===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission file number 1-27
TEXACO INC.
(Exact name of the registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
---------
Texaco Inc. (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, and (2) HAS BEEN subject to such filing requirements for the past 90
days.
As of October 30, 1998, there were outstanding 534,530,334 shares of
Texaco Inc. Common Stock - par value $3.125.
===============================================================================
PART I - FINANCIAL INFORMATION
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
---------------------------------------------------------------
(Millions of dollars, except as noted)
(Unaudited)
---------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
---------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Sales and services $23,132 $33,630 $ 7,481 $10,834
Equity in income of affiliates, interest,
asset sales and other 766 988 226 259
------- ------- ------- -------
23,898 34,618 7,707 11,093
------- ------- ------- -------
DEDUCTIONS
Purchases and other costs 17,922 26,324 5,836 8,355
Operating expenses 1,818 2,377 593 806
Selling, general and administrative expenses 862 1,286 290 450
Exploratory expenses 324 306 93 114
Depreciation, depletion and amortization 1,172 1,145 409 388
Interest expense 355 309 121 106
Taxes other than income taxes 328 365 103 97
Minority interest 43 54 13 17
------- ------- ------- -------
22,824 32,166 7,458 10,333
------- ------- ------- -------
Income before income taxes 1,074 2,452 249 760
Provision for income taxes 258 411 34 270
------- ------- ------- -------
NET INCOME $ 816 $ 2,041 $ 215 $ 490
======= ======= ======= =======
Preferred stock dividend requirements $ (40) $ (42) $ (13) $ (14)
------- ------- ------- -------
Net income available for common stock $ 776 $ 1,999 $ 202 $ 476
======= ======= ======= =======
Per common share (dollars)
Basic net income $ 1.47 $ 3.85 $ .38 $ .91
Diluted net income $ 1.46 $ 3.75 $ .38 $ .90
Cash dividends paid $ 1.35 $ 1.30 $ .45 $ .45
Average shares outstanding for computation
of earnings per share (thousands)
Basic 529,433 519,553 525,836 520,003
Diluted 548,575 540,040 526,382 540,193
See accompanying notes to consolidated financial statements.
- 1 -
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
----------------------------------------------
(Millions of dollars)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
-------------
ASSETS
Current Assets
Cash and cash equivalents $ 250 $ 311
Short-term investments - at fair value 35 84
Accounts and notes receivable, less allowance for doubtful
accounts of $20 million in 1998 and $22 million in 1997 3,578 4,230
Inventories 1,269 1,483
Deferred income taxes and other current assets 262 324
------- -------
Total current assets 5,394 6,432
Investments and Advances 7,370 5,097
Properties, Plant and Equipment - at cost 35,340 38,956
Less - accumulated depreciation, depletion and amortization 20,499 21,840
------- -------
Net properties, plant and equipment 14,841 17,116
Deferred Charges 890 955
------- -------
Total $28,495 $29,600
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 899 $ 885
Accounts payable and accrued liabilities
Trade liabilities 2,023 2,669
Accrued liabilities 1,179 1,480
Estimated income and other taxes 918 960
------- -------
Total current liabilities 5,019 5,994
Long-Term Debt and Capital Lease Obligations 6,061 5,507
Deferred Income Taxes 1,779 1,825
Employee Retirement Benefits 1,209 1,224
Deferred Credits and Other Noncurrent Liabilities 1,459 1,639
Minority Interest in Subsidiary Companies 643 645
------- -------
Total 16,170 16,834
------- -------
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 435 457
Unearned employee compensation and benefit plan trust (369) (389)
Common stock (authorized: 700,000,000 shares, $3.125 par
value; 567,606,290 shares issued) 1,774 1,774
Paid-in capital in excess of par value 1,662 1,688
Retained earnings 10,057 9,987
Other accumulated nonowner changes in equity
Currency translation adjustment (107) (105)
Minimum pension liability adjustment (14) (16)
Unrealized net gain on investments 28 26
------- -------
Total other accumulated nonowner changes in equity (93) (95)
------- -------
13,766 13,722
Less - Common stock held in treasury, at cost 1,441 956
------- -------
Total stockholders' equity 12,325 12,766
------- -------
Total $28,495 $29,600
======= =======
See accompanying notes to consolidated financial statements.
-2-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------------
(Millions of dollars)
(Unaudited)
-----------------------
For the nine months
ended September 30,
-----------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income $ 816 $2,041
Reconciliation to net cash provided by (used in)
operating activities
Depreciation, depletion and amortization 1,172 1,145
Deferred income taxes (36) 196
Exploratory expenses 324 306
Minority interest in net income 43 54
Dividends from affiliates, less than
equity in income (30) (272)
Gains on asset sales (61) (295)
Changes in operating working capital (164) 15
Other - net 14 (144)
------ ------
Net cash provided by operating activities 2,078 3,046
INVESTING ACTIVITIES
Capital and exploratory expenditures (2,226) (2,506)
Proceeds from asset sales 130 756
Sales (purchases) of leasehold interests 25 (503)
Purchases of investment instruments (809) (910)
Sales/maturities of investment instruments 806 913
Payments from affiliate for prior years' capital
and other expenditures 612 --
Other - net -- (57)
------ ------
Net cash used in investing activities (1,462) (2,307)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 1,028 427
Repayments (493) (216)
Net increase (decrease) in other borrowings 166 (156)
Purchases of common stock (579) (74)
Dividends paid to the company's stockholders
Common (716) (676)
Preferred (31) (32)
Dividends paid to minority shareholders (45) (64)
------ ------
Net cash used in financing activities (670) (791)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (7) (8)
------ ------
Decrease during period (61) (60)
Beginning of year 311 511
------ ------
End of period $ 250 $ 451
====== ======
See accompanying notes to consolidated financial statements.
-3-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED NONOWNER CHANGES IN EQUITY
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
---------------------------------------------------------------
(Millions of dollars)
(Unaudited)
-----------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
NET INCOME $ 816 $2,041 $ 215 $ 490
Other nonowner changes in equity (net of tax)
Currency translation adjustment (2) (37) - (22)
Minimum pension liability adjustment 2 - - -
Unrealized net gain (loss) on investments 2 7 (5) 8
------ ------ ------ ------
2 (30) (5) (14)
------ ------ ------ ------
TOTAL NONOWNER CHANGES IN EQUITY $ 818 $2,011 $ 210 $ 476
====== ====== ====== ======
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Formation of Equilon Enterprises LLC
- --------------------------------------------
Effective January 1, 1998, Texaco and Shell Oil Company formed Equilon
Enterprises LLC (Equilon), a Delaware limited liability company. Equilon is a
joint venture that combined major elements of the companies' Western and
Midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. Texaco owns 44 percent and Shell owns
56 percent of Equilon. Further detail concerning Equilon was included in our
Current Report on Form 8-K, filed with the Commission on January 30, 1998.
We are accounting for our interest in Equilon using the equity method. Under
this method, we reclassified the net amount of assets and liabilities of the
businesses contributed to Equilon to Investments and Advances in the
Consolidated Balance Sheet. We record our share of Equilon's results of
operations on a one-line basis to Equity in Income of Affiliates in the
Consolidated Statement of Income. We record the provision for income taxes and
related liability applicable to our share of Equilon's income in our
consolidated financial statements, since Equilon is a limited liability
company. Additionally, we now record transactions between Texaco and Equilon
as outside third-party transactions. This change to the equity method of
accounting results in significant variances between the 1998 and 1997 periods
in the individual line captions appearing in the financial statements.
The carrying amounts at January 1, 1998, of the principal assets and
liabilities of the businesses we contributed to Equilon were $.2 billion
of net working capital assets, $2.8 billion of net properties, plant and
equipment and $.2 billion of debt.
In April, 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation
of the joint venture. In July 1998, we received $149 million from Equilon
for certain specifically identified assets transferred for value to Equilon.
Summarized unaudited financial information for Equilon, for the nine and
three month periods ended September 30, 1998, is presented below on a 100%
Equilon basis (in millions of dollars):
For the nine months For the three months
ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------
Gross revenues $18,195 $6,100
Income before income taxes $ 542 $ 232
- 4 -
Note 2. Formation of Motiva Enterprises LLC
- -------------------------------------------
Effective July 1, 1998, Texaco, Shell Oil Company and Saudi Aramco formed
Motiva Enterprises LLC (Motiva), a Delaware limited liability company.
Motiva is a joint venture that combined Texaco's and Saudi Aramco's
interests and major elements of Shell's Eastern and Gulf Coast U.S.
refining and marketing businesses. Texaco's and Saudi Aramco's interest
in these businesses were previously conducted by Star Enterprise (Star),
a joint-venture partnership owned 50 percent by Texaco and 50 percent by
Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Texaco and
Saudi Refining, Inc., each owns 32.5 percent and Shell owns 35 percent of
Motiva. Further detail concerning Motiva was included in our Current
Report on Form 8-K, filed with the Commission on July 1, 1998.
Beginning July 1, 1998, we are accounting for our interest in Motiva using
the equity method. Previously, our interest in Star was also accounted for
on the equity method of accounting. Accordingly, our investment in Motiva
approximates our previous investment in Star. We record the provision for
income taxes and related liability applicable to our share of Motiva's income
in our consolidated financial statements, since Motiva is a limited liability
company.
Gross revenues and income before income taxes for the first three months
of Motiva's operations (July 1, 1998 through September 30, 1998), on a
100% unaudited basis, were $2,877 million and $59 million, respectively.
Note 3. Inventories
- -------------------
The inventory accounts of Texaco Inc. and consolidated subsidiary companies
are presented below (in millions of dollars):
As of
---------------------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
Crude oil $ 216 $ 308
Petroleum products and petrochemicals 828 893
Other merchandise 35 59
Materials and supplies 190 223
------ ------
Total $1,269 $1,483
====== ======
Note 4. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 16 and 18, pages 57-58 and 61,
respectively, of Texaco Inc.'s 1997 Annual Report to Stockholders.
-------------------
In the company's opinion, while it is impossible to ascertain the ultimate
legal and financial liability with respect to contingent liabilities and
commitments, the aggregate amount of such liability in excess of financial
reserves is not anticipated to be materially important in relation to the
consolidated financial position or results of operations of Texaco.
- 5 -
Note 5. Caltex Group of Companies
- ---------------------------------
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% by Texaco and 50% by Chevron Corporation, is presented below on a 100%
Caltex Group basis (in millions of dollars):
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Gross revenues $12,407 $13,217 $3,852 $4,090
Income before income taxes $ 606 $ 859 $ 17 $ 220
Net income (loss) $ 367 $ 556 $ (59) $ 170
* * * * * * * * * * *
In the determination of preliminary and unaudited financial statements for the
nine-month and three-month periods ended September 30, 1998 and 1997, our
accounting policies have been applied on a basis consistent with the
application of such policies in our financial statements issued in our 1997
Annual Report to Stockholders. In our opinion, we have made all adjustments
and disclosures necessary to present fairly our results of operations for
such periods. These adjustments include normal recurring adjustments. The
information is subject to year-end audit by independent public accountants.
We make no forecasts or representations with respect to the level of net
income for the year 1998.
* * * * * * * * * * *
SUPPLEMENTAL MARKET RISK DISCLOSURES
------------------------------------
Information relative to Texaco's market risk sensitive instruments by major
category at December 31, 1997 is presented in the Supplemental Market Risk
Disclosures on pages 69 and 70 of Texaco Inc.'s 1997 Annual Report to
Stockholders.
Texaco's forward exchange contracts outstanding at September 30, 1998 of
approximately $2,172 million net buy contracts increased by $933 million from
the $1,239 million outstanding at December 31, 1997. This increase principally
resulted from the hedging of increased exposures to foreign currency
denominated net monetary assets and liabilities and from the hedging of
increased exposures related to foreign currency denominated capital
projects. As of September 30, 1998, a hypothetical 10% change in currency
exchange rates would generate an increase or decrease in fair value of
approximately $217 million, compared to $124 million at December 31, 1997.
This would be offset by an opposite effect on the related hedged exposures.
- 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Our net income for the third quarter of 1998 was $215 million, or $0.38 per
share, as compared with $490 million, or $0.90 per share, for the third quarter
of 1997. Net income for the first nine months of 1998 was $816 million, or
$1.46 per share, as compared with $2,041 million, or $3.75 per share, for
the first nine months of 1997.
Net income before special items for the third quarter of 1998 was $208 million,
or $0.37 per share. There were no special items in the third quarter of 1997.
For the first nine months of 1998, net income before special items was $802
million, or $1.43 per share, as compared with $1,422 million, or $2.60 per
share, for the first nine months of 1997.
Weak worldwide crude oil and natural gas prices and depressed downstream
margins in the Far East eroded third quarter earnings. Worldwide production
growth of nine percent and tight control over cash expenses helped to
lessen these negative impacts.
During the third quarter of 1998:
o Average quarterly crude oil prices slumped to their lowest levels
since 1986;
o Continued economic instability in the Far East depressed
downstream margins;
o Worldwide daily production rose nine percent for
the quarter and 12 percent for nine months; and
o Year-to-date cash operating expenses per barrel decreased six
percent.
Average crude oil prices for the quarter reached a low point not seen since
mid-1986. OPEC efforts to reduce production and lower inventory levels caused
crude prices to rebound somewhat from their summer lows; however, prices have
recently retreated and remain significantly below last year's levels. Storms
in the Gulf of Mexico caused temporary production shut-ins which further
dampened earnings.
Our worldwide downstream results decreased from sluggish margins, especially in
the Far East, due to the impact of the Asian financial and economic crisis. As
a result, Singapore refinery margins were negative in the third quarter
from extremely weak demand. In the U.S., results were down from an extremely
strong quarter last year; however, in Latin America and Europe, margins
and sales volumes remained strong.
To remain competitive in this environment, our affiliate, Caltex, announced a
reorganization program. This program will focus the organization functionally
and better position Caltex to identify growth opportunities. When fully
implemented, it is expected to yield expense savings in excess of $50 million
annually. Also, our U.S. alliances with Shell Oil Company and Saudi Refining,
Inc. continue to implement programs that will take advantage of existing
synergies.
Results for 1998 and 1997 are summarized in the following table. Details on
special items are included in the functional analysis which follows this table.
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of Dollars)
Net income before special items $ 802 $1,422 $ 208 $ 490
------ ------ ------ -----
Caltex reorganization (43) - (43) -
U.S. alliance formation issues (7) - 25 -
U.S. tax issues 25 488 25 -
Gains on major asset sales 20 174 - -
Tax benefits on asset sales 19 - - -
Financial reserves for various issues - (43) - -
------ ------ ------ -----
14 619 7 -
------ ------ ------ -----
Total net income $ 816 $2,041 $ 215 $ 490
====== ====== ====== =====
- 7 -
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the third quarter of 1998
were $92 million, as compared with $232 million for the third quarter of 1997.
For the first nine months of 1998 and 1997, earnings were $319 million and $732
million, respectively. Results for 1998 included a second quarter special gain
of $20 million from the sale of an interest in a natural gas pipeline.
Excluding the special gain, results for the first nine months of 1998
totaled $299 million. Results for 1997 included a second quarter special
charge of $43 million to establish financial reserves for royalty and
severance tax issues. Excluding the special charge, results for the first
nine months of 1997 totaled $775 million.
U.S. exploration and production earnings for the third quarter and nine months
of 1998 were below last year's levels due to lower crude oil and natural gas
prices. Average realized crude oil prices for the third quarter and nine
months of 1998 were $10.06 and $10.87 per barrel; 39 percent lower than
the 1997 periods. The dramatic price declines reflect a slowing in
worldwide demand growth and continued high inventory levels. Crude oil
prices recovered somewhat in late September as a result of the OPEC nations'
efforts to cut production. For the third quarter and nine months of 1998,
average natural gas prices were $1.89 and $2.03 per MCF; 11 percent lower
than the 1997 periods. Lower natural gas prices were the result of excess
supply in the marketplace.
Production increased four percent for this year's third quarter and nine
percent for the year. The increased production in the quarter included new
production from the Arnold, Oyster and Barite South fields located in the
Gulf of Mexico. Both production and earnings were negatively impacted by
the recent storms in the Gulf of Mexico. This year included production from
the Monterey properties acquired in November 1997.
We continued to pursue new reserve opportunities in the Gulf of Mexico,
leading to higher exploration expenses this year. Exploration expenses
for the nine months of 1998 were $195 million before tax, $73 million
higher than the same period of 1997. For the third quarter of 1998,
exploration expenses were $48 million, $2 million higher than the third
quarter of 1997.
International
Exploration and production earnings outside the U.S. for the third quarter of
1998 were $40 million, as compared with $103 million for the third quarter of
1997. For the first nine months of 1998 and 1997, earnings were $131 million
and $499 million, respectively. Results for 1997 included second quarter
special gains of $161 million from the sales of a 15 percent interest in
the Captain Field in the U.K. North Sea, an interest in Canadian gas
properties and an interest in an Australian pipeline system. Excluding the
special gains, results for the first nine months of 1997 totaled $338 million.
International exploration and production earnings for the third quarter and
nine months of 1998 declined significantly from the same periods of 1997 due
to lower crude oil prices. Average realized crude oil prices in 1998 were
$11.05 per barrel for the quarter and $11.55 for nine months. These average
prices were 35 percent below 1997 levels. OPEC's efforts to reduce
production and lower inventory levels caused prices to recover slightly
from their summer lows; however, prices have recently retreated and remain
substantially below last year's levels.
Daily production growth of 15 percent for this year's third quarter and
16 percent for the year benefited earnings. The combined production from
the Captain, Erskine and Galley fields in the U.K. North Sea grew to 95
thousand barrels of oil equivalent per day in the third quarter. Production
also grew in the Partitioned Neutral Zone, Indonesia and Colombia.
- 8 -
Exploration and production operating results outside the U.S. for the third
quarter and nine months of 1998 included non-cash currency charges of
$3 million and $6 million, respectively, related to deferred income taxes
denominated in British Pound Sterling. This compares to benefits of $13
million for the third quarter and $26 million for nine months of 1997.
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the
third quarter of 1998 were $124 million, as compared with $132 million for
the third quarter of 1997. For the first nine months of 1998 and 1997,
earnings were $235 million and $238 million, respectively. Results for
1998 included a third quarter net special gain of $25 million associated
with the formation of the U.S. alliances. This net gain included gains on
asset sales, asset writedowns and other formation charges. The second
quarter of 1998 included a special charge of $32 million for alliance
formation expenses, primarily employee severance programs. Excluding these
special items, results for the third quarter and first nine months of 1998
totaled $99 million and $242 million, respectively. Results for 1997
included a second quarter special gain of $13 million from the sale of credit
card operations. Excluding the special gain, results for the first nine
months of 1997 totaled $225 million.
U.S. manufacturing, marketing and distribution earnings for the third quarter
of 1998 included results from Motiva Enterprises LLC, our Eastern alliance
with Shell Oil Company and Saudi Refining, Inc., that began operations in
July. In addition, the quarter and year included operating results
from Equilon Enterprises LLC, our Western alliance with Shell Oil
Company, that began operations in the first quarter.
Results for the third quarter of 1998 reflected the industry trend of
shrinking refining margins. Operating difficulties at certain refineries and
the temporary shutdown of Gulf Coast refineries in September due to
hurricane Georges negatively impacted earnings. Lower crude costs as well as
strong transportation and lubricants earnings benefited the quarter and year.
Results for the third quarter of 1997 included minimum refinery downtime
and solid West Coast margins. Both the quarter and year included strong Gulf
Coast refining margins. However, refinery fires in late 1996 and early 1997
negatively affected product yields and caused casualty loss expense in the
first quarter. Additionally, West Coast margins were weak during the first
half of the year due to intense competitive pressures.
International
Manufacturing, marketing and distribution earnings outside the U.S. for
the third quarter of 1998 were $38 million, as compared with $134 million
for the third quarter of 1997. For the first nine months of 1998 and 1997,
earnings were $414 million and $370 million, respectively. Results for 1998
included a third quarter net special charge of $43 million for a
reorganization program in our affiliate, Caltex. Excluding the special
charge, results for the third quarter and first nine months of 1998
totaled $81 million and $457 million, respectively.
International manufacturing and marketing earnings for the third quarter of
1998 declined significantly from 1997. The sharp decline was due to the
Asian financial and economic crisis which weakened demand and created
currency volatility. Caltex experienced a loss as a result of
declining margins throughout the region from weak inland demand that caused
higher volumes to be sold into the lower margin export markets. Singapore
refinery margins were negative from extremely weak demand. However, in Latin
America and Europe, third quarter earnings were up slightly.
Nine months 1998 results increased due to improved manufacturing and marketing
results from higher margins and volumes, mainly in the U.K., Caribbean and
Central America.
- 9 -
Manufacturing, marketing and distribution operating results outside the U.S.
for the third quarter and nine months of 1998 included non-cash currency
charges of $3 million and $5 million, respectively, related to deferred
income taxes denominated in British Pound Sterling. This compares to
benefits of $4 million for the third quarter and $8 million for nine months of
1997.
NONPETROLEUM
Nonpetroleum earnings for the third quarter of 1998 were $4 million, as
compared with $3 million for the third quarter of 1997. For the first nine
months of 1998 and 1997, earnings were $4 million and $16 million,
respectively.
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the third quarter of 1998 were $83
million, as compared with charges of $114 million for the third quarter of
1997. Corporate and nonoperating charges for the first nine months of 1998
were $287 million, as compared with earnings of $186 million for the first
nine months of 1997. Results for 1998 included a third quarter special
benefit of $25 million to adjust prior year's tax liability and a second
quarter special tax benefit of $19 million attributable to the sale of an
interest in a subsidiary. Excluding the special benefits, charges for the
third quarter and first nine months of 1998 totaled $108 million and $331
million, respectively. Results for the first nine months of 1997 included a
first quarter special benefit of $488 million associated with an IRS
settlement. Excluding this benefit, corporate and nonoperating charges
totaled $302 million for the first nine months of 1997.
Corporate and nonoperating results for the third quarter and nine months of
1998 included increased net interest expense from higher debt levels;
however, successful efforts to control expenses in overhead departments
more than mitigated this impact. Results for nine months of 1998 included
higher expenses for Texaco's corporate advertising campaign introduced in
the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $285 million
at September 30, 1998, as compared with $395 million at year-end 1997.
During 1998, our operations provided cash of $2,078 million. We raised
an additional $701 million from net borrowings and $130 million from asset
sales. We spent $2,226 million on our capital and exploratory program and
paid $792 million in dividends to common, preferred and minority shareholders.
At September 30, 1998, our ratio of debt to total borrowed and invested
capital was 34.9%, as compared with 32.3% at year-end 1997. At September 30,
1998, our long-term debt included $1.7 billion of debt scheduled to mature
within one year, which we have both the intent and ability to refinance on
a long-term basis. At September 30, 1998, we maintained $1.7 billion in
revolving credit facilities, which were unused at quarter end. On
November 9, 1998, we increased the amount of the commitments to $2.05 billion,
which also remained unused.
Our major debt activity during the first nine months of 1998 was as follows. We:
o borrowed $300 million at 6% for seven years and issued $153 million of
Medium-Term Notes.
o borrowed $150 million at 5.92% for seven years to cover expenditures at our
Erskine field in the U.K. North Sea.
o borrowed $131 million for four years and entered into an associated
LIBOR-based floating rate swap associated with existing assets of our Tartan
Field in the U.K. North Sea.
o borrowed $94 million from the issuance of Zero Coupon Notes due 2005.
- 10 -
o increased the amount of our commercial paper by $300 million, to a total of
$1.2 billion at September 30, 1998.
o repurchased approximately $200 million of 10.61% Notes that we assumed in
last year's acquisition of Monterey Resources.
During the first quarter of 1998, we purchased about $125 million of common
stock in the open market. This completed a two-year program under which we
purchased $650 million of our common stock. On March 30, 1998, we announced that
we will purchase up to an additional $1 billion of our common stock, subject to
market conditions, through open market purchases or privately negotiated
transactions. Under the current program, we purchased about $450 million during
the first nine months of 1998.
In April 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
Equilon. In addition, we received $149 million from Equilon in July 1998 for
certain specifically identified assets transferred for value to Equilon.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires that we report
information about our business segments on the same basis used internally when
assessing performance and allocating resources. We will adopt SFAS 131 for our
1998 audited financial statements. Presently, we disclose in our audited
financial statements information about geographic segments only. We expect that
our business segments will be substantially similar to those we presently
identify in the Management's Discussion and Analysis section of our Forms 10-K
and 10-Q.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure about Pension
and Other Postretirement Benefits." We are required to adopt SFAS 132 for our
1998 audited financial statements and will modify our disclosures accordingly.
SFAS 132 does not affect how we measure expense for pension or other
postretirement benefits.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective in the first quarter 2000. SFAS 133
establishes new accounting rules and disclosure requirements for derivative
instruments. We are assessing the impacts of SFAS 133 on the balance sheet and
on net income.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Our capital and exploratory expenditures for the first nine months of 1998 and
1997 were $2,769 million and $3,023 million, respectively.
In the U.S., our exploration and development expenditures slowed during the
third quarter, but were flat for the year. Activities continued to reflect our
focus in both the traditional shelf and deepwater areas of the Gulf of Mexico.
Using advanced technologies, we continue to grow oil and gas production and
reserves.
Internationally, our expenditures decreased following the completion of several
large projects in both the U.K. and Danish sectors of the North Sea. Development
activity in Indonesia, the North Sea and other promising areas continued while
exploratory spending decreased in China and other Far Eastern areas. Upstream
expenditures in discovered reserve opportunities also continued in promising
areas, including the Karachaganak venture in Kazakhstan.
- 11 -
Lower international downstream expenditures reflected a decrease in the Caltex
marketing areas from higher 1997 service station investments in Hong Kong and
slower re-imaging spending in Caltex areas and Europe. These decreases were
partly offset by higher marketing and manufacturing expenditures in our newly
formed U.S. alliances.
We continue to carefully assess investment projects given the current and
projected industry environment. Adjustments in spending have been made by
deferring non-critical projects into future periods. It is expected that our
capital and exploratory expenditures for the year 1998 will be about 20 percent
less than the $4.6 billion that we had budgeted for the year.
YEAR 2000
- ---------
The Year 2000 ("Y2K") problem concerns the inability of information and
technology-based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. This could result in
systems failures and miscalculations, which could cause business disruptions.
Equipment that uses a date, such as computers and operating control systems, may
be affected. This includes equipment used by our customers and suppliers, as
well as by utilities and governmental entities that provide critical services to
us.
At Texaco, we started working on the Y2K problem in early 1995. By early 1996,
we formed a Business Unit Steering Team and a Corporate Year 2000 Office. Our
progress is reported monthly to the CEO, and quarterly to the Board of
Directors. Additionally, we are actively performing both internal audits and
external reviews to ensure that we reach our objectives. We project that we will
spend no more than $75 million on making our systems Y2K ready. As of September
30, 1998, we have incurred costs of approximately $35 million.
We recognize that the Y2K issue affects every aspect of our business, including
computer software, computer hardware, telecommunications, and industrial
automation. Our Y2K effort has included an extensive program to educate our
employees, and development of detailed guidelines for project management,
testing, and remediation. Each business unit is periodically graded on their
progress toward reaching their project milestones. Our major affiliates are
undertaking similar programs.
In our computers and computer software, most of the problems we have found
involve our corporate financial software applications. Approximately 95% of
these need some type of modification or upgrade. In our industrial automation
systems, which are used in our refinery, lubricant plant, gas plant and oil well
operations to monitor, control and log data about the processes, approximately
5% need modification or upgrade. The majority of these are auxiliary systems,
such as laboratory analyzers and alarm logging functions, but several of the
higher level supervisory data acquisition systems and flow metering systems also
require upgrades. We project that we will be approximately 80% through the
effort of inventorying, assessing and fixing our systems by the end of 1998.
Almost all systems should be ready by the end of the first quarter of 1999, but
a few will be delayed until later in 1999 as we wait for vendor upgrades.
We are well into our program to identify and assess the Y2K readiness of our
critical and important suppliers and customers. We will either seek alternative
suppliers and customers for those we assess as risky, or we will develop and
test contingency plans. We have begun to develop these contingency plans. In
addition, we are reviewing our existing business resumption plans. We expect to
arrange alternative suppliers or develop and complete the testing of contingency
plans no later than July 1, 1999.
All of our production and automation systems are routinely analyzed for
potential failures and appropriate responses are identified and documented. If
we have missed a potential Y2K problem, it will most likely be in our financial
software, or in auxiliary systems in our operations, such as laboratory
analyzers and alarm logging functions, where we have found the majority of the
problems. We do not anticipate that a problem in these areas will have a
significant impact on our ability to pursue our primary business objectives. Any
problems in our primary industrial automation systems can be dealt with using
our existing engineering procedures. While there can be no assurance that all
such modifications and plans will be successful, including contingency plans for
our major suppliers and customers, we do not expect that any disruptions will
have a material adverse effect on our overall financial position or results of
operations.
- 12 -
EURO
- ----
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency - the euro. The euro
will begin to be traded on world currency exchanges and may be used in business
transactions. On January 1, 2002, new euro-denominated bills and coins will be
issued, and legacy currencies will be completely withdrawn from circulation by
June 30 of that year.
Our operating subsidiaries affected by the euro conversion have been actively
addressing our IT systems and overall fiscal and operational activities to
ensure our euro readiness. We are adapting our computer, financial and operating
systems and equipment to accommodate euro-denominated transactions. We are also
reviewing our marketing and operational policies and procedures to ensure our
ability to continue to successfully conduct all aspects of our business in this
new, price transparent market. We believe that the euro conversion will not have
a material adverse impact on our financial condition or results of operations.
WORLDWIDE UPSTREAM REORGANIZATION
- ---------------------------------
On November 12, 1998, we announced a worldwide upstream reorganization designed
to place greater emphasis on our long-term production and reserve growth, and to
address the need for streamlining costs and improving competitiveness in the
current low oil price environment. The reorganization is expected to result in
the reduction of approximately 1,000 employees and contractors worldwide and to
be completed by the end of the first quarter of next year.
* * * * * * *
FORWARD-LOOKING STATEMENTS
- --------------------------
Portions of the foregoing discussion of YEAR 2000, the EURO and WORLDWIDE
UPSTREAM REORGANIZATION contain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are based on our current expectations,
estimates and projections. Therefore, they could ultimately prove to be
inaccurate. Factors which could affect our ability to be Y2K compliant by the
end of 1999 include: the failure of customers, suppliers, governmental entities
and others to achieve compliance and the inaccuracy of certifications received
from them; our inability to identify and remediate every possible problem; a
shortage of necessary programmers, hardware and software; and, similar
circumstances. Factors which could alter the financial impact of our euro
conversion include changes in current governmental regulations (and
interpretations of such regulations), unanticipated implementation costs, and
the effect of the euro conversion on product prices and margins. The extent and
timing of the upstream reorganization will depend upon worldwide and industry
economic conditions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 4 to the
Consolidated Financial Statements of this Form 10-Q, Item 1 of Texaco Inc.'s
Forms 10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998 and
to Item 3 of Texaco Inc.'s 1997 Annual Report on Form 10-K, which are
incorporated herein by reference.
- 13 -
Item 5. Other Information
- -------------------------
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of dollars)
FUNCTIONAL NET INCOME
- ---------------------
Operating earnings
Petroleum and natural gas
Exploration and production
United States $ 319 $ 732 $ 92 $ 232
International 131 499 40 103
------ ------ ------ ------
Total 450 1,231 132 335
------ ------ ------ ------
Manufacturing, marketing and distribution
United States 235 238 124 132
International 414 370 38 134
------ ------ ------ ------
Total 649 608 162 266
------ ------ ------ ------
Total petroleum and natural gas 1,099 1,839 294 601
Nonpetroleum 4 16 4 3
------ ------ ------ ------
Total operating earnings 1,103 1,855 298 604
Corporate/Nonoperating (287) 186 (83) (114)
------ ------ ------ ------
Total net income $ 816 $2,041 $ 215 $ 490
====== ====== ====== ======
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Exploration and production
United States $1,251 $1,272 $ 352 $ 491
International 834 990 283 444
------ ------ ------ ------
Total 2,085 2,262 635 935
------ ------ ------ ------
Manufacturing, marketing and distribution
United States 303 246 120 94
International 358 486 130 178
------ ------ ------ ------
Total 661 732 250 272
------ ------ ------ ------
Other 23 29 3 18
------ ------ ------ ------
Total $2,769 $3,023 $ 888 $1,225
====== ====== ====== ======
Exploratory expenses included above:
United States $ 195 $ 122 $ 48 $ 46
International 129 184 45 68
------ ------ ------ ------
Total $ 324 $ 306 $ 93 $ 114
====== ====== ====== ======
- 14 -
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
Exploration and Production
- --------------------------
United States
- -------------
Net production of crude oil and natural
gas liquids (000 BPD) 443 387 432 391
Net production of natural gas - available
for sale (000 MCFPD) 1,694 1,686 1,641 1,722
Total net production (000 BOEPD) 726 668 706 678
Natural gas sales (000 MCFPD) 3,926 3,570 3,963 3,312
Average U.S. crude (per bbl) $10.87 $17.71 $10.06 $16.56
Average U.S. natural gas (per mcf) $ 2.03 $ 2.28 $ 1.89 $ 2.13
Average WTI (Spot) (per bbl) $14.89 $20.83 $14.16 $19.78
Average Kern (Spot) (per bbl) $ 8.43 $14.81 $ 8.65 $14.30
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 157 116 163 118
Indonesia 159 148 168 150
Partitioned Neutral Zone 106 94 104 97
Other 66 67 59 64
------ ------ ------ ------
Total 488 425 494 429
Net production of natural gas - available
for sale (000 MCFPD)
Europe 255 197 261 176
Colombia 185 168 165 190
Other 108 88 87 79
------ ------ ------ ------
Total 548 453 513 445
Total net production (000 BOEPD) 579 501 580 503
Natural gas sales (000 MCFPD) 692 562 633 536
Average International crude (per bbl) $11.55 $17.79 $11.05 $16.88
Average U.K. natural gas (per mcf) $ 2.53 $ 2.68 $ 2.34 $ 2.55
Average Colombia natural gas (per mcf) $ 0.88 $ 1.04 $ 0.79 $ 0.95
Worldwide
- ---------
Total net production (000 BOEPD) 1,305 1,169 1,286 1,181
- 15 -
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
Refinery input (000 BPD)
Western U.S. 388 415 410 420
Eastern U.S. 316 334 301 339
----- ----- ----- -----
Total 704 749 711 759
Refined product sales (000 BPD)
Western U.S. 597 492 643 512
Eastern U.S. 387 323 486 327
Other Operations 228 205 216 222
----- ----- ----- -----
Total 1,212 1,020 1,345 1,061
International
- -------------
Refinery input (000 BPD)
Europe 356 337 326 329
Caltex 417 400 397 379
Latin America/West Africa 64 59 66 60
----- ----- ----- -----
Total 837 796 789 768
Refined product sales (000 BPD)
Europe 567 496 547 508
Caltex 580 564 563 545
Latin America/West Africa 455 408 474 440
Other 53 62 56 66
----- ----- ----- -----
Total 1,655 1,530 1,640 1,559
- 16 -
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (11) Computation of Earnings Per Share of Common Stock.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on
a Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (including portions of Texaco
Inc.'s Annual Report to Stockholders for the year 1997) and a
copy of Texaco Inc.'s Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1998 and June 30, 1998, as
previously filed by the Registrant with the Securities and
Exchange Commission, File No. 1-27.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K:
During the third quarter of 1998, the Registrant filed Current Reports on
Form 8-K for the following events:
1. July 1, 1998 (date of earliest event reported: July 1, 1998)
Item 5. Other Events -- reported that Texaco, Saudi Aramco and Shell
Oil Company reached agreement on the formation and operational
start-up, effective July 1, 1998, of Motiva Enterprises LLC.
2. July 21, 1998 (date of earliest event reported: July 21, 1998)
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the second quarter of 1998.
3. September 3, 1998 (date of earliest event reported: September 3, 1998)
Item 5. Other Events -- reported that Texaco and Shell Oil Company
signed a non-binding memorandum of understanding with the intention of
forming an alliance for their European oil products marketing and
manufacturing activities.
- 17 -
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.
Texaco Inc.
-------------------------------
(Registrant)
By: R.C. Oelkers
-------------------------------
(Vice President and Comptroller)
By: R.E. Koch
-------------------------------
(Assistant Secretary)
Date: November 12, 1998
-----------------
- 18 -
EXHIBIT 11
TEXACO INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
---------------------------------------------------------------
(millions of dollars, except as noted)
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Basic Net Income Per Common Share:
- ----------------------------------
Net income less preferred stock dividend requirements $ 776 $ 1,999 $ 202 $ 476
======= ======= ======= =======
Average shares outstanding (thousands) 529,433 519,553 525,836 520,003
======= ======= ======= =======
Basic net income per share (dollars) $ 1.47 $ 3.85 $ 0.38 $ 0.91
======= ======= ======= =======
Diluted Net Income Per Common Share:
- ------------------------------------
Net income less preferred stock dividend requirements $ 776 $ 1,999 $ 202 $ 476
Adjustments, mainly ESOP preferred stock dividends (a) 25 26 - 8
------- ------- ------- -------
Net income for diluted net income per share $ 801 $ 2,025 $ 202 $ 484
======= ======= ======= =======
Average shares outstanding (thousands) 529,433 519,553 525,836 520,003
Adjustments, mainly ESOP preferred stock (a) 19,142 20,487 546 20,190
------- ------- ------- -------
Shares outstanding for diluted computation (thousands) 548,575 540,040 526,382 540,193
======= ======= ======= =======
Diluted net income per share (dollars) $ 1.46 $ 3.75 $ 0.38 $ 0.90
======= ======= ======= =======
(a) For the three months ended September 30, 1998, ESOP preferred stock had an
anti-dilutive effect and, therefore, is excluded from the computation of
diluted earnings per share .
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
OF TEXACO ON A TOTAL ENTERPRISE BASIS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1997
--------------------------------------------------
(Millions of dollars)
For the Nine Years Ended December 31,
Months Ended -------------------------------------------
September 30, 1998 1997 1996 1995 1994(a) 1993(a)
------------------ ---- ---- ---- ------- -------
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-95..................... $1,178 $3,514 $3,450 $1,201 $1,409 $1,392
Dividends from less than 50% owned companies
more or (less) than equity in net income................ (3) (11) (4) 1 (1) (8)
Minority interest in net income............................ 43 68 72 54 44 17
Previously capitalized interest charged to
income during the period................................ 12 25 27 33 29 33
------ ------ ------ ------ ------ ------
Total earnings..................................... 1,230 3,596 3,545 1,289 1,481 1,434
------ ------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges...................................... 490 528 551 614 594 546
Interest factor attributable to operating
lease rentals.................................... 68 112 129 110 118 91
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc......................... 26 33 35 36 31 4
------ ------ ------ ------ ------ ------
Total items charged to income...................... 584 673 715 760 743 641
Interest capitalized.................................... 18 27 16 28 21 57
Interest on ESOP debt guaranteed by Texaco Inc.......... 3 7 10 14 14 14
------ ------ ------ ------ ------ ------
Total fixed charges................................ 605 707 741 802 778 712
------ ------ ------ ------ ------ ------
Earnings available for payment of fixed charges............ $1,814 $4,269 $4,260 $2,049 $2,224 $2,075
(Total earnings + Total items charged to income) ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges of Texaco
on a total enterprise basis............................. 3.00 6.04 5.75 2.55 2.86 2.91
====== ====== ====== ====== ====== ======
(a) Excludes discontinued operations.
5
1,000,000
9-MOS
DEC-31-1998
JAN-1-1998
SEP-30-1998
250
35
3,598
20
1,269
5,394
35,340
20,499
28,495
5,019
6,061
0
656
1,705
9,964
28,495
23,132
23,898
17,922
19,740
2,729
0
355
1,074
258
816
0
0
0
816
1.47
1.46
