EX-99.1 4 d90037a2ex99-1.txt FINANCIAL STATEMENT OF BUSINESS ACQUIRED 1 EXHIBIT 99.1 FINANCIAL STATEMENTS OF BUSINESS ACQUIRED EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS (as defined in the Sale and Purchase Agreement between Exxon Mobil Corporation and Valero Refining Company -- California) Report of Independent Accountants Balance Sheet as of December 31, 1999 and 1998 Statement of Income for the Years Ended December 31, 1999, 1998 and 1997 Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Statement of Changes in Exxon Mobil Corporation Net Investment Notes to Financial Statements as of December 31, 1999 Balance Sheet as of March 31, 2000 (unaudited) and December 31, 1999 Statement of Income for the Three Months Ended March 31, 2000 and 1999 (unaudited) Statement of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (unaudited) Notes to Financial Statements as of March 31, 2000 2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Exxon Mobil Corporation In our opinion, the accompanying balance sheet and the related statements of income, of cash flows and of changes in Exxon Mobil Corporation net investment present fairly, in all material respects, the financial position of the Exxon California Refinery, Terminal and Retail Assets Business (as defined in the Sale and Purchase Agreement between Exxon Mobil Corporation and Valero Refining Company - California) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Exxon Mobil Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 3 to the financial statements, Exxon Mobil Corporation changed its method of accounting for the cost of start-up activities in 1998. PricewaterhouseCoopers LLP Houston, Texas May 10, 2000 3 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS BALANCE SHEET DECEMBER 31, 1999 AND 1998 --------------------------------------------------------------------------------
1999 1998 (in thousands) ASSETS Current assets: Cash $ 4 $ 246 Receivables 41,039 28,002 Inventories 41,680 38,218 Other current assets 3,922 10,124 ------------ ------------ Total current assets 86,645 76,590 Property, plant and equipment, net 476,687 478,928 Prepaids and deferred charges 8,422 6,940 Other noncurrent assets 7,360 6,587 ------------ ------------ Total assets $ 579,114 $ 569,045 ============ ============ LIABILITIES AND EXXON MOBIL CORPORATION NET INVESTMENT Current liabilities: Accounts payable $ 23,949 $ 19,142 Payroll and benefits payable 2,080 2,000 Taxes other than income taxes 17,481 10,263 Deferred income tax 1,147 2,451 Other current liabilities 5,932 3,311 ------------ ------------ Total current liabilities 50,589 37,167 Long-term deferred income taxes 85,654 71,575 Deferred credits and other liabilities 6,057 1,430 ------------ ------------ Total liabilities 142,300 110,172 Exxon Mobil Corporation net investment 436,814 458,873 ------------ ------------ Total liabilities and Exxon Mobil Corporation net investment $ 579,114 $ 569,045 ============ ============
The accompanying notes are an integral part of these financial statements. 4 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 -------------------------------------------------------------------------------
1999 1998 1997 (in thousands) Revenues:- Sales and other operating revenue, including excise taxes: Unrelated parties $ 1,818,355 $ 1,611,327 $ 1,793,767 Related parties 7,726 13,698 20,529 ------------ ------------ ------------ 1,826,081 1,625,025 1,814,296 ------------ ------------ ------------ Costs and expenses: Crude oil and product purchases 962,718 785,040 1,060,502 Operating expenses 214,506 160,291 188,282 Selling, general and administrative expenses 25,478 27,961 30,705 Depreciation and amortization 26,474 22,748 20,983 Excise taxes 474,506 497,714 414,370 Taxes other than income taxes 10,020 9,957 9,493 Loss on property, plant and equipment sales 825 740 418 ------------ ------------ ------------ Total costs and expenses 1,714,527 1,504,451 1,724,753 ------------ ------------ ------------ Income before income taxes 111,554 120,574 89,543 Income taxes 46,023 48,317 36,549 ------------ ------------ ------------ Income before cumulative effect of accounting change 65,531 72,257 52,994 Cumulative effect of accounting change (2,925) ------------ ------------ ------------ Net income $ 65,531 $ 69,332 $ 52,994 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 5 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 -------------------------------------------------------------------------------
1999 1998 1997 (in thousands) Cash flows from operating activities:- Net income $ 65,531 $ 69,332 $ 52,994 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,474 22,748 20,983 Deferred income taxes 12,775 14,411 19,335 Cumulative effect of accounting change 2,925 Loss on sale of property, plant and equipment 825 740 418 Increase in accounts receivable (13,037) (11,483) 16,820 Decrease (increase) in inventories (3,462) 4,312 (13,052) Decrease (increase) in other current assets 6,202 (5,044) (2,876) Decrease (increase) in prepaids and deferred charges (1,482) 3,440 4,263 Decrease (increase) in other noncurrent assets (773) (3,587) (1,529) Increase (decrease) in accounts payable and accrued liabilities 7,508 (1,909) 507 Decrease (increase) in taxes other than income 7,218 23,094 (4,557) Increase in deferred credits and other liabilities 4,627 413 1,017 ------------ ------------ ------------ Net cash provided by operating activities 112,406 119,392 94,323 ------------ ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment (25,058) (37,866) (31,267) ------------ ------------ ------------ Net cash used in investing activities (25,058) (37,866) (31,267) ------------ ------------ ------------ Cash flows from financing activities: Net cash distributions to Exxon Mobil Corporation (87,590) (81,413) (63,023) ------------ ------------ ------------ Net cash used in financing activities (87,590) (81,413) (63,023) ------------ ------------ ------------ Net increase (decrease) in cash (242) 113 33 Cash at beginning of year 246 133 100 ------------ ------------ ------------ Cash at end of year $ 4 $ 246 $ 133 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 6 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS STATEMENT OF CHANGES IN EXXON MOBIL CORPORATION NET INVESTMENT -------------------------------------------------------------------------------
(in thousands) Exxon Mobil Corporation net investment at December 31, 1996 $ 480,983 Net income 52,994 Net cash distributions to Exxon Mobil Corporation (63,023) ------------ Exxon Mobil Corporation net investment at December 31, 1997 470,954 Net income 69,332 Net cash distributions to Exxon Mobil Corporation (81,413) ------------ Exxon Mobil Corporation net investment at December 31, 1998 458,873 Net income 65,531 Net cash distributions to Exxon Mobil Corporation (87,590) ------------ Exxon Mobil Corporation net investment at December 31, 1999 $ 436,814 ============
The accompanying notes are an integral part of these financial statements. 7 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION Exxon Mobil Corporation (ExxonMobil) operates a refinery and marketing assets in the state of California which are collectively referred to herein as the Exxon California Refinery, Terminal and Retail Assets Business (the Business). The Business is engaged in the manufacturing, purchasing and marketing of petroleum products in the state of California. Operating assets primarily consist of: (a) the Benicia Refinery, located in the San Francisco Bay area, including a deepwater dock, (b) a 20-inch crude pipeline and an adjacent truck terminal for regional truck rack sales and (c) Exxon-branded retail assets comprised of 80 marketing sites, of which ten are ExxonMobil owned and operated and 70 are owned by ExxonMobil and leased to dealers. The retail assets owned by ExxonMobil are primarily located in the San Francisco Bay area. In addition, there are 260 independently owned and operated, Exxon-branded retail assets located throughout California. On March 2, 2000, ExxonMobil agreed to sell to Valero Refining Company - California (a subsidiary of Valero Energy Corporation) these assets as a result of Consent Decrees issued by the Federal Trade Commission and the state of California, which provided that certain assets be divested by ExxonMobil in connection with the merger of Exxon Corporation and Mobil Corporation. The anticipated closing date for the refinery sale is May 15, 2000 with a secondary close for the remaining assets scheduled for June 15, 2000. The accompanying financial statements do not include any adjustments that might result from the proposed sale. The accompanying financial statements represent a carve-out financial statement presentation of the Business' operations and reflect ExxonMobil historical cost basis. The financial statements include allocations and estimates of direct and indirect ExxonMobil administrative costs attributable to the Business' operations. The methods by which such amounts are attributed or allocated are deemed reasonable by management. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the Business had been operated as a separate entity. 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of -1- 8 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- contingent assets and liabilities. Actual results could differ from these estimates. REVENUE RECOGNITION Revenues associated with sales of petroleum products and all other items are recorded when title passes to the customer. INVENTORIES Inventories are carried at lower of current market value or cost. Cost of crude oil and refined products inventories is determined under the last-in, first-out (LIFO) method. Crude oil and product purchases are reflected in the income statement at cost. Costs include applicable purchase costs and operating expenses but not general and administrative expenses or research and development costs. Inventory is adjusted for any ExxonMobil consolidated LIFO effect at the end of each period. Cost of materials and supplies is determined under the average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation, based on cost less estimated salvage value of the asset, is determined under the straight-line method. When a major facility depreciated on an individual basis is sold or otherwise disposed of, any gain or loss is reflected in income. Expenditures for maintenance and repairs, including those for refinery turnarounds, are expensed as incurred. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. ExxonMobil estimates undiscounted future cash flows to judge the recoverability of carrying amounts. ENVIRONMENTAL CONSERVATION Liabilities for environmental conservation are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. These liabilities are not reduced by possible recoveries from third parties, and projected cash expenditures are not discounted. INCOME TAXES Historically, the Business' results have been included in the consolidated federal income tax returns filed by ExxonMobil. The income tax provision for each period presented represents the current and deferred income taxes that would have resulted if the Business were a stand-alone taxable entity filing its own income tax returns. Accordingly, the calculation of tax provisions and deferred taxes necessarily require certain assumptions, allocations and estimates which management believes are -2- 9 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- reasonable to reflect the tax reporting for the Business as a stand-alone taxpayer. FAIR VALUE OF FINANCIAL INSTRUMENTS The reported amounts of financial instruments such as receivables and payables approximate fair value because of their short maturities. 3. ACCOUNTING CHANGE The American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-up Activities", was implemented by ExxonMobil in the fourth quarter of 1998, effective as of January 1, 1998. This statement requires that costs of start-up activities and organizational costs be expensed as incurred. The cumulative effect of this accounting change on years prior to 1998 applicable to the Business was a charge of $2.9 million (net of $2 million income tax effect). 4. EXXON MOBIL CORPORATION NET INVESTMENT, ALLOCATIONS AND RELATED-PARTY TRANSACTIONS For purposes of these carve-out financial statements, payables and receivables related to transactions between the Business and ExxonMobil, as well as liabilities and refunds related to current income taxes, are included as a component of the Exxon Mobil Corporation net investment. Such amounts related to current income taxes are deemed to have been paid in cash to ExxonMobil in the year in which the income taxes were recorded. The Business purchased crude oil from ExxonMobil, at transfer prices that were intended to reflect market prices, in the amounts of $755 million, $565 million and $802 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Business' sales of refined products to ExxonMobil for the years ended December 31, 1999, 1998 and 1997, were $8 million, $14 million and $21 million, respectively. Throughout the period covered by the financial statements, ExxonMobil provided the Business with certain services, including data processing, legal, human resources and financial services and certain corporate-funded research programs. Charges for these services were allocated based on various formulas that incorporate indicators such as expenditures, personnel head counts and refinery throughputs. Such charges amounted to $21 million, $20 million and $22 million for the years ended December 31, 1999, 1998 and 1997, respectively. These amounts include research and development expenses of $3 million, $2 million and $2 million, respectively. ExxonMobil uses a -3- 10 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- centralized cash management system under which cash receipts of the Business are remitted to ExxonMobil and cash disbursements of the Business are funded by ExxonMobil. No interest has been charged or credited on transactions with ExxonMobil. 5. EMPLOYEE BENEFIT PLANS ExxonMobil has noncontributory defined benefit pension plans covering substantially all employees of the Business. Benefits under these plans are based primarily upon years of service and final earnings. The funding policy for all plans provides that payments to the pension trusts shall be equal to the minimum funding requirements of the Employee Retirement and Income Security Act, plus such additional amounts as may be approved. ExxonMobil also has defined benefit retiree life and health insurance plans covering most of the Business' employees upon their retirement. Health benefits are primarily provided through comprehensive hospital, surgical and major medical benefit provisions subject to various cost-sharing features. For the purposes of these carve-out financial statements, the Business is considered to be participating in multiemployer benefit plans of ExxonMobil. For 1999, 1998 and 1997, the Business' allocated share of compensation expense related to these plans was approximately $3 million for each of the three years. 6. INCOME TAXES Income tax provisions and related assets and liabilities are determined on a stand-alone basis (Note 2). Income tax provision consists of the following:
(in thousands) 1999 1998 1997 ------------------------------ ------------------------------ ------------------------------ CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL Federal $ 26,035 $ 9,330 $ 35,365 $ 27,098 $ 11,958 $ 39,056 $ 16,571 $ 12,048 $ 28,619 State 7,213 3,445 10,658 6,808 2,453 9,261 643 7,287 7,930 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total $ 33,248 $ 12,775 $ 46,023 $ 33,906 $ 14,411 $ 48,317 $ 17,214 $ 19,335 $ 36,549 ======== ======== ======== ======== ======== ======== ======== ======== ========
-4- 11 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(in thousands) 1999 1998 1997 Statutory rate applied to income before income taxes $ 39,044 $ 42,201 $ 31,340 State income taxes (net of federal income tax benefit and California business tax credits) 6,928 6,019 5,154 Other 51 97 55 -------- -------- -------- Total provisions $ 46,023 $ 48,317 $ 36,549 ======== ======== ========
Deferred tax assets and liabilities resulted from the following temporary differences as of December 31, 1999 and 1998:
(in thousands) 1999 1998 Deferred tax assets: Accrued liabilities $ 3,898 $ 1,519 ---------- ---------- Total deferred tax assets 3,898 1,519 ---------- ---------- Deferred tax liabilities: Depreciation 75,524 62,390 Inventory 2,935 3,154 Other 12,240 10,001 ---------- ---------- Total deferred tax liabilities 90,699 75,545 ---------- ---------- Net deferred tax liabilities $ 86,801 $ 74,026 ========== ==========
7. INVENTORIES Inventories consist of the following:
(in thousands) 1999 1998 Crude oil $ 12,892 $ 7,872 Refined products 17,416 16,111 Materials and supplies 11,372 14,235 ---------- ---------- Total inventories $ 41,680 $ 38,218 ========== ==========
-5- 12 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- The LIFO method accounted for 73% and 63% of total inventory at December 31, 1999 and 1998, respectively. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $115 million and $39 million at December 31, 1999 and 1998, respectively. 8. OTHER CURRENT ASSETS Other current assets consist of the following:
(in thousands) 1999 1998 Prepaid expenses $ 7,853 Catalyst $ 2,699 1,937 Other 1,223 334 ---------- ---------- Total $ 3,922 $ 10,124 ========== ==========
9. PROPERTY, PLANT AND EQUIPMENT
(in thousands) 1999 1998 Refining $811,868 $788,295 Marketing 84,300 83,990 -------- -------- 896,168 872,285 Less - accumulated depreciation and amortization 419,481 393,357 -------- -------- Total property, plant and equipment, net $476,687 $478,928 ======== ========
The depreciation lives used in computing the annual provision for depreciation are substantially as follows: Refining 25 - 33 years Marketing 3 - 21 years 10. LEASES The Business leases a wide variety of facilities and equipment under operating leases, including office equipment and transportation equipment. Rent expense approximated $5 million, $4 million and $3 million for December 31, 1999, 1998 and 1997, respectively. -6- 13 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- 11. CONTINGENCIES AND COMMITMENTS ExxonMobil is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Business involving a variety of matters, including laws and regulations relating to the environment. The more significant of these matters are discussed below. ENVIRONMENTAL MATTERS The Business is subject to federal, state and local environmental laws and regulations that in the future may require ExxonMobil to take action to correct or reduce the effects on the environment of prior disposal or release of chemical or petroleum substances, including MTBE, by ExxonMobil or other parties. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1999 and 1998, accrued liabilities for remediation totaled $11 million and $4 million, respectively. Environmental expenses were $11 million, $5 million and $3 million during the years ended December 31, 1999, 1998 and 1997, respectively, and are included in operating expenses. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that might be imposed. For a number of years, the Business has made substantial capital expenditures to maintain compliance with various laws relating to the environment at existing facilities. The Business anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. UNOCAL PATENT LITIGATION ExxonMobil and four other refiners filed a lawsuit against Unocal Corporation (UNOCAL) in Los Angeles, California, seeking a determination that a UNOCAL patent on certain gasoline compositions (commonly referred to as the " '393 patent") is invalid and unenforceable. UNOCAL's '393 patent potentially covers a substantial portion of the reformulated gasoline compositions required by the CARB Phase II regulations that went into effect in March 1996. In 1997, a federal court found that the refiners had not proven the '393 patent to be invalid or unforceable and, furthermore, found the reasonable royalty for infringement to be 5.75 cents per gallon. The case was appealed and, in March 2000, the Court of Appeals for the Federal Circuit affirmed. In April 2000, ExxonMobil and the other four refiners filed a petition for reconsideration and for rehearing en banc -7- 14 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 ------------------------------------------------------------------------------- with the appellate court. The ultimate outcome of the litigation is uncertain. ExxonMobil has retained, and will continue to retain, even after transfer of the Business to Valero Refining Company - California, any and all liability associated with the UNOCAL patent litigation arising prior to the date of transfer of the assets. For operations subsequent to the transfer of the Business, Valero Refining Company - California will be responsible for any UNOCAL patent exposure. OTHER MATTERS Claims have been made against ExxonMobil relating to the Business in other pending lawsuits, the outcome of which is not expected to have a materially adverse effect on the Business' operations, cash flows or financial position. 12. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board released Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities Information." As amended by Statement No. 137 issued in June 1999, this statement, which must be adopted no later than January 1, 2001 for calendar-year companies such as the Business, establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the financial statements and measure those instruments at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. Adoption of this statement is not expected to have a material effect upon the Business' operations or financial condition. -8- 15 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS BALANCE SHEET MARCH 31, 2000 AND DECEMBER 31, 1999 -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 2000 1999 (unaudited) (in thousands) ASSETS Current assets: Cash $ 99 $ 4 Receivables 44,998 41,039 Inventories 30,345 41,680 Other current assets 3,224 3,922 ------------ ------------ Total current assets 78,666 86,645 Property, plant and equipment, net 475,450 476,687 Prepaids and deferred charges 9,901 8,422 Other noncurrent assets 8,208 7,360 ------------ ------------ Total assets $ 572,225 $ 579,114 ------------ ------------ LIABILITIES AND EXXON MOBIL CORPORATION NET INVESTMENT Current liabilities: Accounts payable $ 37,768 $ 23,949 Payroll and benefits payable 2,080 2,080 Taxes other than income taxes 14,856 17,481 Deferred income tax 1,147 1,147 Other current liabilities 6,429 5,932 ------------ ------------ Total current liabilities 62,280 50,589 Long-term deferred income taxes 88,560 85,654 Deferred credits and other liabilities 11,503 6,057 ------------ ------------ Total liabilities 162,343 142,300 Exxon Mobil Corporation net investment 409,882 436,814 ------------ ------------ Total liabilities and Exxon Mobil Corporation net investment $ 572,225 $ 579,114 ------------ ------------
The accompanying notes are an integral part of these financial statements. 16 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 2000 AND 1999 -------------------------------------------------------------------------------
2000 1999 (in thousands) (unaudited) Revenues:- Sales and other operating revenue, including excise taxes: Unrelated parties $ 619,358 $ 233,106 Related parties 3,979 1,497 ------------ ------------ 623,337 234,603 ------------ ------------ Costs and expenses: Crude oil and product purchases 397,081 79,006 Operating expenses 39,158 86,966 Selling, general and administrative expenses 7,501 7,722 Depreciation and amortization 6,723 6,496 Excise taxes 128,538 108,337 Taxes other than income taxes 2,758 2,647 Loss on property, plant and equipment sales 45 203 ------------ ------------ Total costs and expenses 581,804 291,377 ------------ ------------ Income (loss) before income taxes 41,533 (56,774) Income taxes 16,923 (23,133) ------------ ------------ Net income (loss) $ 24,610 $ (33,641) ------------ ------------
17 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 --------------------------------------------------------------------------------
2000 1999 (in thousands) (unaudited) Cash flows from operating activities:- Net income (loss) $ 24,610 $ (33,641) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,723 6,496 Deferred income taxes 2,906 2,813 Loss on sale of property, plant and equipment 45 203 Increase in accounts receivable (3,959) (24,740) Decrease (increase) in inventories 11,335 (3,530) Decrease in other current assets 698 9,656 Increase in prepaids and deferred charges (1,479) (2,348) Increase in other noncurrent assets (848) (262) Increase in accounts payable and accrued liabilities 14,316 6,984 Decrease in taxes other than income (2,625) (9,004) Increase in deferred credits and other liabilities 5,446 4,038 ------------ ------------ Net cash provided by (used in) operating activities 57,168 (43,335) ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment (5,531) (9,498) ------------ ------------ Net cash used in investing activities (5,531) (9,498) ------------ ------------ Cash flows from financing activities: Net cash advances from (distributions to) Exxon Mobil Corporation (51,542) 52,787 ------------ ------------ Net cash provided by (used in) financing activities (51,542) 52,787 ------------ ------------ Net increase (decrease) in cash 95 (46) Cash at beginning of period 4 246 ------------ ------------ Cash at end of period $ 99 $ 200 ------------ ------------
The accompanying notes are an integral part of these financial statements. 18 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 ------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION Exxon Mobil Corporation (ExxonMobil) operates a refinery and marketing assets in the state of California which are collectively referred to herein as the Exxon California Refinery, Terminal and Retail Assets Business (the Business). The Business is engaged in the manufacturing, purchasing and marketing of petroleum products in the state of California. Operating assets primarily consist of: (a) the Benicia Refinery, located in the San Francisco Bay area, including a deepwater dock, (b) a 20-inch crude pipeline and an adjacent truck terminal for regional truck rack sales and (c) Exxon-branded retail assets comprised of 80 marketing sites, of which ten are ExxonMobil owned and operated and 70 are owned by ExxonMobil and leased to dealers. The retail assets owned by ExxonMobil are primarily located in the San Francisco Bay area. In addition, there are 260 independently owned and operated, Exxon-branded retail assets located throughout California. On March 2, 2000, ExxonMobil agreed to sell to Valero Refining Company - California (a subsidiary of Valero Energy Corporation) these assets as a result of Consent Decrees issued by the Federal Trade Commission and the state of California, which provided that certain assets be divested by ExxonMobil in connection with the merger of Exxon Corporation and Mobil Corporation. The closing date for the refinery sale was May 15, 2000 with a secondary close for the remaining assets scheduled for June 15, 2000. The accompanying unaudited financial statements do not include any adjustments that might result from the proposed sale. The accompanying unaudited financial statements represent a carve-out financial statement presentation of the Business' operations and reflect ExxonMobil historical cost basis. The unaudited financial statements include allocations and estimates of direct and indirect ExxonMobil administrative costs attributable to the Business' operations. The methods by which such amounts are attributed or allocated are deemed reasonable by management. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the Business had been operated as a separate entity. These unaudited financial statements should be read in the context of the carve-out financial statements and notes thereto included in Valero Energy Corporation's Form 8-K/A filed with the Securities and Exchange Commission. In the opinion of management, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. 2. EXXON MOBIL CORPORATION NET INVESTMENT, ALLOCATIONS AND RELATED-PARTY TRANSACTIONS For purposes of these unaudited carve-out financial statements, payables and receivables related to transactions between the Business and ExxonMobil, as well as liabilities and refunds related to current income taxes, are included as a component of the Exxon Mobil Corporation net investment. Such amounts related to current income taxes are deemed to have been paid in cash to ExxonMobil in the year in which the income taxes were recorded. ExxonMobil uses a centralized cash management system under which cash receipts of the Business are remitted to ExxonMobil and cash disbursements of the Business are funded by ExxonMobil. No interest has been charged or credited on transactions with ExxonMobil. 3. INVENTORIES Inventories consist of the following: - 1 - 19 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 2000 1999 (in thousands) Crude oil $ 7,481 $ 12,892 Refined products 10,980 17,416 Materials and supplies 11,884 11,372 ------------ ------------ Total inventories $ 30,345 $ 41,680 ------------ ------------
4. CONTINGENCIES AND COMMITMENTS ExxonMobil is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Business involving a variety of matters, including laws and regulations relating to the environment. The more significant of these matters are discussed below. ENVIRONMENTAL MATTERS The Business is subject to federal, state and local environmental laws and regulations that in the future may require ExxonMobil to take action to correct or reduce the effects on the environment of prior disposal or release of chemical or petroleum substances, including MTBE, by ExxonMobil or other parties. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31, 2000 and December 31, 1999, accrued liabilities for remediation totaled $11 million and $11 million, respectively. For a number of years, the Business has made substantial capital expenditures to maintain compliance with various laws relating to the environment at existing facilities. The Business anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. UNOCAL PATENT LITIGATION ExxonMobil and four other refiners filed a lawsuit against Unocal Corporation (UNOCAL) in Los Angeles, California, seeking a determination that a UNOCAL patent on certain gasoline compositions (commonly referred to as the " '393 patent") is invalid and unenforceable. UNOCAL's '393 patent potentially covers a substantial portion of the reformulated gasoline compositions required by the CARB Phase II regulations that went into effect in March 1996. In 1997, a federal court found that the refiners had not proven the '393 patent to be invalid or unforceable and, furthermore, found the reasonable royalty for infringement to be 5.75 cents per gallon. The case was appealed and, in March 2000, the Court of Appeals for the Federal Circuit affirmed. In April 2000, ExxonMobil and the other four refiners filed a petition for reconsideration and for rehearing en banc with the appellate court. In May 2000, the federal appeals court denied this petition. ExxonMobil is currently reviewing its options and the ultimate outcome of the litigation is uncertain. ExxonMobil has retained, and will continue to retain, even after transfer of the Business to Valero Refining Company - California, any and all liability associated with the UNOCAL patent litigation arising prior to the date of transfer of the assets. - 2 - 20 EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 ------------------------------------------------------------------------------- For operations subsequent to the transfer of the Business, Valero Refining Company - California will be responsible for any UNOCAL patent exposure. OTHER MATTERS Claims have been made against ExxonMobil relating to the Business in other pending lawsuits, the outcome of which is not expected to have a materially adverse effect on the Business' operations, cash flows or financial position. 5. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board released Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities Information." As amended by Statement No. 137 issued in June 1999, this statement, which must be adopted no later than January 1, 2001 for calendar-year companies such as the Business, establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the financial statements and measure those instruments at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. Adoption of this statement is not expected to have a material effect upon the Business' operations or financial condition. - 3 -