155,622,130 170,041,111
============== =============
Diluted earnings per share $ 0.18 $ 0.26
============== =============
DIVIDENDS PER SHARE
Dividends per share $ 0.06 $ 0.06
============== =============
(a) Conversion of the Trust Preferred Securities was not assumed in 1999 due
to the anti-dilutive impact of the conversion.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income $27,870 $41,541
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 82,604 75,970
Provision for bad debts 2,461 2,000
Deferred income taxes (57,570)
Changes in operating assets and liabilities, net (39,549) (154,565)
Other, net (111) 1,518
------------- ------------
Net cash provided by (used in) operating activities 15,705 (33,536)
------------- ------------
Cash flows from investing activities:
Net change in marketable securities and deposits (10,359) (6,312)
Purchase of property, plant, and equipment (83,403) (72,121)
Proceeds on sale of property, plant, and equipment 68,292 6,858
Deferred turnaround spending (16,542) (10,918)
Increase in deferred charges and other assets, net (11,157) (2,438)
Other, net (763) 1,857
------------- ------------
Net cash used in investing activities (53,932) (83,074)
============= ============
Cash flows from financing activities:
Net borrowings under revolving credit facilities 20,000 205,000
Payments under long-term debt agreements (226) (11,988)
Retirement of real estate installment purchase note (64,622)
Dividends paid on common stock (9,142) (9,380)
Other, net 2,295 736
------------- ------------
Net cash provided by financing activities 12,927 119,746
------------- ------------
Net (decrease) increase in cash and cash equivalents (25,300) 3,136
Cash and cash equivalents at beginning of period 31,302 34,482
------------- ------------
Cash and cash equivalents at end of period $6,002 $37,618
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
(ALL INFORMATION IS UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated interim financial statements of Tosco Corporation and
subsidiaries ("Tosco" or the "Company") reflect all adjustments, consisting of
normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the Company's consolidated financial position,
results of operations, and cash flows. Such interim financial statements are
presented in accordance with the disclosure requirements for Form 10-Q. These
unaudited consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
2. INVENTORIES
MARCH 31, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1999 1998
------------- -------------
Refineries (LIFO):
Raw materials $ 351,190 $ 418,768
Intermediates 186,139 191,575
Finished products 287,694 302,225
Retail (FIFO):
Merchandise 122,931 129,223
Gasoline and diesel 34,782 35,428
Other 878 83
------------- ------------
$ 983,614 $ 1,077,302
============= ============
Inventories accounted for under the LIFO method at March 31, 1999 and December
31, 1998, are reduced by a $293,000,000 inventory valuation reserve. At March
31, 1999, the net realizable value of such inventories exceeded carrying cost by
more than the $293,000,000 valuation reserve.
3. PROPERTY, PLANT, AND EQUIPMENT
During the first quarter of 1999, Tosco completed the sale of 200 convenience
stores for $60,071,000, plus the value of inventories.
Effective January 1, 1999, Tosco prospectively extended the useful lives of its
refinery and distribution assets. This change was made to better represent the
remaining useful lives of the assets, as determined by a third party appraisal.
The impact of this change in accounting estimate, which was partially offset by
additional depreciation of assets placed in service in late 1998 and early 1999,
was to increase net income during the three month period ended March 31, 1999 by
$3,540,000 ($0.02 per share).
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND OTHER CURRENT LIABILITIES
During 1998, Tosco recorded a $40,000,000 charge primarily related to the
restructuring of its San Francisco Area Refinery System. Activity for 1999 and
1998 is summarized below (thousands of dollars):
Impairment of assets $ 15,153
Exit costs 18,904
Employee termination costs 5,943
-------------
40,000
Utilization through March 31, 1999, primarily
the write-off of refinery assets (15,370)
$ 24,630
=============
<PAGE>
On February 23, 1999, a fire occurred at a crude unit at the San Francisco Area
Refinery, Avon facility and resulted in four fatalities. The fire was quickly
isolated and extinguished with no offsite impacts or health risks to the
community. On March 2, 1999, Tosco announced that the Avon Refinery would be
shutdown for at least 30 days, while a thorough safety review was conducted. As
a result of this incident, management is assessing various strategies for the
Avon Refinery. While such developments do not materially alter the restructuring
accrual remaining at March 31, 1999, depending on the outcome of such
assessment, the restructuring accrual may be modified during the remainder of
1999 (Note 8).
5. REVOLVING CREDIT FACILITY
MARCH 31, DECEMBER 31,
(THOUSANDS OF DOLLARS) 1999 1998
------------- -------------
Cash borrowings outstanding $ 216,000 $ 196,000
Letters of credit 23,293 30,160
------------- -------------
Total utilization 239,293 226,160
Availability 660,707 773,840
------------- -------------
$ 900,000 $ 1,000,000
============= =============
In order to reduce financing costs, Tosco elected not to renew its $100 million
Facility B under the Revolving Credit Facility when it expired on January 12,
1999.
6. COMMITMENTS AND CONTINGENCIES
There are various legal proceedings and claims pending against the Company that
are common to its operations. While it is not feasible to predict or determine
the ultimate outcome of these matters, it is the opinion of management that
these suits will not result in monetary damages not covered by insurance that in
the aggregate would be material to the Company's business or operating results.
As a condition of Tosco's March 31, 1997 acquisition of Union Oil Company of
California's ("Unocal") West Coast petroleum assets (the "76 Products
Acquisition"), Unocal is entitled to receive contingent participation payments
through March 31, 2004, up to a maximum of $250,000,000, if retail market
conditions and/or California Air Resources Board ("CARB") gasoline margins
increase above specified levels. The contingent participation payments will be
capitalized, when incurred, as an additional cost of the 76 Products
Acquisition. For completed participation periods, the Company's contingent
participation payments are not material to its consolidated financial position.
Litigation between Unocal and certain petroleum refiners has contested the
validity of patents held by Unocal covering certain formulations for clean
burning fuels meeting California fuel specifications and, in turn, alleged
infringement of those patents by certain refiners. The Company is not a party to
the patent litigation. Under the terms of the 76 Products Acquisition, the
Company has no liability to Unocal for any possible past infringement of the
patents, including to the date of final resolution of the matter, which,
considering appeals, could take several years.
The Company has employment agreements with certain of its executive officers
that provide for lump sum severance payments and accelerated vesting of options
upon termination of employment under certain circumstances or a change of
control, as defined.
The Company, in keeping with industry practice, schedules periodic maintenance
of major processing units for significant non-routine repairs and replacements
(turnarounds) as the units reach the end of their normal operating cycles.
Unscheduled turnarounds also occur because of operating difficulties or external
factors. Throughput and earnings are lowered, and deferred turnaround
expenditures increased, during such periods.
The Company carries insurance policies on insurable risks, which it believes to
be appropriate at commercially reasonable rates. While management believes the
Company is adequately insured, future losses could exceed insurance policy
limits or, under adverse interpretations, be excluded from coverage. Future
liability or costs, if any, incurred under such circumstances would have to be
paid out of general corporate funds.
In the normal course of business, the Company has entered into numerous crude
oil and feedstock supply contracts, finished product sale and exchange
agreements, and transportation contracts.
<PAGE>
7. BUSINESS SEGMENTS
The Company has two operating business segments: refining and marketing. The
refining segment includes the acquisition of crude oil and other feedstocks, the
production of petroleum products, and the distribution and sale of petroleum
products to wholesale customers. The marketing segment includes the sale of
petroleum products and merchandise through company owned gasoline stations and
convenience stores, and branded dealers and jobbers. The nonoperating segment
consists of corporate activities and certain nonoperating subsidiaries.
Summarized financial information by segment for the three-month periods ended
March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
1999 (THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total sales $ 1,829,696 $ 1,230,035 $ - $3,059,731
Intersegment sales (418,344) (3,677) (422,021)
------------- ------------- ------------- ------------
Third party sales $ 1,411,352 $ 1,226,358 $ - $2,637,710
============= ============= ============== ==============
Operating contribution (a) $ 115,963 $ 126,770 $ - $242,733
Depreciation and amortization 48,555 33,696 353 82,604
Net interest expense (income) 19,287 12,428 (637) 31,078
Income (loss) before income taxes and
distributions on Trust Preferred Securities 28,035 26,882 (3,366) 51,551
Capital expenditures (b) 48,696 51,239 10 99,945
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
1998 (THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
------------- ------------- ------------- -------------
Total sales $ 2,249,092 $ 1,242,825 $ - $3,491,917
Intersegment sales (443,542) (1,320) (444,862)
------------- ------------- ------------- ------------
Third party sales $ 1,805,550 $ 1,241,505 $ - $3,047,055
============= ============= =============== =============
Operating contribution (a) $ 154,281 $ 104,461 $ - $258,742
Depreciation and amortization 43,580 32,136 254 75,970
Net interest expense (income) 24,016 11,527 (825) 34,718
Income (loss) before income taxes and
distributions on Trust Preferred Securities 65,946 12,635 (3,258) 75,323
Capital expenditures (b) 30,508 52,511 20 83,039
(a) Operating contribution is calculated as sales minus cost of sales.
(b) Capital expenditures include the purchase of property, plant, and equipment
and deferred turnaround spending.
</TABLE>
Summarized total assets by segment as of March 31, 1999 and December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
OPERATING SEGMENTS NONOPERATING CONSOLIDATED
(THOUSANDS OF DOLLARS) REFINING MARKETING SEGMENT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
March 31, 1999 $ 3,289,163 $ 2,312,549 $ 115,567 $ 5,717,279
December 31, 1998 3,436,007 2,319,272 87,537 5,842,816
8. SUBSEQUENT EVENTS
On April 1, 1999, the Company entered into an agreement with BP Amoco for the
purchase of 137 retail gasoline and service station sites. The majority of the
sites will be acquired by a special purpose entity that will lease the sites to
Tosco under a long-term operating lease. These sites are located principally in
seven major Southeastern urban areas as well as Pittsburgh, Pennsylvania and
will be operated under the Company's "76" gasoline and "Circle K" convenience
store brands. Additionally, the Company reached an agreement with BP Amoco for
the return of the "BP" tradename over a two-year period.
<PAGE>
On April 27, 1999, the Company announced that it would restart its Avon Refinery
(Note 4). The Avon Refinery is expected to be operational by the end of June
1999 after completion of planned maintenance and turnaround work. The Company
has been conducting intensive safety training at the plant since operations were
temporarily suspended following a fire on February 23, 1999. The restart
decision was made following approval of a modified collective bargaining
agreement by the plant's work force that included, among other things, work rule
changes to improve safety. The Company also committed to the implementation of
additional safety measures recommended by an independent consultant and that
layoffs and certain consolidation of functions would not occur as previously
contemplated. Accordingly, the Company expects to reverse previously accrued
employee termination costs included in the 1998 restructuring accrual during the
second quarter of 1999. As plans regarding the Avon Refinery's ultimate
configuration evolve, the Company will reevaluate the elements of the 1998
restructuring accrual.
9. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company plans to adopt SFAS No. 133 on January 1, 2000. The Company is currently
evaluating the effect SFAS No. 133 will have on its financial position and
results of operations.
<PAGE>
TOSCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") for the three month period ended March 31, 1999 should be
read in conjunction with Management's Discussion and Analysis included in the
Tosco Corporation ("Tosco") 1998 Annual Report on Form 10-K. The Annual Report
sets forth Selected Financial Data that, in summary form, reviewed Tosco's
results of operations and capitalization over the five year period 1994 through
1998. This MD&A updates that data.
RESULTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(THOUSANDS OF DOLLARS) 1999 1998
------------- -------------
<S> <C> <C>
Sales $ 2,637,710 $ 3,047,055
Cost of sales 2,394,977 2,788,313
Depreciation and amortization 82,604 75,970
Selling, general, and administrative expenses 77,500 72,731
Interest expense, net 31,078 34,718
------------- -------------
Income before income taxes and distributions on
Trust Preferred Securities 51,551 75,323
Income taxes 21,136 31,259
------------- -------------
Income before distributions on Trust Preferred Securities 30,415 44,064
Distributions on Trust Preferred Securities, net of
income tax benefit 2,545 2,523
------------- -------------
Net income $ 27,870 $ 41,541
============= =============
Diluted earnings per share (a) $ 0.18 $ 0.26
============= =============
(a) Earnings per share throughout MD&A are expressed on a diluted basis.
REFINING DATA SUMMARY (a)
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------- -------------
Average charge barrels input per day (b):
<S> <C> <C>
Crude oil 739,500 857,800
Other feed and blending stocks 81,800 91,300
---------- -----------
821,300 949,100
========== ===========
Average production barrels produced per day (b):
Clean products (c) 701,400 784,900
Other finished products 115,300 166,600
------------- -------------
816,700 951,500
============= =============
Operating margin per charge barrel (d) $ 4.28 $ 4.43
============= ==============
(a) The Refining Data Summary presents the operating results of the following refineries:
- Bayway Refinery, located on the New York Harbor
- Ferndale Refinery, located on Washington's Puget Sound
- Los Angeles Refinery System, comprised of two refineries in Los Angeles
- San Francisco Area Refinery System, comprised of the Rodeo-Santa Maria
complex and the Avon Refinery, which was shutdown in March 1999 for a
safety review following a fire at a crude unit on February 23, 1999
- Trainer Refinery, located near Philadelphia
(b) A barrel is equal to 42 gallons.
(c) Clean products are defined as clean transportation fuels (gasoline, diesel,
distillates, and jet fuel) and heating oil.
(d) Operating margin per charge barrel is calculated as operating contribution,
excluding refinery operating costs, divided by total refinery charge barrels.
</TABLE>
RETAIL DATA SUMMARY
THREE MONTHS ENDED
MARCH 31,
(THOUSANDS OF DOLLARS) 1999 1998
------------- -----------
Volume of fuel sold (thousands of gallons) 1,085,214 1,068,638
Blended fuel margin (cents per gallon) (a) 11.3 11.1
Number of gasoline stations at period end (b) 4,203 4,656
Merchandise sales (thousands of dollars) $ 500,363 $ 475,857
Merchandise margin (percentage of sales) 30.3% 29.2%
Number of merchandise stores at period end (b) 2,152 2,291
Other retail gross profit (thousands of dollars) $ 28,152 $ 29,407
(a) Blended fuel margin is calculated as fuel sales minus fuel cost of sales
divided by fuel gallons sold.
(b) During the first quarter of 1999, Tosco completed the sale of 200
convenience stores.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Tosco earned net income of $27.9 million ($0.18 per share) on sales of $2.6
billion during the first quarter of 1999, compared to earnings of $41.5 million
($0.26 per share) on sales of $3.0 billion in the corresponding period of 1998.
The decrease in sales of $409.3 million was primarily due to lower refinery
production and product prices.
Tosco generated an operating contribution (sales less cost of sales) of $242.7
million for the first quarter of 1999, compared to $258.7 million in the
corresponding period in 1998. The decline of $16.0 million was attributable to
refining (reduction of $38.3 million) and retail (improvement of $22.3 million)
operations.
Refining operating contribution was $116.0 million for the 1999 first quarter,
compared to $154.3 million in the 1998 first quarter. This decrease of $38.3 was
attributable to Tosco's East Coast operations, where production and operating
margins per charge barrel both declined. Production rates were reduced and the
scheduled turnaround of the Bayway refinery cat cracker was moved forward in
response to the poor margins on the East Coast. Refining operating contribution
on the West Coast was greater in the first quarter of 1999 due to improved
operating margins per charge barrel.
Retail operating contribution was $126.8 million for the quarter ended March 31,
1999, compared to $104.5 million in the comparable period in 1998. The 1999
improvement of $22.3 million was primarily attributable to increased merchandise
and fuel sales volumes and margins.
<PAGE>
Depreciation and amortization for the quarter ended March 31, 1999 was $82.6
million, compared to $76.0 million in the comparable 1998 period. The increase
of $6.6 million was due to depreciation on assets placed in service in late 1998
and early 1999, and the acceleration of the Bayway cat cracker turnaround. These
factors were partially offset by a reduction in depreciation associated with
Tosco's January 1, 1999 extension of its refinery and distribution assets'
useful lives. See Note 3 to the Consolidated Financial Statements.
Selling, general, and administrative expenses for the first quarter of 1999
increased by $4.8 million compared to the corresponding period in 1998,
primarily due to higher levels of incentive compensation accruals.
Net interest expense for the quarter ended March 31, 1999 decreased by $3.6
million compared to the 1998 period. This decrease was primarily due to lower
borrowings and interest rates under Tosco's revolving credit facility.
Effective January 1, 1999, Tosco reduced its effective income tax rate from
41.5% to 41.0%. This reduction was attributable to decreased state income taxes
based upon revised state apportionment factors.
OUTLOOK
Results of operations are primarily determined by the operating efficiency of
the refineries, and by refining and retail fuel margins. All of Tosco's
refineries, with the exception of the Avon Refinery, are currently operating at
or near capacity. The Avon Refinery is expected to be operational by the end of
June 1999 after completion of necessary maintenance and turnaround work. See
Note 8 to the Consolidated Financial Statements. Tosco is not able to predict
the level of refinery and retail fuel operating margins for the balance of 1999
because of the uncertainties associated with oil markets. In view of uncertain
operating margins and highly competitive markets, Tosco is committed to
improving its results by lowering costs without compromising safety,
reliability, or environmental compliance.
Tosco's policy is to recognize non-cash writedowns and recoveries of inventories
due to price changes only at year-end, unless the change is not expected to be
temporary. At March 31, 1999, the fair value of Tosco's LIFO inventories
exceeded carrying value by more than the $293.0 million net realizable value
reserve existing at March 31, 1999. This recovery was not recorded because there
is no assurance that the higher level of prices will continue through December
31, 1999 due to volatilities in market.
CASH FLOWS
As summarized in the Consolidated Statement of Cash Flows, cash and cash
equivalents decreased by $25.3 million during the three-month period ended March
31, 1999. Cash used in investing activities of $53.9 million exceeded cash
provided by operating activities of $15.7 and financing activities of $12.9
million.
Net cash provided by operating activities of $15.7 million was from cash
earnings (net income plus depreciation and amortization, provision for bad
debts, and deferred income taxes) of $55.4 million net of an increase in
operating assets and liabilities of $39.6 million and other uses of $0.1
million.
Net cash used in investing activities totaled $53.9 million due to the net
change in marketable securities and deposits of $10.3 million, capital additions
of $83.4 million, spending for turnarounds of $16.5 million, spending for
deferred charges and other assets of $11.2 million, and other items totaling
$0.8 million partially offset by proceeds on sales of property, plant, and
equipment of $68.3 million.
Net cash provided by financing activities totaled $12.9 million, due to net
borrowings under the revolving credit facility of $20.0 million and other items
of $2.0 million partially offset by Common Stock dividend payments of $9.1
million.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, liquidity (cash and cash equivalents, marketable securities
and deposits, and availability under the revolving credit facility) totaled
$726.7 million, a $128.1 million decrease from December 31, 1998. Cash and cash
equivalents decreased by $25.3 million, marketable securities and deposits
increased by $10.3 million, and availability under the Revolving Credit Facility
decreased by $113.1 million. The decrease in availability under the revolving
credit facility was primarily due to Tosco's election not to renew its $100
million Facility B under the revolving credit facility when it expired on
January 12, 1999.
<PAGE>
At March 31, 1999, total shareholders' equity was $1.9 billion, a $21.0 million
increase from December 31, 1998. This increase was due to net income of $27.9
million and other items of $2.2 million, less Common Stock dividends of $9.1
million. Debt (current and long-term debt and the revolving credit facility)
increased by $19.9 million to $1.6 billion at March 31, 1999 due to increased
borrowings under the revolving credit facility.
The ratio of long-term debt (revolving credit facility and non-current portion
of long-term debt) to total capitalization (revolving credit facility,
non-current portion of long-term debt, Trust Preferred Securities, and total
shareholders' equity) was 41% at March 31, 1998, consistent with the December
31, 1998 ratio.
In January 1997, Tosco filed a shelf registration statement providing for the
issuance of up to $1.5 billion aggregate principal amount of debt and equity
securities. Such securities may be offered, separately or together, in amounts
and at prices and terms to be set forth in one or more supplements to the shelf
registration statement. At March 31, 1999, Tosco had available for issue $779
million of securities pursuant to this shelf registration statement.
Tosco's Board of Directors previously approved the repurchase of up to $300
million of Tosco Common Stock. Through December 31, 1998 and April 30, 1999,
Tosco has repurchased 4,258,000 shares of Common Stock for $101.1 million.
Future purchases, if any, will be made from time to time in the open market or
otherwise at prevailing prices which Tosco considers opportune and as permitted
by applicable securities laws.
The Revolving Credit Facility, as well as funds potentially available from the
issuance of securities, provide Tosco with adequate resources to meet its
expected liquidity demands for at least the next twelve months.
CAPITAL EXPENDITURES
During the 1999 first quarter. Tosco spent $99.9 million for budgeted capital
additions: $83.4 million on property, plant, and equipment additions and $16.5
million for turnarounds. Refining capital additions of $48.7 million were
primarily for turnaround projects at the Bayway Refinery and the completion of
projects related to compliance with environmental regulations and permits,
personnel/process safety programs, and operating flexibility and reliability
projects. Tosco intends to finance its 1999 capital additions, including
construction of a polypropylene plant at the Bayway Refinery, through cash flows
from operations and, if needed, by borrowings under the Revolving Credit
Facility.
Marketing capital additions of $51.2 million were primarily for improvements at
existing sites. On April 1, 1999, the Company entered into an agreement with BP
Amoco for the purchase of 137 retail gasoline and service station sites. See
Note 8 to the Consolidated Financial Statements. Tosco continued its efforts to
rationalize its marketing system by divesting 200 non-core properties during the
first quarter of 1999. Approximately 185 additional non-core sites are expected
to be divested during the balance of 1999.
IMPACT OF THE YEAR 2000 ISSUE
Historically, certain computer programs have used two rather than four digits to
define a given calendar year. Computer programs that use two digits to define
the year may recognize a date using "00" as the year 1900 rather than 2000. This
could result in business and field system failures or miscalculations that could
cause serious disruption of operations. This is generally referred to as the
"Year 2000 Issue."
For several years, Tosco has been proactively upgrading and replacing its
information systems. During early 1998, Tosco formed a Year 2000 Program Office
to coordinate the efforts of Tosco's operating units and administrative
departments. Three primary areas related to the Year 2000 Issue are being
addressed: business systems, field systems, and third parties. Each of these
areas has five overlapping phases: (i) identifying and assessing critical
systems, equipment, and business relationships requiring modification or
replacement prior to 2000; (ii) formulating compliance action plans; (iii)
upgrading, replacing, and/or remediating noncompliant systems and equipment;
(iv) testing; and (v) contingency and business continuation planning.
BUSINESS SYSTEMS: These include computer systems and applications relating to
financial reporting, human resources, purchasing, commercial, supply, pricing,
and marketing activities. Tosco is addressing its Year 2000 issues, primarily
through software upgrades and replacements, and remediation of existing business
systems. The assessment and planning phases for critical business systems is
complete, and substantially complete for other business systems. Business system
testing is being done on an ongoing and prioritized basis. We believe these
business systems will be substantially Year 2000 ready by June 30, 1999.
FIELD SYSTEMS: These include embedded computer chips and computer systems
relating to Tosco's refining, distribution, and marketing operating assets.
Tosco has assessed the Year 2000 compliance status of substantially all of its
field systems and is currently implementing plans related to the replacement and
remediation of noncompliant systems. Tosco expects these plans to be
substantially completed by September 30, 1999. The balance of field system
replacements and remediation are expected to be performed during scheduled
turnarounds of refinery processing units in the fourth quarter. Field system
remediation progress is dependent upon the timely delivery of Year 2000
compliant, third party software and devices. Internal and vendor-assisted
testing is being done on an ongoing basis as the field systems are replaced or
remediated.
THIRD PARTY RELATIONSHIPS: These are Tosco's critical suppliers, vendors,
customers, financial institutions, utilities, telecommunication providers,
governmental entities, and others with whom Tosco does significant business
(collectively "third parties"). Tosco has initiated two-way communications with
third parties about their plans and progress in addressing the Year 2000 Issue.
Tosco will continue to communicate with and monitor the progress its third
parties are making in addressing their Year 2000 Issues. Tosco's ability to
accurately assess its third parties' Year 2000 readiness is dependent in large
part upon the completeness and reliability of the third parties'
representations.
CONTINGENCY PLANS: Tosco has formed a Year 2000 Contingency Task Force (the
"Task Force") which includes representatives from all business segments and
other functional responsibilities. The Task Force is currently evaluating
various business disruption scenarios, evaluating existing contingency plans,
and formulating new contingency plans, and preemptive strategies, as
appropriate. Additionally, Tosco will formulate contingency plans based on the
progress its third parties are making in addressing their Year 2000 Issues. By
June 30, 1999, the Task Force will organize management response teams and
formalize Year 2000 plans and strategies in conjunction with Tosco's existing
contingency plans for equipment failures, emergencies, and other business
disruptions. Throughout the balance of 1999, the Year 2000 contingency plans and
strategies will be modified as facts and circumstances change.
COSTS: Tosco's Year 2000 compliance costs include external consultants and
contractors, compensation costs of internal employees working directly on Year
2000 Issues, purchases of software and hardware, and system upgrades and
modifications which were accelerated to address the Year 2000 Issue. Year 2000
compliance costs did not have a material effect on Tosco's 1998 operating
results or financial position. Year 2000 compliance costs are not expected to
have a material effect on Tosco's 1999 operating results or financial position.
RISKS: Tosco believes its business and field systems will be substantially Year
2000 compliant prior to September 30, 1999. Tosco further believes that its
critical third party vendors and suppliers are making good progress on their own
Year 2000 remediation efforts. In the event that Tosco is unable to make the
necessary system changes on a timely basis, fails to identify all critical Year
2000 Issues, or is unable to implement appropriate contingency plans, such
inability could cause significant business disruptions. Additionally, Tosco
could incur significant business disruptions if one or more of its critical
third parties (over whom Tosco does not have control) are not Year 2000
compliant by December 31, 1999. Business disruptions such as production and/or
distribution shutdowns, out-of-stock conditions, communication and/or energy
outages, or billing and/or collecting problems could negatively effect Tosco's
results of operations.
The foregoing Year 2000 readiness disclosure is based on Tosco's current
expectations, estimates, and projections, which could ultimately prove to be
inaccurate. Because of uncertainties, the actual effect of the Year 2000 Issue
on Tosco may be different from our current assessment.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company plans to adopt SFAS No. 133 on January 1, 2000. Tosco is currently
evaluating the effect SFAS No. 133 will have on its financial position and
results of operations.
<PAGE>
FORWARD LOOKING STATEMENTS
TOSCO HAS MADE, AND MAY CONTINUE TO MAKE, VARIOUS FORWARD-LOOKING STATEMENTS
WITH RESPECT TO ITS FINANCIAL POSITION, BUSINESS STRATEGY, PROJECTED COSTS,
PROJECTED SAVINGS, AND PLANS AND OBJECTIVES OF MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS
"ANTICIPATES," "INTENDS," "EXPECTS," "PLANS," "BELIEVES," "ESTIMATES," OR WORDS
OR PHRASES OF SIMILAR IMPORT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
NUMEROUS ASSUMPTIONS, RISKS, AND UNCERTAINTIES, AND THE STATEMENTS LOOKING
FORWARD BEYOND 1999 ARE SUBJECT TO GREATER UNCERTAINTY BECAUSE OF THE INCREASED
LIKELIHOOD OF CHANGES IN UNDERLYING FACTORS AND ASSUMPTIONS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS.
IN ADDITION TO FACTORS PREVIOUSLY DISCLOSED BY TOSCO AND FACTORS IDENTIFIED
ELSEWHERE HEREIN, CERTAIN OTHER FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO TOSCO, OR PERSONS ACTING ON BEHALF OF
TOSCO, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FACTORS.
TOSCO'S FORWARD-LOOKING STATEMENTS REPRESENT ITS JUDGMENT ONLY ON THE DATES SUCH
STATEMENTS ARE MADE. BY MAKING ANY FORWARD-LOOKING STATEMENTS, TOSCO ASSUMES NO
DUTY TO UPDATE THEM TO REFLECT NEW, CHANGED, OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES.
<PAGE>
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 - Financial Data Schedule (filed electronically only)
b. Reports on Form 8-K:
None.
<PAGE>
SIGNATURE
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.
TOSCO CORPORATION
(Registrant)
Date: May 14, 1999 By: /S/ ROBERT I. SANTO
-----------------------
(Robert I. Santo)
Vice President and
Chief Accounting Officer
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