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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 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
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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 31, 1997, there were outstanding 529,018,839 shares of Texaco
Inc. Common Stock - par value $3.125.
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<PAGE>
PART I - FINANCIAL INFORMATION
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
---------------------------------------------------------------
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales and services $33,630 $31,777 $10,834 $10,901
Equity in income of affiliates, interest,
asset sales and other 988 852 259 196
------- ------- ------- -------
34,618 32,629 11,093 11,097
------- ------- ------- -------
DEDUCTIONS
Purchases and other costs 26,324 24,526 8,355 8,399
Operating expenses 2,184 2,105 740 721
Selling, general and administrative expenses 1,219 1,205 427 406
Maintenance and repairs 260 266 89 88
Exploratory expenses 306 243 114 84
Depreciation, depletion and amortization 1,145 1,068 388 364
Interest expense 309 328 106 107
Taxes other than income taxes 365 361 97 129
Minority interest 54 50 17 17
------- ------- ------- -------
32,166 30,152 10,333 10,315
------- ------- ------- -------
Income before income taxes 2,452 2,477 760 782
Provision for income taxes 411 968 270 348
------- ------- ------- -------
NET INCOME $ 2,041 $ 1,509 $ 490 $ 434
======= ======= ====== =======
Preferred stock dividend requirements $ (42) $ (43) $ (14) $ (14)
------- ------- ------- -------
Net income available for common stock $ 1,999 $ 1,466 $ 476 $ 420
======= ======= ====== =======
Per common share (dollars)(a)
Net income $ 3.84 $ 2.81 $ .91 $ .80
Cash dividends paid $ 1.30 $ 1.225 $ .45 $ .425
Average number of common shares outstanding
for computation of earnings per share
(thousands) (a) 520,356 521,451 520,745 521,515
<FN>
(a) Reflects two-for-one stock split, effective September 29, 1997.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 1 -
<PAGE>
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
----------------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
-----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 451 $ 511
Short-term investments - at fair value 48 41
Accounts and notes receivable, less allowance for doubtful
accounts of $22 million in 1997 and $34 million in 1996 3,999 5,195
Inventories 1,537 1,460
Deferred income taxes and other current assets 283 458
------- -------
Total current assets 6,318 7,665
Investments and Advances 5,439 4,996
Properties, Plant and Equipment - at cost 35,291 33,988
Less - accumulated depreciation, depletion and amortization 21,198 20,577
------- -------
Net properties, plant and equipment 14,093 13,411
Deferred Charges 965 891
------- -------
Total $26,815 $26,963
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 521 $ 465
Accounts payable and accrued liabilities
Trade liabilities 2,527 3,472
Accrued liabilities 1,291 1,333
Estimated income and other taxes 1,205 914
------- -------
Total current liabilities 5,544 6,184
Long-Term Debt and Capital Lease Obligations 5,116 5,125
Deferred Income Taxes 808 795
Employee Retirement Benefits 1,208 1,236
Deferred Credits and Other Noncurrent Liabilities 1,873 2,593
Minority Interest in Subsidiary Companies 649 658
------- -------
Total 15,198 16,591
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 459 474
Unearned employee compensation and benefit plan trust (376) (378)
Common stock (authorized: 700,000,000 shares, $3.125 par
value; 548,586,834 shares issued - See Note 5) 1,714 1,714
Paid-in capital in excess of par value 616 630
Retained earnings 9,628 8,292
Currency translation adjustment (102) (65)
Unrealized net gain on investments 40 33
------- -------
12,279 11,000
Less - Common stock held in treasury, at cost 662 628
------- -------
Total stockholders' equity 11,617 10,372
------- -------
Total $26,815 $26,963
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Millions of dollars)
<TABLE>
<CAPTION>
(Unaudited)
-----------------------
For the nine months
ended September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $2,041 $1,509
Reconciliation to net cash provided by (used in)
operating activities
Depreciation, depletion and amortization 1,145 1,068
Deferred income taxes 196 108
Exploratory expenses 306 243
Minority interest in net income 54 50
Dividends from affiliates, greater than (less than)
equity in income (272) 141
Gains on asset sales (295) (49)
Changes in operating working capital 15 36
Other - net (144) (55)
------ ------
Net cash provided by operating activities 3,046 3,051
INVESTING ACTIVITIES
Capital and exploratory expenditures (2,506) (2,001)
Proceeds from sale of discontinued operations, net of
cash and cash equivalents sold -- 344
Proceeds from sales of assets 756 99
Sales (purchases) of leasehold interests (503) 231
Purchases of investment instruments (910) (1,390)
Sales/maturities of investment instruments 913 1,436
Other - net (57) 21
------ ------
Net cash used in investing activities (2,307) (1,260)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 427 125
Repayments (216) (250)
Net decrease in other borrowings (156) (481)
Purchases of common stock (74) (59)
Dividends paid to the company's stockholders
Common (676) (638)
Preferred (32) (34)
Dividends paid to minority shareholders (64) (49)
------ ------
Net cash used in financing activities (791) (1,386)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (8) (3)
------ ------
Increase (decrease) during period (60) 402
Beginning of year 511 501
------ ------
End of period $ 451 $ 903
====== ======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Discontinued Operations
- -------------------------------
On February 29, 1996, Texaco completed the disposition of its operations
classified as discontinued operations by completing the sale of its worldwide
lubricant additives business to Ethyl Corporation for $136 million in cash and a
three-year note with a face amount of $60 million.
Revenues for the discontinued operations totaled $33 million for the first two
months of 1996, representing activities through the sale date.
Discontinued operations had no significant impact on the 1996 results.
Note 2. Inventories
- -------------------
The inventories of Texaco Inc. and consolidated subsidiary companies were as
follows:
<TABLE>
<CAPTION>
As of
---------------------------------------
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
(Millions of dollars)
<S> <C> <C>
Crude oil $ 378 $ 296
Petroleum products and petrochemicals 891 904
Other merchandise 46 58
Materials and supplies 222 202
------ ------
Total $1,537 $1,460
====== ======
</TABLE>
Note 3. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 14 and 16, pages 63-64 and 67,
respectively, of Texaco Inc.'s 1996 Annual Report to Stockholders.
With respect to the U.S. Internal Revenue Service (IRS) claims discussed in Note
16, page 67, of Texaco Inc.'s 1996 Annual Report to Stockholders, on April 21,
1997, the U.S. Supreme Court decided not to review the decisions of the U.S.
Court of Appeals for the Fifth Circuit and the U.S. Tax Court in the so-called
"Aramco Advantage" case. As a result of this decision by the Supreme Court,
Texaco recognized an after-tax earnings benefit of $488 million in the first
quarter 1997, representing the refund of the balance of deposits made to the IRS
in previous years for potential tax claims and accrued interest. In August 1997,
Texaco received approximately $770 million, which represents substantially all
amounts recoverable by the company.
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- 4 -
<PAGE>
In the company's opinion, while it is impossible to ascertain the ultimate legal
and financial liability with respect to contingent liabilities and commitments,
including lawsuits, claims, guarantees, taxes and regulations, 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 Inc. and its subsidiaries.
Note 4. 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 and is
reflected on a 100% Caltex Group basis:
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of dollars)
<S> <C> <C> <C> <C>
Gross revenues $13,217 $13,385 $ 4,090 $ 4,225
Income before income taxes $ 859 $ 1,945 $ 220 $ 221
Net income $ 556 $ 1,082 $ 170 $ 93
</TABLE>
On April 2, 1996, Caltex Petroleum Corporation ("Caltex") completed the sale of
its 50% interest in Nippon Petroleum Refining Company, Limited to its partner
Nippon Oil Company for approximately $2 billion. Caltex' net income for the
second quarter of 1996 included a gain of $621 million associated with this
sale.
Effective April 1, 1997, Caltex' 40% interest in its Bahrain refining joint
venture (Bapco) was sold to the government of the State of Bahrain at
approximately net book value.
On June 17, 1997, Caltex received a claim from the IRS for $292 million in
excise taxes, plus penalties and interest. The IRS claim relates to crude oil
sales to Japanese customers beginning in 1980. Prior to 1980, Caltex directly
supplied crude oil to its Japanese customers. In 1980, a Caltex subsidiary,
Caltex Trading and Transport Corporation, also became a contractual supplier of
crude oil to the Japanese customers. The IRS position is that this was a
transfer of property, and thus taxable. Caltex is challenging the claim and
fully expects to prevail, since the addition of another supplying company was
not a taxable event. Additionally, Caltex believes the claim is based on an
overstated value. Finally, Caltex disagrees with the imposition and calculation
of interest and penalties. Just as Caltex believes the underlying excise tax
claim is wrong, Caltex also believes the related claim for approximately $140
million in penalties is equally wrong and the IRS claim for almost $1.6 billion
in interest charges is flawed. Caltex believes that the likelihood that it will
pay these charges is remote.
- 5 -
<PAGE>
Note 5. Stockholders' Equity
- -----------------------------
On July 25, 1997, the company's Board of Directors approved a two-for-one split
of the company's common stock, effective September 29, 1997. All data presented
in this Form 10-Q reflect the impact of the stock split.
The Board's action followed the approval by shareholders at the company's 1997
Annual Meeting to increase the number of authorized common shares to 700,000,000
and halve the par value to $3.125 per share.
Note 6. Subsequent Event - Acquisition of Monterey Resources, Inc.
- -------------------------------------------------------------------
On November 4, 1997, the shareholders of Monterey Resources, Inc. approved the
merger of Monterey with Texaco, in a transaction valued at $1.4 billion. Under
the terms of the merger, Monterey shareholders received 0.3471 shares of Texaco
common stock for each share of Monterey common stock. As a result, Texaco issued
approximately 19 million additional shares of Texaco common stock. In addition,
Texaco assumed Monterey's existing debt of approximately $300 million.
The merger will be recorded by Texaco as a purchase business combination for
accounting and financial reporting purposes. The pro forma effect of the merger
on revenues, consolidated net income and net income per share of Texaco common
stock for nine months, 1997 and prior periods is not material.
* * * * * * * * * * *
In the determination of preliminary and unaudited financial statements for the
nine-month and three-month periods ended September 30, 1997 and 1996, Texaco's
accounting policies have been applied on a basis consistent with the application
of such policies in Texaco's financial statements issued in its 1996 Annual
Report to Stockholders. In the opinion of Texaco, all adjustments and
disclosures necessary to present fairly the results of operations for such
periods have been made. These adjustments are of a normal recurring nature. The
information is subject to year-end audit by independent public accountants.
Texaco makes no forecasts or representations with respect to the level of net
income for the year 1997.
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Total worldwide net income for Texaco Inc. and subsidiary companies for the
third quarter of 1997 was $490 million, or $.91 per share, as compared with $434
million, or $.80 per share, for the third quarter of 1996. Total net income for
the first nine months of 1997 was $2,041 million, or $3.84 per share, as
compared with $1,509 million, or $2.81 per share, for the first nine months of
1996. Per share amounts reflect the two-for-one stock split, effective September
29, 1997. Both nine month periods included special items.
For the first nine months of 1997, net income before special items was $1,422
million, or $2.65 per share, as compared with $1,285 million, or $2.38 per
share, for the first nine months of 1996.
Significantly improved downstream results and upstream production gains were key
contributors to strong third quarter 1997 earnings. During the third quarter of
1997:
o Net income rose 13 percent to $490 million.
o Worldwide production rose three percent.
o Branded gasoline sales in the U.S. increased six percent.
o Quarterly dividend increased six percent to $.45 per share.
o Year-to-date capital and exploratory expenditures grew 34 percent to
$3.0 billion.
The solid third quarter performance reflects the momentum that Texaco is
building. Downstream earnings significantly improved in the third quarter this
year. Increased refinery throughput and higher gasoline sales volumes
complemented higher margins. Upstream earnings for the third quarter were below
last year due to the impacts of lower crude prices and higher exploratory
activities. However, these factors were partially offset by higher production in
the Partitioned Neutral Zone, the addition of production from the U.K. Captain
field and higher U.S. natural gas prices.
Two major upstream initiatives announced during the third quarter demonstrate
Texaco's commitment to enhance shareholder value. Texaco continues its efforts
to strengthen its competitive position in the global energy market. Texaco
acquired a 20 percent interest in the giant Karachaganak field in Kazakstan and
on November 4, 1997, completed the merger with the California heavy oil
producer, Monterey Resources, Inc. Each will add significantly to the company's
growing worldwide production and reserve base. The two-for-one stock split and
the six percent quarterly common stock dividend increase are further evidence of
Texaco's continued confidence in its ability to grow earnings and cash flow.
- 7 -
<PAGE>
Results for 1997 and 1996 are summarized in the following table. Details on
special items are included in the functional analysis which follows this table.
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net income before special items $1,422 $1,285 $ 490 $ 434
------ ------ ------ ------
Gains on major asset sales 174 224 - -
Financial reserves for various issues (43) - - -
U.S. tax issue 488 - - -
------ ------ ------ ------
619 224 - -
------ ------ ------ ------
Total net income $2,041 $1,509 $ 490 $ 434
====== ====== ====== ======
</TABLE>
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the third quarter of 1997
were $232 million, as compared with $262 million for the third quarter of 1996.
For the nine month periods of 1997 and 1996, earnings were $732 million and $772
million, respectively. Results for 1997 included a second quarter special charge
of $43 million for the establishment of financial reserves for royalty and
severance tax issues. Excluding the special charge, results for the nine months
of 1997 totaled $775 million.
In the U.S. upstream, third quarter 1997 earnings were below last year's level
as the benefits of higher natural gas prices could not offset lower crude oil
prices and higher operating expenses associated with increased activities.
Average realized crude oil and natural gas prices for the third quarter of 1997
were $16.56 per barrel and $2.13 per thousand cubic feet (MCF); $1.37 per barrel
lower and $.11 per MCF higher than 1996. Ample worldwide supply levels led to
the weaker crude oil prices.
Earnings before special items for nine months of 1997 were slightly above 1996.
Higher realized commodity prices offset lower gas trading results and higher
expenses associated with increased operating and exploratory activities. Average
realized crude oil and natural gas prices for nine months of 1997 were $17.71
per barrel and $2.28 per MCF; $.47 per barrel and $.20 per MCF higher than 1996.
Production gains from new and existing fields, particularly in the Gulf of
Mexico and Louisiana, offset declines from maturing fields.
International
Exploration and production earnings outside the U.S. for the third quarter of
1997 were $103 million, as compared with $132 million for the third quarter of
1996. For the nine month periods of 1997 and 1996, earnings were $499 million
and $365 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 these special gains,
results for the nine month period of 1997 totaled $338 million.
- 8 -
<PAGE>
In the international upstream, third quarter and nine months 1997 earnings
before special items were below 1996 levels. Improved production only partly
offset the cost of Texaco's expanded exploration programs, lower gas trading
results in the U.K. and lower crude prices. Average realized crude oil prices
were $16.88 per barrel for the third quarter and $17.79 per barrel for the nine
months 1997; $2.55 and $.85 per barrel below 1996 prices.
Production in 1997 increased 10 percent over last year. New production from the
Captain field in the U.K. North Sea and record production in the Partitioned
Neutral Zone contributed to the increase. Also, new activities coming onstream
late in 1996 in the Bagre field offshore Angola and in the Danish North Sea led
to higher liquids production this year. Natural gas production in 1997 benefited
from a full nine months of operations at the Dolphin field in Trinidad and from
the Chuchupa "B" field in Colombia.
Results for the third quarter and nine months of 1997 included noncash currency
benefits of $13 million and $26 million, respectively, due to the weakening of
the Pound Sterling versus the U.S. dollar relating to deferred income taxes,
compared to minimal charges in 1996.
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the third
quarter of 1997 were $132 million, as compared with $94 million for the third
quarter of 1996. For the nine month periods of 1997 and 1996, earnings were $238
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 nine months of 1997 were $225
million.
In the U.S. downstream, strong gasoline demand bolstered third quarter 1997
margins. Gulf Coast sour crude cracking margins also were higher in the third
quarter of 1997, maintaining the strength shown throughout the year. Improved
refinery operations and higher gasoline sales volumes also benefited 1997
results.
During the first nine months of 1997, Gulf Coast sour crude cracking margins
were higher than last year. However, weaker West Coast margins in the first half
of the year contributed to the lower earnings for the nine months of 1997 versus
the same period in 1996. Last year, regional refining problems and new
California gasoline formulation requirements caused a supply disruption
resulting in margin increases that peaked in the second quarter of 1996. In
1997, competitive pressures and increased costs dampened West Coast margins;
however, third quarter margin increases resulted in a modest recovery.
Additionally, the impact of refinery fires late in 1996 and early 1997 at the
Los Angeles, California refinery resulted in property damage and processing unit
downtime in the first quarter of 1997. Lower crude oil trading margins and
clean-up costs from the May pipeline break in Lake Barre, Louisiana also
contributed to the decline in 1997 earnings.
International
Manufacturing, marketing and distribution earnings outside the U.S. for the
third quarter of 1997 were $134 million, as compared with $37 million for the
third quarter of 1996. For the nine month periods of 1997 and 1996, earnings
were $370 million and $433 million, respectively. Results for 1996 included a
second quarter special gain of $224 million for Caltex' sale of its interest in
a Japanese affiliate, including the tax portion of the sales proceeds
distributed to the shareholders. Excluding the special gain, results for the
nine months of 1996 totaled $209 million.
In the international downstream, the strong 1997 earnings before special items
reflected higher manufacturing and marketing results. The refining segment
experienced improved margins and lower expenses. Improved U.K. marketing results
reflected a recovery from significantly depressed 1996 margins. Increased sales
volumes and stronger marketing margins in Latin America also contributed to the
higher earnings. Lower results in Scandinavia, primarily from competitive
pressures in the Norwegian marketplace, partly offset these improvements.
- 9 -
<PAGE>
In the Caltex area of operations, third quarter and nine months 1997 benefited
from higher earnings in Korea through improved petrochemical results, refining
margins and higher refined product sales. Currency devaluations, notably in
Thailand, Malaysia and the Philippines, have caused an erosion in third quarter
marketing margins due to the inability to fully recover feedstock costs. Prices
are being raised to restore margins as quickly as market forces and regulations
permit. In the third quarter, favorable balance sheet currency translations
caused by the devaluations more than offset related product margin declines.
NONPETROLEUM
Nonpetroleum earnings for the third quarter of 1997 were $3 million, as compared
with $6 million for the third quarter of 1996. For the nine month periods of
1997 and 1996, earnings were $16 million and $11 million, respectively.
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the third quarter of 1997 were $114
million, as compared with charges of $97 million for the third quarter of 1996.
Corporate and nonoperating earnings for the nine months of 1997 were $186
million, as compared with charges of $314 million for the nine months of 1996.
Results for 1997 included a first quarter special benefit of $488 million
associated with the "Aramco Advantage" U.S. tax case. Excluding this benefit,
corporate and nonoperating charges totaled $302 million for the nine months of
1997.
During the third quarter 1997, corporate expenses increased with the
introduction of a new advertising campaign. Comparative nine months 1997 results
benefited from reduced interest expense due to lower debt levels and slightly
lower interest rates. Additionally, 1997 included higher gains on sales of
marketable securities held for investment by insurance operations.
- 10 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Texaco's cash, cash equivalents and short-term investments were $499 million at
September 30, 1997, as compared with $552 million at year-end 1996. Cash from
operations totaled $3.05 billion and included the receipt of the IRS refund.
During 1997, cash from operations, together with proceeds from the sale of
nonstrategic assets of $756 million, exceeded outlays for Texaco's significantly
higher capital and exploratory program of $2.5 billion and the payment of
common, preferred and minority interest dividends of $772 million.
At September 30, 1997, Texaco's ratio of total debt to total borrowed and
invested capital was 31.5%, as compared with 33.6% at year-end 1996. At
September 30, 1997, Texaco's long-term debt included $1,056 million of debt
scheduled to mature within one year, which the company has both the intent and
the ability to refinance on a long-term basis. The company maintained a
revolving credit facility with commitments of $1.5 billion, which was unused at
both September 30, 1997 and at year-end 1996.
The company issued $150 million of 7.09% Noncallable Notes Due 2007 in the first
quarter and $200 million of 3.50% Cash-Settled Convertible Notes Due 2004 in the
third quarter. Concurrently with the issuance of the Cash-Settled Convertible
Notes, the company entered into an arrangement that converts its interest cost
into a LIBOR-based floating rate and limits Texaco's cost of conversion to the
face amount of these Notes. Proceeds from these offerings were used for working
capital, retirement of existing debt and other general corporate purposes.
During the first nine months of 1997, the company purchased $74 million of
common stock under the $500 million common stock repurchase program announced in
1995. This brings total purchases under this program to $237 million. The
company will continue repurchasing shares from time to time based on market
conditions.
During the first nine months of 1997, the company completed the following sales:
o In March, Texaco exercised an option to terminate a lease arrangement
and obtained ownership of the assets used in its propylene oxide/methyl
tertiary butyl ether (PO/MTBE) business. Concurrent with this
transaction, Texaco sold the PO/MTBE business to a Huntsman Corporation
affiliate for cash and preferred stock. The cash proceeds of $512
million were used to substantially offset the cost of exercising the
option. The preferred stock, with a stated value of $65 million, is
mandatorily redeemable in eleven years.
o During April, the company sold a 15% interest in its U.K. North Sea
Captain Field to an affiliate of Korea Petroleum Development
Corporation for approximately $210 million. Of this total amount, $20
million was received during the first quarter of 1996.
o In April, the company sold its interests in certain producing
operations in Canada for approximately $80 million.
o In May, the company sold its credit card services unit, including its
portfolio of proprietary credit card accounts receivable, for
approximately $300 million.
- 11 -
<PAGE>
On August 12, 1997, Texaco repurchased certain equipment leasehold interests in
conjunction with a sale/leaseback arrangement for $522 million, which was less
than the sales proceeds previously received.
On July 25, 1997, Texaco's Board of Directors approved a two-for-one split of
the company's common stock, effective September 29, 1997. The company also
increased its quarterly dividend on its common stock to 45 cents per share from
42.5 cents per share, on a split basis, representing an increase of 5.9 percent.
On November 4, 1997, the shareholders of Monterey Resources, Inc. approved the
merger of Monterey with Texaco. (See Note 6, Subsequent Event - Acquisition of
Monterey Resources, Inc. for additional information on this transaction.) As a
result of the merger, Texaco issued approximately 19 million additional shares
of Texaco common stock and assumed Monterey's existing debt of approximately
$300 million.
The company considers its financial position sufficient to meet its anticipated
future financial requirements.
EMPLOYEE SEVERANCE PROGRAM
- --------------------------
On October 30, 1996, Texaco announced a companywide realignment and
consolidation of its operations designed to enhance the company's ability to
grow existing and new businesses. An after-tax provision of $56 million was
recorded in the fourth quarter of 1996 to cover the costs of employee
separations, including employees of affiliates. Through September 30, 1997,
approximately 870 employees have been terminated with a related commitment to
severance payments of $39 million after-tax. Of this commitment, payments of $30
million have been made and charged against the reserve. The remaining reserve
balance will be used for ongoing employee separation benefits relating
principally to affiliates, for which Texaco is responsible.
NEW ACCOUNTING STANDARD
- -----------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 128, Earnings per Share. Under SFAS 128,
companies currently required to report primary and fully diluted earnings per
share (EPS), will instead report basic and diluted EPS, respectively. Currently,
primary EPS considers the average number of common shares outstanding and the
potential dilution that would result if conversion rights associated with
certain outstanding securities were exercised. Fully diluted EPS considers all
potentially dilutive securities. Basic EPS, which will replace primary EPS, does
not consider any potential dilution. Diluted EPS is essentially similar to fully
diluted EPS.
Texaco must adopt SFAS 128 for its fiscal year 1997 financial statements and, at
that time, restate the per share amounts of prior periods. Amounts to be
reported as basic and diluted EPS in accordance with the new Statement will not
differ significantly from previously reported primary and fully diluted EPS.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures, including equity in such expenditures of
affiliates, were $3,023 million for the first nine months of 1997, as compared
to $2,252 million for the same period of 1996.
Increased U.S. exploration and production expenditures in 1997 reflected the
continued focus on strategic projects both onshore and offshore, especially in
the deepwater Gulf of Mexico. Platform construction and development drilling is
underway in the Petronius and Arnold fields while delineation drilling continues
in the Fuji and Gemini prospects. Additionally, enhanced oil recovery efforts in
California and drilling and development programs in the traditional offshore
shelf area and onshore increased investments. Construction continued during the
third quarter on a jointly-owned natural gas pipeline and processing complex in
the Gulf Coast area.
- 12 -
<PAGE>
Internationally, exploration and production expenditures in 1997 were 30 percent
higher than last year. During the third quarter 1997, Texaco acquired a 20
percent interest in Kazakstan's giant Karachaganak oil and gas field. One of the
largest oil and gas fields in the world, the Karachaganak field holds huge
quantities of recoverable reserves. Development work in Indonesia continued,
including expenditures for enhanced oil recovery installations. In the U.K.,
North Sea activities in the Galley and Mariner fields moved forward while work
in the Erskine field neared completion with initial production starting in early
November, 1997. Exploration activities expanded with significant spending in
China, Indonesia and Nigeria.
Downstream expenditures outside the U.S. showed a significant increase in
marketing investments for facilities and service station reimaging throughout
the Asia-Pacific area by Texaco's affiliate, Caltex Petroleum Corporation.
Marketing investments throughout Latin America also increased as compared to
1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 3 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, 1997 and June 30, 1997 and
to Item 3 of Texaco Inc.'s 1996 Annual Report on Form 10-K, which are
incorporated herein by reference.
- 13 -
<PAGE>
Item 5. Other Information
- -------------------------
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of dollars)
<S> <C> <C> <C> <C>
FUNCTIONAL NET INCOME
- ---------------------
Operating earnings
Petroleum and natural gas
Exploration and production
United States $ 732 $ 772 $ 232 $ 262
International 499 365 103 132
------ ------ ------ -------
Total 1,231 1,137 335 394
------ ------ ------ -------
Manufacturing, marketing and distribution
United States 238 242 132 94
International 370 433 134 37
------ ------ ------ -------
Total 608 675 266 131
------ ------ ------ -------
Total petroleum and natural gas 1,839 1,812 601 525
Nonpetroleum 16 11 3 6
------ ------ ------ -------
Total operating earnings 1,855 1,823 604 531
Corporate/Nonoperating 186 (314) (114) (97)
------ ------ ------ -------
Total net income $2,041 $1,509 $ 490 $ 434
====== ====== ====== =======
CAPITAL AND EXPLORATORY EXPENDITURES -
- --------------------------------------
INCLUDING EQUITY IN AFFILIATES
------------------------------
Exploration and production
United States $1,272 $ 894 $ 491 $ 273
International 990 762 444 312
------ ------ ------ -------
Total 2,262 1,656 935 585
------ ------ ------ -------
Manufacturing, marketing and distribution
United States 246 234 94 78
International 486 345 178 144
------ ------ ------ -------
Total 732 579 272 222
------ ------ ------ -------
Other 29 17 18 8
------ ------ ------ -------
Total, including equity in affiliates $3,023 $2,252 $1,225 $ 815
====== ====== ====== =======
Texaco Inc. and subsidiary companies
Exploratory expenses included above:
United States $ 122 $ 112 $ 46 $ 45
International 184 131 68 39
------ ------ ------ -------
Total $ 306 $ 243 $ 114 $ 84
======= ======= ====== ========
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
-----------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Exploration and Production
- --------------------------
United States
- -------------
<S> <C> <C> <C> <C>
Net production of crude oil and natural
gas liquids (000 BPD) 387 388 391 393
Net production of natural gas - available
for sale (000 MCFPD) 1,686 1,680 1,722 1,708
Total net production (000 BOEPD) 668 668 678 678
Natural gas sales (000 MCFPD) 3,570 3,100 3,312 3,059
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 189 208 189 191
Average U.S. crude (per bbl) $17.71 $17.24 $16.56 $17.93
Average U.S. natural gas (per mcf) $ 2.28 $ 2.08 $ 2.13 $ 2.02
Average WTI (Spot) (per bbl) $20.83 $21.30 $19.78 $22.41
Average Kern (Spot) (per bbl) $14.81 $14.92 $14.30 $14.41
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 116 115 118 115
Indonesia 148 143 150 146
Partitioned Neutral Zone 94 75 97 79
Other 67 62 64 65
------ ------ ------ ------
Total 425 395 429 405
Net production of natural gas - available
for sale (000 MCFPD)
Europe 197 182 176 162
Colombia 168 117 190 124
Other 88 66 79 77
------ ------ ------ ------
Total 453 365 445 363
Total net production (000 BOEPD) 501 456 503 466
Natural gas sales (000 MCFPD) 562 456 536 450
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 98 95 107 74
Average International crude (per bbl) $17.79 $18.64 $16.88 $19.43
Average U.K. natural gas (per mcf) $ 2.68 $ 2.56 $ 2.55 $ 2.55
Average Colombia natural gas (per mcf) $ 1.04 $ .94 $ .95 $ .97
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
<S> <C> <C> <C> <C>
Refinery input (000 BPD)
Subsidiary 415 405 420 417
Affiliate - Star Enterprise 334 320 339 325
----- ----- ----- -----
Total 749 725 759 742
Refined product sales (000 BPD)
Gasolines 511 499 525 515
Avjets 95 127 103 122
Middle Distillates 217 214 222 217
Residuals 82 65 102 70
Other 115 133 109 132
----- ----- ----- -----
Total 1,020 1,038 1,061 1,056
International
- -------------
Refinery input (000 BPD)
Europe 337 336 329 334
Affiliate - Caltex 400 368 379 340
Latin America/West Africa 59 64 60 68
----- ----- ----- -----
Total 796 768 768 742
Refined product sales (000 BPD)
Europe 496 481 508 496
Affiliate - Caltex 564 602 545 555
Latin America/West Africa 408 397 440 408
Other 62 61 66 39
----- ----- ----- -----
Total 1,530 1,541 1,559 1,498
</TABLE>
- 16 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (11) Computation of Earnings Per Share of Common Stock of Texaco Inc.
and Subsidiary Companies.
-- (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, 1996 (including portions of Texaco
Inc.'s Annual Report to Stockholders for the year 1996) and a
copy of Texaco Inc.'s Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1997 and June 30, 1997, 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 1997, the Registrant filed Current Reports on
Form 8-K for the following events:
1. July 17, 1997 (date of earliest event reported: July 16, 1997)
Item 5. Other Events -- reported that Texaco, Saudi Aramco and Shell
Oil Company signed a memorandum of understanding to combine their
Eastern and Gulf Coast U.S. refining and marketing businesses.
2. July 22, 1997 (date of earliest event reported: July 22, 1997)
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the second quarter 1997.
3. July 25, 1997 (date of earliest event reported: July 25, 1997)
Item 5. Other Events -- reported that Texaco's Board of Directors
approved a two-for-one split of Texaco's Common Stock effective
September 29, 1997. Also reported that the Board voted to increase the
quarterly dividend to 90 cents per share (on a pre-split basis) from
85 cents per share.
4. August 19, 1997 (date of earliest event reported: August 18, 1997)
Item 5. Other Events -- reported that Texaco and Monterey Resources,
Inc. announced that they had signed an agreement to merge in
a transaction valued at $1.4 billion.
- 17 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Texaco Inc.
--------------------------------
(Registrant)
By: R.C. Oelkers
--------------------------------
(Vice President and Comptroller)
By: R.E. Koch
--------------------------------
(Assistant Secretary)
Date: November 13, 1997
-----------------
- 18-
EXHIBIT 11
TEXACO INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK(a)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
---------------------------------------------------------------
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
For the nine months For the three months
Primary Net Income Per Common Share ended September 30, ended September 30,
- ----------------------------------- ------------------- -------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $ 2,041 $ 1,509 $ 490 $ 434
Less: Preferred stock dividend requirements (42) (43) (14) (14)
------- ------- ------- -------
Primary net income available for common stock $ 1,999 $ 1,466 $ 476 $ 420
======= ======= ======= =======
Average number of primary common shares
outstanding for computation of earnings
per share (thousands) 520,356 521,451 520,745 521,515
======= ======= ======= =======
Primary net income per common share $ 3.84 $ 2.81 $ .91 $ .80
======= ======= ======= =======
Fully Diluted Net Income Per Common Share
Net income $ 2,041 $ 1,509 $ 490 $ 434
Less: Preferred stock dividend requirements of
non-dilutive and anti-dilutive issues and
adjustments to net income associated with
dilutive securities (16) (18) (6) (6)
------- ------- ------- -------
Fully diluted net income $ 2,025 $ 1,491 $ 484 $ 428
======= ======= ======= =======
Average number of primary common shares
outstanding for computation of earnings
per share (thousands) 520,356 521,451 520,745 521,515
Additional shares outstanding assuming full conversion
of dilutiveconvertible securities into common stock
(thousands):
Convertible debentures 287 292 287 290
Convertible Preferred Stock
Series B ESOP 18,228 18,893 18,000 18,695
Series F ESOP 1,135 1,178 1,126 1,159
Other 294 125 229 237
------- ------- ------- -------
Average number of fully diluted common
shares outstanding for computation of earnings
per share (thousands) 540,300 541,939 540,387 541,896
======= ======= ======= =======
Fully diluted net income per common share $ 3.75 $ 2.75 $ .90 $ .79
======= ======= ======= =======
<FN>
(a) Reflects two-for-one stock split, effective September 29, 1997.
</FN>
</TABLE>
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, 1997 AND
FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1996 (a)
------------------------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
For the Nine Years Ended December 31,
Months Ended -----------------------------------------
September 30, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-92 and 1-1-95.......... $2,600 $3,450 $1,201 $1,409 $1,392 $1,707
Dividends from less than 50% owned companies
more or (less) than equity in net income................ (9) (4) 1 (1) (8) (9)
Minority interest in net income............................ 54 72 54 44 17 18
Previously capitalized interest charged to
income during the period................................ 28 27 33 29 33 30
------ ------ ------ ------ ------ ------
Total earnings..................................... 2,673 3,545 1,289 1,481 1,434 1,746
------ ------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges...................................... 397 551 614 594 546 551
Interest factor attributable to operating
lease rentals.................................... 97 129 110 118 91 94
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc......................... 26 35 36 31 4 -
------ ------ ------ ------ ------ ------
Total items charged to income...................... 520 715 760 743 641 645
Interest capitalized.................................... 16 16 28 21 57 109
Interest on ESOP debt guaranteed by Texaco Inc.......... 5 10 14 14 14 18
------ ------ ------ ------ ------ ------
Total fixed charges................................ 541 741 802 778 712 772
------ ------ ------ ------ ------ ------
Earnings available for payment of fixed charges............ $3,193 $4,260 $2,049 $2,224 $2,075 $2,391
(Total earnings + Total items charged to income) ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges of Texaco
on a total enterprise basis............................. 5.90 5.75 2.55 2.86 2.91 3.10
====== ====== ====== ====== ====== ======
<FN>
(a) Excludes discontinued operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TEXACO INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 451
<SECURITIES> 48
<RECEIVABLES> 4,021
<ALLOWANCES> 22
<INVENTORY> 1,537
<CURRENT-ASSETS> 6,318
<PP&E> 35,291
<DEPRECIATION> 21,198
<TOTAL-ASSETS> 26,815
<CURRENT-LIABILITIES> 5,544
<BONDS> 5,116
0
631
<COMMON> 1,420
<OTHER-SE> 9,566
<TOTAL-LIABILITY-AND-EQUITY> 26,815
<SALES> 33,630
<TOTAL-REVENUES> 34,618
<CGS> 26,324
<TOTAL-COSTS> 28,508
<OTHER-EXPENSES> 3,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309
<INCOME-PRETAX> 2,452
<INCOME-TAX> 411
<INCOME-CONTINUING> 2,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,041
<EPS-PRIMARY> 3.84<F1>
<EPS-DILUTED> 3.75<F1>
<FN>
<F1>THE EARNINGS PER SHARE (EPS) INFORMATION REFLECTS THE IMPACT OF A
TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK, EFFECTIVE
SEPTEMBER 29, 1997.
</FN>
</TABLE>
