================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-27
Texaco Inc .
(Exact name of registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of incorporation (I.R.S. Employer
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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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ----------------------
<S> <C>
Common Stock, par value $3.125 New York Stock Exchange
Chicago Stock Exchange
The Stock Exchange, London
Antwerp and Brussels Exchanges
Swiss Stock Exchange
Rights to Purchase Series D Junior Participating Preferred Stock New York Stock Exchange
Cumulative Adjustable Rate Monthly Income Preferred Shares, Series B* New York Stock Exchange
6 7/8% Cumulative Guaranteed Monthly Income Preferred Shares, Series A* New York Stock Exchange
8 1/2% Notes, due February 15, 2003** New York Stock Exchange
8 5/8% Debentures, due June 30, 2010** New York Stock Exchange
9% Notes, due December 15, 1999** New York Stock Exchange
9 3/4% Debentures, due March 15, 2020** New York Stock Exchange
Extendible Notes, due June 1, 1999 (8 1/2% to June 1, 1998)** New York Stock Exchange
Extendible Notes, due March 1, 2000 (9.45% to March 1, 2000)** New York Stock Exchange
<FN>
- - -------------------
* Issued by Texaco Capital LLC and the payments of dividends and payments on liquidation or redemption are guaranteed by Texaco
Inc.
** Issued by Texaco Capital Inc. and unconditionally guaranteed by Texaco Inc.
</FN>
</TABLE>
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The Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained herein, and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock of Texaco Inc. held by
non-affiliates at the close of business on February 27, 1998 based on the New
York Stock Exchange composite sales price, was approximately $30,141,000,000.
The market value of the voting stock of Series B ESOP Convertible Preferred
Stock held in the Employees Thrift Plan of Texaco Inc. at the close of business
on February 27, 1998, was approximately $989,429,000. The market value of the
voting stock of Series F ESOP Convertible Preferred Stock held in the Employees
Savings Plan of Texaco Inc. at the close of business on February 27, 1998, was
approximately $61,920,000.
As of February 27, 1998, there were 540,847,277 outstanding shares of
Texaco Inc. Common Stock.
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<TABLE>
<CAPTION>
DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)
Part of
Form 10-K
---------
<S> <C>
Texaco Inc. Annual Report to Stockholders for the year 1997................................. I, II
Proxy Statement of Texaco Inc. relating to the 1998 Annual Meeting of Stockholders.......... III
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----------------------------------------------
Texaco Inc.
Texaco Inc. Year 1997 Texaco Inc.
Year 1997 Annual Report March 17, 1998
Form 10-K Item Form 10-K To Stockholders Proxy Statement
- - -------------- --------- --------------- ---------------
PART I
<S> <C> <C> <C>
1. and 2. Business and Properties
Development and Description of Business................... 1 35 and 36 --
Certain Factors Which May Affect Business................. 2-4 -- --
Worldwide Operations...................................... 5 6-22, 37 and 61-62 --
Supplementary Exploration and Production Information...... 6-8 64-65 and 68 --
3. Legal Proceedings............................................. 9-10 61 --
4. Submission of Matters to a Vote of Security Holders........... 10 -- --
Executive Officers of Texaco Inc................................. 11 -- --
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 12 72 --
6. Selected Financial Data....................................... 12 71 --
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12 24-36 --
8. Financial Statements and Supplementary Data
-- Financial Statements....................... 12 37-62 --
-- Report of Independent Public Accountants... 12 63 --
-- Supplemental Oil and Gas Information....... 12 64-68 --
-- Supplemental Market Risk Disclosures....... 12 69-70 --
--Selected Quarterly Financial Data.......... 12 71 --
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 12 -- --
PART III
10. Directors and Executive Officers of the Registrant............. 13 -- 3-13
11. Executive Compensation......................................... 13 -- 7, 32-36 and 38
12. Security Ownership of Certain Beneficial Owners
and Management............................................... 13 -- 2 and 8
13. Certain Relationships and Related Transactions................. 13 -- 7
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14-15 -- --
</TABLE>
<PAGE>
PART I
TEXACO INC.
Items 1 and 2. Business and Properties
DEVELOPMENT AND DESCRIPTION OF BUSINESS
Texaco Inc. was incorporated in Delaware on August 26, 1926, as The
Texas Corporation. Its name was changed in 1941 to The Texas Company and in 1959
to Texaco Inc. It is the successor of a corporation incorporated in Texas in
1902. As used herein and within the portions of the documents incorporated by
reference, the term Texaco Inc. refers solely to Texaco Inc., a Delaware
corporation. The use of such terms as "Texaco," "company," "division,"
"organization," "unit," "we," "us," "our" and "its," when referring either to
Texaco Inc. and its consolidated subsidiaries or to subsidiaries and affiliates
either individually or collectively, is for convenience only and is not intended
to describe legal relationships.
Texaco Inc. and its subsidiary companies, together with affiliates
owned 50% or less, represent a vertically integrated enterprise principally
engaged in the worldwide exploration for and production, transportation,
refining and marketing of crude oil, natural gas and petroleum products.
Research Expenditures
Worldwide expenditures of Texaco Inc. and subsidiary companies for
research, development and technical support for continuing operations amounted
to approximately $147 million in 1997, $139 million in 1996 and $154 million in
1995.
Environmental Expenditures
Information regarding capital environmental expenditures of Texaco Inc. and
subsidiary companies, including equity in affiliates, during 1997, and
projections for 1998 and 1999, for air, water and solid waste pollution
abatement, and related environmental projects and facilities, is incorporated
herein by reference from pages 35 and 36 of Texaco Inc.'s 1997 Annual Report to
Stockholders.
Employees
The number of employees of Texaco Inc. and subsidiary companies as of
December 31, 1997 and 1996 totaled 29,313 and 28,957, respectively.
In January 1998, approximately 4,500 employees, mostly service station
employees, were transferred to Equilon Enterprises LLC. Equilon is a newly
formed joint venture company, owned by Texaco and Shell Oil Company, involved in
the refining, marketing, trading, transportation and lubricants businesses (see
page 5 for a further discussion). Further, by year-end 1998, all other operating
and support employees to be transferred to Equilon will have been identified.
1
<PAGE>
CERTAIN FACTORS WHICH MAY AFFECT BUSINESS
In recent years, a number of changes affecting the petroleum industry have
occurred both in the United States and abroad. In the United States and other
countries in which Texaco operates, various laws and regulations are either now
in force, in standby status or under consideration, dealing with such matters as
production restrictions, import and export controls, price controls, crude oil
and refined product allocations, refined product specifications, environmental,
health and safety regulations, retroactive and prospective tax increases,
cancellation of contract rights, expropriation of property, divestiture of
certain operations, foreign exchange rate changes and restrictions as to
convertibility of currencies, tariffs and other international trade
restrictions. The industry may also be affected by strikes and other industrial
disputes.
A number of legislative proposals are currently under consideration by the
U.S. Congress and various State legislatures. Although it is not possible at
this time to predict the ultimate form that any such proposals might take, or
the likelihood of their enactment, such legislation, if passed, could adversely
affect the petroleum industry and Texaco.
In addition, operations and investments in some foreign areas are subject
to political and business risks. The nature of these risks varies from country
to country and from time to time. The overall effect of the foregoing on Texaco
cannot be predicted with any certainty.
Industry Review of 1997
Economic Performance - The world economy grew at a relatively healthy 3.6%
rate in 1997, though growth patterns varied among regions. On balance, economic
expansion in the industrialized world remained modest. The U.S. economy enjoyed
robust growth in 1997, while the economies of Western Europe gained momentum,
benefiting from strong export performance. However, the Japanese economy showed
signs of stalling, due largely to the effects of a tax increase on consumer
spending.
The economy of the former Soviet Bloc registered modest growth in 1997.
Strong gains in some of the Eastern European countries and a small increase in
Russia were offset by continued stagnation in other parts of the former Soviet
Bloc.
In the developing world, a financial crisis in much of Asia slowed economic
expansion during the second half of 1997. But the economies of other developing
regions remained strong, and growth for the developing world as a whole was
still well above the world average.
Demand & Supply Conditions - The overall favorable global economic
conditions resulted in robust growth for oil demand during 1997. World petroleum
demand averaged a record 73.8 million barrels per day - 2.8% higher than in
1996.
o Growth in the industrialized world was supported by the U.S., where
strong demand for gasoline helped boost overall oil demand.
o The economic turmoil in some Asian markets slowed historic growth
rates for the developing countries as a whole.
o Growth also took place in the former Soviet Bloc. For the first time
since 1987, Russia registered a modest increase in oil consumption.
<TABLE>
<CAPTION>
WORLD PETROLEUM DEMAND/SUPPLY
Forecast
(Millions of barrels a day) 1998 1997 1996
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Demand
Industrial Nations 42.2 41.8 41.3
Developing Nations 26.9 26.0 24.8
Former Soviet Bloc 6.1 6.0 5.7
---------------------------------------
Total 75.2 73.8 71.8
- - --------------------------------------------------------------------------
Supply
Non-OPEC Crude 38.9 37.8 37.1
OPEC Crude 27.6 27.2 25.9
Other Liquids 9.5 9.3 9.1
---------------------------------------
Total 76.0 74.3 72.1
- - --------------------------------------------------------------------------
Stock Change 0.8 0.5 0.3
==========================================================================
</TABLE>
On the supply side, OPEC (Organization of Petroleum Exporting Countries)
and non-OPEC liquids production rose during the year to 74.3 million barrels per
day, from 72.1 million barrels per day in 1996.
2
<PAGE>
However, growth in non-OPEC supply was less than anticipated due to new field
delays in the North Sea and technical problems in Colombia, Australia and
Brazil.
Output from OPEC showed a substantial gain versus 1996. Nearly every OPEC
country boosted production, with Venezuela and Nigeria showing some of the
largest gains. Iraq's "oil-for-food" exports under U.N. Resolution 986 added
significant volumes to the market.
World crude oil prices declined in 1997, despite the production problems in some
non-OPEC areas. The spot price of U.S. benchmark West Texas Intermediate (WTI)
averaged $20.61 per barrel, $1.55 below prior year levels.
Near-Term Outlook
Trimmed by somewhat slower growth in the industrialized world and the
lingering effects of the Asian financial crisis, we expect world economic
expansion to slow to a 3.0% rate in 1998.
o Within the industrialized world, the U.S. is forecast to experience
slightly lower economic growth than in 1997. Also, the Japanese economy
is expected to remain weak. On the other hand, economic expansion in
Western Europe is expected to pick up steam, benefiting from increased
investment.
o Developing Asia is likely to experience lower economic growth due to the
continuing repercussions of its financial crisis. However, other
developing areas are expected to remain largely unaffected.
o Despite strong economic gains in some Eastern European countries,
continued economic stagnation in Russia is expected to once again prevent
a significant rebound in the economy of the former Soviet Bloc.
During 1998, we project world oil consumption to increase by approximately
1.4 million barrels per day to an average of 75.2 million barrels per day.
Growth in demand for oil in the industrialized world is expected to slow down,
in part due to the deceleration in the U.S. economy. The relatively poor
economic conditions in parts of Asia are expected to continue to slow growth in
the developing countries overall. In the former Soviet Bloc, oil demand should
rise, although modestly.
Despite the continued uptrend in demand, increases in world oil production
appear to be running ahead of consumption. Many non-OPEC projects delayed in
1997 are expected to start up in 1998. Also, OPEC is continuing to increase
production, particularly given higher output quotas negotiated at the end of
1997. With the supply/demand balance loosening, oil prices have declined
precipitously in early 1998; however, some recovery in prices is likely as the
year progresses.
Extreme weakness in some Asian economies will constrain both regional
downstream margins and petroleum product sales. The financial performance of
company operations through our affiliate, Caltex, could be adversely impacted.
----------
3
<PAGE>
Forward-Looking Statements
Parts I and II of this Form 10-K may contain or incorporates by reference
forward-looking statements that are based on current expectations, estimates and
projections about the industries in which Texaco operates, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "potential," variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and are subject to the
safe harbors created thereby. These statements are based on a number of
assumptions that could ultimately prove inaccurate and, therefore, there can be
no assurance that they will prove to be accurate. Factors which could affect
performance include estimation of reserves, inaccurate seismic data, mechanical
failures, unilateral cancellation of concessions by host governments, decreased
demand for motor fuels, natural gas and other products, above-average
temperatures, pipeline failures, oil spills, increasing price and product
competition, higher or lower costs and expenses, domestic and foreign
governmental and public policy changes including environmental regulations, the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing. These are representative of factors which
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other factors. Texaco
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
4
<PAGE>
WORLDWIDE OPERATIONS
Texaco owns, leases, or has interests in extensive production,
manufacturing, marketing, transportation and other facilities throughout the
world. A description of the company's worldwide operations appears on pages 6
through 22, and information regarding sales to significant affiliates and
geographical financial data appear on pages 37 and 61-62, respectively, of
Texaco Inc.'s 1997 Annual Report to Stockholders, applicable portions of which
are incorporated herein by reference. Except as indicated under Items 1, 2, 3,
5, 6, 7, 8 and 14, no other data and information appearing in the 1997 Annual
Report to Stockholders are deemed to be filed as part of this Annual Report on
Form 10-K.
In 1993, Texaco announced its intention to dispose of substantially all of
its worldwide chemical operations, including its lubricant additives business,
and entered into a memorandum of understanding with an affiliate of the Jon M.
Huntsman Group of Companies for the sale of Texaco Chemical Company and related
international chemical operations. On April 21, 1994, Texaco received from
Huntsman Corporation $850 million, consisting of $650 million in cash and an
11-year subordinated note with a face amount of $200 million, which was prepaid
in January, 1996. On February 29, 1996, Texaco completed the sale of its
worldwide lubricant additives business to Ethyl Corporation, a fuel and
lubricant additives manufacturer. Ethyl purchased this business for $196
million, comprised of $136 million in cash and a three year note of $60 million.
On March 21, 1997, Texaco completed the sale of its propylene oxide/methyl
tertiary butyl ether (PO/MTBE) business to a subsidiary of Huntsman Corporation,
for approximately $600 million.
On August 19, 1997, Texaco announced the acquisition of a 20 percent
interest in Kazakhstan's Karachaganak oil and gas field. This project has the
potential to add up to 200 million barrels of oil to Texaco's reserve base.
On November 4, 1997, Texaco completed the acquisition of Monterey
Resources, Inc., an independent oil and gas producer, with primary holdings in
California's San Joaquin Valley. The transaction, valued at $1.4 billion,
included the issuance of $1.1 billion of Texaco common stock and approximately
$.3 billion of existing Monterey debt. Monterey currently has production levels
of 55,000 barrels of oil equivalent per day.
On January 15, 1998, Texaco and Shell Oil Company reached agreement on the
formation and operational start-up of a joint venture combining major elements
of their midwestern and western U.S. refining and marketing businesses and their
nationwide trading, transportation and lubricants businesses. The new company,
operating as Equilon Enterprises LLC, will continue to market gasoline and other
products under both the Texaco and Shell brands through the thousands of
independent wholesalers and retailers. Texaco will hold 44 percent of Equilon
and Shell will have 56 percent ownership.
The two companies also announced that they and Saudi Refining, Inc. (SRI),
have signed a separate memorandum of understanding to combine Star Enterprise (a
50/50 joint venture between SRI and Texaco in the eastern U.S.) with Shell's
eastern U.S. refining and marketing business. Final agreements for a separate
joint venture are expected to be concluded in early 1998. The new eastern
operations joint venture company will be initially owned 35 percent by Shell and
32.5 percent each by Texaco and SRI.
5
<PAGE>
SUPPLEMENTARY EXPLORATION AND PRODUCTION INFORMATION
The following information concerns the oil and gas exploration, development
and producing activities of Texaco Inc. and consolidated subsidiaries, as well
as Texaco's equity in P.T. Caltex Pacific Indonesia (CPI), a 50%-owned affiliate
operating in Other Eastern Hemisphere:
Estimates of Total Proved Net Oil and Gas Reserve Data Provided to Other
Governmental Bodies and Availability of Oil and Gas
Information concerning estimates of total proved net oil and gas reserve
data provided to other governmental bodies and availability of oil and gas is
incorporated herein by reference from pages 64 and 65 of Texaco Inc.'s 1997
Annual Report to Stockholders.
Average Sales Prices and Production Costs--Per Unit
Information concerning average sales prices and production costs on a per
unit basis is incorporated herein by reference from page 68 of Texaco Inc.'s
1997 Annual Report to Stockholders.
6
<PAGE>
<TABLE>
<CAPTION>
Oil and Gas Acreage
As of December 31, 1997
------------------------------
Thousands of acres Gross Net
------------------ ----- ---
<S> <C> <C>
Producing
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 3,212 1,875
Other Western Hemisphere ................................... 129 63
Europe ..................................................... 146 53
Other Eastern Hemisphere ................................... 637 154
------ ------
Total Texaco Inc. and Consolidated Subsidiaries.......... 4,124 2,145
Equity in an Affiliate-Other Eastern Hemisphere................... 206 103
------ ------
Total worldwide.............................. .... 4,330 2,248
------ ------
Undeveloped
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 8,285 5,529
Other Western Hemisphere ................................... 3,607 2,761
Europe ..................................................... 7,356 3,032
Other Eastern Hemisphere..................................... 55,286 27,224
------ ------
Total Texaco Inc. and Consolidated Subsidiaries.......... 74,534 38,546
Equity in an Affiliate-Other Eastern Hemisphere................... 2,239 1,120
------ ------
Total worldwide............................. 76,773 39,666
------ ------
Total Oil and Gas Acreage....................... 81,103 41,914
====== ======
</TABLE>
<TABLE>
<CAPTION>
Number of Wells Capable of Producing*
As of December 31, 1997
---------------------------------
Gross Net
----- ---
<S> <C> <C>
Oil wells
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 34,498 19,110
Other Western Hemisphere ................................... 1,747 262
Europe ..................................................... 237 64
Other Eastern Hemisphere ................................... 1,692 616
------ ------
Total Texaco Inc. and Consolidated Subsidiaries......... 38,174 20,052
Equity in an Affiliate-Other Eastern Hemisphere................... 4,698 2,349
------ ------
Total worldwide**........................... 42,872 22,401
====== ======
Gas wells
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 7,607 3,463
Other Western Hemisphere ................................... 33 17
Europe ..................................................... 50 11
Other Eastern Hemisphere ................................... 2 --
------ ------
Total Texaco Inc. and Consolidated Subsidiaries.......... 7,692 3,491
Equity in an Affiliate-Other Eastern Hemisphere................... 40 20
------ ------
Total worldwide**............................ 7,732 3,511
====== ======
<FN>
- - --------------
* Producible well counts include active wells and wells temporarily shut-in.
Consistent with general industry practice, injection or service wells and
wells shut-in that have been identified for plugging and abandonment have
been excluded from the number of wells capable of producing.
** Includes 107 gross and 39 net multiple completion oil wells and 7 gross and
5 net multiple completion gas wells.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Oil, Gas and Dry Wells Completed For the years ended December 31,
-----------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Oil Gas Dry Oil Gas Dry Oil Gas Dry
--- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net exploratory wells*
Texaco Inc. and Consolidated Subsidiaries
United States................................. 32 22 35 29 28 29 12 15 14
Other Western Hemisphere...................... 1 -- 1 -- 3 1 -- 2 1
Europe....................................... 4 -- 1 3 -- 1 14 1 3
Other Eastern Hemisphere...................... 1 3 5 1 2 2 1 -- 5
----- --- -- --- --- -- --- -- --
Total Texaco Inc. and Consolidated
Subsidiaries.............................. 38 25 42 33 33 33 27 18 23
Equity in an Affiliate
Other Eastern Hemisphere...................... 2 -- -- -- -- -- -- -- --
----- --- -- --- --- -- --- -- --
Total worldwide........................... 40 25 42 33 33 33 27 18 23
===== === == === === == === == ==
Net development wells
Texaco Inc. and Consolidated Subsidiaries
United States................................. 883 165 23 283 191 44 291 91 19
Other Western Hemisphere...................... 107 1 3 33 8 -- 8 1 --
Europe....................................... 6 3 -- 1 -- 1 2 1 --
Other Eastern Hemisphere...................... 45 1 -- 44 -- 1 23 -- 1
----- --- -- --- --- -- --- -- --
Total Texaco Inc. and Consolidated
Subsidiaries.............................. 1,041 170 26 361 199 46 324 93 20
Equity in an Affiliate
Other Eastern Hemisphere...................... 143 1 -- 259 1 -- 135 -- --
----- --- -- --- --- -- --- -- --
Total worldwide........................... 1,184 171 26 620 200 46 459 93 20
===== === == === === == === == ==
<FN>
- - ------------
* Exploratory wells which identify oil and gas reserves, but have not resulted in
recording of proved reserves pending further evaluation, are not considered
completed wells. Reserves which are identified by such wells are included in
Texaco's proved reserves when sufficient information is available to make that
determination. This is particularly applicable to deep exploratory areas which
may require extended time periods to assess, such as the U.K. sector of the
North Sea and in the deepwater U.S. Gulf of Mexico.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Additional Well Data As of December 31, 1997
-----------------------------------------------------------
Wells in the Pressure Maintenance
process of ------------------------------------
drilling Projects in
-------- Installations the process of
Gross Net in operation being installed
----- --- ------------ ---------------
<S> <C> <C> <C> <C>
Texaco Inc. and Consolidated Subsidiaries
United States................................... 127 87 374 --
Other Western Hemisphere........................ 3 1 7 --
Europe.......................................... 9 3 5 --
Other Eastern Hemisphere........................ 28 11 8 3
--- --- --- ---
Total Texaco Inc. and Consolidated
Subsidiaries................................ 167 102 394 3
Equity in an Affiliate
Other Eastern Hemisphere........................ 6 3 6 --
--- --- --- ---
Total worldwide............................. 173 105 400 3
=== === === ===
</TABLE>
8
<PAGE>
Item 3. Legal Proceedings
Litigation--Information relative to legal proceedings pending against
Texaco Inc. and subsidiary companies is presented in Note 18, Contingent
Liabilities, on page 61 of Texaco Inc.'s 1997 Annual Report to Stockholders,
which note is incorporated herein by reference.
As of December 31, 1997, Texaco Inc. and its subsidiaries were parties to
various proceedings instituted or contemplated by governmental authorities
arising under the provisions of applicable laws or regulations relating to the
discharge of materials into the environment or otherwise relating to the
protection of the environment, none of which is material to the business or
financial condition of the company. The following is a brief description of
pending proceedings and a settled proceeding which, because of the amounts
involved, require disclosure under applicable Securities and Exchange Commission
regulations.
On June 9, 1992, an administrative complaint was served on Texaco
Chemical Company ("TCC")* by the U.S. Environmental Protection Agency
("EPA"), Region VI, alleging certain violations of the State
Implementation Plan at TCC's Port Neches, Texas chemical plant. The EPA
is seeking civil penalties of $149,000. Texaco Inc. is contesting
liability.
On December 28, 1992, an administrative complaint was served on
TCC by the EPA, Region VI, alleging hazardous waste, PCB, release
notification and reporting violations at TCC's Port Neches chemical
plant. The EPA is seeking civil penalties of $3.8 million and corrective
action. Texaco Inc. is contesting liability. The EPA and the company
agreed to consolidate this complaint with the above-referenced June 9,
1992 complaint, and the consolidated matter is pending before an EPA
administrative law judge.
On February 22, 1996, the Los Angeles Air Quality Management
District issued a notice of violation of air quality regulations to
Texaco Refining and Marketing Inc. ("TRMI"), a wholly-owned subsidiary,
in connection with refrigerant use and maintenance at TRMI's Los Angeles
refinery. Penalties may exceed $100,000.
The U.S. Department of Justice has filed suit against Texaco
Trading and Transportation Inc. ("TTTI"), a wholly-owned subsidiary, in
connection with spills along pipelines in Kansas in 1991. The suit seeks
civil penalties of approximately $4,200,000 and injunctive relief. TTTI
has not been served with the complaint, and the parties continue to
discuss this matter.
An order was received in August 1996 from the EPA regarding spills
of oil and produced water at the Aneth Producing Field in Utah in
violation of the Clean Water Act. During December 1997, Texaco determined
that proposed fines in this matter may exceed $100,000.
- - ----------
* Texaco Chemical Company was sold on April 21, 1994 to Huntsman Corporation
and, by agreement, Texaco Inc. retains obligations applicable to events
occurring prior to the closing date.
9
<PAGE>
A notice of violation was received in September 1996 from the EPA
regarding alleged Clean Air Act New Source Performance Standard and
Emergency Planning and Right-To-Know Act violations at the Texaco
Bakersfield Plant. During October 1996, Texaco determined that proposed
fines in this matter may exceed $100,000.
On May 23, 1994, the EPA, Region VII, instituted an administrative
proceeding alleging that on 12 occasions pipelines owned by TTTI, a
wholly-owned subsidiary, released oil into surface waters in violation of
the Federal Clean Water Act and seeking penalties of $10,000 for each
release. The EPA and TTTI have settled these matters.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
----------
10
<PAGE>
Executive Officers of Texaco Inc.
The executive and other elected officers of Texaco Inc. as of March 1, 1998
are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter I. Bijur................... 55 Chairman of the Board and Chief Executive Officer
C. Robert Black.................. 62 Senior Vice President
Patrick J. Lynch................. 60 Senior Vice President and Chief Financial Officer
John J. O'Connor ............... 51 Senior Vice President
Glenn F. Tilton ............... 49 Senior Vice President
Stephen M. Turner................ 58 Senior Vice President and General Counsel
William M. Wicker ............... 48 Senior Vice President
Clarence P. Cazalot, Jr.......... 47 Vice President
Eugene G. Celentano.............. 59 Vice President
David C. Crikelair............... 50 Vice President
Carl B. Davidson................. 64 Vice President and Secretary
Claire S. Farley................. 39 Vice President
James R. Metzger................. 50 Vice President
Robert C. Oelkers................ 53 Vice President and Comptroller
Elizabeth P. Smith............... 48 Vice President
Robert A. Solberg................ 52 Vice President
Janet L. Stoner.................. 49 Vice President
Michael N. Ambler ............... 61 General Tax Counsel
James F. Link.................... 53 Treasurer
</TABLE>
For more than five years, each of the above listed officers of Texaco Inc.,
except for Messrs. Wicker and O'Connor, has been actively engaged in the
business of Texaco Inc. or one of its subsidiary or affiliated companies.
Effective August 1, 1997, Mr. Wicker joined Texaco as a Senior Vice
President of Texaco Inc. for Corporate Development. Prior to joining Texaco, Mr.
Wicker had been with First Boston and Credit Suisse First Boston for the last
eight years, most recently as the Managing Director and Co-Head of the Global
Energy Group for Credit Suisse First Boston. Prior to this, Mr. Wicker served as
Senior Vice President of Kidder Peabody & Co.'s Energy Group and earlier as a
consultant with McKinsey & Co.'s energy practice from 1983 to 1987.
Effective January 1, 1998, Mr. O'Connor joined Texaco as a Senior Vice
President of Texaco Inc. and President of Worldwide Exploration and Production.
Prior to joining Texaco, Mr. O'Connor, since 1994, was Chief Executive Officer
of BHP Petroleum in Melbourne, Australia, the oil and gas exploration division
of Broken Hill Proprietary Company, Ltd. Mr. O'Connor also was a Director of
Broken Hill Proprietary Company, Ltd. Prior to joining BHP, Mr. O'Connor was
with Mobil Oil Corporation for 26 years.
There are no family relationships among any of the officers of Texaco Inc.
11
<PAGE>
PART II
The following information, contained in Texaco Inc.'s 1997 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1997 Annual Report to Stockholders, as
provided to stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
Year 1997
Annual Report
to Stockholders
Form 10-K Item Page Reference
- - -------------- --------------
<S> <C>
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 72 (a)
Item 6. Selected Financial Data
Five-Year Comparison of Selected Financial Data 71
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-36
Item 8. Financial Statements and Supplementary Data
Statement of Consolidated Income 37
Consolidated Balance Sheet 38
Statement of Consolidated Cash Flows 39
Statement of Consolidated Stockholders' Equity 40-41
Notes to Consolidated Financial Statements 42-62
Report of Independent Public Accountants 63
Supplemental Information on Oil and Gas Producing Activities 64-68
Suplemental Market Risk Disclosures 69-70
Selected Quarterly Financial Data 71
--------------
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Not applicable.
<FN>
(a) Only the data and information provided under the caption "Common Stock
Market and Dividend Information" is deemed to be filed as part of this
Annual Report on Form 10-K.
</FN>
</TABLE>
12
<PAGE>
PART III
The following information, contained in Texaco Inc.'s Proxy Statement dated
March 17, 1998, relating to the 1998 Annual Meeting of Stockholders, is
incorporated herein by reference. Except as indicated under Items 10, 11, 12 and
13, no other data and information appearing in the Proxy Statement dated March
17, 1998 are deemed to be filed as part of this Annual Report on Form 10-K. Page
references are to the paper document version of Texaco Inc.'s 1998 Proxy
Statement, as provided to stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
March 17, 1998
Proxy Statement
Form 10-K Item Page Reference
- - -------------- --------------
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant
--The Board of Directors
Governance, Committees, Qualifications and Nomination
of Directors and Compensation of Directors 3-7
--Security Ownership of Directors and Management 8
--Item 1- Election of Directors 9-13
Item 11. Executive Compensation
--The Board of Directors
Compensation of Directors 7
--Summary Compensation Table 32
--Option Grants in 1997 33-35
--Aggregated Option Exercises in 1997 and Year-End Option Values 36
--Retirement Plan 38
Item 12. Security Ownership of Certain Beneficial Owners and Management
--Voting of Shares 2
--Security Ownership of Directors and Management 8
Item 13. Certain Relationships and Related Transactions
--Certain Transactions 7
</TABLE>
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following information, contained in Texaco Inc.'s 1997 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1997 Annual Report to Stockholders, as
provided to stockholders: (a) The following documents are filed as part of this
report:
<TABLE>
<CAPTION>
<S> <C>
Texaco Inc.
Year 1997
Annual Report
1. Financial Statements (incorporated by reference from the indicated To Stockholders
pages of Texaco Inc.'s 1997 Annual Report to Stockholders): Page Reference
Statement of Consolidated Income for the three years ---------------
ended December 31, 1997 .................................................... 37
Consolidated Balance Sheet at December 31, 1997 and 1996...................... 38
Statement of Consolidated Cash Flows for the three years
ended December 31, 1997 .................................................... 39
Statement of Consolidated Stockholders' Equity
for the three years ended December 31, 1997................................. 40-41
Notes to Consolidated Financial Statements.................................... 42-62
Report of Independent Public Accountants...................................... 63
2. Financial Statement Schedules
Caltex Group of Companies Combined Financial Statements, the
investments in which are accounted for on the equity method and are
filed as part of this report.
</TABLE>
Financial statements and schedules of certain affiliated companies have
been omitted in accordance with the provisions of Rule 3.09 of Regulation S-X.
Financial Statement Schedules are omitted as permitted under Rule 4.03 and
Rule 5.04 of Regulation S-X.
3. Exhibits
-- (3.1) Copy of Restated Certificate of Incorporation
of Texaco Inc., as amended to and including
September 10, 1997, including Certificate of
Designations, Preferences and Rights of Series B
ESOP Convertible Preferred Stock, Series D Junior
Participating Preferred Stock, Series F ESOP
Convertible Preferred Stock and Series G, H, I and J
Market Auction Preferred Shares, filed as Exhibit
3(a) to Texaco Inc.'s Registration Statement on Form
S-4 (No. 333-36679), dated September 29, 1997,
incorporated herein by reference, SEC File No. 1-27.
-- (3.2) Copy of By-Laws of Texaco Inc., as amended to
and including July 25, 1997, filed as Exhibit 3 to
Texaco Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 dated August
13, 1997, incorporated herein by reference, SEC
File No. 1-27.
-- (4) Instruments defining the rights of holders of long-
term debt of Texaco Inc. and its subsidiary
companies are not being filed, since the total
amount of securities authorized under each of such
instruments does not exceed 10 percent of the total
assets of Texaco Inc. and its subsidiary companies
on a consolidated basis. Texaco Inc. agrees to
furnish a copy of any instrument to the Securities
and Exchange Commission upon request.
-- (10(iii)(a)) Texaco Inc.'s 1997 Stock Incentive Plan,
incorporated herein by reference to Appendix A,
pages 39 through 44 of Texaco Inc.'s proxy statement
dated March 27, 1997, SEC File No. 1-27.
-- (10(iii)(b)) Texaco Inc.'s 1997 Incentive Bonus Plan,
incorporated herein by reference to Appendix A,
pages 45 and 46 of Texaco Inc.'s proxy statement
dated March 27, 1997, SEC File No. 1-27.
14
<PAGE>
-- (10(iii)(c)) Texaco Inc.'s Stock Incentive Plan, incorporated
herein by reference to pages A-1 through A-8 of
Texaco Inc.'s proxy statement dated April 5, 1993,
SEC File No. 1-27.
-- (10(iii)(d)) Texaco Inc.'s Stock Incentive Plan, incorporated
herein by reference to pages IV-1 through IV-5
of Texaco Inc.'s proxy statement dated April 10,
1989 and to Exhibit A of Texaco Inc.'s proxy
statement dated March 29, 1991, SEC File No. 1-27.
-- (10(iii)(e)) Texaco Inc.'s Incentive Bonus Plan, incorporated
herein by reference to page IV-5 of Texaco Inc.'s
proxy statement dated April 10, 1989, SEC File No.
1-27.
-- (10(iii)(f)) Description of Texaco Inc.'s Supplemental
Pension Benefits Plan, incorporated herein by
reference to pages 8 and 9 of Texaco Inc.'s proxy
statement dated March 17, 1981, SEC File No. 1-27.
-- (10(iii)(g)) Description of Texaco Inc.'s Revised Supplemental
Pension Benefits Plan, incorporated herein by
reference to pages 24 through 27 of Texaco Inc.'s
proxy statement dated March 9, 1978, SEC File
No. 1-27.
-- (10(iii)(h)) Description of Texaco Inc.'s Revised Incentive
Compensation Plan, incorporated herein by reference
to pages 10 and 11 of Texaco Inc.'s proxy statement
dated March 13, 1969, SEC File No. 1-27.
-- (12.1) Computation of Ratio of Earnings to Fixed Charges of
Texaco on a Total Enterprise Basis.
-- (12.2) Definitions of Selected Financial Ratios.
-- (13) Copy of those portions of Texaco Inc.'s 1997 Annual
Report to Stockholders that are incorporated herein
by reference into this Annual Report on Form 10-K.
-- (21) Listing of significant Texaco Inc. subsidiary
companies and the name of the state or other
jurisdiction in which each subsidiary was
organized.
-- (23) Consent of Arthur Andersen LLP.
-- (24) Powers of Attorney for the Directors and certain
Officers of Texaco Inc. authorizing, among other
things, the signing of Texaco Inc.'s Annual Report
on Form 10-K on their behalf.
-- (27) Financial Data Schedule.
(b) -- Reports on Form 8-K.
During the fourth quarter of 1997, Texaco Inc. filed Current Reports
on Form 8-K relating to the following events:
1. October 21, 1997 (date of earliest event reported: October
21, 1997)
Item 5. Other Events -- reported that Texaco issued an
Earnings Press Release for the third quarter and first
nine months of 1997.
2. November 6, 1997 (date of earliest event reported: November 4,
1997)
Item 5. Other Events -- reported that the shareholders of
Monterey Resources, Inc. approved the merger of Monterey
with a subsidiary of the Registrant, effective November 4,
1997. The transaction, valued at $1.4 billion, included
the issuance of $1.1 billion of Texaco common stock and
$.3 billion of existing Monterey debt.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of
Harrison, State of New York, on the 18th day of March, 1998.
TEXACO INC.
(Registrant)
CARL B. DAVIDSON
By ........................................
(CARL B. DAVIDSON)
Vice President and Secretary
Attest:
R. E. KOCH
By .......................................
(R. E. KOCH)
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
PETER I. BIJUR .................. Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
PATRICK J. LYNCH ............... Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
ROBERT C. OELKERS .............. Vice President and Comptroller
(Principal Accounting Officer)
</TABLE>
Directors:
PETER I. BIJUR THOMAS S. MURPHY
JOHN BRADEMAS SAM NUNN
MARY K. BUSH CHARLES H. PRICE, II
WILLARD C. BUTCHER ROBIN B. SMITH
EDMUND M. CARPENTER WILLIAM C. STEERE, JR.
MICHAEL C. HAWLEY THOMAS A. VANDERSLICE
FRANKLYN G. JENIFER WILLIAM WRIGLEY
R. E. KOCH
By .......................................
(R. E. KOCH)
Attorney-in-fact for the above-named
officers and directors
March 18, 1998
16
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
December 31, 1997
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
December 31, 1997
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
INDEX
Page
----
<S> <C>
General Information 1-4
Independent Auditors' Report 5
Combined Balance Sheet 6-7
Combined Statement of Income 8
Combined Statement of Stockholders' Equity 9
Combined Statement of Cash Flows 10
Notes to Combined Financial Statements 11-22
<FN>
Note: Financial statement schedules are omitted as permitted by Rule 4.03 and Rule 5.04 of Regulation S-X.
</FN>
</TABLE>
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
The Caltex Group of Companies (Group) is jointly owned 50% each by Chevron
Corporation and Texaco Inc. and was created in 1936 by its two owners to
produce, transport, refine and market crude oil and petroleum products.
The Group is comprised of the following companies:
o Caltex Petroleum Corporation, a company incorporated in Delaware that,
through its many subsidiaries and affiliates, conducts refining,
transporting, and marketing activities in the Eastern Hemisphere;
o P. T. Caltex Pacific Indonesia, an exploration and production company
incorporated and operating in Indonesia; and,
o American Overseas Petroleum Limited, a company incorporated in the
Bahamas, that, through its subsidiary, provides services for and manages
certain exploration and production operations in Indonesia in which
Chevron and Texaco have interests, but not necessarily jointly or in the
same properties.
A brief description of each company's operations and other items follow:
Caltex Petroleum Corporation (Caltex)
- - -------------------------------------
Through its subsidiaries and affiliates, Caltex operates in approximately
60 countries, principally in Africa, Asia, the Middle East, New Zealand and
Australia. Caltex is involved in all aspects of the downstream business:
refining, distribution, shipping, storage, marketing, supply and trading
operations. At year end 1997, Caltex had over 7,600 employees, of which
approximately 3% were located in the United States.
The majority of refining and certain marketing operations are conducted
through joint ventures. Caltex has equity interests in 13 refineries with a
refining capacity of more than 900,000 barrels per day. Caltex continues to
improve its refineries with investments designed to provide higher yields and
meet environmental regulations. Additionally, it has interests in two lubricant
refineries, six asphalt plants, 17 lubricating oil blending plants and more than
500 ocean terminals and depots. Caltex also has an interest in a fleet of
vessels and owns or has equity interests in numerous pipelines. Caltex sales of
crude oil and petroleum products were 1.4 million barrels per day in 1997.
Caltex and its affiliates maintain a strong marketing presence through a
network of 7,900 retail outlets, of which 4,600 are branded as Caltex. It also
operates 305 Star Mart convenience stores. A significant portion of the $2.3
billion that Caltex plans to invest over the next three years is targeted to
stimulate retail growth and continue the roll-out of the company's new corporate
and retail image.
Caltex introduced a new corporate and retail identity in 1996 and is
actively pursuing its objective of reimaging over 3,000 branded sites by 2000.
Underperforming stations with poor prospects for improvement are being
eliminated. New Caltex Star Mart convenience stores anchor many high-volume
station locations. Many stations also include new ancillary revenue centers such
as quick-service restaurants, auto lube bays and brushless car washes.
In 1997, Caltex continued its refinery upgrade projects in the Philippines
and Korea and enhanced its role in Australia through an affiliate's acquisition
of the remaining 50% interest in Australian Petroleum Pty. Limited (APPL)
thereby becoming the largest oil company in Australia. It also continued to make
inroads into emerging countries such as China, Vietnam, Indonesia and India in
selected product markets. Caltex increased its market share in Thailand by
acquiring British Petroleum's retail service station network of 47 sites, and
has entered the independent power producer market in Japan through an affiliate.
In addition to the retail initiatives, Caltex has created specialized
business units that are helping Caltex operating companies position themselves
for larger shares of the high-growth markets for lubricating oils and greases,
aviation fuels, and liquefied petroleum gas. Caltex conducts international crude
oil and petroleum product logistics and trading operations from a subsidiary in
Singapore. Caltex is also active in the petrochemical business, particularly in
Japan and Korea.
1
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
P. T. Caltex Pacific Indonesia (CPI)
- - ------------------------------------
CPI holds a Production Sharing Contract in Central Sumatra through the
year 2021. CPI also acts as operator in Sumatra for eight other petroleum
contract areas, with 33 fields, which are jointly held by Chevron and Texaco.
Exploration is pursued through an area comprising 18.3 million acres with
production established in the giant Minas and Duri fields, along with smaller
fields. Gross production from fields operated by CPI for 1997 was over 765,000
barrels per day. CPI entitlements are sold to its stockholders, who use them in
their systems or sell them to third parties. At year end 1997, CPI had
approximately 6,100 employees, all located in Indonesia.
American Overseas Petroleum Limited (AOPL)
- - ------------------------------------------
In addition to providing services to CPI, AOPL, through its subsidiary
Amoseas Indonesia Inc., manages selective contract areas for Texaco's and
Chevron's undivided interests in Indonesia, excluding Sumatra. At year end, AOPL
had approximately 250 employees, of which 6% were located in the United States.
Economic Uncertainties
- - ----------------------
During the second half of 1997, many of the countries in the Pacific Rim
experienced major devaluations in their currencies compared to the U.S. dollar.
The Group has significant operations (either subsidiary or affiliate) in most of
the "currency crisis" areas (Indonesia, Korea, Philippines, Thailand and
Malaysia), which are material to the Group's net income, cash flows and capital.
Such operations accounted for approximately 84% of the Group's earnings in 1997.
The economies and related oil consumption in the areas involved are being
negatively affected by the crisis. In some cases, normal short-term trade
related financing provided by international banks has been curtailed.
The devaluations in these five countries resulted in significant net
exchange gains of $211 million, $73 million of pre-tax exchange losses offset by
$284 million in net local tax benefits, inclusive of amounts applicable to
equity affiliates. The tax benefits resulted from the increase in the amount of
local currencies required to repay debt denominated in U.S. dollars. These tax
benefits are reflected in the income statement but the increased local currency
debt amounts are not, as there is no change in the U.S. dollar value of the
debt. A significant portion of the tax benefit has been recorded as a deferred
tax asset to be realized based on future local currency taxable income. Reported
earnings include additional reserves for potential bad debts related to the
currency crisis of $48 million.
Local currency selling prices for petroleum products in these markets
could not be immediately increased to fully recover prior dollar margins. The
most significant uncertainties that will affect Group operating results and cash
flows in these areas in 1998 are the ability to raise local currency selling
prices and restore dollar marketing margins, continued weak regional refining
margins and reduced demand and liquidity concerns relative to its operating
companies and their customers. Certain subsidiaries of Caltex Petroleum
Corporation, beginning in January 1998, provided short-term trade financing of
up to $500 million for a four-month period to its Korean affiliate. This support
is considered temporary.
The Group is further focusing on cost management and its recurring capital
investment in the areas involved. While the impact of the crisis on period
operating results has been, and is expected to continue to be significant, the
Group does not expect this will have a material effect on its consolidated
financial position or liquidity.
2
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Environmental Activities
- - ------------------------
The Group's activities are subject to various environmental, health and
safety regulations in each of the countries in which it operates. Such
regulations vary significantly in degree of scope, standards and enforcement.
The Group's policy is to comply with all applicable environmental, health and
safety laws and regulations as well as its own internal policies. The Group has
an active program to ensure that its environmental standards are maintained,
which includes closely monitoring applicable statutory and regulatory
requirements, as well as enforcement policies in each of the countries in which
it operates, and conducting periodic environmental compliance audits.
The environmental guidelines and definitions promulgated by the American
Petroleum Institute provide the basis for reporting the Group's expenditures.
For the year ended December 31, 1997, the Group, including its equity share of
affiliates, incurred total costs of approximately $160 million, including
capital costs of $98 million and nonremediation related operating expenses of
$62 million. The major component of the Group's expenditures is for the
prevention of air pollution. As of December 31, 1997, the Group had accrued $110
million for various known remediation activities, including $88 million relating
to the future cost of restoring and abandoning existing oil and gas properties.
While the Group has provided for known environmental obligations that are
probable and reasonably estimable, the amount of future costs may be material to
results of operations in the period in which they are recognized. However, the
Group believes that future environmental expenditures will not materially affect
its financial position or liquidity.
Year 2000 Compliance Issues
- - ---------------------------
The Group's computer systems, software and mechanical equipment containing
embedded technology are impacted by the year 2000 programming problems. Older
programs may incorrectly interpret this date causing systems and equipment to
shut down, produce erroneous information or malfunction.
The Group has established various teams to address these issues. While it
is not possible at this time to quantify the impact of this problem on the
operations of the Group, evaluations are currently underway to assess the risks
and compliance issues the Group is facing. Strategies are being developed to
mitigate risks, and correct various system and mechanical problems already
identified. The Group is also working with customers and suppliers to ensure
that data interfaces, equipment, software and other issues have been properly
identified and measures taken to protect the operations of the Group from
problems outside the organization.
Much of the cost of compliance is included in planned system or equipment
upgrades already scheduled or underway, although certain programs will be
accelerated to ensure that major problems are properly addressed before the
target dates. Other costs which are classified as incremental expenses will
represent a redeployment of existing resources. At this time, estimates of the
total incremental costs to be incurred to correct these issues are unavailable.
However, the Group believes that the cost of compliance with these issues will
not have a material effect on the Group's combined financial position, results
of operations or liquidity.
Refining Synergies
- - ------------------
During 1997, Caltex' Thailand affiliate, Star Petroleum Refining Company
(SPRC), and Rayong Refining Company (RRC), an affiliate of the Royal Dutch
Petroleum Company, signed a Memorandum of Understanding to pursue an operating
alliance to optimize the operations of the two nearby refineries as a single
economic group. Significant economic benefits are possible from this
arrangement. SPRC and RRC are currently evaluating various proposed structures
and synergies, as well as conducting discussions with lenders to ensure proper
concurrences are obtained. To date, discussions are still in the early stages
and no legally binding agreements have been executed.
3
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Supplemental Market Risk Disclosures
- - ------------------------------------
The Group uses derivative financial instruments for hedging purposes.
These instruments principally include interest rate and/or currency swap
contracts, forward and option contracts to buy and sell foreign currencies, and
commodity futures, options, swaps and other derivative instruments. Hedged
market risk exposures include certain portions of assets, liabilities, future
commitments and anticipated sales. Positions are adjusted for changes in the
exposures being hedged. Since the Group hedges only a portion of its market risk
exposures, market risk exposure remains on the unhedged portion. The Notes to
the financial statements provide data relating to derivatives and applicable
accounting policies.
Debt and debt-related derivatives
The Group is exposed to interest rate risk on its short-term and long-term
debt with variable interest rates (approximately $1.9 billion at December 31,
1997, before the effects of related net interest rate swaps of $0.4 billion).
The Group seeks to balance the benefit of lower cost variable rate debt, having
inherent increased risk, with more expensive, but less risky fixed rate debt.
This is accomplished through adjusting the mix of fixed and variable rate debt,
as well as the use of derivative financial instruments, principally interest
rate swaps.
Based on the overall interest rate exposure on variable rate debt and
interest rate swaps taken separately at December 31, 1997, a hypothetical 2%
change in the interest rates would not materially affect the Group's combined
financial position, net income or liquidity.
Crude oil and petroleum product hedging
The Group hedges a portion of the market risks associated with its crude
oil and petroleum product purchases and sales. The Group uses established
petroleum futures exchanges, as well as "over-the counter" hedge instruments,
including futures, options, swaps, and other derivative products which reduce
the Group's exposure to price volatility in the physical markets.
As a sensitivity, a hypothetical 13% change in crude oil and petroleum
product prices would not result in a material loss on the outstanding
derivatives at the end of 1997, in terms of the Group's financial position,
results of operations or liquidity.
Currency-related derivatives
The Group is exposed to foreign currency exchange risk in the countries in
which it operates. To hedge against adverse changes in foreign currency exchange
rates against the U.S. dollar, the Group sometimes enters into forward exchange
and option contracts. Depending on the exposure being hedged, the Group either
purchases or sells selected foreign currencies. At year end 1997, the Group had
net local currency purchase contracts of approximately $417 million to hedge
certain specific transactions or net exposures including foreign currency
denominated debt. A hypothetical 10% change in exchange rates against the U.S.
dollar would not result in a net material change in the Group's operating
results or cash flows from the derivatives and their related underlying hedged
positions as of the end of 1997.
4
<PAGE>
[logo] KPMG Peat Marwick LLP
Independent Auditors' Report
----------------------------
To the Stockholders
The Caltex Group of Companies:
We have audited the accompanying combined balance sheets of the Caltex
Group of Companies as of December 31, 1997 and 1996, and the related combined
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These combined financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of the Caltex
Group of Companies as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 9, 1998
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
As of December 31
------------------------
(Millions of dollars)
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including time deposits of
$69 in 1997 and $21 in 1996 $ 282 $ 206
Marketable securities 82 116
Accounts and notes receivable, less allowance for doubtful accounts of $21
in 1997 and $18 in 1996:
Trade 808 864
Affiliates 368 452
Other 360 318
-------- -------
1,536 1,634
Inventories:
Crude oil 127 159
Petroleum products 437 503
Materials and supplies 28 53
-------- -------
592 715
Deferred income taxes 29 10
-------- -------
Total current assets 2,521 2,681
Investments and advances:
Equity in affiliates 2,035 1,842
Miscellaneous investments and long-term receivables,
less allowance of $13 in 1997 116 153
-------- -------
Total investments and advances 2,151 1,995
Property, plant, and equipment, at cost:
Producing 4,058 3,721
Refining 1,272 1,550
Marketing 2,892 2,451
Other 13 8
-------- -------
8,235 7,730
Accumulated depreciation, depletion and amortization (3,393) (3,217)
-------- -------
Net property, plant and equipment 4,842 4,513
Prepaid and deferred charges 200 206
-------- -------
Total assets $ 9,714 $ 9,395
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
6
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
As of December 31
------------------------
(Millions of dollars)
1997 1996
---- ----
<S> <C> <C>
Current liabilities:
Short-term debt $ 1,554 $ 1,246
Accounts payable:
Trade and other 1,053 1,236
Stockholders 102 176
Affiliates 60 84
-------- -------
1,215 1,496
Accrued liabilities 138 148
Estimated income taxes 84 109
-------- -------
Total current liabilities 2,991 2,999
Long-term debt 770 713
Employee benefit plans 106 107
Deferred credits and other noncurrent liabilities 1,050 949
Deferred income taxes 190 249
Minority interest in subsidiary companies 15 122
-------- -------
Total 5,122 5,139
Stockholders' equity:
Common stock 355 355
Capital in excess of par value 2 2
Retained earnings 4,342 3,910
Currency translation adjustment (120) (36)
Unrealized holding gain on investments 13 25
-------- -------
Total stockholders' equity 4,592 4,256
-------- -------
Total liabilities and stockholders' equity $ 9,714 $ 9,395
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF INCOME
Year ended December 31
----------------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales and other operating revenues(1) $ 17,920 $ 16,895 $ 15,067
Gain on sale of investment in affiliate - 1,132 -
Income in equity affiliates 390 51 425
Dividends, interest and other income 47 88 130
--------- --------- --------
Total revenues 18,357 18,166 15,622
Costs and deductions:
Cost of sales and operating expenses(2) 15,909 14,774 13,045
Selling, general and administrative expenses 580 532 620
Depreciation, depletion and amortization 421 407 361
Maintenance and repairs 143 134 104
Foreign exchange, net (55) 6 (37)
Interest expense 146 140 159
Minority interest 3 (2) 4
--------- --------- --------
Total costs and deductions 17,147 15,991 14,256
--------- --------- --------
Income before income taxes 1,210 2,175 1,366
Provision for income taxes 364 982 467
--------- --------- --------
Net income $ 846 $ 1,193 $ 899
========= ========= ========
(1) Includes sales to:
Stockholders $1,695 $1,711 $1,376
Affiliates 3,018 2,841 1,524
(2) Includes purchases from:
Stockholders $2,174 $2,634 $1,834
Affiliates 1,813 1,297 1,638
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(Millions of dollars)
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Common stock and capital in excess of par value $ 357 $ 357 $ 357
======== ======== =======
Retained earnings:
Balance at beginning of year $ 3,910 $ 4,187 $ 3,898
Net income 846 1,193 899
Cash dividends (414) (1,470) (610)
-------- -------- -------
Balance at end of year $ 4,342 $ 3,910 $ 4,187
======== ======== =======
Currency translation adjustment:
Balance at beginning of year $ (36) $ 350 $ 399
Sale of investment in affiliate - (240) -
Other changes during the year (84) (146) (49)
---------- -------- -------
Balance at end of year $ (120) $ (36) $ 350
======== ======== =======
Unrealized holding gain on investments:
Balance at beginning of year $ 25 $ 65 $ 79
Change during the year (12) (40) (14)
---------- -------- -------
Balance at end of year $ 13 $ 25 $ 65
======== ======== =======
Total stockholders' equity - end of year $ 4,592 $ 4,256 $ 4,959
======== ======== =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31
--------------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 846 $1,193 $ 899
Reconciliation to net cash provided by operating activities:
Depreciation, depletion and amortization 421 407 361
Dividends (less) more than income in equity affiliates (347) 38 (349)
Net losses on asset sales 16 10 11
Deferred income taxes (51) 36 18
Prepaid charges and deferred credits 103 38 69
Changes in operating working capital (150) (7) (27)
Gain on sale of investment in affiliate - (1,132) -
Other (13) (12) 66
-------- ------- ------
Net cash provided by operating activities 825 571 1,048
Investing activities:
Capital expenditures (905) (741) (663)
Investments in and advances to affiliates (10) (30) (150)
Net sales (purchases) of investment instruments 34 (55) (7)
Proceeds from sale of investment in affiliate - 1,984 -
Proceeds from asset sales 156 95 46
------- ------- ------
Net cash (used for) provided by investing activities (725) 1,253 (774)
Financing activities:
Debt with terms in excess of three months :
Borrowings 845 1,112 1,063
Repayments (628) (1,351) (1,093)
Net increase (decrease) in other debt 323 (53) 275
Dividends paid, including minority interest (414) (1,490) (617)
------- ------- ------
Net cash provided by (used for) financing activities 126 (1,782) (372)
Effect of exchange rate changes on cash and cash equivalents (150) (2) 13
------- ------- ------
Cash and cash equivalents:
Net change during the year 76 40 (85)
Beginning of year balance 206 166 251
------- ------- ------
End of year balance $ 282 $ 206 $ 166
======= ======= ======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
10
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Principles of combination The combined financial statements of the Caltex Group
of Companies (Group) include the accounts of Caltex Petroleum Corporation and
subsidiaries, American Overseas Petroleum Limited and subsidiary, and P.T.
Caltex Pacific Indonesia. Intercompany transactions and balances have been
eliminated. Subsidiaries include companies owned directly or indirectly more
than 50 percent except cases in which control does not rest with the Group.
Chevron Corporation and Texaco Inc. (stockholders), through subsidiary
companies, each own 50% of the common shares of the Group companies. The Group
is primarily engaged in exploring, producing, refining, transporting and
marketing crude oil and petroleum products in the Asia-Pacific and East-of-Suez
Regions. The Group's accounting policies are in accordance with United States
generally accepted accounting principles.
Translation of foreign currencies The U.S. dollar is the functional currency for
all principal subsidiary and affiliate operations. Effective October 1, 1997,
the Group changed the functional currency for its affiliates in Japan and Korea
from the local currency to the U.S. dollar. Major changes in economic facts and
circumstances, including a significant reduction in regulatory restrictions for
petroleum products in those countries, supported this change in functional
currency.
The change in functional currency is applied on a prospective basis. The
U.S. dollar translated amounts of nonmonetary assets and liabilities at
September 30, 1997 become the historical accounting basis for those assets and
liabilities at October 1, 1997 and for subsequent periods. As a result of the
change in functional currency, translation gains and losses on U.S. dollar
denominated assets and liabilities of these affiliates will not arise in the
Group's financial statements for periods after September 30, 1997. The $83
million cumulative translation adjustments for Korea and Japan at September 30,
1997 recorded prior to the change will remain as a separate component of
stockholders' equity.
Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.
Short-term investments All highly liquid investments are classified as available
for sale. Those with a maturity of three months or less when purchased are
considered as "Cash equivalents" and those with longer maturities are classified
as "Marketable securities".
Inventories Crude oil and petroleum product inventories are stated at cost,
primarily determined using the last-in, first-out (LIFO) method. Costs include
applicable acquisition and refining costs, duties, import taxes, freight, etc.
Materials and supplies are stated at average cost. Inventories are valued at the
lower of cost or current market.
Investments and advances Investments in affiliates in which the Group has an
ownership interest of 20% to 50% or majority-owned investments where control
does not rest with the Group, are accounted for by the equity method. The
Group's share of earnings or losses of these companies is included in current
results, and the recorded investments reflect the underlying equity in each
company. Investments in other affiliates are carried at cost and dividends are
reported as income.
Property, plant and equipment Exploration and production activities are
accounted for under the successful efforts method. Depreciation, depletion and
amortization expenses for capitalized costs relating to producing properties,
including intangible development costs, are determined using the
unit-of-production method. All other assets are depreciated by class on a
straight-line basis using rates based upon the estimated useful life of each
class.
11
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Maintenance and repairs necessary to maintain facilities in operating
condition are charged to income as incurred. Additions and improvements that
materially extend the life of assets are capitalized. Upon disposal of assets,
any net gain or loss is included in income.
Derivative financial instruments The Group uses various derivative financial
instruments for hedging purposes. These instruments principally include interest
rate and/or currency swap contracts, forward and option contracts to buy and
sell foreign currencies, and commodity futures, options, swaps and other
derivative instruments. Hedged market risk exposures include certain portions of
assets, liabilities, future commitments and anticipated sales. Prior realized
gains and losses on hedges of existing nonmonetary assets are included in the
carrying value of those assets. Gains and losses related to qualifying hedges of
firm commitments or anticipated transactions are deferred and recognized in
income when the underlying hedged transaction is recognized in income. If the
derivative instrument ceases to be a hedge, the related gains and losses are
recognized currently in income. Gains and losses on derivative contracts that do
not qualify as hedges are recognized currently in other income.
Accounting for contingencies Certain conditions may exist as of the date
financial statements are issued, which may result in a loss to the Group, but
which will only be resolved when one or more future events occur or fail to
occur. Assessing contingencies necessarily involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Group or unasserted claims that may result in such proceedings, the
Group evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability is accrued in the Group's financial
statements. If the assessment indicates that a potentially material liability is
not probable, but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable are disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature and amount of the guarantee
would be disclosed. However, in some instances in which disclosure is not
otherwise required, the Group may disclose contingent liabilities of an unusual
nature which, in the judgment of management and its legal counsel, may be of
interest to stockholders or others.
Environmental matters The Group's environmental policies encompass the existing
laws in each country in which the Group operates and the Group's own internal
standards. Expenditures that create future benefits or contribute to future
revenue generation are capitalized. Future remediation costs are accrued based
on estimates of known environmental exposure even if uncertainties exist about
the ultimate cost of the remediation. Such accruals are based on the best
available undiscounted estimates using data primarily developed by third party
experts. Costs of environmental compliance for past and ongoing operations,
including maintenance and monitoring, are expensed as incurred. Recoveries from
third parties are recorded as assets when realizable.
Reclassifications Certain amounts for 1996 have been reclassified to conform
with the current year's presentation.
Note 2 - Asset Sale
Effective April 1, 1997 Caltex Trading and Transport Corporation, a
subsidiary of the Group, sold its 40% interest in its Bahrain refining joint
venture (Bapco) plus related assets to its partner, the Government of the State
of Bahrain, at net book value of approximately $140 million.
12
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 3 - Inventories
The excess of current cost over the reported value of inventory maintained
on the LIFO basis was approximately $28 million and $125 million at December 31,
1997 and 1996, respectively.
During the periods presented, inventory quantities valued on the LIFO
basis were reduced at certain locations. Inventory reductions, net of related
market valuation adjustments ($14 million in 1997), decreased net income $5
million in 1997 and $1 million in 1995 and increased net income $4 million in
1996.
Certain inventories were recorded at market, which was lower than the LIFO
carrying value. Adjustments to market reduced earnings $36 million in 1997.
Earnings increased $29 million in 1996 and $25 million in 1995 due to recovery
of market values over previous years' writedowns.
Note 4 - Equity in affiliates
Investments in affiliates at equity include the following:
<TABLE>
<CAPTION>
As of December 31
----------------------
(Millions of dollars)
Equity % 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Caltex Australia Limited (Australian Petroleum Pty. Limited ) 50% $ 300 $ 336
Koa Oil Company, Limited 50% 353 364
LG-Caltex Oil Corporation 50% 999 739
Star Petroleum Refining Company, Ltd. 64% 228 287
All other Various 155 116
-------- -------
$ 2,035 $ 1,842
======== =======
</TABLE>
The carrying value of the Group's investment in its affiliates in excess
of its proportionate share of affiliate net equity is being amortized over
approximately 20 years.
In 1995, Caltex Australia Limited (CAL), a subsidiary of the Group,
combined its petroleum refining and marketing operations with those of Ampol
Limited to form Australian Petroleum Pty. Limited (APPL) which owns and manages
the combined refining and marketing operations. CAL contributed net assets at
their carrying value of $419 million for its 50% equity interest in APPL and no
gain or loss was recognized.
On December 31, 1997, CAL acquired the remaining 50% of APPL from its
partner, a subsidiary of Pioneer International Limited, for approximately $186
million in cash plus the issuance of an additional 90 million shares of CAL
stock. As a result of this transaction, the Group's equity in CAL has declined
from 75% to 50% and its indirect equity in APPL has increased to 50% from 37.5%.
This transaction was recorded as a purchase. CAL is now classified as an
affiliate and the individual assets and liabilities have been excluded from the
Group's consolidated financial statements for 1997.
Effective April 1, 1996, the Group sold its 50% investment in Nippon
Petroleum Refining Company, Limited (NPRC) to its partner, Nippon Oil Company,
Limited (NOC) for approximately $2 billion in cash. The Group's net income in
1996 includes a net after-tax gain of approximately $620 million related to this
sale. The combined statement of income includes Group product sales to NOC of
approximately $0.5 billion in the first quarter of 1996 and $2.1 billion in
1995.
During 1995, an affiliate sold certain property required by the local
government. The Group's share (approximately $171 million) of the resulting gain
was included in the Group's 1995 net income.
13
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Equity in affiliates - continued
The remaining interest in Star Petroleum Refining Company, Ltd. (SPRC) is
owned by a Thailand governmental entity. Provisions in the SPRC shareholders
agreement limit the Group's control and provide for active participation of the
minority shareholder in routine business operating decisions. The agreement also
mandates reduction in Group ownership to a minority position by the year 2000,
however, it is likely that this will be delayed in view of the current economic
difficulties.
Shown below is summarized financial information for these affiliates (in
millions of dollars):
<TABLE>
<CAPTION>
100% Equity Share
---------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Current assets $ 4,768 $ 6,128 $ 2,400 $ 3,075
Other assets 7,345 7,303 3,867 3,836
Current liabilities 4,740 5,191 2,411 2,618
Other liabilities 3,483 4,768 1,879 2,533
-------- -------- -------- --------
Net worth $ 3,890 $ 3,472 $ 1,977 $ 1,760
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
100% Equity Share
---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 14,669 $ 15,436 $ 15,396 $ 7,452 $ 7,751 $ 7,674
Operating income 1,078 749 955 532 364 472
Net income 853 133 859 390 51 425
</TABLE>
Cash dividends received from these affiliates were $43 million, $89
million, and $76 million in 1997, 1996 and 1995, respectively.
Retained earnings as of December 31, 1997 and 1996, includes $1.4 billion
and $1.0 billion, respectively, representing the Group's share of undistributed
earnings of affiliates at equity.
Note 5 - Short-term debt
Short term debt consists primarily of demand and promissory notes,
acceptance credits, overdrafts and the current portion of long-term debt. The
weighted average interest rates on short-term financing as of December 31, 1997
and 1996 were 7.9% and 7.5%, respectively. Unutilized lines of credit available
for short-term financing totaled $411 million as of December 31, 1997.
14
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Long-term debt
Long-term debt, with related interest rates for 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
As of December 31
--------------------
(Millions of dollars)
1997 1996
---- ----
<S> <C> <C>
U.S. dollar debt:
Variable interest rate term loans $ 348 $ 294
Fixed interest rate term loans
with 6.40% and 6.25% average rates 100 110
Australian dollar debt:
Promissory notes payable with
6.73 % average rate - 20
Fixed interest rate loan with
11.2% rate due 2001 218 224
New Zealand dollar debt:
Variable interest rate term loans 63 46
Fixed interest rate loan with
8.09% rate due 2000 6 7
Malaysian ringgit debt:
Fixed interest rate loan with
8.56% and 6.32% average rates 21 8
South African rand debt:
Fixed interest rate loan with
17.8% rate due 2003 9 -
Other 5 4
----- ------
$ 770 $ 713
===== ======
</TABLE>
Aggregate maturities of long -term debt for the next five years are as
follows (in millions of dollars): 1998 - $62 (included in short-term debt); 1999
- - - $75; 2000 - $133; 2001- $379; 2002 - $174; 2003 and thereafter - $9.
Note 7 - Operating leases
The Group has operating leases involving various marketing assets for
which net rental expense was $105 million, $92 million, and $91 million in 1997,
1996 and 1995, respectively.
Future net minimum rental commitments under operating leases having
non-cancelable terms in excess of one year are as follows (in millions of
dollars): 1998 - $44; 1999 - $36; 2000 - $32; 2001 - $34; 2002 - $33, and 2003
and thereafter - $48.
15
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee benefit plans
The Group has various retirement plans. Generally, these plans provide
defined benefits based on final or final average pay. The benefit levels,
vesting terms and funding practices vary among plans.
The funded status of retirement plans, primarily foreign and inclusive of
affiliates at equity, is as follows:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------
(Millions of dollars)
Assets Exceed Accumulated
Accumulated Benefits
Funding Status Benefits Exceed Assets
-------------- ----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value :
Vested benefit obligation $ 184 $ 203 $ 74 $ 88
Accumulated benefit obligation 197 224 93 113
Projected benefit obligation 293 387 112 136
Amount of assets available for benefits :
Funded assets at fair value $ 276 $ 348 $ 46 $ 51
Net pension (asset) liability recorded (15) (3) 54 67
----- ------ ------ ------
Total assets $ 261 $ 345 $ 100 $ 118
===== ====== ====== ======
Assets less than projected benefit obligation $ (32) $ (42) $ (12) $ (18)
Consisting of:
Unrecognized transition net assets
(liabilities) 1 - (4) (9)
Unrecognized net losses (26) (26) (6) (6)
Unrecognized prior service costs (7) (16) (2) (3)
Weighted average rate assumptions:
Discount rate 9.7% 10.9% 5.0% 5.6%
Rate of increase in compensation 7.8% 8.6% 2.8% 3.3%
Expected return on plan assets 10.3% 11.0% 4.0% 4.5%
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
(Millions of dollars)
Components of Pension Expense 1997 1996 1995
----------------------------- ---- ---- ----
<S> <C> <C> <C>
Cost of benefits earned during the year $ 26 $ 26 $ 32
Interest cost on projected benefit obligation 44 46 55
Actual return on plan assets (41) (40) (47)
Net amortization and deferral 11 10 12
----- ------ ------
Total $ 40 $ 42 $ 52
===== ====== ======
</TABLE>
16
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies
On June 17, 1997, Caltex Petroleum Corporation (CPC) received a claim from
the U.S. Internal Revenue Service (IRS) for $292 million in excise tax, along
with penalties and interest bringing the total to approximately $2 billion. The
IRS claim relates to crude oil sales to Japanese customers beginning in 1980.
Prior to this time, CPC directly supplied crude oil to its Japanese customers,
however, in 1980, a CPC subsidiary also became a contractual supplier of crude
oil. The IRS position is that the additional supplier constituted a transfer of
property, and was thus taxable. CPC is challenging the claim since the addition
of another supplying company was not a taxable event. Additionally, CPC believes
the claim is based on an overstated value. Finally, CPC disagrees with the
imposition and calculation of interest and penalties. CPC believes the
underlying excise tax claim is wrong, it also believes the related claim for
penalties is wrong and the IRS claim for interest is flawed. CPC is challenging
the claim and fully expects to prevail.
To litigate this claim, CPC has been required to maintain a letter of
credit in the amount of $2.3 billion, including interest for 1998. This letter
was provided to the IRS during February, 1998. For excise taxes, unlike income
taxes, the taxpayer is required to pay a portion of the tax liability to gain
access to the courts. The required cash payment will not have a material impact
on the Group's financial position or liquidity.
CPC also is involved in IRS tax audits for years 1987-1993. While no
claims have been asserted by the IRS for these years, in the opinion of
management, adequate provision has been made for income taxes for all years
either under examination or subject to future examination.
CPC and certain of its subsidiaries are named as defendants, along with
privately held Philippine ferry and shipping companies and the shipping
company's insurer, in various lawsuits filed in the U.S. and the Philippines on
behalf of at least 3,350 parties, who were either survivors of, or relatives of
persons who allegedly died in a collision in Philippine waters on December 20,
1987. One vessel involved in the collision was carrying CPC products in
connection with a contract of affreightment. Although CPC had no direct or
indirect ownership in or operational responsibility for either vessel, various
theories of liability have been alleged against CPC. The major suit filed in the
U.S. (Louisiana State Court) does not mention a specific monetary recovery
although the pleadings contain a variety of demands for various categories of
compensatory as well as punitive damages. Consequently, no reasonable estimate
of damages involved or being sought can be made at this time. CPC sought to
preclude the plaintiffs from pursuing the Louisiana litigation on various
federal and procedural grounds. Having pursued these remedies in the federal
court system without success (including a denial of a writ of certiorari by the
U.S. Supreme Court), CPC management intends to continue to contest all of the
foregoing litigation vigorously on various substantive and procedural grounds.
The Group may be subject to loss contingencies pursuant to environmental
laws and regulations in each of the countries in which it operates that, in the
future, may require the Group to take action to correct or remediate the effects
on the environment of prior disposal or release of petroleum substances by the
Group. The amount of such future cost is indeterminable due to such factors as
the nature of the new regulations, the unknown magnitude of any possible
contamination, the unknown timing and extent of the corrective actions that may
be required, and the extent to which such costs are recoverable from third
parties.
In the Group's opinion, while it is impossible to ascertain the ultimate
legal and financial liability, if any, with respect to the above mentioned and
other contingent liabilities, the aggregate amount that may arise from such
liabilities is not anticipated to be material in relation to the Group's
combined financial position or liquidity, or results of operations over a
reasonable period of time.
In 1996, a CPC subsidiary entered into a contractual commitment, for a
period of eleven years, to purchase petroleum products in conjunction with the
financing of a refinery owned by an affiliate. Total future estimated
commitments (in billions of dollars) for CPC under this and other similar
contracts, based on current pricing and projected growth rates, are: 1998 -
$0.7, 1999 - $0.8, 2000 - $0.8, 2001 - $0.8, 2002 - $0.7, and 2003 to expiration
of contracts - $3.6. Purchases (in billions of dollars) under this and other
similar contracts were $1.0, $0.8, and $0.5 in 1997, 1996 and 1995,
respectively.
17
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies - continued
CPC is contingently liable for sponsor support funding for both
construction completion (maximum $192 million) and post-completion loan
repayments (maximum $304 million) in connection with an affiliate's project
finance obligations. While the project is operational, construction completion
as defined includes achieving extended continuous operation and satisfying
certain financial conditions, which contractually must be met or resolved by
June 30, 1998. The post-completion support declines progressively as the related
long-term loans are repaid (final payment due 2010). As of December 31, 1997,
there have been no calls made by lenders on either type of sponsor support.
However, CPC has provided short-term extended trade credit related to crude oil
supply of approximately $144 million to the affiliate as of December 31, 1997.
Discussions are ongoing with the lenders and the Group anticipates that some
sponsor support will be required, including replacing existing extended trade
credit. However, the Group believes that this support will not have a material
impact on its combined financial position or liquidity, or results of operations
over a reasonable period of time.
Note 10 - Financial Instruments
Certain Group companies are parties to financial instruments with
off-balance sheet credit and market risk, principally interest rate risk. The
Group's outstanding commitments for interest rate swaps and foreign currency
contractual amounts are:
<TABLE>
<CAPTION>
As of December 31
-----------------------
(Millions of dollars)
1997 1996
---- ----
<S> <C> <C>
Interest rate swaps - Pay Fixed, Receive Floating $ 591 $ 460
Interest rate swaps - Pay Floating, Receive Fixed 209 265
Commitments to purchase foreign currencies 467 417
Commitments to sell foreign currencies 50 11
</TABLE>
The Group enters into interest rate swaps in managing its interest risk,
and their effects are recognized in the statement of income at the same time as
the interest expense on the debt to which they relate. The swap contracts have
remaining maturities of up to eight years. Unrealized gains and losses on
contracts outstanding at year-end 1997 and 1996 were not material.
The Group enters into forward exchange contracts to hedge against some of
its foreign currency exposure stemming from existing liabilities and firm
commitments. Contracts to purchase foreign currencies (principally Australian
and Singapore dollars) hedging existing liabilities have maturities of up to
four years. Unrealized gains and losses applicable to outstanding forward
exchange contracts at December 31, 1997 and 1996 were not material.
The Group hedges a portion of the market risks associated with its crude
oil and petroleum product purchases and sales. Established petroleum futures
exchanges are used, as well as "over-the counter" hedge instruments, including
futures, options, swaps, and other derivative products which reduce the Group's
exposure to price volatility in the physical markets. The derivative positions
are marked-to-market for valuation purposes. Gains and losses on hedges are
deferred and recognized concurrently with the underlying commodity transactions.
Derivative gains and losses not considered as a hedge are recognized currently
in income. Open positions and related unrealized gains and losses on
commodity-based derivative hedging contracts outstanding as of December 31, 1997
and 1996 were not material.
The Group's long-term debt of $770 million and $713 million as of December
31, 1997 and 1996, respectively, had fair values of $731 million and $756
million as of December 31, 1997 and 1996, respectively. The fair value estimates
were based on the present value of expected cash flows discounted at current
market rates for similar obligations. The reported amounts of financial
instruments such as cash and cash equivalents, marketable securities, notes and
accounts receivable, and all current liabilities approximate fair value because
of their short maturities.
18
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10 - Financial Instruments - continued
The Group had investments in debt securities available-for-sale at
amortized costs of $82 million and $116 million at December 31, 1997 and 1996,
respectively. The fair value of these securities at December 31, 1997 and 1996
approximates amortized costs. As of December 31, 1997 and 1996, investments in
debt securities available-for-sale had maturities less than ten years. As of
December 31, 1997 and 1996, the Group's carrying amount for investments in
affiliates accounted for at equity included $12 million and $25 million,
respectively, for after tax unrealized net gains on investments held by these
companies.
The Group is exposed to credit risks in the event of non-performance by
counterparties to financial instruments. For financial instruments with
institutions, the Group does not expect any counterparty to fail to meet its
obligations given their high credit ratings. Other financial instruments exposed
to credit risk consist primarily of trade receivables. These receivables are
dispersed among the countries in which the Group operates, thus limiting
concentration of such risk.
The Group performs ongoing credit evaluations of its customers and
generally does not require collateral. Letters of credit are the principal
security obtained to support lines of credit when the financial strength of a
customer is not considered sufficient. Credit losses have historically been
within management's expectations.
Note 11 - Taxes
Taxes charged to income consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes other than income taxes (International):
Duties, import and excise taxes $ 1,409 $ 1,349 $ 1,660
Other 19 18 29
-------- -------- -------
Total taxes other than income taxes $ 1,428 $ 1,367 $ 1,689
======== ======== =======
Income taxes:
U.S. taxes :
Current $ 8 $ 455 $ 24
Deferred (2) 19 (23)
-------- -------- -------
Total U.S. 6 474 1
-------- -------- -------
International taxes:
Current 407 491 425
Deferred (49) 17 41
-------- -------- -------
Total International 358 508 466
-------- -------- -------
Total provision for income taxes $ 364 $ 982 $ 467
======== ======== =======
</TABLE>
19
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Income taxes have been computed on an individual company basis at rates in
effect in the various countries of operation. The effective tax rate differs
from the "expected" tax rate (U.S. Federal corporate tax rate) as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 35.0% 35.0% 35.0%
Effect of recording equity in net income
of affiliates on an after tax basis (11.3) (0.7) (10.9)
Effect of dividends received from
subsidiaries and affiliates (0.3) (0.5) 2.9
Income subject to foreign taxes at other
than U.S. statutory tax rate 5.2 8.1 8.3
Effect of sale of investment in affiliate - 3.6 -
Other 1.4 (0.3) (1.1)
---- ---- ----
Effective tax rate 30.0% 45.2% 34.2%
==== ==== ====
</TABLE>
Deferred income taxes are provided in each tax jurisdiction for temporary
differences between the financial reporting and the tax basis of assets and
liabilities. A valuation allowance has been established to adjust recorded
deferred tax assets to amounts likely to be recoverable. Temporary differences
and tax loss carryforwards which give rise to deferred tax liabilities (assets)
are as follows:
<TABLE>
<CAPTION>
As of December 31
-----------------------
(Millions of dollars)
1997 1996
---- ----
<S> <C> <C>
Depreciation $ 314 $ 337
Miscellaneous 22 28
----- ------
Deferred tax liabilities 336 365
----- ------
Investment allowances (74) (73)
Tax loss carryforwards (50) (10)
Foreign exchange (33) -
Retirement benefits (30) (28)
Miscellaneous (15) (25)
----- ------
Deferred tax assets (202) (136)
Valuation allowance 27 10
----- ------
Net deferred taxes $ 161 $ 239
===== ======
</TABLE>
20
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Deferred taxes are classified on the combined balance sheet as current
assets of $29 million and noncurrent liabilities of $190 million as of December
31, 1997, and current assets of $10 million and noncurrent liabilities of $249
million as of December 31, 1996.
Undistributed earnings of subsidiaries and affiliates, for which no U.S.
deferred income tax provision has been made, approximated $3.4 billion as of
December 31, 1997 and $3.0 billion as of December 31, 1996. Such earnings have
been or are intended to be indefinitely reinvested, and become taxable in the
U.S. only upon remittance as dividends. It is not practical to estimate the
amount of tax that may be payable on the eventual remittance of such earnings.
Upon remittance, certain foreign countries impose withholding taxes which,
subject to certain limitations, are available for use as tax credits against the
U.S. tax liability.
Note 12 - Combined statement of cash flows
Changes in operating working capital consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accounts and notes receivable $ 33 $ (235) $ 42
Inventories 85 (16) (89)
Accounts payable (252) 210 15
Accrued liabilities 1 18 31
Estimated income taxes (17) 16 (26)
----- ------ ------
Total $(150) $ (7) $ (27)
===== ====== ======
</TABLE>
Net cash provided by operating activities includes the following cash
payments for interest and income taxes:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest paid (net of capitalized interest) $ 138 $ 137 $ 144
Income taxes paid $ 440 $ 865 $ 466
</TABLE>
The deconsolidation of Caltex Australia Limited as of December 31, 1997,
as described in Note 4, results in a noncash reduction in the following combined
balance sheet captions, which have not been included in the combined statement
of cash flows:
<TABLE>
<S> <C>
Net working capital $ 60
Equity in affiliates 94
Long-term debt 45
Minority interest 109
</TABLE>
21
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 12 - Combined statement of cash flows - continued
During 1995, Caltex Australia Limited exchanged, in a noncash investing
transaction, its petroleum refining and marketing net assets of $419 million for
an investment in Australian Petroleum Pty. Limited, an affiliate of the Group.
No significant noncash investing or financing transactions occurred in 1996.
Net cash provided by operating activities in 1996 includes income tax
payments relating to the sale of an investment in an affiliate. Proceeds from
this sale are included in net cash provided by investing activities.
Note 13 - Oil and gas exploration, development and producing activities
The financial statements of Chevron Corporation and Texaco Inc. contain
required supplementary information on oil and gas producing activities,
including disclosures on affiliates at equity. Accordingly, such disclosures are
not presented herein.
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC/IMAGE/ILLUSTRATION MATERIAL INCLUDED IN
EXHIBIT 13 - TEXACO INC.'S 1997 ANNUAL REPORT TO STOCKHOLDERS
The following information is depicted in graphic/image/illustration form in
Texaco Inc.'s 1997 Annual Report to Stockholders filed as Exhibit 13 to Texaco
Inc.'s 1997 Annual Report on Form 10-K and all page references included in the
following descriptions are to the actual and complete paper format version of
Texaco Inc.'s 1997 Annual Report to Stockholders as provided to Texaco Inc.'s
stockholders:
This Appendix is separated in two parts. Part A (Items A1-A16) describes the
graphic/image/illustration material contained in the portion of Texaco Inc.'s
1997 Annual Report to Stockholders which is incorporated by reference into
Texaco Inc.'s 1997 Annual Report on Form 10-K, in response to Form 10-K Items 1
and 2 - Business and Properties. Part B (Items B1-B6) describes the graphic
material contained in the portion of Texaco Inc.'s 1997 Annual Report to
Stockholders which is incorporated by reference into Texaco Inc.'s 1997 Annual
Report on Form 10-K, in response to Form 10-K Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
PART A
- - ------
A1. The first item is an illustration on Page 11 entitled, "TEEMS: Remote
Sensing." Below the illustration is a footnote which states, "Housed in
an airplane, TEEMS combines radar and unique spectrometer technology to
map the Earth's surface for potential drilling sites."
A2. The second item is an illustration on Page 11 entitled, "Vertical Cable
Seismic." Below the illustration is a footnote which states, "In
offshore exploration, vertical cables hold hydrophones in a 3-D grid
pattern that helps reveal complex geological structures."
A3. The third item is an illustration on Page 12 entitled, "Conventional
Drilling." Below the illustration is a footnote which states,
"Conventional drilling can only gain access to some of the available
hydrocarbons."
A4. The fourth item is an illustration on Page 12 entitled, "Multilateral
Drilling." Below the illustration is a footnote which states, "Where
multiple reserves are layered on top of one another, multilateral
drilling extracts oil and gas from all levels simultaneously."
A5. The fifth item is a map illustration on Page 14. The map illustration
is entitled, "Monterey Resources Acquisition Boosts California Net
Production." The map depicts the location of four fields acquired by
Texaco as a result of the Monterey
<PAGE>
Resources acquisition. Below the map is a footnote which states,
"Monterey Resources' production sites in four fields lie in close
proximity to Texaco's steamflood operations in Kern River and
Midway-Sunset."
A6. The sixth item is a table on Page 14, which depicts Texaco's net
production from California at the time of the Monterey Resources
acquisition. The table is in barrels of oil equivalent per day, as
follows:
<TABLE>
<CAPTION>
Monterey/Texaco
Monterey Fields Texaco Combined
--------------- ------ --------
<S> <C> <C> <C>
Midway-Sunset 41,100 3,870 44,970
Coalinga 2,100 0 2,100
Belridge 2,500 0 2,500
Kern River 5,600 94,570 100,170
Other 4,200 29,930 34,130
-------- --------- ---------
Total 55,500 128,370 183,870
</TABLE>
Below the table is footnote which states "The addition of Monterey
Resources significantly raised Texaco's total net production in
California."
A7. The seventh item is a graph on Page 15. The bar graph is entitled,
"Monterey Resources' Impact on Texaco's Worldwide Proved Reserves" and
is reflected in millions of barrels of oil equivalent (BOE). The graph
indicates that as of December 31, 1995, 1996 and 1997, Texaco's
worldwide proved reserves totaled 3,674 million BOE, 3,700 million BOE
and 4,307 million BOE (including 420 million BOE in 1997 as a result of
the Monterey Resources acquisition), respectively. Below the graph is a
footnote which states, "The Monterey Resources acquisition provided an
added boost to our worldwide reserves."
A8. The eighth item is a map illustration on Page 17. The map illustration
is entitled, "Deepwater Gulf Discovery Sites" and depicts Texaco's
discoveries in the Gulf of Mexico in 1995, 1996 and 1997. Below the map
is a footnote which states, "Texaco has seven discoveries in the Gulf
of Mexico's deepwater frontier."
A9. The ninth item is a map illustration on Page 17. The map illustration
is entitled, "Deepwater Gulf Offshore Leases" and depicts where Texaco
has lease interests in the Gulf of Mexico. Below the map is a footnote
which states, "Texaco's extensive lease acreage in the Gulf's deep
waters points to further upstream development."
A10. The tenth item is a bar graph on Page 18. The bar graph is entitled,
"Deepwater Gulf: Number of Leases." The graph indicates that as of
December 31, 1994, 1995, 1996 and 1997, Texaco had 106, 123, 273 and
358 leases, respectively, in the Gulf of Mexico. Below the graph is a
footnote which states, "Accelerated
<PAGE>
lease-buying since 1995 has made Texaco the third-largest player in
the Gulf, in water depths greater than 1,300 feet."
A11. The eleventh item is a bar graph on Page 20 entitled, "Gasoline Market
Share vs. Competitors" and reflects percent of market share in 1996, as
follows:
<TABLE>
<S> <C>
Texaco (7.1%) and Shell (7.2%) 14.3%
Mobil 7.0%
Amoco 6.9%
Exxon 6.5%
Chevron 6.2%
</TABLE>
A footnote next to the graph indicates that the source is the Lundberg
Survey, Inc. Below the graph is another footnote which states, "The
allied Texaco and Shell brands will present a formidable front to their
principal U.S. competitors."
A12. The twelfth item is two bar graphs on Page 20 entitled, "Texaco-Shell
Lubricants Comparison" and reflects the percent of market share in
1996, as follows:
<TABLE>
<S> <C>
Commercial and Industrial Lubricants:
Texaco (6.0%) and Shell (7.8%) 13.8%
Mobil 9.0%
Chevron 8.2%
Exxon 7.6%
Sun 5.9%
Citgo 3.0%
Total Lubricants:
Texaco (6.6%) and Shell (5.7%) 12.3%
Pennzoil 9.0%
Mobil 7.9%
Chevron 6.6%
Exxon 6.0%
Sun 4.6%
Castrol 4.6%
Quaker State 4.4%
</TABLE>
A footnote next to the graphs indicates that the source is compiled
from industry surveys. Below the graph is another footnote which
states, "In the lubricants business, the combined Texaco and Shell
brands will comprise an industry-leading force."
A13. The thirteenth item is a map illustration on Page 21 entitled,
"Refining Alignment." The map depicts where the Texaco, Star Enterprise
and Shell
<PAGE>
refineries are located in the United States, as well as footnoting
that agreements call for the divestiture of the Shell refinery in
Anacortes, Washington. Below the map is a footnote which states,
"Strategically situated refineries will have a combined 12% share of
the nation's refining capacity."
A14. The fourteenth item is a map illustration on Page 21 entitled,
"Combined Market Share by State - 1997." The map of the United States
illustrates the combined Texaco and Shell market share of branded
gasoline sales by state and is color coded to indicate market share
less than 10%, 10-20%, 20-30% and 30-40%. A footnote indicates that
agreements call for divestiture of certain facilities in California and
Hawaii. Another footnote indicates that the source is The NPD Group;
Lundberg Survey. Below the map is a footnote which states, "Across the
U.S., the alliances' combined market presence will strengthen both
brands."
A15. The fifteenth item is a bar graph on Page 22 entitled, "U.S. Retail
Facilities." The bar graph indicates that Texaco-branded, pre-alliance
U.S. retail facilities totaled 13,859 in 1997 and the Shell- and
Texaco-branded U.S. retail facilities will total 22,651 in 1998. A
footnote indicates that data for 1998 excludes certain California and
Hawaii facilities under divestiture agreements. Below the graph is a
footnote which states, "Building Competitive Strength: With increased
size will come not only greater strength but more opportunities
for profitability, cost control and growth."
A16. The sixteenth item is a bar graph on Page 22 entitled, "U.S. Refining
Capacity." The bar graph indicates that Texaco/Star Enterprise,
pre-alliance U.S. refining capacity totaled 988,000 barrels a day in
1997 and the Shell and Texaco/Star Enterprise U.S. refining capacity
will total 1,664,000 barrels a day in 1998. A footnote indicates that
data for 1998 excludes Shell's Anacortes, Washington refinery under
divestiture agreements.
<PAGE>
PART B
- - ------
B1. The first graph is located on Page 26. The bar graph is entitled
"Revenues" and is reflected in billions of dollars. The revenues, in
billions of dollars, for each year and segment are depicted as follows:
<TABLE>
<CAPTION>
Petroleum Crude Oil Natural Gas Other Revenues Total
Products --------- ----------- (Including Equity, -----
-------- Services and
Asset Sales
-----------
<S> <C> <C> <C> <C> <C> <C>
1995 $21.0 $11.4 $2.3 $2.1 $36.8
1996 $24.9 $15.4 $3.1 $2.1 $45.5
1997 $26.1 $14.3 $3.8 $2.5 $46.7
</TABLE>
Below the graph a footnote appears which states, "This chart shows the
growth in Texaco's revenues, by major components."
B2. The second graph is located on Page 29. The bar graph is entitled
"Exploration and Production - Total Operating Earnings" and is
reflected in millions of dollars. The total exploration and production
operating earnings, in millions of dollars, are depicted as follows:
<TABLE>
<CAPTION>
United States International Total
------------- ------------- -----
<S> <C> <C> <C> <C>
1995 $ 293 $340 $ 633
1996 $1,123 $478 $1,601
1997 $ 957 $797 $1,754
</TABLE>
Below the graph a footnote appears which states, "Solid 1997 Upstream
results reflect higher prices and a 9% increase in worldwide production
since 1995."
B3. The third graph is located on Page 30. The bar graph is entitled "U.S.
Branded Gasoline Sales (1995-1997)." The graph indicates that industry
demand increased 2.9% and Texaco's sales increased 7.5% for the period
1995-1997. Below the graph a footnote appears which states, "During the
period 1995-1997 Texaco's branded gasoline sales rose 7.5% while
industry demand increased only 2.9%."
B4. The fourth graph is located on Page 31. The bar graph is entitled
"Manufacturing, Marketing and Distribution - Total Operating Earnings"
and is reflected in millions of dollars. The total manufacturing,
marketing and distribution operating earnings, in millions of dollars,
are depicted as follows:
<TABLE>
<CAPTION>
United States International Total
------------- ------------- -----
<S> <C> <C> <C> <C>
1995 $121 $365 $486
1996 $207 $450 $657
1997 $318 $514 $832
</TABLE>
<PAGE>
Below the graph a footnote appears which states, "Worldwide Downstream
earnings have significantly increased with 1997 results over 71% higher
than in 1995."
B5. The fifth graph is located on Page 34. The bar graph is entitled
"Capital and Exploratory Expenditures - Geographical," and is reflected
in billions of dollars. Capital and exploratory expenditures, in
billions of dollars, for each year and geographical location are
depicted as follows:
<TABLE>
<CAPTION>
United States International Acquisition of Total
------------- ------------- Monterey Resources -----
------------------
<S> <C> <C> <C> <C> <C>
1995 $1.4 $1.7 $ - $3.1
1996 $1.6 $1.8 $ - $3.4
1997 $2.3 $2.2 $1.4 $5.9
</TABLE>
Below the graph, two footnotes appear. The first footnote states
"Includes equity in affiliates." The second footnote states, "This
chart shows the growth in our capital expenditures, including the U.S.
acquisition of Monterey Resources."
B6. The sixth graph is located on Page 34. The bar graph is entitled
"Capital and Exploratory Expenditures - Functional," and is reflected
in billions of dollars. Capital and exploratory expenditures, in
billions of dollars, for each year and function are depicted as
follows:
<TABLE>
<CAPTION>
Exploration and Manufacturing, Acquisition of Total
Production Marketing, Monterey Resources -----
---------- Distribution ------------------
and Other
---------
<S> <C> <C> <C> <C> <C>
1995 $1.9 $1.2 $ - $3.1
1996 $2.4 $1.0 $ - $3.4
1997 $3.2 $1.3 $1.4 $5.9
</TABLE>
Below the graph, two footnotes appear. The first footnote states
"Includes equity in affiliates." The second footnote states, "This
chart shows our continued emphasis on Upstream capital and exploratory
expenditures in our drive to increase current and future production."
BGM:jms
APPENDIX.doc
<PAGE>
INDEX TO EXHIBITS
The exhibits designated by an asterisk are incorporated herein by reference
to documents previously filed by Texaco Inc. with the Securities and Exchange
Commission, SEC File No. 1-27.
Exhibits
--------
<TABLE>
<S> <C>
(3.1) Copy of Restated Certificate of Incorporation of Texaco Inc., as
amended to and including September 10, 1997, including
Certificate of Designations, Preferences and Rights of Series B
ESOP Convertible Preferred Stock, Series D Junior Participating
Preferred Stock, Series F ESOP Convertible Preferred Stock and
Series G, H, I and J Market Auction Preferred Shares,
incorporated herein by reference to Texaco Inc.'s Registration
Statement on Form S-4 (No. 333-36679), dated September 29, 1997. *
(3.2) Copy of By-Laws of Texaco Inc., as amended to and including July
25, 1997, incorporated herein by reference to Texaco Inc.'s
Quarterly Report Report on Form 10-Q for the quarterly period
ended June 30, 1997, dated August 13, 1997. *
(10(iii)(a)) Texaco Inc.'s 1997 Stock Incentive Plan, incorporated herein by reference
to Appendix A, pages 39 through 44 of Texaco Inc.'s proxy statement
dated March 27, 1997. *
(10(iii)(b)) Texaco Inc.'s 1997 Incentive Bonus Plan, incorporated herein by reference
to Appendix A, pages 45 and 46 of Texaco Inc.'s proxy statement dated
March 27, 1997. *
(10(iii)(c)) Texaco Inc.'s Stock Incentive Plan, incorporated herein by reference to pages
A-1 through A-8 of Texaco Inc.'s proxy statement dated April 5, 1993. *
(10(iii)(d)) Texaco Inc.'s Stock Incentive Plan, incorporated herein by reference to pages
IV-1 through IV-5 of Texaco Inc.'s proxy statement dated April 10, 1989
and to Exhibit A of Texaco Inc.'s proxy statement dated March 29, 1991. *
(10(iii)(e)) Texaco Inc.'s Incentive Bonus Plan, incorporated herein by reference to page
IV-5 of Texaco Inc.'s proxy statement dated April 10, 1989. *
(10(iii)(f)) Description of Texaco Inc.'s Supplemental Pension Benefits Plan, incorporated
herein by reference to pages 8 and 9 of Texaco Inc.'s proxy statement dated March
17, 1981. *
(10(iii)(g)) Description of Texaco Inc.'s Revised Supplemental Pension Benefits
Plan, incorporated herein by reference to pages 24 through 27 of Texaco Inc.'s
proxy statement dated March 9, 1978. *
(10(iii)(h)) Description of Texaco Inc.'s Revised Incentive Compensation Plan,
incorporated herein by reference to pages 10 and 11 of Texaco Inc.'s proxy
statement dated March 13, 1969. *
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(12.1) Computation of Ratio of Earnings to Fixed Charges of Texaco on a
Total Enterprise Basis.
(12.2) Definitions of Selected Financial Ratios.
(13) Copy of those portions of Texaco Inc.'s 1997 Annual Report to
Stockholders that are incorporated herein by reference into this
Annual Report on Form 10-K.
(21) Listing of significant Texaco Inc. subsidiary companies and the
name of the state or other jurisdiction in which each subsidiary
was organized.
(23) Consent of Arthur Andersen LLP.
(24) Powers of Attorney for the Directors and certain Officers of
Texaco Inc. authorizing, among other things, the signing of
Texaco Inc.'s Annual Report on Form 10-K on their behalf.
(27) Financial Data Schedule.
</TABLE>
EXHIBIT 12.1
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
OF TEXACO ON A TOTAL ENTERPRISE BASIS (UNAUDITED)
FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1997 (a)
(in millions of dollars)
Years Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-95................... $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.............. (11) (4) 1 (1) (8)
Minority interest in net income.......................... 68 72 54 44 17
Previously capitalized interest charged to
income during the period.............................. 25 27 33 29 33
------ ------ ------ ------ ------
Total earnings................................... 3,596 3,545 1,289 1,481 1,434
------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges.................................... 528 551 614 594 546
Interest factor attributable to operating
lease rentals.................................. 112 129 110 118 91
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc....................... 33 35 36 31 4
------ ------ ------ ------ ------
Total items charged to income.................... 673 715 760 743 641
Interest capitalized.................................. 27 16 28 21 57
Interest on ESOP debt guaranteed by Texaco Inc........ 7 10 14 14 14
------ ------ ------ ------ ------
Total fixed charges.............................. 707 741 802 778 712
------ ------ ------ ------ ------
Earnings available for payment of fixed charges.......... $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........................... 6.04 5.75 2.55 2.86 2.91
====== ====== ====== ====== ======
<FN>
(a) Excludes discontinued operations.
</FN>
</TABLE>
EXHIBIT 12.2
DEFINITIONS OF SELECTED FINANCIAL RATIOS
CURRENT RATIO
- - -------------
Current assets divided by current liabilities.
RETURN ON AVERAGE STOCKHOLDERS' EQUITY
- - --------------------------------------
Net income divided by average stockholders' equity. Average
stockholders' equity is computed using the average of the monthly
stockholders' equity balances.
RETURN ON AVERAGE CAPITAL EMPLOYED
- - ----------------------------------
Net income plus minority interest plus after-tax interest expense
divided by average capital employed. Capital employed consists of
stockholders' equity, total debt and minority interest. Average capital
employed is computed on a four-quarter average basis.
TOTAL DEBT TO TOTAL BORROWED AND INVESTED CAPITAL
- - -------------------------------------------------
Total debt, including capital lease obligations, divided by total debt
plus minority interest liability and stockholders' equity.
EXHIBIT 13
6 TEXACO INC.
TEXACO
AT A GLANCE
DURING THE PAST 96 YEARS, TEXACO HAS BECOME ONE OF THE WORLD'S LARGEST, MOST
RESPECTED COMPANIES. OPERATING IN SOME 150 COUNTRIES, TEXACO AND ITS AFFILIATES
EXPLORE FOR, FIND AND PRODUCE OIL AND NATURAL GAS; MANUFACTURE AND MARKET
HIGH-QUALITY FUELS AND LUBRICANT PRODUCTS; OPERATE TRADING, TRANSPORTATION AND
DISTRIBUTION FACILITIES; AND PRODUCE ALTERNATE FORMS OF ENERGY FOR POWER,
MANUFACTURING AND CHEMICALS.
STRENGTHS We possess a solid asset base, a talented and diverse workforce and
leading-edge technologies. We are aligned for nimble, decisive action. We have a
worldwide reputation for quality products, service and financial management. Our
total debt to total borrowed and invested capital ratio gives us financial
strength and flexibility to invest in growth opportunities. We have sound
environmental, health and safety practices fully integrated into our global
business operations.
1997 PERFORMANCE Higher oil and natural gas production, increased gasoline sales
- - - coupled with improved refinery utilization, higher margins and tight expense
controls - contributed to outstanding results: total net income of $1.894
billion before special items; a 13% return on average capital employed; our
second dividend increase in the past two years; completion of our $500 million
share buyback; a two-for-one split of our common stock; a 14.3% total return to
shareholders; and a 16% increase in our oil and gas reserves base.
STRATEGIES Our investments, focused on high-impact areas, are growing profitable
production and reserves. By leveraging our technology, we are speeding
development of these resources and reducing costs. We are strengthening assets
that can deliver competitive returns and selling or restructuring those that do
not. We have planned a capital and exploratory budget of $4.6 billion for 1998.
We have made organizational changes - including an expanded upstream leadership
team and a recently formed corporate development team - that will enable us to
more quickly identify and act upon emerging opportunities around the globe. This
group will identify and execute business strategies to create a portfolio of
assets that leverages our strengths and achieves high returns. Respect for the
individual is our number-one priority throughout the organization. Our emphasis
on the individual also includes a focus on safety for our employees and
contractors, as we build loss-prevention practices into our global operations.
Exploration and Production
WE FIND AND PRODUCE OIL AND NATURAL GAS FROM A GLOBAL PORTFOLIO OF NEW AND
MATURE FIELDS. THE 1997 ADDITION OF MONTEREY RESOURCES IN CALIFORNIA, A 20%
INTEREST IN THE HAMACA PROJECT IN VENEZUELA, ALONG WITH THE EARLY 1998
ACQUISITION OF A 20% INTEREST IN KAZAKHSTAN'S KARACHAGANAK FIELD, COMPLEMENT OUR
OTHER OPERATIONS IN THE U.S., THE U.K. NORTH SEA, LATIN AMERICA, WEST AFRICA,
THE MIDDLE EAST, INDONESIA AND THE PACIFIC RIM.
STRENGTHS Solid cash flow and earnings are generated by core upstream assets
around the world, aided by our advanced technologies and alliance-forming
skills. Examples: our aggressive exploration and production activity in the
deepwater Gulf of Mexico, supported by our partnership in Project DeepStar; our
leadership in recovery techniques for heavy oil, which we will utilize in
developing such
<PAGE>
TEXACO INC. 7
reserves as those of Monterey Resources and the Hamaca field in Venezuela.
1997 PERFORMANCE Increased production contributed to worldwide upstream
operating earnings of $1.5 billion, despite lower crude oil prices and higher
exploratory expenses. Worldwide production grew 6% to 1.2 million barrels of oil
equivalent a day. Growth stemmed primarily from: higher production in the
Partitioned Neutral Zone between Saudi Arabia and Kuwait; new production from
the Captain field in the U.K. North Sea; additional production from the Guajira
field offshore Colombia, the Dolphin field in Trinidad, and offshore Angola and
Denmark. In addition, we had two months' production from Monterey Resources. Our
1997 reserve replacement rate, which excludes Monterey Resources and other
purchases and sales, was 132% in the U.S. and 212% outside the U.S. - our
highest rates for any single year in nearly 30 years.
STRATEGIES We have ambitious but attainable goals to significantly increase our
worldwide production over the next five years, and to increase our net income
per barrel of oil equivalent. We plan to grow profitable production and reserves
through a balance of discovered reserve opportunities, selected acquisitions,
focused exploration, and technological exploitation of our existing assets. We
have sharpened our exploration focus on high-impact areas, such as the deepwater
Gulf of Mexico, Latin America, West Africa and the Caspian Sea area. In 1997, we
increased our upstream capital budget by 32% (excluding the Monterey Resources
acquisition) to add reserves and to develop projects in the Gulf of Mexico, the
Partitioned Neutral Zone, the North Sea, West Africa and Indonesia. In 1998, we
will expand our focus to include developments in Kazakhstan, Venezuela and
Western Australia. We are continuing to leverage technologies - such as
three-dimensional visualization, vertical-cable seismic and multilateral
drilling - that speed the discovery and production of new oil and gas reserves,
while reducing development costs. We are conducting our drilling and producing
operations in an environmentally responsible manner, in accordance with our
Worldwide Environment, Health and Safety Standards.
Marketing, Manufacturing and Distribution
WE MARKET AUTOMOTIVE FUELS THROUGH SOME 23,000 TEXACO-BRANDED RETAIL FACILITIES
WORLDWIDE. THROUGH OUR GLOBAL BUSINESSES, WE SELL LUBRICANTS, COOLANTS AND
MARINE AND AVIATION FUELS, AS WELL AS NATURAL GAS. IN THE U.S., TEXACO, SHELL
AND SAUDI REFINING ARE FORMING ALLIANCES THAT COMBINE THE COMPANIES' DOWNSTREAM
AND TRANSPORTATION ASSETS. TEXACO AND ITS AFFILIATES OWN OR HAVE INTERESTS IN 24
REFINERIES.
STRENGTHS The combination of Texaco's and Shell's highly respected brands will
create the number-one gasoline marketer in the U.S. With our affiliates, Texaco
holds significant market shares in the world's growth areas and operates an
increasingly efficient and technologically advanced manufacturing system. In
addition, we have a significant marketing presence throughout Central and South
America and the Caribbean. By applying innovative technologies and processes, we
are improving the operating efficiency of our refineries and reducing emissions
and waste. Our global products group - Worldwide Lubricants, Coolants and Fuel
Additives - strives to leverage our brands and technologies in world markets.
Havoline Formula 3(Registered), the top-selling motor oil among major oil
companies, is distributed in more than 100 countries. And we are developing
other products, such as our Extended Life Anti-Freeze/Coolant, to meet growing
<PAGE>
8 TEXACO INC.
consumer needs. Caltex, our 50% joint venture with Chevron, operates in nearly
60 countries throughout Asia, the Pacific Rim and southern Africa, and has an
overall market share in those countries of 18%.
1997 PERFORMANCE Worldwide downstream earnings grew by $350 million, led by
improved refinery utilization, higher margins and a 3% increase in
Texaco-branded gasoline sales in the U.S. In Latin America and Europe, stronger
marketing margins and lower costs contributed to significantly higher earnings,
and we are expanding our market presence in those areas - especially Latin
America. In 1997, we expanded our presence in many new market countries,
including Peru, Venezuela and Poland. In response to Asia's economic turmoil,
our Caltex affiliate focused on cost containment and a prudent investment
policy. It also sold its interest in a refinery in Bahrain and will integrate
the operations of its refinery in Thailand with a nearby Shell refinery.
STRATEGIES We are committed to ensuring that our assets provide competitive
returns, even under the most challenging industry conditions. Our alliances with
Shell and Saudi Refining, Inc., will provide us with a platform for growth and
create more value from our U.S. downstream assets. We are investing in selected
Latin American and European growth markets, as well as in pipeline construction
projects in the U.S. Gulf Coast. In Brazil, our second largest retail market,
with more than 3,000 facilities, we have a major expansion program under way.
Wherever we operate, Texaco's Global Brand Initiative will enhance the strength
of our brand and the quality of our facilities.
Global Gas and Power
TEXACO HAS AN ARRAY OF WORLDWIDE OPPORTUNITIES FOR NEW REVENUE GROWTH. THEY
INCLUDE OUR GLOBAL GAS AND POWER'S EXPERTISE IN POWER GENERATION AND
GASIFICATION TECHNOLOGY. THESE ACTIVITIES COMPLEMENT OUR NATURAL GAS ACTIVITIES
WORLDWIDE, AND FREQUENTLY ENHANCE OUR PRODUCING AND MANUFACTURING OPERATIONS.
STRENGTHS Our global focus enables us to bring increased value to customers
across the entire energy value chain. In 1997, we formed Texaco Global Gas and
Power to commercialize selected natural gas properties, develop gas-to-liquids
conversion processes, and leverage our strengths in power generation and
proprietary gasification technology, which reduce emissions and lower operating
costs.
1997 PERFORMANCE In 1997, we agreed to develop the first gas-to-liquids plant
using the Syntroleum Process (Registered). We also became an equity partner in a
276-megawatt cogeneration project at a refinery in Ancona, Italy, which is
scheduled for a 1999 start-up. The project will use Integrated Gasification
Combined Cycle (IGCC) technology under license from Texaco. In Indonesia, we
continue to supply steam for a 55-megawatt government-owned power plant and have
a 70-megawatt facility under construction. The same steam source was
successfully expanded with additional drilling and has proven large enough to
support another 70-megawatt plant. Two Texaco affiliates signed power purchase
agreements for construction of private power projects: a 300-megawatt facility
in the Philippines and a 700-megawatt plant in Thailand. At our California
cogeneration facilities, we are installing emission-control devices that will
benefit the environment by eliminating the generation of acid wastes.
STRATEGIES We are growing our business in key markets by using clean
technologies that benefit the environment, such as cogeneration and our
gasification technology, through licensing and select investment. Our goal is to
be a top-20 company in megawatt capacity by 2001.
<PAGE>
9
BUILDING
VALUE:
IN 1997, WE SHARPENED OUR FOCUS ON OPPORTUNITIES
THAT WILL ADD VALUE QUICKLY. WE APPLIED
OUR INTELLECTUAL CAPITAL TO IMPROVE AND GROW THE
BUSINESS. OUR RELENTLESS PURSUIT OF ENERGY
AND EXCELLENCE IS EXEMPLIFIED IN THE FOUR STORIES
THAT FOLLOW. EACH ILLUSTRATES VIVIDLY OUR
COMMITMENT TO BUILD VALUE
TEXACO
[LOGO]
<PAGE>
10
TECHNOLOGY:
RELENTLESS PURSUIT OF ENERGY
[GRAPHIC OMITTED]
TEXACO'S FIRST-IN-THE-INDUSTRY 3-D VISUALIZATION CENTER IN HOUSTON
SPEEDS OUR ABILITY TO PINPOINT HYDROCARBONS,
ENABLING US TO ACHIEVE GREATER RETURNS ON OUR INVESTMENTS.
<PAGE>
TEXACO INC. 11
TEXACO EXCELS AT APPLYING TECHNOLOGIES THAT BUILD VALUE across our business
spectrum. We have the tools - and the brainpower - to achieve greater precision
and speed in finding and producing energy. Our technology and our energy are
recovering more reserves from existing fields; formulating new products and
processes that meet emerging consumer needs; and creating new efficiencies for
busy retail customers. Underpinning our technology applications is a drive to
improve our environment, protect the health and safety of our employees, and
enhance the communities in which we operate.
Leveraging our technologies to create greater value is one of our core
strategies. Moreover, it is essential to Texaco's goals, which call for
significantly increasing our earnings and raising our return on average capital
employed. To achieve our goals, we are applying cutting-edge technologies and
innovative approaches:
o In 1997, Texaco introduced two new 3-D Visualization Centers, one in Houston
and one in Bakersfield, Calif. In both locations, Texaco people are speeding our
ability to pinpoint hidden hydrocarbon deposits by applying 3-D visualization, a
technology that allows our scientists to "see" inside geological formations in
three dimensions. The payoff: by improving the quality of our analysis and doing
so in days instead of months, we accelerate the process of increasing our energy
production.
o Texaco's one-of-a-kind remote sensing device called TEEMS (Texaco Exploration
and Environmental Multispectral Spectrometer) scans wide-ranging sites to
collect data that reveals the potential for oil and gas deposits. The device,
which is mounted aboard an aircraft, can create a detailed map across hundreds
of miles in a single day. It also helps us make an environmental assessment of
the new site so that our exploration and production activities can minimize
impacts.
o We are using our proprietary vertical-cable seismic technology to find
hydrocarbons and cut our field development costs in complex geological
formations from the North Sea to the Gulf of Mexico. In the deepwater Gulf, this
technology, which utilizes vertical cables to detect reflected sound waves,
provided data that led to the Gemini discovery. This technology also is helping
us to determine the potential size of the reservoirs in our Fuji discovery. (See
p. 16, Deepwater Gulf: Tapping Enormous Potential.)
o By sharing technological advances with alliance partners, we gain knowledge
and speed without incurring the high cost of going it alone. Through our
leadership in DeepStar, a consortium of oil and service companies and U.S.
agencies, we are solving technical problems of deepwater drilling, production
ITEM A1
TEEMS: REMOTE SENSING
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A1.]
ITEM A2
VERTICAL-CABLE SEISMIC
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A2.]
<PAGE>
12 TEXACO INC.
and subsea completions in the Gulf of Mexico. And our involvement in MoBPTeCh
(Mobil, BP, Texaco and Chevron) is yielding advances in multilateral drilling,
which we're applying offshore Nigeria.
o Our capability in horizontal drilling techniques and advanced production
technology, such as floating production systems and high-rate submersible pumps,
enabled us to accelerate the development of our 85%-owned Captain field, which
came onstream in the U.K. North Sea in 1997.
o In 1997, we also began production from our 50%-owned Erskine field, the first
high-temperature/ high-pressure field in the North Sea, after adopting and
integrating technologies that had helped us to produce natural gas under similar
conditions in the Gulf of Mexico.
o We are applying our expertise in heavy-oil recovery to increase production and
reduce costs from our major heavy-oil properties, from the Kern River field in
California to the Hamaca field in Venezuela. (See p. 13, Monterey: Boosting
Production & Reserves.)
o In December 1997, we and our partners, Brown & Root and Syntroleum Corp.,
agreed to construct the first gas-to-liquids plant using the Syntroleum
Process(Registered) by 1999. The plant will convert natural gas into synthesis
gas, which can then be processed into clean, zero-sulfur diesel fuel and other
petroleum products. This will allow Texaco to produce a valuable fuel from gas
reserves that currently lack pipelines to markets. It will also help Texaco in
its efforts to reduce emissions of carbon dioxide, sulfur dioxide and nitrogen
oxides.
o The Delaware City, Del., refinery, which is expected to become part of the
Eastern U.S. venture with Shell and Saudi Refining, will utilize Texaco's
Integrated Gasification Combined Cycle (IGCC) power technology for production of
cleaner energy. The IGCC technology will convert petroleum coke into syngas for
use in the generation of electricity at the refinery's newly upgraded power
plant. In addition to the environmental benefits of energy efficiency, this
project will reduce overall air emissions.
o Texaco's extended-life motor-vehicle coolants, which our scientists formulated
from mixtures of carboxylic acids, are surpassing our own high expectations.
After passing a series of demanding road tests, Texaco Extended Life
Anti-Freeze/Coolant's protection capability for heavy-duty vehicles has been
increased to up to 600,000 miles.
Throughout our operations, technology will continue to be a driver in our
commitment to build value.
ITEM A3
CONVENTIONAL DRILLING
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A3.]
ITEM A4
MULTILATERAL DRILLING
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A4.]
<PAGE>
13
MONTEREY:
BOOSTING PRODUCTION & RESERVES
[GRAPHIC OMITTED]
OUR CONTINUOUS STEAMFLOOD TECHNOLOGY ADDS IMMEDIATE
PRODUCTION AND RESERVES FROM RECENTLY
ACQUIRED MONTEREY RESOURCES ASSETS IN CALIFORNIA.
<PAGE>
14 TEXACO INC.
IN THE 1996 REPORT, WE TOLD YOU THAT WE HAD RESTRUCTURED our worldwide
organization along functional lines to eliminate barriers to swift and decisive
action. The benefit of this restructuring was proved when we were able to
quickly acquire Monterey Resources in November 1997.
Just three months earlier, our upstream teams had identified Monterey Resources,
a California independent oil and gas producer, as a prime candidate for
acquisition. The company's location and resource base made it a perfect fit for
Texaco's strategy of seeking selected acquisitions where we have a clear
competitive advantage - and where we can apply our technologies to realize
significant growth potential both in earnings and production. We expect that the
acquisition will generate substantial additional profits and cash flow for
Texaco over both the short and long term.
Monterey Resources' operations in California primarily lie adjacent to Texaco's
operations in the Kern River and Midway-Sunset fields. Through the acquisition,
Texaco added proved reserves of 420 million barrels of oil equivalent (BOE) and
production of 55,500 BOE a day, an instant profitable infusion to Texaco's
reserve and production base.
Moreover, Monterey Resources' concentration of heavy-oil production and reserves
is a strategic fit for Texaco. Our competitive leadership in heavy oil is best
demonstrated by our performance in the Kern River field. At Kern River,
steamflood technology has already driven down the cost of producing oil by more
than 20% since 1990, in spite of increased prices for the natural gas used as a
fuel in steam generation. Reduced cost, coupled with technology application, has
increased our expected recovery of the heavy oil in place from 45% to 65%.
Inspired by science and experience, Texaco projects greater revenue - with a
target recovery of 80% of the oil - from many of our California heavy-oil
assets.
The acquisition of Monterey Resources for $1.4 billion underscores Texaco's
strong commitment to investing in growth opportunities. Our manageable total
debt to total borrowed and invested capital ratio of 32% provided us with the
financial flexibility to move rapidly to make the acquisition. Our plan is for
Monterey Resources to contribute significantly to Texaco's production goals over
the next five years.
This acquisition raised our total worldwide 1997 capital and exploratory
expenditures to $5.9 billion. Over the five-year period from 1998 through 2002,
we project capital expenditures of about $26 billion.
ITEM A5
MONTEREY RESOURCES ACQUISIION BOOSTS CALIFORNIA NET PRODUCTION
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A5.]
ITEM A6
MONTEREY RESOURCES ACQUISIION BOOSTS CALIFORNIA NET PRODUCTION
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A6.]
<PAGE>
TEXACO INC. 15
In November, Monterey Resources' production began adding to Texaco's profile.
Production is expected to rise to 60,000 BOE a day in 1998, increasing our total
California production to 189,000 BOE a day. Over the next three years, our
strategic goal is to more than double production from Monterey Resources to
119,000 BOE a day.
Texaco's steamflood process involves the injection of steam, produced at our
Bakersfield cogeneration facilities or from steam generators, to raise the
temperature of the oil so that it moves more easily through the reservoir.
Continuous steam injection allows the oil to be produced while maximizing the
amount of heat kept in the ground. In contrast, Monterey Resources used a less
efficient cyclic process. By applying Texaco's steamflood technology to Monterey
Resources' fields, we expect to increase production rapidly while lowering
per-barrel production costs. We expect to implement additional efficiencies in
future years.
Our core competency in heavy-oil development is global: outside the U.S., Texaco
has major concentrations of heavy oil in Indonesia, the Partitioned Neutral
Zone, the U.K.'s Captain field, and the Hamaca field in Venezuela. Hamaca is
Texaco's joint venture with ARCO, Phillips Petroleum and Corpoven, a subsidiary
of the national oil company. Texaco's share of this field, scheduled to start
production in 1999, is expected to rise to 36,000 barrels a day in 2006 and
continue at that level for 30 years.
Hamaca is one of Texaco's recent investments in discovered reserve
opportunities, along with our 20% interest in Kazakhstan's Karachaganak field.
Together with the acquisition of Monterey Resources, these investments are
expected to add 1.6 billion barrels of oil equivalent to our reserves base.
These assets will maintain strong production growth and generate shareholder
value over the decades ahead.
We will ratchet up this value by leveraging Texaco's leading-edge technology,
which will continue to make the recovery from Texaco's holdings - in California,
Venezuela, Kazakhstan and elsewhere - faster, cheaper and more profitable for
our shareholders.
ITEM A7
MONTEREY RESOURCES' IMPACT ON TEXACO'S WORLDWIDE PROVED RESERVES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A7.]
<PAGE>
16
DEEPWATER GULF:
TAPPING ENORMOUS POTENTIAL
[GRAPHIC OMITTED]
WE HAVE THE TECHNOLOGY AND THE HARDWARE - SUCH AS THIS DRILLING RIG
IN USE AT OUR FUJI DISCOVERY - TO FAST-TRACK THE
DEVELOPMENT OF OUR DEEPWATER SITES IN THE GULF OF MEXICO.
<PAGE>
TEXACO INC. 17
DEVELOPMENT OF OUR ASSETS IN THE DEEPWATER GULF OF MEXICO IS ON FAST-FORWARD,
aided by technologies that help us find hydrocarbons and produce them at greater
speeds and lower costs.
Our strategy: to leverage deepwater technologies that give us a competitive
advantage and build on our solid acreage position in the deepwater Gulf. Our
goal: to raise production from nearly zero to more than 100,000 barrels a day of
oil equivalent by 2002. The payoff: a boost in our total production profile of
profitable oil and gas and an increase in net income per barrel of oil
equivalent when the first significant deepwater production begins in 1999.
We're increasing our capital expenditures to invest extra dollars in projects in
the deepwater Gulf and other high-impact areas. In 1998, 70% of our planned
capital expenditures of $4.6 billion will be devoted to exploration and
production projects.
These expenditures flow from the potential we confirmed in the deepwater Gulf
and elsewhere during 1997. In the Gulf, we are appraising and developing
Petronius, Gemini and Fuji - three 1995 discoveries that form the linchpin of
our deepwater projections. During 1997, we had new discoveries at Ladybug and
Oudinot, and confirmed commercial projects at Arnold and Oyster. Through
aggressive bidding in deepwater leases, we upgraded the quality of our
exploratory prospect inventory and solidified a competitive third-place lease
position, with 358 leases in depths greater than 1,300 feet.
Some of our best ideas for developing these assets come from technology
alliances. Notable among them is Project DeepStar, a consortium of energy and
service companies and U.S. agencies dedicated to joint technology development
for producing hydrocarbon reserves in deep water. Bracketing their expertise
with ours reduces cycle time from discovery to first production and lowers our
costs.
At Gemini, Texaco's 60%-owned subsalt gas and condensate discovery, we applied
sophisticated 3-D imaging to interpret reservoirs that lie below a
2,900-foot-thick salt sheet that initially defied scientific exploration.
Coupling DeepStar technology with our subsea completion experience, we are now
developing the Gemini gas discovery while we continue exploring the area for
additional potential. We expect to begin gas production and reach a peak rate of
about 180 million cubic feet a day by mid-1999.
At Petronius, we are on target and on budget with construction of an 1,870-foot
compliant tower for the drilling and production platform for Texaco's 50%-owned
oil and gas field. We expect to bring the field onstream in early 1999 in record
time - from discovery well to production in just three-and-a-half years - which
will pay off in early cash flow and improved profitability.
ITEM A8
DEEPWATER GULF DISCOVERY SITES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A8.]
ITEM A9
DEEPWATER GULF OFFSHORE LEASES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A9.]
<PAGE>
18 TEXACO INC.
At Fuji, Texaco's 65%-owned discovery, we continue to delineate its potential,
using both drilling and well-testing. We also are using vertical-cable 3-D
surveys to define the size of its reservoirs.
Meanwhile, we are expanding our pipeline network to accommodate oil and gas
production from the deepwater fields. The newly constructed Discovery pipeline
transports natural gas from these fields. In 1997, we also completed Phase I of
the Texaco Expanded NGL (natural gas liquids) Distribution System, a 500-mile
pipeline network designed to distribute NGLs safely and efficiently throughout
Southern Louisiana markets. Phase II, which will serve Eastern Louisiana
markets, is due for completion in the second quarter of 1998.
To meet our goals for deepwater development, we must be creative in confronting
a difficult operating environment, resulting from a tight supply of deepwater
rigs, yard space and services. Texaco's ability to form strategic alliances
helped us to move swiftly in 1995 to contract for a semi-submersible drilling
rig, upgraded in 1996 and rechristened Ocean Star. The rig began working at Fuji
in early 1997. Exclusive use of this rig in water depths up to 4,500 feet will
enable us to continue exploration of high-potential prospects through the end of
the century. To pursue our aggressive plans quickly and cost-effectively in the
Gulf of Mexico, we also have contracts for two other deepwater rigs - the Sedco
Energy and the 50% interest we have in the Glomar Explorer. For our deepwater
acreage off West Africa, we announced a contract for a deepwater drillship
capable of operating in 8,000 feet of water.
Despite rising costs of rigs and services, our return on average capital
employed in our North American upstream operations was 22% for 1997.
In 1997, our North American production rose to 685,000 barrels of oil equivalent
a day from 675,000 in 1996. Spurred largely by future production from the
deepwater Gulf, we expect North American production to rise to an average
856,000 barrels of oil equivalent a day in 2002.
We will apply some of the technologies that are accelerating deepwater Gulf
development to promising areas around the world, such as Angola, Nigeria and
Australia. There, as in the U.S., our goal is to increase the profitability of
our assets by speeding the process from discovery to first production.
ITEM A10
DEEPWATER GULF: NUMBER OF LEASES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A10.]
<PAGE>
19
ALLIANCE:
LEVERAGING STRENGTHS
[GRAPHIC OMITTED]
IN THE FIERCELY COMPETITIVE U.S. DOWNSTREAM MARKET, THE TEXACO,
SHELL AND SAUDI REFINING ALLIANCES WILL HELP US TO GENERATE
GREATER EFFICIENCIES, HIGHER MARGINS AND GROWTH OPPORTUNITIES.
<PAGE>
20 TEXACO INC.
THE HIGHLY COMPETITIVE, CAPITAL INTENSIVE U.S. downstream business has
challenged us to find innovative ways to convert this business into a valuable
asset. Faced with the prospect of continuing single-digit returns from these
downstream operations, we decided to apply a strategy of asset management to
propel our U.S. downstream business into a platform for growth. The strategy:
improve returns in mature markets by managing our costs and combining our assets
so that each asset provides returns greater than our cost of capital.
In a U.S. downstream initiative that promises to reinvent the country's refining
and marketing industry, we formed a Western U.S. alliance with Shell Oil
Company, named Equilon Enterprises LLC, and we anticipate forming an Eastern
U.S. alliance with Shell and Saudi Refining, Inc., early this year. On December
18, 1997, the U.S. Federal Trade Commission (FTC) accepted a consent agreement
allowing Texaco, Shell and Saudi Refining, Inc., to proceed with formation of
the two new alliances.
Together, these alliances will have the size, quality of assets, scope of
operations, talent and know-how to be world-class competitors. Through their
formation, the ventures expect to achieve annual cost savings and margin
improvements of at least $800 million, with the bulk to be realized after 1998.
Equilon, which began operations in January 1998, combines the Western and
Midwestern U.S. refining and marketing businesses and the U.S. lubricants,
trading and transportation businesses of Texaco and Shell. Two of the partners
in the anticipated Eastern U.S. alliance, Texaco and Saudi Refining, are
joint-venture partners in Star Enterprise, which markets throughout the Gulf
Coast and Eastern U.S. These operations will be combined with Shell's in the
area to create the Eastern U.S. alliance. Both of the new alliances will be
supported by a jointly owned service company.
The consent of the FTC and state attorneys general required Texaco and Shell to
sell some assets to reduce the combined market presence in specific areas. Under
these agreements, divestitures include the Shell refinery in Anacortes, Wash.,
certain Shell and Texaco retail facilities in Southern California and Hawaii,
and certain terminal and pipeline interests. No assets in the Eastern U.S.
alliance are affected by the agreements.
Even with these divestitures, the alliances will comprise a potent force in the
U.S. downstream business. They will have almost 15% of total U.S. gasoline and
automotive lubricants sales, as well as about 12% of total U.S. refining
capacity. Their combined assets will make the ventures number one in U.S. market
ITEM A11
GASOLINE MARKET SHARE VS. COMPETITORS
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A11.]
ITEM A12
TEXACO - SHELL LUBRICANTS COMPARISON
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A12.]
<PAGE>
TEXACO INC. 21
share for refining capacity, branded gasoline sales and lubricants sales. The
alliances are expected to generate $45 billion in annual revenues, with capital
employed of about $13 billion. The alliances will employ about 24,000 people.
Size, however, was not Texaco's prime motivation for fostering the alliances.
The critical factor is that Texaco, Saudi Refining and Shell have complementary
strengths with an economic potential far greater than the sum of their parts. By
efficiently combining assets, we can achieve a fundamental change in our
downstream operations and become an industry leader in profitability, growth and
cost control.
The distinctive Texaco and Shell brands will retain their strong consumer
identities. Each will be marketed by both joint-venture companies. The alliance
companies are committed to protect and grow both brands and to align their
retail marketing strategies on a national basis.
Consistent with the alliances' principle of "equal voice," sub-teams from the
three parent companies have worked closely together to identify efficiencies and
margin improvements that the new organizations can achieve by integrating
overlapping functions and assets and by sharing best practices. For example, the
new organizations expect to streamline industrial lubricant product lines,
enhance the efficiency of the order-entry process, improve logistical
flexibility and coordinate bulk purchases.
In cases where Shell and Texaco operate contiguous facilities, we can now
optimize the sites by streamlining some areas of service and product lines. For
example, in locations where Texaco and Shell refineries are near each other,
feedstock purchases and product yields can be coordinated to optimize
profitability.
We will also take maximum advantage of our complementary strengths. For example,
Shell's Rotella(R) brand diesel engine oil has a strong position in the truck
market, while Texaco's Havoline Formula3(R) brand motor oil is a top seller in
the passenger vehicle market. And we will benefit by learning more about each
other's strengths. By working together on reliability studies and safety
practices, we will be able to further reduce lost-time incidents throughout the
refining system. The sheer size of the alliances will allow us to leverage the
use of best practices across a much larger network than the individual companies
could achieve on their own.
Longer term, we will endeavor to leverage our cost-efficiency improvements to
increase earnings, cash flow and market presence - creating a true "growth
engine" in the U.S. downstream market.
ITEM A13
REFINING ALIGNMENT
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A13.]
ITEM A14
COMBINED MARKET SHARE BY STATE - 1997
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A14.]
<PAGE>
22 TEXACO INC.
Texaco enters the new alliances in the U.S. from a position of experience and
confidence. We have a long-held strategic focus on active alliance management,
which minimizes risk and strengthens returns. In 1995, we entered into a joint
venture with Norsk Hydro, which gave us a leading market position in the
countries of Scandinavia. The joint venture, Hydro Texaco, currently has about
18% of the national gasoline markets in Norway and Denmark. Our long tradition
of joint ventures includes the formation in 1988 of Star Enterprise.
The largest and most enduring of Texaco's alliances is Caltex, formed in 1936 as
a 50% joint downstream venture with Chevron. Caltex is a leading marketer in
many of the nearly 60 countries in which it operates. Caltex reduced expenses
3.5% in 1997, compared to 1996. The company's continuing cost-containment
efforts have resulted in a cost reduction of some 15% from 1994 to 1997. In the
face of continued volatility in the principal Asian economies, Caltex has
initiated additional programs - with active participation from its shareholders
- - - to continue improving its cost structure and gaining greater efficiencies
across its asset base. At the same time, Caltex is actively searching for
valuable growth opportunities afforded by the region's economic troubles.
Just as Caltex has consistently added shareholder value by growing its business
in markets around the world, our new downstream alliances for growth in the U.S.
are expected to achieve strong results as we change the way of doing business in
the competitive U.S. downstream market.
ITEM A15
U.S. RETAIL FACILITIES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A15.]
ITEM A16
U.S. REFINING CAPACITY
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART A, ITEM A16.]
<PAGE>
23
FINANCIAL AND OPERATIONAL INFORMATION
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
24 MANAGEMENT'S DISCUSSION AND ANALYSIS
37 STATEMENT OF CONSOLIDATED INCOME
38 CONSOLIDATED BALANCE SHEET
39 STATEMENT OF CONSOLIDATED CASH FLOWS
40 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42 NOTE 1. Description of Significant Accounting Policies
43 NOTE 2. Adoption of New Accounting Standards
44 NOTE 3. Net Income Per Common Share
45 NOTE 4. Acquisition of Monterey Resources
45 NOTE 5. Discontinued Operations
45 NOTE 6. Inventories
45 NOTE 7. Investments and Advances
47 NOTE 8. Properties, Plant and Equipment
48 NOTE 9. Short-Term Debt, Long-Term Debt, Capital Lease Obligations
and Related Derivatives
50 NOTE 10. Lease Commitments and Rental Expense
50 NOTE 11. Preferred Stock and Rights
51 NOTE 12. Foreign Currency
52 NOTE 13. Taxes
53 NOTE 14. Employee Benefit Plans
56 NOTE 15. Stock Incentive Plan
57 NOTE 16. Other Financial Information and Commitments
58 NOTE 17. Financial Instruments
61 NOTE 18. Contingent Liabilities
61 NOTE 19. Financial Data by Geographic Area
62 NOTE 20. Subsequent Event
63 REPORT OF MANAGEMENT
63 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
64 SUPPLEMENTAL OIL AND GAS INFORMATION
69 SUPPLEMENTAL MARKET RISK DISCLOSURES
SELECTED FINANCIAL DATA
71 Selected Quarterly Financial Data
71 Five-Year Comparison of Selected Financial Data
72 INVESTOR INFORMATION
<PAGE>
24 TEXACO INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
INTRODUCTION
- - --------------------------------------------------------------------------------
During 1997, we volunteered to participate in a pilot program with the
Securities and Exchange Commission to write our Management's Discussion and
Analysis (MD&A) in plain English. We hope by using plain English our information
will be more easily understood.
In the MD&A, we explain the operating results and general financial
condition of Texaco Inc. and its subsidiaries. We begin the MD&A with a table of
consolidated financial highlights, which provides a financial picture of our
company. The remainder of our MD&A is comprised of four main topics: Industry
Review, Results of Operations, Functional Analysis of Net Income and Other
Items.
In the Industry Review, we discuss the economic factors that affected our
industry in 1997. Our near-term outlook for the industry and a worldwide
supply/demand forecast are also provided.
In the Results of Operations, we describe comparative variances in
consolidated revenues, costs, expenses, and income taxes. Summary schedules of
net income complete this section. These schedules show net income before and
after special items. Special items are significant events considered to be
outside the scope of normal current year operations.
In the Functional Analysis of Net Income, we present the various segments
of our business. Our net income is detailed according to the following
functions:
o Exploration and Production (also known as "Upstream"): We explore for, find
and produce crude oil, natural gas liquids and natural gas
o Manufacturing, Marketing and Distribution (also known as "Downstream"): We
refine, transport and sell crude oil and products, such as gasoline, fuel oil
and lubricants
o Nonpetroleum: Insurance, alternate energy and real estate
o Corporate/Nonoperating: Interest expense and general corporate expenses, as
well as interest and other income.
Finally, in the Other Items section, we discuss items that we think are
important to our overall business strategies:
o Liquidity and Capital Resources: Our program to manage cash, working capital,
debt and other factors that provide us with financial flexibility
o Capital and Exploratory Expenditures: Our program to invest in projects aimed
at future growth
o Environmental Matters: A discussion about our expenditures relating to the
environment
o Reserves: A discussion about our worldwide net proved reserves of crude oil,
natural gas liquids and natural gas
o U.S. Downstream Alliances: An overview of the formation of two ventures that
combine our refining, marketing, transportation, trading and lubricants
operations with those of Shell Oil Company and Saudi Refining, Inc. in 1998
o Year 2000: The status of our identification and correction of computers,
software, and related technologies to be year 2000 compliant.
oooooooo
Our discussions in the MD&A and other sections of this Annual Report represent
our best estimate of the trends we know about and the trends we anticipate.
Actual results may be different from our estimates.
<PAGE>
TEXACO INC. 25
CONSOLIDATED FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Millions of dollars, except per share and ratio data) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 46,667 $ 45,500 $ 36,787
Net income before special items and cumulative effect of accounting change $ 1,894 $ 1,665 $ 1,152
Special items 770 353 (424)
Cumulative effect of accounting change -- -- (121)
-----------------------------------
Net income $ 2,664 $ 2,018 $ 607
Net income per common share (dollars)
Basic
Net income before special items and cumulative effect of accounting change $ 3.52 $ 3.09 $ 2.10
Special items 1.47 .68 (.81)
Cumulative effect of accounting change -- -- (.24)
-----------------------------------
Net income $ 4.99 $ 3.77 $ 1.05
Diluted
Net income before cumulative effect of accounting change $ 4.87 $ 3.68 $ 1.28
Net income $ 4.87 $ 3.68 $ 1.05
Cash dividends per common share (dollars) $ 1.75 $ 1.65 $ 1.60
Total assets $ 29,600 $ 26,963 $ 24,937
Total debt $ 6,392 $ 5,590 $ 6,240
Stockholders' equity $ 12,766 $ 10,372 $ 9,519
Current ratio 1.07 1.24 1.24
Return on average stockholders' equity* 23.5% 20.4% 7.5%
Return on average capital employed* 17.3% 14.9% 6.9%
Total debt to total borrowed and invested capital 32.3% 33.6% 38.0%
-----------------------------------
</TABLE>
* Returns for 1995 exclude the cumulative effect of accounting change.
INDUSTRY REVIEW
- - --------------------------------------------------------------------------------
REVIEW OF 1997
Economic Performance - The world economy grew at a relatively healthy 3.6% rate
in 1997, though growth patterns varied among regions. On balance, economic
expansion in the industrialized world remained modest. The U.S. economy enjoyed
robust growth in 1997, while the economies of Western Europe gained momentum,
benefiting from strong export performance. However, the Japanese economy showed
signs of stalling, due largely to the effects of a tax increase on consumer
spending.
The economy of the former Soviet Bloc registered modest growth in 1997.
Strong gains in some of the Eastern European countries and a small increase in
Russia were offset by continued stagnation in other parts of the former Soviet
Bloc.
In the developing world, a financial crisis in much of Asia slowed economic
expansion during the latter part of 1997. But the economies of other developing
regions remained strong, and growth for the developing world as a whole was
still well above the world average.
Demand & Supply Conditions - The overall favorable global economic conditions
resulted in robust growth for oil demand during 1997. World petroleum demand
averaged a record 73.8 million barrels per day - 2.8% higher than in 1996.
o Growth in the industrialized world was supported by the U.S., where strong
demand for gasoline helped boost overall oil demand.
o The economic turmoil in some Asian markets slowed historic growth rates for
the developing countries as a whole.
o Growth also took place in the former Soviet Bloc. For the first time since
1987, Russia registered a modest increase in oil consumption.
On the supply side, OPEC (Organization of Petroleum Exporting Countries) and
non-OPEC liquids production rose during the year to 74.3 million barrels per
day, from 72.1 million barrels per day in 1996. However, growth in non-OPEC
supply was less than anticipated due to new field delays in the North Sea and
technical problems in Colombia, Australia and Brazil.
Output from OPEC showed a substantial gain versus 1996. Nearly every OPEC
country boosted production, with Venezuela and Nigeria showing some of the
largest gains. Iraq's "oil-for-food" exports under U.N. Resolution 986 added
significant volumes to the market.
World crude oil prices declined in 1997, despite the production problems in
some non-OPEC areas. The spot price of U.S. benchmark West Texas Intermediate
(WTI) averaged $20.61 per barrel, $1.55 below prior year levels.
<PAGE>
26 TEXACO INC.
WORLD PETROLEUM DEMAND/SUPPLY
Forecast
(Millions of barrels a day) 1998 1997 1996
- - --------------------------------------------------------------------------------
Demand
Industrial Nations 42.2 41.8 41.3
Developing Nations 26.9 26.0 24.8
Former Soviet Bloc 6.1 6.0 5.7
------------------------------
Total 75.2 73.8 71.8
- - --------------------------------------------------------------------------------
Supply
Non-OPEC Crude 38.9 37.8 37.1
OPEC Crude 27.6 27.2 25.9
Other Liquids 9.5 9.3 9.1
------------------------------
Total 76.0 74.3 72.1
- - --------------------------------------------------------------------------------
Stock Change 0.8 0.5 0.3
- - --------------------------------------------------------------------------------
NEAR-TERM OUTLOOK
Trimmed by somewhat slower growth in the industrialized world and the lingering
effects of the Asian financial crisis, we expect world economic expansion to
slow to a 3.0% rate in 1998.
o Within the industrialized world, the U.S. is forecast to experience slightly
lower economic growth than in 1997. Also, the Japanese economy is expected to
remain weak. On the other hand, economic expansion in Western Europe is expected
to pick up steam, benefiting from increased investment.
o Developing Asia is likely to experience lower economic growth due to the
continuing repercussions of its financial crisis. However, other developing
areas are expected to remain largely unaffected.
o Despite strong economic gains in some Eastern European countries, continued
economic stagnation in Russia is expected to once again prevent a significant
rebound in the economy of the former Soviet Bloc.
During 1998, we project world oil consumption to increase by approximately 1.4
million barrels per day to an average of 75.2 million barrels per day. Growth in
demand for oil in the industrialized world is expected to slow down, in part due
to the deceleration in the U.S. economy. The relatively poor economic conditions
in parts of Asia are expected to continue to slow growth in the developing
countries overall. In the former Soviet Bloc, oil demand should rise, although
modestly.
Despite the continued uptrend in demand, increases in world oil production
appear to be running ahead of consumption. Many non-OPEC projects delayed in
1997 are expected to start up in 1998. Also, OPEC is continuing to increase
production, particularly given higher output quotas negotiated at the end of
1997. With the supply/demand balance loosening, oil prices have declined
precipitously in early 1998; however, some recovery in prices is likely as the
year progresses.
Extreme weakness in some Asian economies will constrain both regional
Downstream margins and petroleum product sales. The financial performance of
company operations through our affiliate, Caltex, could be adversely impacted.
RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
REVENUES
Our consolidated worldwide revenues rose to $46.7 billion in 1997, an increase
of almost 3% over revenues of $45.5 billion in 1996. In 1997, we had higher
sales volumes of crude oil, natural gas and refined products. We also had higher
prices for natural gas sales, principally in the United States. Crude oil
revenues were lower due to a significant price drop late in the year. Revenues
for 1995 were $36.8 billion.
ITEM B1
REVENUES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B1.]
1997 versus 1996 - Crude oil and natural gas sales volumes increased due to
higher worldwide production. Higher production resulted from new field
development, field expansions and an acquisition. "Buy/Sell" activity in the
U.S. increased for natural gas but was partially offset by lower international
crude sales. "Buy/Sells" are the marketing of crude oil and natural gas produced
by other companies and purchased by us for resale. This activity enables us to
utilize our significant trading and pipeline distribution network to optimize
market opportunities in the volatile petroleum industry. Our petroleum products
sales rose during 1997 due to strong sales of gasoline and heating oil.
Generally declining prices for crude oil and petroleum products decreased
sales revenues late in the year. This impact was only partially offset by higher
prices for U.S. natural gas.
Other revenues increased due to higher duties and taxes collected on
increased international refined product sales. These duties are passed on to
consumers. We also had more asset sales in 1997.
1996 versus 1995 - Revenues in 1996 exceeded 1995 by 24%. Two-thirds of the 1996
rise was due to higher worldwide prices for crude oil, refined products and
natural gas. Sales volumes increased across most product lines reflecting
expanded trading and producing operations and our product marketing initiatives.
<PAGE>
TEXACO INC. 27
COSTS
Purchases and other costs were $35.2 billion in 1997, $34.6 billion in 1996 and
$27.2 billion in 1995.
Costs were higher in 1997 because we purchased more natural gas for resale
than in 1996. We also paid higher prices for natural gas in the United States.
Costs increased further by duties on higher refined product volumes and rates
imposed by foreign governments. Partially offsetting these impacts were lower
worldwide purchase costs and international volumes of crude oil acquired for
resale.
The 1996 increase versus 1995 was due to higher worldwide prices and
volumes for purchased crude oil, refined products and natural gas.
EXPENSES
Expenses of our operations, excluding special items, rose to $7.6 billion in
1997 as compared to $7.2 billion in 1996 and $6.8 billion in 1995.
We have expanded our operations considerably over the past three years.
Higher production of crude oil and natural gas, increased refinery utilization
and a rise in refined product sales have led to increased expenses.
We have also increased our exploratory spending to aggressively search for
new reserves of crude oil and natural gas. Expenses have seen upward pressure
due to a general shortage of drilling rigs, equipment and in some cases talented
manpower. Our producing and refinery operations experienced higher utility costs
necessary to fuel units and equipment used in our business.
We spent more on advertising and corporate sponsorship. In 1997 we launched
our "Texaco. A World of Energy" campaign and initiated our new eight year
sponsorship of the U.S. Olympic team.
While expenses for operations increased over prior years' levels, cash
operating expenses on a per barrel basis have been contained in spite of
inflationary pressures. These expenses have increased only 1% from 1995 to 1997
as compared to a 5% rise in inflation. This measurement shows our ability to
grow the business and enhance shareholder value while controlling expenses.
INCOME TAXES
Income tax expense was $663 million in 1997, $965 million in 1996 and $258
million in 1995. The year 1997 included a $488 million benefit resulting from an
IRS settlement. The years 1996 and 1995 included benefits from the sales of a
partial interest in a subsidiary of $188 million and $65 million, respectively.
The year 1995 also included significant deferred tax benefit effects from the
adoption of a new accounting standard.
NET INCOME SUMMARY SCHEDULES
The following schedules show net income before and after special items. Special
items are significant events considered to be outside the scope of normal
current year operations.
NET INCOME
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------
Net income before special
items and cumulative effect
of accounting change $ 1,894 $ 1,665 $ 1,152
Special items:
Gains on major asset sales 367 194 232
Tax benefits on asset sales -- 188 65
Tax and other issues 487 68 --
Employee separation costs -- (65) (56)
Asset writedowns (41) -- (639)
Other special items (43) (32) (26)
------------------------------------
Total special items 770 353 (424)
- - --------------------------------------------------------------------------------
Net income before
cumulative effect of
accounting change $ 2,664 $ 2,018 $ 728
- - --------------------------------------------------------------------------------
The following schedule further details net income by major function within our
U.S. and International operations.
- - --------------------------------------------------------------------------------
NET INCOME
<TABLE>
<CAPTION>
Before Special Items After Special Items
-------------------------- -----------------------------
(Millions of dollars) 1997 1996 1995 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exploration and Production
U.S. $ 1,031 $ 1,123 $ 674 $ 957 $ 1,123 $ 293
International 438 451 343 797 478 340
---------------------------------------------------------
Total Exploration and Production 1,469 1,574 1,017 1,754 1,601 633
- - --------------------------------------------------------------------------------------------------------------------
Manufacturing, Marketing and Distribution
U.S. 305 233 141 318 207 121
International 530 252 358 514 450 365
---------------------------------------------------------
Total Manufacturing, Marketing and Distribution 835 485 499 832 657 486
- - --------------------------------------------------------------------------------------------------------------------
Total Petroleum and Natural Gas 2,304 2,059 1,516 2,586 2,258 1,119
- - --------------------------------------------------------------------------------------------------------------------
Nonpetroleum 17 16 32 17 16 (28)
Corporate/Nonoperating (427) (410) (396) 61 (256) (363)
---------------------------------------------------------
Net income $ 1,894 $ 1,665 $1,152 $2,664 $ 2,018 $ 728
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
28 TEXACO INC.
FUNCTIONAL ANALYSIS OF NET INCOME
- - --------------------------------------------------------------------------------
UPSTREAM
The following schedule provides financial and key operational information
relating to our Upstream operations:
- - --------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. operating earnings before special items $1,031 $ 1,123 $ 674
Special items (74) -- (381)
---------------------------------
Total U.S. 957 1,123 293
- - --------------------------------------------------------------------------------------------------------------------
International operating earnings before special items 438 451 343
Special items 359 27 (3)
---------------------------------
Total International 797 478 340
- - --------------------------------------------------------------------------------------------------------------------
Worldwide exploration and production earnings $1,754 $ 1,601 $ 633
- - --------------------------------------------------------------------------------------------------------------------
Worldwide return on average capital employed, before special items 18.3% 22.1% 14.9%
Total worldwide return on average capital employed 21.9% 22.5% 9.3%
- - --------------------------------------------------------------------------------------------------------------------
Selected Operating Data
Net production of crude oil and NGL's (thousands of barrels a day)
U.S. 396 388 381
International 437 399 381
---------------------------------
Worldwide 833 787 762
- - --------------------------------------------------------------------------------------------------------------------
Net production of natural gas - available for sale (millions of cubic feet a day)
U.S. 1,706 1,675 1,619
International 471 382 373
---------------------------------
Worldwide 2,177 2,057 1,992
- - --------------------------------------------------------------------------------------------------------------------
Natural gas sales (millions of cubic feet a day)
U.S. 3,584 3,176 3,153
International 592 477 435
---------------------------------
Worldwide 4,176 3,653 3,588
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Upstream operating earnings, before special items, totaled $1,031 million
in 1997, down 8% from 1996, but up 53% from 1995.
We earned less in 1997 compared with 1996, due to slightly lower crude oil
prices, lower gas marketing results and higher operating expenses. Gas marketing
margins were squeezed throughout the year. Our operating expenses were higher
due to increased exploration and production activities, primarily in the
deepwater Gulf of Mexico and California.
Increased demand, low inventory levels and uncertainty regarding the
possible resumption of Iraqi crude sales drove an upward trend in crude oil
prices that began in 1996 and peaked in early 1997. Crude oil prices trended
lower beginning in the second quarter and continued to do so for the remainder
of the year, particularly in the fourth quarter of 1997. During this time, the
market reacted to weakening demand, the potential of increased OPEC and non-OPEC
production and possible changes in Iraqi export volumes. For the year 1997,
Texaco's average crude oil price was $17.34 per barrel, or $.59 per barrel below
the 1996 price. The 1996 average price of $17.93 per barrel represented an
increase of $2.83 per barrel from 1995.
Higher natural gas prices and increased production of crude oil and natural
gas during 1997 had a positive impact on our financial results. Our average
realized price for natural gas of $2.37 per MCF was $.18 per MCF higher than in
1996. The overall higher price in 1997 reflects industry demand to replenish
natural gas inventory levels. The 1996 average natural gas price of $2.19 per
MCF was $.54 per MCF higher than 1995.
We increased our production of crude oil, natural gas liquids and natural
gas in 1997 by 2% as compared with 1996. Production from new fields, most
notably the acquired Monterey Resources properties, and existing fields in the
<PAGE>
TEXACO INC. 29
Gulf of Mexico and Louisiana, contributed to the increase. At the same time, we
more than offset declines from maturing fields. During 1996, we had increased
our production by 2.5% over 1995 levels. This upward trend in U.S. production
over the last two years reflects our commitment to increase production through
enhancements at existing fields such as Kern River, California and the deepwater
Gulf, as well as through acquisitions such as Monterey Resources.
In 1997, our total U.S. operating earnings were $957 million, compared with
$1,123 million in 1996 and $293 million in 1995. Results for 1997 included
special charges of $43 million for the establishment of financial reserves for
royalty and severance tax issues and $31 million for asset writedowns. Included
in 1995 results were special items of $381 million, which included: asset
writedowns of $493 million, gains from the sale of non-core producing properties
totalling $125 million, and charges of $13 million for reserves for
environmental remediation on the non-core properties sold.
ITEM B2
EXPLORATION AND PRODUCTION - TOTAL OPERATING EARNINGS
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B2.]
International Upstream operating earnings, before special items were $438
million in 1997 as compared with $451 million and $343 million for 1996 and
1995.
Even though we increased our international production, our operating
earnings dropped by 3% due to lower crude oil prices, lower gas marketing
results and higher expenses. Our international average crude oil price of $17.64
per barrel in 1997 was $1.91 lower than in 1996. Crude oil prices peaked very
early in 1997 and then began to trend downward for the better part of the year.
The decrease in 1997 average price brought to an end the upward trend in prices
that began in late 1995. Texaco's international average crude oil price in 1995
was $16.29 per barrel.
The higher expenses in 1997 are associated with our expanded exploration
programs. This increase in spending supports our aggressive initiative to
increase production. We also increased our expenses in 1996 to support our
worldwide production goals. The 1997 increase relates to enhancements made in
existing fields in such locations as the Partitioned Neutral Zone, U.K. North
Sea and Angola, and also includes expenses associated with new fields that came
onstream, such as the Captain field.
Crude oil and natural gas production was up more than 11% in 1997. The
double-digit increase in our production volumes follows the 4.5% increase we
achieved in 1996 versus 1995. New production from the Captain and Erskine
fields, as well as record production in the Partitioned Neutral Zone,
contributed to the 1997 increase. A full year's production from activities in
the Bagre field offshore Angola and in the Danish North Sea also bolstered 1997
results. These areas came onstream late in 1996. Increased natural gas
production at the Dolphin field in Trinidad and from Chuchupa "B" offshore
Colombia pushed our international gas production to higher levels.
Operating results for the last three years include non-cash currency
translation effects. These effects relate to deferred income taxes denominated
in British pounds. Results for 1997 and 1995 included benefits of $21 million
and $2 million, while 1996 results included charges of $38 million.
In our international Upstream business, we had total operating earnings of
$797 million for 1997. This compares with $478 million in 1996 and $340 million
in 1995. Results for 1997 included a $15 million prior period tax benefit, a
charge of $10 million for asset writedowns and gains of $354 million related to
asset sales involving:
o a 15% interest in the Captain field in the U.K.,
o interests in Canadian gas properties and an Australian pipeline system, and
o the company's Myanmar operations.
Results for 1996 included a special non-cash gain of $27 million related to a
Danish deferred tax benefit, while 1995 amounts included a special charge of $3
million related to asset writedowns.
<PAGE>
30 TEXACO INC.
DOWNSTREAM
The following schedule provides financial and key operational information
relating to our Downstream operations:
- - --------------------------------------------------------------------------------
MANUFACTURING, MARKETING AND DISTRIBUTION
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. operating earnings before special items $ 305 $ 233 $ 141
Special items 13 (26) (20)
--------------------------------
Total U.S. 318 207 121
- - --------------------------------------------------------------------------------------------------------------------
International operating earnings before special items 530 252 358
Special items (16) 198 7
--------------------------------
Total International 514 450 365
- - --------------------------------------------------------------------------------------------------------------------
Worldwide manufacturing, marketing and distribution earnings $ 832 $ 657 $ 486
- - --------------------------------------------------------------------------------------------------------------------
Worldwide return on average capital employed, before special items 9.3% 5.5% 5.7%
Total worldwide return on average capital employed 9.3% 7.5% 5.6%
- - --------------------------------------------------------------------------------------------------------------------
Selected Operating Data
Refinery input (thousands of barrels a day)
U.S. 747 724 693
International 804 762 788
--------------------------------
Worldwide 1,551 1,486 1,481
- - --------------------------------------------------------------------------------------------------------------------
Refined product sales (thousands of barrels a day)
U.S. 1,022 1,036 934
International 1,563 1,552 1,567
--------------------------------
Worldwide 2,585 2,588 2,501
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Downstream operating earnings, before special items, in 1997 were 31%
higher than 1996 amounts and more than doubled the 1995 results.
We earned more in 1997, compared to 1996, due to improvements in our
refinery operations as well as stronger margins and higher gasoline volumes.
These factors more than offset the effects of lower crude oil trading margins
and clean-up costs from a pipeline break at Lake Barre.
Our East Coast operations benefited from improved margins for most of the
year. Higher crude oil costs squeezed our West Coast margins for the first six
months. However, by the third quarter of 1997, margins started to recover,
allowing 1997 West Coast operations to surpass 1996 results. In 1996, we
experienced just the opposite, as higher crude oil costs during the latter part
of the year sent margins downward from a second quarter peak.
In addition, both first quarter 1997 and fourth quarter 1996 results were
adversely impacted by fires at our Los Angeles, California and Convent,
Louisiana refineries. We experienced property damage and earnings losses from
lower yields. Our refined product sales were slightly lower in 1997. The 1996
level was nearly 11% above 1995 amounts. Although refined product sales dipped
slightly in 1997, gasoline sales continued to remain strong. Texaco branded
gasoline sales volumes increased more than 3% in 1997, fueled by new marketing
initiatives in high growth areas such as Southern California and Denver. This
jump follows a 4% increase in 1996 over 1995 amounts.
ITEM B3
U.S. BRANDED GASOLINE SALES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B3.]
<PAGE>
TEXACO INC. 31
We achieved higher results for 1996 versus 1995, mainly due to higher West Coast
refinery margins, improved refinery operations and the favorable impact of cost
containment efforts. Higher sales volumes of gasoline and diesel as well as
improved profits in the distribution and transportation business offset the
impact of lower margins in 1996.
In 1997, our total U.S. operating earnings were $318 million. Results for
1997 included a special gain of $13 million from the sale of our credit card
operations. The year 1996 included special charges of $25 million related to the
sale of a propylene oxide/methyl tertiary butyl ether (PO/MTBE) manufacturing
site in Texas. Amounts for 1996 and 1995 included special charges of $1 million
and $11 million for employee separations and 1995 results also included special
charges of $9 million related to asset writedowns.
ITEM B4
MANUFACTURING, MARKETING AND DISTRIBUTION -
TOTAL OPERATING EARNINGS
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B4.]
International Downstream operating earnings, before special items, were $530
million in 1997. We earned $252 million in 1996 and $358 million in 1995.
The more than doubling of earnings in 1997 reflects higher manufacturing
and marketing results. In manufacturing, we improved refining operations,
increased margins and lowered expenses - particularly in the U.K. and at the
Panama refinery. Marketing results in 1997 also significantly improved due in
large part to the recovery of margins in the United Kingdom. In 1996, our
results were squeezed by significantly depressed marketing margins. In Latin
America and Europe, refined product sales increased over 1996 amounts. Increased
sales volumes throughout Latin America and Europe - along with stronger
marketing margins in the Latin America areas, offset the impact of lower results
in Scandinavia. Price wars in the Norwegian marketplace lowered our 1997
results.
Caltex earnings for 1997 were bolstered by improved petrochemical results
in Korea, higher refining margins and improved refining efficiencies, and higher
refined product sales. This improvement occurred in spite of the economic crisis
in Southeast Asia that arose during the latter part of 1997. Effective October
1, Caltex changed the functional currency used to account for its operations in
Korea and Japan to the U.S. dollar. Results for the year included $70 million of
benefits in Korea recorded in the fourth quarter, principally relating to
currency effects. The favorable currency-related effects were primarily local
tax benefits on currency losses on U.S. dollar-denominated obligations resulting
from the devaluation of the won.
Two unscheduled refinery shutdowns in Thailand during 1997 and inventory
valuation losses associated with a decline in crude oil prices partly offset the
increase in Korean earnings. In the last half of 1997, currency devaluations in
various countries drove down margins, as Caltex was unable to immediately
recover dollar based crude costs.
Results for 1996 were almost 30% lower than 1995's. This decrease was
driven mainly by lower margins in both the Europe and the Caltex areas. In
Europe, 1996 marketing margins were significantly depressed by an excessive
supply of gasoline and competitive market pressures in the United Kingdom. In
the Caltex operating markets, higher crude costs significantly lowered margins
in Australia, Korea, Thailand and Japan.
Operating results for all three periods included non-cash currency
translation effects. These effects relate to deferred income taxes denominated
in British pounds. Results for 1997 and 1995 included benefits of $7 million and
$3 million, while 1996 results included charges of $20 million.
Our total international operating earnings were $514 million for 1997. This
compares with $450 million in 1996 and $365 million in 1995. Results for 1997
included a special charge of $16 million, primarily for adjustments related to
deferred tax issues in Ireland. Results for 1996 and 1995 included the following
special items:
o gains related to asset sales: $219 million in 1996 related to sale of Caltex'
interest in Nippon Petroleum Refining Company, Limited, and $80 million in 1995,
principally related to sale of land in Japan by a Caltex affiliate,
o charges for employee separations: $21 million in 1996 and $29 million in 1995,
o a charge of $31 million in 1995 related to asset writedowns, and
o restructuring charges of $13 million in 1995 for certain Caltex operations.
<PAGE>
32 TEXACO INC.
NONPETROLEUM
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------
Operating earnings (losses)
before special items $ 17 $ 16 $ 32
Special items -- -- (60)
-----------------------------
Total operating earnings
(losses) $ 17 $ 16 $(28)
- - --------------------------------------------------------------------------------
Nonpetroleum operating earnings before special items were $17 million in 1997,
$16 million in 1996 and $32 million in 1995. The 1995 results reflect the
benefits of improved loss experience of insurance operations.
Included in total nonpetroleum operating results for 1995 was a special
charge of $87 million for asset writedowns and a special gain of $27 million
from the sale of our interest in Pekin Energy Company.
CORPORATE/NONOPERATING
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------
Corporate/nonoperating
before special items $(427) $(410) $(396)
Special items 488 154 33
----------------------------------
Total $ 61 $(256) $(363)
- - --------------------------------------------------------------------------------
Corporate and nonoperating charges, before special items, were $427 million in
1997, higher than both the $410 million for 1996 and $396 million in 1995.
Our results in 1997 include higher expenses associated with the company's
new "Texaco. A World of Energy" advertising campaign and with our human resource
initiatives. These initiatives are targeted toward making Texaco a leader in
opportunity and diversity. Partly offsetting these higher expenses in 1997 was a
decrease in interest expense that resulted from slightly lower interest rates.
Lower debt levels and interest rates benefited 1996 results as compared
with 1995. The overall lower 1995 charges included gains of $25 million,
principally from the sales of equity securities held for investment by the
insurance operations.
Total corporate and nonoperating results for 1997 included a first quarter
special benefit of $488 million associated with an IRS settlement. Results for
both 1996 and 1995 included special tax benefits from the sales of interests in
a subsidiary which amounted to $188 million in 1996 and $65 million in 1995. In
addition, results for 1996 and 1995 included the following:
o charges for severance - $43 million in 1996 and $16 million in 1995,
o $41 million benefit in 1996 from lower than anticipated prior years' state tax
exposures,
o $32 million charge in 1996 for the establishment of reserves for various
litigation matters, and
o $16 million charge in 1995 for asset writedowns.
OTHER ITEMS
- - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
This section discusses our cash inflows and outflows. Our liquidity strategy is
to rely primarily on cash from operations, supplemented by the proceeds from the
sale of nonstrategic assets, for our cash requirements. We use these funds for
our capital and exploratory programs, dividends and working capital. We manage
our working capital efficiently and have strong credit ratings and ready access
to global financial markets. This flexibility allows us to secure funds at low
capital costs. We consider our financial position to be sufficiently strong to
meet our anticipated future financial requirements.
To provide liquidity and to support our commercial paper program, we also
maintain $1.5 billion in revolving credit facilities, which were unused at
year-end 1997. Our debt has an average maturity in excess of 11 years and a
weighted average interest rate of 7.2%. We manage our long-term debt to avoid
large requirements for cash redemption in any particular year. During 1997, we
issued $150 million of 7.09% noncallable notes due 2007 and $200 million of
3.50% cash-settled convertible notes due 2004. The latter was hedged by a swap
which converts the interest cost into a LIBOR-based floating rate and limits our
cost of redemption to the face value of these notes.
The following table highlights relevant financial information:
(Millions of dollars, except ratio data) 1997 1996 1995
- - --------------------------------------------------------------------------------
Current ratio 1.07 1.24 1.24
Total debt $ 6,392 $ 5,590 $ 6,240
Minority interest in
subsidiary companies $ 645 $ 658 $ 667
Stockholders' equity $12,766 $10,372 $ 9,519
Total debt to total borrowed
and invested capital 32.3% 33.6% 38.0%
- - --------------------------------------------------------------------------------
1997 Cash Flow Highlights
The following table highlights the major components of cash flows during 1997:
(Millions of dollars)
- - --------------------------------------------------------------------------------
Inflows:
Cash from operations $3,915
Sale of non-strategic assets 1,036
Borrowings 1,135
------
6,086
Outflows:
Capital and exploratory expenditures 3,628
Payments of dividends 1,054
Repayment of borrowings 637
Stock repurchase program 382
Net purchases of leasehold interests 503
Other net outflows 82
------
6,286
------
Decrease in cash and cash equivalents $ 200
- - --------------------------------------------------------------------------------
<PAGE>
TEXACO INC. 33
o In March, we exercised an option to terminate a lease arrangement and obtained
ownership of the assets used in our PO/MTBE business. At the same time, we 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 11 years.
o In April, we completed the sale of a 15% interest in our U.K. North Sea
Captain field for approximately $210 million. We received $20 million in 1996
and the balance at closing.
o In April, we sold our interest in certain producing operations in Canada for
approximately $80 million.
o In May, we sold our credit card services unit, including its portfolio of
proprietary credit card accounts receivable, for $308 million.
o In the third quarter, the quarterly dividend on common stock was increased by
5.9%, to 45 cents per share, as adjusted for the two-for-one stock split.
o In August, we repurchased certain equipment leasehold interests in conjunction
with a sale/leaseback arrangement for $522 million. This amount was less than
the sales proceeds received in previous years.
o In August, we received approximately $770 million of cash related to an
IRS settlement.
o In December, we sold our interest in producing and pipeline operations under
development in Myanmar for $260 million.
o During 1997, we purchased about $400 million of common stock in the open
market. We also purchased an additional $77 million during January of 1998. Of
these total purchases, about $150 million will be used to replace shares to be
issued during 1998 under various employee benefit and incentive plans.
Monterey Acquisition - In November, the shareholders of Monterey Resources
approved the merger of Monterey with our company. As a result, we issued
approximately 19 million additional shares of Texaco common stock, valued at
$1.1 billion. We also acquired Monterey's existing debt of approximately $300
million, of which $120 million of short-term debt was paid off immediately.
Managing Market Risk - The company is exposed to the following principal types
of market risk:
o the price of crude oil, natural gas and petroleum products
o the value of foreign currencies in relation to the U.S. dollar
o interest rates.
We attempt to maintain our exposure to these risks within established
guidelines. We enter into arrangements that obligate us to pay cash or entitle
us to receive cash when one or more of the above fluctuates from baseline
reference prices or rates. Collectively, these arrangements do not expose us to
material adverse effects. The change in value of these arrangements will
approximate the change in value of the underlying transaction, in the opposite
direction. The fees and other costs associated with these arrangements are often
less than those associated with other transactions that we could use to
accomplish the same result.
Our written policies allow use of these types of arrangements for managing
risks only. We are not permitted to speculate on future prices. Our written
policies place limits on the dollar value, the time period and the volumes of
these arrangements.
CAPITAL AND EXPLORATORY EXPENDITURES
1997 Activity - Worldwide capital and exploratory expenditures, including our
share of expenditures by affiliates, were $5.9 billion for the year 1997. This
amount includes $1.4 billion for the acquisition of Monterey Resources, a
company that produces significant quantities of heavy crude oil in California.
Excluding the Monterey acquisition, expenditures were geographically and
functionally split as follows:
o International ($2.3 billion, or 51%) and United States ($2.2 billion, or 49%)
o Upstream ($3.2 billion, or 71%) and Downstream and Other ($1.3 billion, or
29%).
<PAGE>
34 TEXACO INC.
ITEM B5
CAPITAL AND EXPLORATORY EXPENDITURES - GEOGRAPHICAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B5.]
Exploration and Production - Significant areas of investment included:
o Acquisition of Monterey Resources
o High impact development and exploratory projects in the deepwater Gulf of
Mexico
o Platform development and drilling in the U.K. North Sea, China and West Africa
o A 20% interest in the Karachaganak field in Kazakhstan
o Enhanced oil recovery spending in California and Indonesia
o Construction of a jointly-owned natural gas pipeline and processing complex in
the Gulf Coast area.
ITEM B6
CAPITAL AND EXPLORATORY EXPENDITURES - FUNCTIONAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, PART B, ITEM B6.]
Manufacturing, Marketing and Distribution - Investments in Downstream facilities
included:
o Marketing facilities and service station re-imaging throughout Asia by Caltex
o Marketing expansion throughout promising areas of Latin America and Europe
o Enhancement in U.S. marketing operations to strengthen the Texaco brand
o Acquisition of the remaining interest in a refinery unit in Pembroke, Wales
o Construction of various crude oil pipeline projects in the Gulf Coast area and
a refining upgrade at Port Arthur, Texas.
The following table details our capital and exploratory expenditures:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ------------------------- ---------------------------
Inter- Inter- Inter-
(Millions of dollars) U.S. national Total U.S. national Total U.S. national Total
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
Exploratory expenses $ 189 $ 282 $ 471 $ 153 $ 226 $ 379 $ 94 $ 195 $ 289
Capital expenditures* 2,994 1,129 4,123 1,090 909 1,999 810 838 1,648
--------------------------------------------------------------------------------------
Total exploration and
production 3,183 1,411 4,594 1,243 1,135 2,378 904 1,033 1,937
Manufacturing, marketing
and distribution 431 848 1,279 360 658 1,018 453 687 1,140
Other 55 2 57 33 2 35 44 7 51
- - --------------------------------------------------------------------------------------------------------------------
Total $ 3,669 $2,261 $5,930 $1,636 $ 1,795 $3,431 $1,401 $1,727 $ 3,128
- - --------------------------------------------------------------------------------------------------------------------
Total, excluding equity
in affiliates $ 3,421 $1,718 $5,139 $1,535 $ 1,338 $2,873 $1,248 $1,242 $ 2,490
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
*1997 includes $1.4 billion acquisition of Monterey Resources.
<PAGE>
TEXACO INC. 35
1998 and Beyond - Including our affiliates, we plan to spend approximately $26
billion over the next five years. Spending for 1998 is expected to be $4.6
billion. These expenditures will be evenly divided between the U.S. and
international areas.
Exploration and Production - Our Upstream expenditures will continue to be
directed toward finding, developing and increasing our access to crude oil and
natural gas reserves, including:
o The Gulf of Mexico, where we hold a significant inventory of valuable
exploration and development acreage
o Kazakhstan, where we have a 20% interest in the giant Karachaganak oil and gas
field
o The U.K. North Sea, where activities are underway in several fields slated to
phase in production from 1998-2001
o Areas rich in heavy oil reserves where we can apply our world class enhanced
oil recovery techniques. Some of these areas are California, including the
Monterey Resources properties, and the Duri field of Indonesia
o Opportunities where our advanced geological and geophysical visualization
technologies indicate that good drilling and development prospects exist
o Exploration activity focused on existing areas in West Africa and Latin
America.
Manufacturing, Marketing and Distribution - Spending will be concentrated mainly
in the marketing segment of our business. Our investments will focus on
locations where we can enhance brand loyalty, improve market share and are
positioned to achieve attractive rates of return, such as:
o Enhanced retail positions in Latin American growth areas
o Upgraded and expanded retail outlets in Asia-Pacific areas where Caltex has a
major presence
o Increased cogeneration and gasification projects in international areas.
ENVIRONMENTAL MATTERS
In 1997, we spent $825 million to protect the environment and to comply with
federal, state and local environmental laws and regulations. This includes our
equity share in the environmental expenditures of our major affiliates. We
continued to promote pollution prevention at our refineries and the refineries
of our affiliates, Star Enterprise and Caltex Petroleum Corporation. We have
also designed and applied processes to convert refinery wastes and used motor
oil into valuable products. This minimizes the need to dispose of such
materials. We are also actively involved in the remediation of hazardous waste
sites which have been identified by the U. S. Environmental Protection Agency
(EPA) and other regulatory agencies.
The following table provides our environmental expenditures for the past
three years:
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------
Capital expenditures $162 $185 $275
Non-capital:
Ongoing operations 538 561 480
Remediation 79 111 134
Restoration and
abandonment 46 48 46
------------------------------
Total environmental
expenditures $825 $905 $935
- - --------------------------------------------------------------------------------
Capital Expenditures - Our capital environmental expenditures were $162 million
in 1997. We spent $23 million less than in 1996, when we made large outlays for
refinery upgrades to comply with government standards for reformulated fuels and
low-sulfur diesel oil. Capital environmental expenditures projected for 1998 and
1999 total $222 million and $238 million, respectively.
Ongoing Activities - In 1997, we spent and expensed $538 million for ongoing
operations, primarily to produce cleaner-burning fuels and to manage our
environmental programs. We dedicated nearly 70% of this amount to improved air
quality.
Remediation Costs and Superfund Sites - Worldwide remediation expenditures in
1997 were $79 million. This included $15 million spent on remediating Superfund
waste sites. At the end of 1997, we had financial reserves of $577 million for
the estimated future costs of our environmental programs. This included $57
million for the cleanup of Superfund waste sites. We have provided these
reserves to the extent reasonably measurable. It is not possible to project
overall costs or a range of costs beyond that disclosed, due to the uncertainty
surrounding future developments in regulations and/or until further information
develops regarding waste sites.
The EPA and other regulatory agencies have identified us as a potential
responsible party (PRP) for clean up of certain hazardous waste sites. We have
determined that we may have potential exposure, though limited in most cases, at
237 multi-party waste sites. Of these sites, 78 are on the EPA's National
Priority List. Under Superfund, liability is joint and several; that is, each
PRP at a site can be held liable individually for the entire cleanup cost of the
site. We are, however, actively pursuing and/or participating in the sharing of
Superfund costs with other identified PRP's. The sharing of these costs is on
the basis of weight, volume and toxicity of the materials contributed by the
PRP's.
<PAGE>
36 TEXACO INC.
Restoration and Abandonment - Financial reserves at year-end 1997 to cover the
cost of restoration and abandonment or "closure" of our oil and gas producing
properties were $845 million. Expenditures in 1997 for restoration and
abandonment amounted to $46 million.
oooooooo
In summary, we make every reasonable effort to fully comply with applicable
governmental regulations. Changes in governmental regulations and/or our
re-evaluation of our environmental programs may result in additional future
costs to the company. It is assumed that any mandated future costs would be
recoverable in the marketplace, since all companies within the industry would be
facing similar requirements. However, it is not believed that such future costs
will be material to the company's financial position nor to its operating
results over any reasonable period of time.
RESERVES
Worldwide oil and gas activities are described in detail by geographic area in
the section Supplemental Oil and Gas Information. Amounts shown below provide
total crude oil and natural gas on a barrel of oil equivalent (BOE) basis.
Natural gas, measured in thousands of cubic feet, is converted to a comparable
equivalent of oil at a ratio of 6:1. Some key highlights of our worldwide net
proved oil and gas reserves are provided below:
o At the end of 1997, our company has net proved reserves of 4.3 billion BOE, of
which 57% of these reserves are located in the United States.
o The estimated life of our reserves is now 9.4 years as compared with 8.6 years
at year-end 1996. We expect to increase our reserve life, as improved technology
speeds up our rate of oil and gas recoveries, and as we make new discoveries and
mineral right purchases.
o We replaced 167% of our 1997 worldwide combined oil and gas production. This
excludes reserves added from the acquisition of Monterey Resources and other
purchases and sales. The Monterey acquisition added 420 million BOE to our
proved reserve base.
o Our finding and development costs in 1997 of $3.99 per BOE were 18% lower than
last year.
U.S. DOWNSTREAM ALLIANCES
On January 15, 1998, we and Shell Oil Company reached agreement on the formation
and operational start-up of a joint venture. The joint venture combines major
elements of the two companies' western and midwestern U.S. refining and
marketing businesses and nationwide trading, transportation and lubricants
businesses. The new company will operate as Equilon Enterprises LLC. The venture
will allow us to accomplish a fundamental change in the way we operate our
Downstream business, improve performance and provide future growth. Texaco,
Shell and Saudi Refining, Inc. are finalizing agreements for a separate venture
involving the companies' eastern and Gulf Coast refining and marketing
businesses which should conclude in early 1998.
YEAR 2000
Our computer systems, software and related technologies are affected by the Year
2000 compliance issue. We have been identifying and correcting affected
applications to ensure that all of our key computer systems will be Year 2000
compliant by early 1999. We are also working with our vendors and suppliers to
ensure their compliance. Costs to modify such applications have been, and are
estimated to remain, immaterial to our results of operations or financial
condition.
<PAGE>
TEXACO INC. 37
STATEMENT OF CONSOLIDATED INCOME
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales and services (includes transactions with significant
affiliates of $3,633 million in 1997, $3,867 million
in 1996 and $3,146 million in 1995) $ 45,187 $ 44,561 $ 35,551
Equity in income of affiliates, interest, asset sales and other 1,480 939 1,236
-----------------------------------
Total revenues 46,667 45,500 36,787
- - --------------------------------------------------------------------------------------------------------------------
DEDUCTIONS
Purchases and other costs (includes transactions with significant
affiliates of $2,178 million in 1997, $2,048 million
in 1996 and $1,733 million in 1995) 35,230 34,643 27,237
Operating expenses 2,990 2,978 2,907
Selling, general and administrative expenses 1,662 1,693 1,580
Maintenance and repairs 354 367 375
Exploratory expenses 471 379 289
Depreciation, depletion and amortization 1,633 1,455 2,385
Interest expense 412 434 483
Taxes other than income taxes 520 496 491
Minority interest 68 72 54
-----------------------------------
43,340 42,517 35,801
- - --------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 3,327 2,983 986
Provision for income taxes 663 965 258
-----------------------------------
Net income before cumulative effect of accounting change 2,664 2,018 728
Cumulative effect of accounting change -- -- (121)
-----------------------------------
Net Income $ 2,664 $ 2,018 $ 607
- - --------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (DOLLARS)
Basic
Net income before cumulative effect of accounting change $ 4.99 $ 3.77 $ 1.29
Cumulative effect of accounting change -- -- (.24)
-----------------------------------
Net income $ 4.99 $ 3.77 $ 1.05
- - --------------------------------------------------------------------------------------------------------------------
Diluted
Net income before cumulative effect of accounting change $ 4.87 $ 3.68 $ 1.28
Net income $ 4.87 $ 3.68 $ 1.05
- - --------------------------------------------------------------------------------------------------------------------
Average Number of Common Shares Outstanding (for computation
of earnings per share) (thousands)
Basic 522,234 520,392 519,793
Diluted 542,570 541,824 520,364
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
38 TEXACO INC.
CONSOLIDATED BALANCE SHEET
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 311 $ 511
Short-term investments - at fair value 84 41
Accounts and notes receivable (includes receivables from significant affiliates
of $234 million in 1997 and $299 million in 1996), less allowance for
doubtful accounts of $22 million in 1997 and $34 million in 1996 4,230 5,195
Inventories 1,483 1,460
Deferred income taxes and other current assets 324 458
----------------------
Total current assets 6,432 7,665
Investments and Advances 5,097 4,996
Net Properties, Plant and Equipment 17,116 13,411
Deferred Charges 955 891
----------------------
Total $ 29,600 $ 26,963
- - --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable, commercial paper and current portion of long-term debt $ 885 $ 465
Accounts payable and accrued liabilities (includes payables to significant affiliates
of $106 million in 1997 and $144 million in 1996)
Trade liabilities 2,669 3,472
Accrued liabilities 1,480 1,333
Estimated income and other taxes 960 914
----------------------
Total current liabilities 5,994 6,184
Long-Term Debt and Capital Lease Obligations 5,507 5,125
Deferred Income Taxes 1,825 795
Employee Retirement Benefits 1,224 1,236
Deferred Credits and Other Noncurrent Liabilities 1,639 2,593
Minority Interest in Subsidiary Companies 645 658
----------------------
Total 16,834 16,591
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 457 474
Unearned employee compensation and benefit plan trust (389) (378)
Common stock - Shares issued: 567,606,290 in 1997; 548,586,834 in 1996 1,774 1,714
Paid-in capital in excess of par value 1,688 630
Retained earnings 9,987 8,292
Currency translation adjustment (105) (65)
Minimum pension liability adjustment (16) --
Unrealized net gain on investments 26 33
----------------------
13,722 11,000
Less - Common stock held in treasury, at cost 956 628
----------------------
Total stockholders' equity 12,766 10,372
- - --------------------------------------------------------------------------------------------------------------------
Total $ 29,600 $ 26,963
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TEXACO INC. 39
STATEMENT OF CONSOLIDATED CASH FLOWS
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,664 $ 2,018 $ 607
Reconciliation to net cash provided by (used in) operating activities
Cumulative effect of accounting change -- -- 121
Depreciation, depletion and amortization 1,633 1,455 2,385
Deferred income taxes 451 (20) (102)
Exploratory expenses 471 379 289
Minority interest in net income 68 72 54
Dividends from affiliates, greater than (less than) equity in income (370) 167 (103)
Gains on asset sales (558) (19) (320)
Changes in operating working capital
Accounts and notes receivable 718 (1,072) (766)
Inventories (56) (104) (29)
Accounts payable and accrued liabilities (856) 716 (116)
Other - mainly estimated income and other taxes (64) 97 (44)
Other - net (186) 73 146
-----------------------------------
Net cash provided by operating activities 3,915 3,762 2,122
INVESTING ACTIVITIES
Capital and exploratory expenditures (3,628) (2,897) (2,386)
Proceeds from asset sales 1,036 125 1,150
Proceeds from sale of discontinued operations, net of cash
and cash equivalents sold -- 344 --
Sales (purchases) of leasehold interests (503) 261 248
Purchases of investment instruments (1,102) (1,668) (1,238)
Sales/maturities of investment instruments 1,096 1,816 1,273
Other - net (57) 70 12
-----------------------------------
Net cash used in investing activities (3,158) (1,949) (941)
FINANCING ACTIVITIES
Borrowings having original terms in excess of three months
Proceeds 507 307 313
Repayments (637) (802) (358)
Net increase (decrease) in other borrowings 628 (143) (137)
Issuance of preferred stock by subsidiaries -- -- 65
Purchases of common stock (382) (159) (4)
Dividends paid to the company's stockholders
Common (918) (859) (832)
Preferred (55) (58) (60)
Dividends paid to minority stockholders (81) (87) (55)
Other - net -- -- (2)
-----------------------------------
Net cash used in financing activities (938) (1,801) (1,070)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (19) (2) (14)
-----------------------------------
Increase (decrease) during year (200) 10 97
Beginning of year 511 501 404
-----------------------------------
End of year $ 311 $ 511 $ 501
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
40 TEXACO INC.
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
Shares Amount Shares Amount Shares Amount
- - --------------------------------------------------------------------------------------------------------------------
(Shares in thousands; amounts in millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
par value $1; Shares authorized - 30,000,000
Market Auction Preferred Shares (Series G, H, I
and J) - liquidation preference of $250,000 per share
Beginning and end of year 1 $ 300 1 $ 300 1 $ 300
- - --------------------------------------------------------------------------------------------------------------------
Series B ESOP Convertible Preferred Stock -
liquidation value of $600 per share
Beginning of year 720 432 751 450 780 468
Retirements (27) (16) (31) (18) (29) (18)
--------------------------------------------------------------
End of year 693 416 720 432 751 450
- - --------------------------------------------------------------------------------------------------------------------
Series F ESOP Convertible Preferred Stock -
liquidation value of $737.50 per share
Beginning of year 57 42 60 45 63 47
Retirements (1) (1) (3) (3) (3) (2)
---------------------------------------------------------------
End of year 56 41 57 42 60 45
- - --------------------------------------------------------------------------------------------------------------------
UNEARNED EMPLOYEE COMPENSATION
(related to ESOP preferred stock and restricted
stock awards)
Beginning of year (175) (234) (282)
Awards (16) (22) (8)
Amortization and other 42 81 56
---------------------------------------------------------------
End of year (149) (175) (234)
- - --------------------------------------------------------------------------------------------------------------------
BENEFIT PLAN TRUST
(common stock)
Beginning of year 8,000 (203) 8,000 (203) -- --
Establishment/additions 1,200 (37) -- -- 8,000 (203)
---------------------------------------------------------------
End of year 9,200 (240) 8,000 (203) 8,000 (203)
- - --------------------------------------------------------------------------------------------------------------------
COMMON STOCK
par value $3.125; Shares authorized - 700,000,000
Beginning of year 548,587 1,714 548,587 1,714 548,587 1,714
Issued for Monterey acquisition 19,019 60 -- -- -- --
---------------------------------------------------------------
End of year 567,606 1,774 548,587 1,714 548,587 1,714
- - --------------------------------------------------------------------------------------------------------------------
COMMON STOCK HELD IN TREASURY, AT COST
Beginning of year 21,191 (628) 20,152 (517) 29,523 (753)
Purchases of common stock 7,423 (410) 3,515 (159) 102 (4)
Transfer to benefit plan trust (1,200) 37 -- -- -- --
Other - mainly employee benefit plans (1,947) 45 (2,476) 48 (9,473) 240
---------------------------------------------------------------
End of year 25,467 $ (956) 21,191 $ (628) 20,152 $ (517)
- - --------------------------------------------------------------------------------------------------------------------
(Continued on next page)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TEXACO INC. 41
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PAID-IN-CAPITAL IN EXCESS OF PAR VALUE
Beginning of year $ 630 $ 655 $ 654
Monterey acquisition 1,091 -- --
Treasury stock transactions relating to investor services plan
and employee compensation plans (33) (25) 1
----------------------------------
End of year 1,688 630 655
- - --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 8,292 7,186 7,463
Add:
Net income 2,664 2,018 607
Tax benefit associated with dividends on unallocated ESOP
Convertible Preferred Stock 4 5 8
Deduct: Dividends declared on
Common stock ($1.75 per share in 1997, $1.65 per share in 1996
and $1.60 per share in 1995) 918 859 832
Preferred stock
Series B ESOP Convertible Preferred Stock 40 42 43
Series F ESOP Convertible Preferred Stock 4 4 4
Market Auction Preferred Shares (Series G, H, I and J) 11 12 13
----------------------------------
Balance at end of year 9,987 8,292 7,186
- - --------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENT
Beginning of year (65) 61 87
Change during year (40) (126) (26)
----------------------------------
End of year (105) (65) 61
- - --------------------------------------------------------------------------------------------------------------------
MINIMUM PENSION LIABILITY ADJUSTMENT
Establishment (16) -- --
----------------------------------
End of year (16) -- --
- - --------------------------------------------------------------------------------------------------------------------
UNREALIZED NET GAIN ON INVESTMENTS
Beginning of year 33 62 51
Change during year (7) (29) 11
----------------------------------
End of year 26 33 62
- - --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
End of year (including preceding page) $ 12,766 $ 10,372 $ 9,519
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
42 TEXACO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTE 1 DESCRIPTION OF SIGNIFICANT ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements consist of the accounts of Texaco Inc. and
subsidiary companies owned directly or indirectly more than 50 percent.
Intercompany accounts and transactions are eliminated.
The U.S. dollar is the functional currency of all the company's operations
and substantially all of the operations of its affiliates accounted for on the
equity method. For these operations, translation effects and all gains and
losses from transactions not denominated in the functional currency are included
in income currently, except for certain hedging transactions. The cumulative
translation effects for the equity affiliates using functional currencies other
than the U.S. dollar are included in the currency translation adjustment in
stockholders' equity.
USE OF ESTIMATES
The preparation of Texaco's consolidated financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
management's judgment. While all available information has been considered,
actual amounts could differ from those reported as assets and liabilities and
related revenues, costs and expenses and the disclosed amounts of contingencies.
CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less when purchased
are generally considered to be cash equivalents.
INVENTORIES
Virtually all inventories of crude oil, petroleum products and petrochemicals
are stated at cost, determined on the last-in, first-out (LIFO) method. Other
merchandise inventories are stated at cost, determined on the first-in,
first-out (FIFO) method. Materials and supplies are stated at average cost.
Inventories are valued at the lower of cost or market.
INVESTMENTS AND ADVANCES
The equity method of accounting is used for investments in certain affiliates
owned 50 percent or less, including corporate joint-ventures, limited liability
companies and partnerships. Under this method, equity in the pre-tax income or
losses of limited liability companies and partnerships, and in the net income or
losses of corporate joint-venture companies is reflected currently in Texaco's
revenues, rather than when realized through dividends or distributions.
The company's interest in the net income of affiliates accounted for at
cost is reflected in net income when realized through dividends.
Investments in debt securities and in equity securities with readily
determinable fair values are accounted for at fair value if classified as
available-for-sale.
PROPERTIES, PLANT AND EQUIPMENT AND DEPRECIATION, DEPLETION AND AMORTIZATION
Texaco follows the "successful efforts" method of accounting for its oil and gas
exploration and producing operations.
Lease acquisition costs of properties held for oil, gas and mineral
production are capitalized as incurred. Exploratory costs other than wells are
charged to expense as incurred. Exploratory wells, including stratigraphic test
wells, are initially capitalized pending further evaluation of whether
economically recoverable proved reserves have been found. If such reserves are
not found, the well costs are then charged to exploratory expenses. Intangible
drilling costs of productive wells and of development dry holes, and tangible
equipment costs, are capitalized. Costs of injected carbon dioxide related to
development of oil and gas reserves are capitalized.
Evaluation of impairment for properties, plant and equipment intended to be
held is based on comparison of carrying value against undiscounted future net
pre-tax cash flows. If an impairment is identified, the asset's carrying amount
is adjusted to fair value. Assets to be disposed of are generally accounted for
at the lower of amortized cost or fair value less cost to sell.
Unproved oil and gas properties, when individually significant, are
amortized by property using a valuation assessment. Other unproved oil and gas
properties are generally amortized on an aggregate basis over the average
holding period, for the portion expected to be nonproductive. Productive
properties and other tangible and intangible costs of producing activities are
amortized principally by field. Amortization is based on the unit-of-production
basis by applying the ratio of produced oil and gas to estimated recoverable
proved oil and gas reserves. Estimated future restoration and abandonment costs
are included in determining amortization and depreciation rates of productive
properties.
Depreciation of facilities other than producing properties is applied
generally on the group plan, using the straight-line method, with composite
rates reflecting the estimated useful life and cost of each class of property.
Facilities not on the
<PAGE>
TEXACO INC. 43
group plan are depreciated individually by estimated useful life using the
straight-line method. Estimated salvage value is excluded from amounts subject
to depreciation. Capitalized nonmineral leases are amortized over the estimated
useful life of the asset or the lease term, as appropriate, using the
straight-line method.
Periodic maintenance and repairs applicable to manufacturing facilities are
accounted for on the accrual basis. Normal maintenance and repairs of all other
properties, plant and equipment are charged to expense as incurred. Renewals,
betterments and major repairs that materially extend the useful life of
properties are capitalized and the assets replaced, if any, are retired.
When capital assets representing complete units of property are disposed
of, the difference between the disposal proceeds and net book value is credited
or charged to income.
ENVIRONMENTAL EXPENDITURES
When remediation of a property is probable and the related costs can be
reasonably estimated, environmentally-related remediation costs are expensed and
recorded as liabilities. If recoveries of environmental costs from third parties
are probable, a receivable is recorded. Other environmental expenditures,
principally maintenance or preventive in nature, are expensed or capitalized as
appropriate.
DEFERRED INCOME TAXES
Deferred income taxes are determined utilizing a liability approach. The income
statement effect is derived from changes in deferred income taxes on the balance
sheet. This approach gives consideration to the future tax consequences
associated with differences between financial accounting and tax bases of assets
and liabilities. These differences relate to items such as depreciable and
depletable properties, exploratory and intangible drilling costs, nonproductive
leases, merchandise inventories and certain liabilities. This approach gives
immediate effect to changes in income tax laws upon enactment.
Provision is not made for possible income taxes payable upon distribution
of accumulated earnings of foreign subsidiary companies and affiliated corporate
joint-venture companies when such earnings are deemed to be permanently
reinvested.
ACCOUNTING FOR CONTINGENCIES
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the company, but which will only be resolved when
one or more future events occur or fail to occur. Such contingent liabilities
are assessed by the company's management and legal counsel. The assessment of
loss contingencies necessarily involves an exercise of judgment and is a matter
of opinion. In assessing loss contingencies related to legal proceedings that
are pending against the company or unasserted claims that may result in such
proceedings, the company's legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee would be
disclosed. However, in some instances in which disclosure is not otherwise
required, the company may disclose contingent liabilities of an unusual nature
which, in the judgment of management and its legal counsel, may be of interest
to stockholders or others.
NOTE 2 ADOPTION OF
NEW ACCOUNTING STANDARDS
- - --------------------------------------------------------------------------------
SFAS 121 - During 1995, Texaco adopted Statement of Financial Accounting
Standards, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" (SFAS 121). Under SFAS 121, assets whose
carrying amounts are not expected to be fully recovered by future use or
disposition must be written down to their fair values.
Adoption of this Standard resulted in a non-cash after-tax charge of $639
million against 1995 earnings. Application of SFAS 121 to assets to be retained
resulted in a pre-tax charge of $775 million, primarily recorded to
depreciation, depletion and amortization expense. On an after-tax basis, this
charge amounted to $514 million and primarily reflected the write-down to their
estimated fair values of certain of the company's producing properties in the
United States which were evaluated for impairment on a field-by-field basis
rather than in the aggregate. Also, certain non-core coal and marketing
properties, surplus buildings and other properties and equipment held for
disposal were written down by a $184 million charge, primarily recorded to
depreciation, depletion and amortization expense. Including estimated disposal
costs, this charge to income was $125 million, net-of-tax. There were no
material changes in the estimated fair values of assets to be disposed of
subsequent to the determination of their impairment. At year-end 1997 and 1996,
the carrying amounts of assets to be disposed of were not significant. Adoption
of SFAS 121 by Star Enterprise and the Caltex group of companies, each owned 50%
by Texaco, had no effect on 1995 net income.
<PAGE>
44 TEXACO INC.
In accordance with SFAS 121, a $121 million after-tax write-down of
non-core domestic producing properties held for sale at January 1, 1995,
previously recorded in the first quarter of 1995 in income from continuing
operations, has been classified as the cumulative effect of an accounting
change.
SFAS 123 - In 1996, Texaco adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation."
SFAS 128 and 129 - During 1997, Texaco adopted SFAS 128, "Earnings per Share."
Texaco's basic and diluted net income per common share under SFAS 128 were
approximately the same as under the comparable prior basis of reporting. In
1997, Texaco also adopted SFAS 129, "Disclosure of Information about Capital
Structure." Texaco's existing disclosures complied with this standard.
NOTE 3 NET INCOME PER COMMON SHARE
- - --------------------------------------------------------------------------------
Basic net income per common share is based on net income less preferred stock
dividend requirements divided by the average number of common shares
outstanding. Diluted net income per common share assumes issuance of the net
incremental shares from stock options and full conversion of all dilutive
convertible securities at the later of the beginning of the year or date of
issuance. Common shares held by the benefit plan trust are not considered
outstanding for purposes of net income per common share.
In July, 1997, the Board of Directors approved a two-for-one split of the
company's common stock, effective September 29, 1997. The par value was halved
and the number of authorized shares was doubled. Prior years financial
statements and all references to number of shares and per share amounts have
been restated for the stock split. Also, all agreements that include exchange,
conversion or other rights based on the company's common stock have been
adjusted for the stock split.
- - --------------------------------------------------------------------------------
Basic Net Income Per Common Share
<TABLE>
<CAPTION>
For the years ended December 31 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (millions of dollars)
Net income before cumulative effect of accounting change $ 2,664 $ 2,018 $ 728
Preferred stock dividend requirements (56) (58) (60)
----------------------------------
Net income for basic net income per share $ 2,608 $ 1,960 $ 668
Average number of common shares outstanding (thousands) 522,234 520,392 519,793
Per Common Share - Before cumulative effect of accounting change (dollars) $ 4.99 $ 3.77 $ 1.29
- - --------------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Common Share
For the years ended December 31 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
Net Income (millions of dollars)
Net income for basic net income per share
before cumulative effect of accounting change $ 2,608 $ 1,960 $ 668
Adjustments:
Add: preferred stock dividend requirements of dilutive issues 43 45 --
Deduct: net income adjustments for dilutive securities (9) (11) --
----------------------------------
Net income for diluted earnings per share $ 2,642 $ 1,994 $ 668
Average number of shares outstanding (thousands):
Applicable for basic net income per common share 522,234 520,392 519,793
Effects of dilutive items:
Stock options and restricted stock 776 1,090 277
Convertible debentures 287 290 294
ESOP convertible preferred stock 19,273 20,052 --
----------------------------------
Applicable for diluted net income per common share 542,570 541,824 520,364
Per Common Share - Before cumulative effect of accounting change (dollars) $ 4.87 $ 3.68 $ 1.28
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TEXACO INC. 45
NOTE 4 ACQUISITION OF
MONTEREY RESOURCES
- - --------------------------------------------------------------------------------
In November, 1997, Texaco acquired all of the outstanding common stock of
Monterey Resources (Monterey) in exchange for approximately 19 million shares of
Texaco common stock valued at $1.1 billion. The transaction has been accounted
for as a purchase. The total purchase price was $1.4 billion, including existing
Monterey debt of $.3 billion; $2.2 billion was assigned to properties, plant and
equipment, and $.7 billion was assigned to deferred income tax liabilities.
Monterey is an oil and gas company engaged in the production, development and
acquisition of crude oil and natural gas in the State of California. Monterey's
production is principally heavy crude oil.
The financial statements of Texaco reflect the consolidation of Monterey
assets and liabilities at fair value effective from November 1, 1997. The pro
forma effects had Monterey been consolidated at the beginning of either 1997 or
1996 are not material to Texaco's revenues, net income, and basic and diluted
net income per common share for those years.
NOTE 5 DISCONTINUED OPERATIONS
- - --------------------------------------------------------------------------------
In 1994, Texaco Inc. sold Texaco Chemical Company and related international
chemical operations to Huntsman Corporation for $850 million, consisting of $650
million in cash and an 11-year subordinated note with a face value of $200
million. The note was prepaid in January 1996. In 1996, Texaco sold 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.
The results of these operations have been classified as discontinued
operations for 1996 and 1995 in the Statement of Consolidated Income. There was
no net income from these operations for those periods. Revenues of discontinued
operations were $32 million in 1996 and $222 million in 1995. Discontinued
operations have not been segregated in the Statement of Consolidated Cash Flows.
NOTE 6 INVENTORIES
- - --------------------------------------------------------------------------------
(Millions of dollars)
As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Crude oil $ 308 $ 296
Petroleum products and petrochemicals 893 904
Other merchandise 59 58
Materials and supplies 223 202
--------------------
Total $1,483 $1,460
- - --------------------------------------------------------------------------------
The excess of estimated current cost over the book value of inventories carried
on the LIFO basis of accounting was approximately $204 million and $398 million
at December 31, 1997 and 1996, respectively.
NOTE 7 INVESTMENTS AND ADVANCES
- - --------------------------------------------------------------------------------
Investments in affiliates, including corporate joint-ventures and partnerships,
owned 50% or less are accounted for on the equity method. Texaco's total
investments and advances are summarized as follows:
(Millions of dollars)
As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Affiliates accounted for on the
equity method
Caltex group of companies
Exploration and production $ 437 $ 448
Manufacturing, marketing
and distribution 1,860 1,679
--------------------
Total Caltex group of companies 2,297 2,127
Star Enterprise 889 756
Other affiliates 635 928
--------------------
3,821 3,811
Miscellaneous investments, long-term
receivables, etc., accounted for at
Fair value 537 544
Cost, less reserve 739 641
--------------------
Total $5,097 $4,996
- - --------------------------------------------------------------------------------
Texaco's equity in the net income of affiliates accounted for on the equity
method, adjusted to reflect income taxes for limited liability companies and
partnerships whose income is directly taxable to Texaco, is as follows:
(Millions of dollars)
For the years ended December 31 1997 1996 1995
- - --------------------------------------------------------------------------------
Equity in net income (loss)
Caltex group of companies
Exploration and
production $ 171 $ 188 $ 156
Manufacturing, marketing
and distribution 252 347 294
--------------------------------
Total Caltex group
of companies 423 535 450
Star Enterprise 95 14 (47)
Other affiliates 98 120 121
--------------------------------
Total $ 616 $ 669 $ 524
- - --------------------------------------------------------------------------------
Dividends received from
these companies $ 332 $ 878 $ 427
- - --------------------------------------------------------------------------------
The undistributed earnings of these affiliates included in Texaco's retained
earnings were $2,658 million, $2,609 million and $2,768 million as of December
31, 1997, 1996 and 1995, respectively.
<PAGE>
46 TEXACO INC.
CALTEX GROUP
Texaco has investments in the Caltex group of companies, owned 50% by Texaco and
50% by Chevron Corporation. The Caltex group consists of P.T. Caltex Pacific
Indonesia, American Overseas Petroleum Limited and subsidiary and Caltex
Petroleum Corporation and subsidiaries. This group of companies is engaged in
the exploration for and production, transportation, refining and marketing of
crude oil and products in Africa, Asia, the Middle East, Australia and New
Zealand.
In 1996, Caltex Petroleum Corporation completed the sale of its 50%
interest in Nippon Petroleum Refining Company, Limited (NPRC) to its partner,
Nippon Oil Company, for approximately $2 billion. Caltex Petroleum Corporation's
net income for 1996 includes a gain of $621 million associated with this sale.
Texaco's results include a net gain of $219 million relating to this sale,
comprised of its equity share of the gain, less an adjustment in the carrying
value of its investment and further reduced by a tax on the dividend distributed
to the shareholders.
STAR ENTERPRISE
Star Enterprise (Star) is a joint-venture partnership owned 50% by Texaco and
50% by Saudi Refining, Inc. The partnership refines, distributes and markets
certain Texaco-branded petroleum products, including gasolines, in 26 East and
Gulf Coast states and the District of Columbia.
oooooooo
The following table provides summarized financial information on a 100% basis
for the Caltex group, Star and all other affiliates accounted for on the equity
method, as well as Texaco's share. The net income of all limited liability
companies and partnerships, including Star, is net of estimated income taxes.
The actual income tax liability is reflected in the accounts of the respective
partners and not shown in the following table.
Star's assets at the respective balance sheet dates include the remaining
portion of the assets which were originally transferred from Texaco to Star at
the fair market value on the date of formation. Texaco's investment and equity
in the income of Star, as reported in the consolidated financial statements,
reflect the remaining unamortized historical carrying cost of the assets
transferred to Star at formation. Additionally, Texaco's investment includes
adjustments necessary to reflect contractual arrangements on the formation of
this partnership, principally involving contributed inventories.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALTEX GROUP
For the years ended December 31:
Gross revenues $ 18,357 $ 18,166 $ 15,622
Income before income taxes $ 1,210 $ 2,175 $ 1,366
Net income $ 846 $ 1,193 $ 899
- - --------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 2,521 $ 2,681 $ 2,323
Noncurrent assets 7,193 6,714 7,794
Current liabilities (2,991) (2,999) (3,223)
Noncurrent liabilities and deferred credits (2,116) (2,018) (1,799)
Minority interest in subsidiary companies (15) (122) (136)
-----------------------------------
Net assets $ 4,592 $ 4,256 $ 4,959
- - --------------------------------------------------------------------------------------------------------------------
STAR ENTERPRISE
For the years ended December 31:
Gross revenues $ 7,758 $ 8,006 $ 6,619
Income (loss) before income taxes $ 301 $ 38 $ (135)
Net income (loss) $ 196 $ 25 $ (88)
- - --------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 1,042 $ 816 $ 832
Noncurrent assets 3,260 3,204 3,299
Current liabilities (769) (704) (745)
Noncurrent liabilities and deferred credits (1,072) (1,141) (1,207)
-----------------------------------
Partners' equity $ 2,461 $ 2,175 $ 2,179
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(continued on next page)
</FN>
</TABLE>
<PAGE>
TEXACO INC. 47
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER EQUITY AFFILIATES
For the years ended December 31:
Gross revenues $ 4,028 $ 3,940 $ 3,662
Income before income taxes $ 605 $ 697 $ 691
Net income $ 400 $ 451 $ 440
- - --------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 947 $ 1,049 $ 925
Noncurrent assets 3,607 3,853 3,622
Current liabilities (1,032) (1,182) (1,180)
Noncurrent liabilities and deferred credits (2,022) (1,845) (1,703)
-----------------------------------
Net assets (or partners' equity) $ 1,500 $ 1,875 $ 1,664
- - --------------------------------------------------------------------------------------------------------------------
TEXACO'S SHARE
For the years ended December 31:
Gross revenues $ 14,641 $ 14,644 $ 12,567
Income before income taxes $ 940 $ 1,310 $ 818
Net income $ 616 $ 669 $ 524
- - --------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 1,965 $ 1,937 $ 1,739
Noncurrent assets 6,324 6,354 6,820
Current liabilities (2,270) (2,329) (2,420)
Noncurrent liabilities and deferred credits (2,191) (2,090) (1,986)
Minority interest in subsidiary companies (7) (61) (68)
-----------------------------------
Net assets (or partners' equity) $ 3,821 $ 3,811 $ 4,085
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8 PROPERTIES, PLANT AND EQUIPMENT
- - --------------------------------------------------------------------------------
As of December 31, 1997 and 1996, net exploration and production properties,
plant and equipment totaled $8,071 million and $5,258 million, respectively,
relating to U.S. operations and $2,769 million and $2,474 million, respectively,
relating to international operations. As of December 31, 1997 and 1996, net
manufacturing, marketing, and distribution properties, plant and equipment
totaled $2,770 million and $2,834 million, respectively, relating to U.S.
operations and $2,894 million and $2,219 million, respectively, relating to
international operations.
<TABLE>
<CAPTION>
Gross Net Gross Net
--------------------- ----------------------
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration and production $ 29,013 $ 10,840 $ 24,786 $ 7,732
- - --------------------------------------------------------------------------------------------------------------------
Manufacturing, marketing and distribution
Manufacturing 3,892 2,422 3,476 2,097
Marketing 4,013 2,876 3,651 2,607
Distribution 1,071 366 1,043 349
------------------------------------------------
Total manufacturing, marketing and distribution 8,976 5,664 8,170 5,053
- - --------------------------------------------------------------------------------------------------------------------
Other 967 612 1,032 626
------------------------------------------------
Total $ 38,956 $ 17,116 $ 33,988 $ 13,411
- - --------------------------------------------------------------------------------------------------------------------
Capital lease amounts included above $ 450 $ 105 $ 450 $ 111
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Accumulated depreciation, depletion and amortization totaled $21,840 million and
$20,577 million at December 31, 1997 and 1996, respectively. Interest
capitalized as part of properties, plant and equipment was $20 million in 1997,
$12 million in 1996 and $20 million in 1995.
<PAGE>
48 TEXACO INC.
NOTE 9 SHORT-TERM DEBT, LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND RELATED
DERIVATIVES
- - --------------------------------------------------------------------------------
NOTES PAYABLE, COMMERCIAL PAPER AND CURRENT PORTION OF LONG-TERM DEBT
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to banks and others with originating terms of one year or less $ 473 $ 443
Commercial paper 892 326
Current portion of long-term debt and capital lease obligations
Indebtedness 1,005 640
Capital lease obligations 15 13
---------------------
2,385 1,422
Less short-term obligations intended to be refinanced 1,500 957
---------------------
Total $ 885 $ 465
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rate of commercial paper and notes payable to
banks at December 31, 1997 and 1996 was 6.1%.
- - --------------------------------------------------------------------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-Term Debt
3-1/2% Guaranteed cash-settled convertible notes, due 2004 $ 205 $ --
6-7/8% Guaranteed notes, due 1999 200 200
6-7/8% Guaranteed debentures, due 2023 195 195
7.09% Guaranteed notes, due 2007 150 --
7-1/2% Guaranteed debentures, due 2043 198 198
7-3/4% Guaranteed debentures, due 2033 199 199
8% Guaranteed debentures, due 2032 147 147
8-1/4% Guaranteed debentures, due 2006 150 150
8-3/8% Guaranteed debentures, due 2022 198 198
8-1/2% Guaranteed notes, due 2003 199 199
8-5/8% Guaranteed debentures, due 2010 150 150
8-5/8% Guaranteed debentures, due 2031 199 199
8-5/8% Guaranteed debentures, due 2032 199 199
8.65% Guaranteed notes, due 1998 200 200
8-7/8% Guaranteed debentures, due 2021 150 150
9% Guaranteed notes, due 1997 -- 200
9% Guaranteed notes, due 1999 200 200
9-3/4% Guaranteed debentures, due 2020 250 250
10.61% Senior notes, due 2005 206 --
Medium-term notes, maturing from 1998 to 2043 (8.0%) 489 568
Revolving Credit Facility, due 1998-2002 - variable rate (5.9%) 330 330
Pollution Control Revenue Bonds, due 2012 - variable rate (3.7%) 166 166
Other long-term debt:
Texaco Inc. - Guarantee of ESOP Series B and F loans - fixed and
variable rates (5.2%) 76 145
U.S. dollars (6.6%) 417 374
Other currencies (11.1%) 20 59
---------------------
Total 4,893 4,676
Capital Lease Obligations (see Note 10) 134 145
---------------------
5,027 4,821
Less current portion of long-term debt and capital lease obligations 1,020 653
---------------------
4,007 4,168
Short-term obligations intended to be refinanced 1,500 957
---------------------
Total long-term debt and capital lease obligations $ 5,507 $ 5,125
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TEXACO INC. 49
The percentages shown for variable-rate debt are the interest rates at December
31, 1997. The percentages shown for the categories "Medium-term notes" and
"Other long-term debt" are the weighted average interest rates at year-end 1997.
Where applicable, principal amounts shown in the preceding schedule include
unamortized premium or discount. Interest paid, net of amounts capitalized,
amounted to $395 million in 1997, $433 million in 1996 and $482 million in 1995.
At December 31, 1997, Texaco was party to revolving credit facilities with
commitments of $1.5 billion with syndicates of major U.S. and international
banks. These facilities are available as support for the issuance of the
company's commercial paper, as well as for working capital and for other general
corporate purposes. Texaco has no amounts outstanding under these facilities at
year-end 1997. Texaco pays facility fees on the $1.5 billion facilities. The
banks reserve the right to terminate the credit facilities upon the occurrence
of certain specific events, including change in control.
At December 31, 1997, Texaco's long-term debt included $1.5 billion of
short-term obligations scheduled to mature during 1998, which the company has
both the intent and the ability to refinance on a long-term basis, through the
use of its $1.5 billion revolving credit facilities.
Contractual annual maturities of long-term debt, including sinking fund
payments and other redemption requirements, for the five years subsequent to
December 31, 1997 are as follows (in millions): 1998 - $1,005; 1999 - $548; 2000
- - - $179; 2001 - $173; and 2002 - $160. The preceding maturities are before
consideration of short-term obligations intended to be refinanced and also
exclude capital lease obligations.
DEBT-RELATED DERIVATIVES
Texaco seeks to maintain a balanced capital structure that will provide
financial flexibility and support the company's strategic objectives while
achieving a low cost of capital. This is achieved by balancing the company's
liquidity and interest rate exposures. These exposures are managed primarily
through the use of long-term and short-term debt instruments which are reported
on the balance sheet. However, off-balance sheet derivative instruments,
primarily interest rate swaps, are also used as a management tool in achieving
the company's objectives. These instruments are used to manage identifiable
exposures on a non-leveraged, non-speculative basis.
As part of its interest rate exposure management, the company seeks to
balance the benefit of the lower cost of floating rate debt, with its inherent
increased risk, with fixed rate debt having less market risk.
Summarized below are the carrying amounts and fair values of the company's
debt and debt-related derivatives at December 31, 1997 and 1996, excluding a
combined interest rate and equity swap entered into in 1997. Derivative usage
during the periods presented was limited to interest rate swaps, where the
company either paid or received the net effect of a fixed rate versus a floating
rate (commercial paper or LIBOR) index at specified intervals, calculated by
reference to an agreed notional principal amount.
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Notes Payable and Commercial Paper:
Carrying amount $ 1,365 $ 769
Fair value 1,365 769
Related Derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value 3 (4)
Notional principal amount $ 300 $ 150
Weighted average maturity (years) 9.3 6.8
Weighted average fixed pay rate 6.42% 7.06%
Weighted average floating receivable rate 6.09% 5.50%
Long-Term Debt, including current maturities:
Carrying amount $ 4,893 $ 4,676
Fair value 5,289 4,943
Related Derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value (1) 1
Notional principal amount $ 544 $ 583
Weighted average maturity (years) .7 1.7
Weighted average fixed receivable rate 5.71% 5.73%
Weighted average floating pay rate 5.76% 5.53%
Unamortized net gain on terminated swaps
Carrying amount $ 8 $ 5
- - --------------------------------------------------------------------------------
The preceding 1997 derivative table for fixed pay, floating receivable includes
forward-starting swaps with an aggregate notional principal amount of $200
million. These swaps were entered into to hedge expected 1998 debt issuances.
Excluded from this table is an interest rate and equity swap with a
notional principal amount of $200 million entered into in 1997, related to the
3-1/2% notes due 2004. The company pays floating rate and receives fixed rate.
Also, the counterparty assumes all exposure for the potential equity-based cash
redemption premium on the notes. The fair value of this swap at year-end 1997
was not material.
During 1997, fixed rate pay swaps having an aggregate notional principal
amount of $150 million either matured or were terminated, of which $100 million
were replaced. Also during 1997, pay floating rate swaps having an aggregate
notional principal amount of $39 million were amortized or matured.
Fair values of debt are based upon quoted market prices, as well as rates
currently available to the company for borrowings with similar terms and
maturities. The fair value of swaps is the estimated amount that would be
received or paid to terminate the agreements at year-end, taking into account
current interest rates and the current creditworthiness of the swap
counterparties.
<PAGE>
50 TEXACO INC.
Amounts receivable or payable based on the interest rate differentials of
derivatives are accrued monthly and are reflected in interest expense as a hedge
of interest on outstanding debt. Gains and losses on terminated swaps are
deferred and amortized over the life of the associated debt or the original term
of the swap, whichever is shorter.
Since counterparties to the company's derivative transactions are major
financial institutions with strong credit ratings, exposure to credit risk on
the net interest differential is minimal. The notional amounts of derivative
contracts do not represent cash flow and are not subject to credit risk. The
company's counterparty credit exposure limits have been set based upon the
maturity and notional amounts of these transactions.
NOTE 10 LEASE COMMITMENTS AND RENTAL EXPENSE
- - --------------------------------------------------------------------------------
The company has leasing arrangements involving service stations, tanker
charters, crude oil production and processing equipment, and other facilities.
Amounts due under capital leases are reflected in the company's balance sheet as
obligations, while Texaco's interest in the related assets is reflected as
properties, plant and equipment. The remaining lease commitments are operating
leases, and payments on such leases are recorded as rental expense.
As of December 31, 1997, the company had estimated minimum commitments for
payment of rentals (net of noncancelable sublease rentals) under leases which,
at inception, had a noncancelable term of more than one year, as follows:
(Millions of dollars) Operating leases Capital leases
- - --------------------------------------------------------------------------------
1998 $ 276 $ 27
1999 155 27
2000 138 26
2001 127 25
2002 471 25
After 2002 559 64
-----------------------
Total lease commitments $1,726 $ 194
------
Less amounts representing
Executory costs 25
Interest 73
Add noncancelable sublease rentals netted
in capital lease commitments above 38
------
Present value of total capital
lease obligations $ 134
------
Rental expense relative to operating leases, including contingent rentals based
on factors such as gallons sold, is provided in the table below. Such payments
do not include rentals on leases covering oil and gas mineral rights.
(Millions of dollars) 1997 1996 1995
- - --------------------------------------------------------------------------------
Rental expense
Minimum lease rentals $270 $259 $224
Contingent rentals 3 10 16
------------------------------
Total 273 269 240
Less rental income on
properties subleased
to others 78 53 43
------------------------------
Net rental expense $195 $216 $197
- - --------------------------------------------------------------------------------
Note 11 PREFERRED STOCK AND RIGHTS
- - --------------------------------------------------------------------------------
SERIES B ESOP CONVERTIBLE PREFERRED STOCK
At December 31, 1997, the outstanding shares of Series B ESOP Convertible
Preferred Stock (Series B) were held by an Employee Stock Ownership Plan (ESOP).
Dividends on each share of Series B are cumulative and payable semiannually at
the rate of $57 per annum.
Participants may partially convert Series B holdings into common stock
beginning at age 55, and may elect full conversion upon retirement or separation
from the company. Presently, each share of Series B entitles a participant to
25.7 votes, voting together with the holders of common stock, and is convertible
into 25.736 shares of common stock. As an alternative to conversion, a
participant can elect to receive $600 per share of Series B, payable in cash or
common stock. If the participant elects cash, the company will cause shares of
common stock to be sold to fund such election. Texaco Inc. may redeem the
outstanding shares of Series B at $605.70 per share through December 19, 1998
and at $600 per share on or after December 20, 1998.
SERIES D JUNIOR PARTICIPATING PREFERRED STOCK AND RIGHTS
In 1989, the company declared a dividend distribution of one Right for each
outstanding share of common stock, adjusted to one-half Right due to the 1997
two-for-one stock split. Unless redeemed by the company, the Rights will be
exercisable only after a person(s) acquires, obtains the right to acquire or
commences a tender offer that would result in that person(s) acquiring 20% or
more of the outstanding
<PAGE>
TEXACO INC. 51
common stock other than pursuant to a Qualifying Offer. A Qualifying Offer is an
all-cash, fully financed tender offer for all outstanding shares of common stock
which remains open for 45 days, which results in the acquiror owning a majority
of the company's voting stock, and in which the acquiror agrees to purchase for
cash all remaining shares of common stock. The Rights entitle holders to
purchase from the company Units of Series D Junior Participating Preferred Stock
(Series D). In general, each Right entitles the holder to acquire shares of
Series D, or in certain cases common stock, property or other securities at a
formula value equal to two times the exercise price of the Right.
The Rights expire on April 3, 1999. The company will propose that the
shareholders extend the Rights until May 1, 2004. The Rights may be redeemed by
the company at one cent per Right at any time prior to 10 days after the Rights
become exercisable. Until a Right becomes exercisable, the holder has no
additional voting or dividend rights and it will not have any dilutive effect on
the company's earnings. The company has reserved and designated 3 million shares
as Series D for issuance upon exercise of the Rights. At December 31, 1997, the
Rights are not exercisable.
SERIES F ESOP CONVERTIBLE PREFERRED STOCK
At December 31, 1997, the outstanding shares of Series F ESOP Convertible
Preferred Stock (Series F) were held by an Employee Stock Ownership Plan (ESOP).
Dividends on each share of Series F are cumulative and payable semiannually at
the rate of $64.53 per annum.
Participants may partially convert Series F holdings into common stock
beginning at age 55, and may elect full conversion upon retirement or separation
from the company. Presently, each share of Series F entitles a participant to 20
votes, voting together with the holders of common stock, and is convertible into
20 shares of common stock. As an alternative to conversion, a participant can
elect to receive $737.50 per share of Series F, payable in cash or common stock.
If the participant elects cash, the company will cause shares of common stock to
be sold to fund such election. Texaco Inc. may redeem the outstanding shares of
Series F at $750.41 and $743.95 per share through February 12, 1999 and 2000,
respectively, and at $737.50 per share on or after February 13, 2000.
MARKET AUCTION PREFERRED SHARES
There are outstanding 1,200 shares of cumulative variable rate preferred stock,
called Market Auction Preferred Shares (MAPS). The MAPS are grouped into four
series (300 shares each of Series G, H, I and J) of $75 million each, with an
aggregate value of $300 million.
The dividend rates for each series are determined by Dutch auctions
conducted at seven-week intervals.
During 1997, the annual dividend rate for the MAPS ranged between 3.88% and
4.29% and dividends totaled $11 million ($9,689, $9,650, $9,675 and $9,774 per
share for Series G, H, I and J, respectively).
For 1996, the annual dividend rate for the MAPS ranged between 3.90% and
4.19% and dividends totaled $12 million ($9,510, $11,043, $11,009 and $11,015
per share for series G, H, I and J, respectively). For 1995, the annual dividend
rate for the MAPS ranged between 4.22% and 4.65% and dividends totaled $13
million ($12,255, $10,558, $10,521 and $10,531 per share for Series G, H, I and
J, respectively).
The company may redeem the MAPS, in whole or in part, at any time at a
liquidation preference of $250,000 per share, plus premium, if any, and accrued
and unpaid dividends thereon.
The MAPS are non-voting, except under certain limited circumstances.
NOTE 12 FOREIGN CURRENCY
- - --------------------------------------------------------------------------------
Currency translations resulted in a pre-tax loss of $59 million in 1997,
compared to a loss of $60 million in 1996 and a gain of $23 million in 1995.
After applicable taxes, 1997 included a gain of $154 million, compared to a loss
in 1996 of $66 million and a gain in 1995 of $30 million.
Currency exchange impacts for the years 1995 through 1997 were attributable
to a variety of reasons. These included the volatility in currencies throughout
the world, particularly in the Asia Pacific region during 1997. Results were
also impacted by the effects of deferred income taxes denominated in British
pounds.
Effective October 1, 1997, Caltex changed the functional currency for its
operations in its Korean and Japanese affiliates to the U.S. dollar. Major
changes in economic facts and circumstances, including a significant reduction
in regulatory conditions for petroleum products in those countries, supported
this change in functional currency. The net currency-related effects recorded to
the 1997 net income of these operations were primarily tax benefits on currency
losses on U.S. dollar obligations, resulting from the devaluation of the Korean
won.
Currency translation adjustments shown in the separate stockholders' equity
account result from translation items pertaining to certain affiliates of
Caltex. For the years 1997, 1996 and 1995 these adjustments were losses of $40
million, $126 million and $26 million, respectively. The year 1996 includes the
reversal of $60 million of previously deferred gains which were recognized in
earnings due to the sale by Caltex of its investment in its Japanese affiliate,
NPRC.
<PAGE>
52 TEXACO INC.
NOTE 13 TAXES
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
United United United
States Foreign Total States Foreign Total States Foreign Total
------------------------------ ----------------------------- ------------------------------
(Millions of dollars) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct taxes
Provision (benefit)
for income taxes
Current
U.S. Federal and foreign $ (538) $ 689 $ 151 $ 359 $ 642 $ 1,001 $ 34 $ 357 $ 391
U.S. state and local 61 -- 61 (16) -- (16) (31) -- (31)
Deferred 457 (6) 451 13 (33) (20) (90) (12) (102)
-----------------------------------------------------------------------------------------------
Total provision (benefit) for
income taxes (20) 683 663 356 609 965 (87) 345 258
Taxes other than income taxes
Oil and gas production 115 12 127 112 2 114 91 3 94
Sales and use 1 92 93 -- 82 82 -- 73 73
Property 121 18 139 105 14 119 109 18 127
Payroll 75 50 125 72 48 120 72 44 116
Other 47 (11) 36 29 32 61 63 18 81
-----------------------------------------------------------------------------------------------
Total taxes other than
income taxes 359 161 520 318 178 496 335 156 491
Import duties and other
governmental levies 53 5,414 5,467 38 4,127 4,165 43 3,914 3,957
-----------------------------------------------------------------------------------------------
Total direct taxes 392 6,258 6,650 712 4,914 5,626 291 4,415 4,706
Taxes collected from consumers
for governmental agencies 1,480 1,890 3,370 1,413 1,824 3,237 1,266 1,803 3,069
-----------------------------------------------------------------------------------------------
Total $ 1,872 $ 8,148 $10,020 $ 2,125 $ 6,738 $ 8,863 $ 1,557 $6,218 $ 7,775
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The deferred income tax assets and liabilities included in the Consolidated
Balance Sheet as of December 31, 1997 and 1996 amounted to $145 million and $242
million, respectively, as net current assets and $1,825 million and $795
million, respectively, as net noncurrent liabilities. The table that follows
shows deferred income tax assets and liabilities by category. Deferred income
taxes are not recorded on differences between financial reporting and tax bases
of investments in stock of subsidiary companies, unless realization of the
effect is probable in the foreseeable future. Certain potential deferred tax
asset amounts for which possibility of realization is deemed extremely remote
are not included in the following table:
(Liability) Asset
------------------------
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Depreciation $(1,054) $ (947)
Depletion (601) (271)
Intangible drilling costs (826) (655)
Other deferred tax liabilities (755) (502)
------------------------
Total (3,236) (2,375)
Employee benefit plans 526 523
Tax loss carryforwards 728 955
Tax credit carryforwards 237 351
Environmental reserves 167 176
Other deferred tax assets 580 640
------------------------
Total 2,238 2,645
------------------------
Total before valuation allowance (998) 270
Valuation allowance (682) (823)
------------------------
Total - net $(1,680) $ (553)
- - --------------------------------------------------------------------------------
<PAGE>
TEXACO INC. 53
The following schedule reconciles the differences between the U.S. Federal
income tax rate and the effective income tax rate:
1997 1996 1995
- - --------------------------------------------------------------------------------
U.S. Federal income tax rate
assumed to be applicable 35.0% 35.0% 35.0%
IRS settlement (14.7) -- --
Net earnings and dividends
attributable to affiliated
corporations accounted
for on the equity method (4.7) (5.5) (17.1)
Aggregate earnings and
losses from international
operations 6.2 12.7 18.5
Sales of stock of subsidiaries -- (6.3) (6.6)
Energy credits (1.4) (1.9) (3.3)
Other (.5) (1.6) (.4)
------------------------------
Effective income tax rate 19.9% 32.4% 26.1%
- - --------------------------------------------------------------------------------
The year 1997 included a $488 million benefit resulting from an IRS settlement.
For companies operating in the United States, pre-tax earnings from
continuing operations before cumulative effect of accounting change aggregated
$1,527 million in 1997, $1,783 million in 1996 and $40 million in 1995. For
companies with operations located outside the United States, pre-tax earnings on
that basis aggregated $1,800 million in 1997, $1,200 million in 1996 and $946
million in 1995.
Income taxes paid, net of refunds, amounted to $285 million, $917 million
and $554 million in 1997, 1996 and 1995, respectively.
The undistributed earnings of subsidiary companies and of affiliated
corporate joint-venture companies accounted for on the equity method, for which
deferred U.S. income taxes have not been provided at December 31, 1997 amounted
to $1,482 million and $2,313 million, respectively. The corresponding amounts at
December 31, 1996 were $1,302 million and $2,124 million, respectively.
Recording of deferred income taxes on these undistributed earnings is not
required relative to foreign companies and pre-1993 earnings of domestic
companies when the earnings have been permanently reinvested. These amounts
would be subject to possible U.S. taxation only if remitted as dividends. The
determination of the hypothetical amount of unrecognized deferred U.S. taxes on
undistributed earnings of foreign entities is not practicable. For domestic
entities, such unrecorded deferred income taxes were not material.
For the years 1997 and 1995 there was no utilization of loss carryforwards
recorded for U.S. Federal income taxes. For the year 1996, a benefit of $184
million was recorded for the utilization of loss carryforwards. For the years
1997, 1996 and 1995, the utilization of loss carryforwards resulted in income
tax benefits of $31 million, $16 million and $13 million in foreign income
taxes, respectively.
At December 31, 1997, Texaco had worldwide tax basis loss carryforwards of
approximately $1,717 million, including $928 million which do not have an
expiration date. The remainder expire at various dates through 2013.
Foreign tax credit carryforwards available for U.S. Federal income tax
purposes amounted to approximately $186 million at December 31, 1997, expiring
at various dates through 2001. Alternative minimum tax and other tax credit
carryforwards available for U.S. Federal income tax purposes were $237 million
at December 31, 1997, of which $233 million have no expiration date. The
remaining credits expire at various dates through 2012. The credits that are not
utilized by the expiration dates may be taken as deductions for U.S. Federal
income tax purposes. For the years 1997 and 1996 tax credit carryforwards of $24
million and $43 million, respectively, were recognized for U.S. Federal income
tax purposes. There was no recognition of similar carryforwards in 1995.
NOTE 14 EMPLOYEE BENEFIT PLANS
- - --------------------------------------------------------------------------------
Texaco Inc. and certain of its non-U.S. subsidiaries sponsor various benefit
plans for active employees and retirees. The costs of the savings, health care
and life insurance plans relative to employees' active service are shared by the
company and its employees, with Texaco's costs for these plans charged to
expense as incurred. In addition, reserves for employee benefit plans are
provided principally for the unfunded costs of various pension plans, retiree
health and life insurance benefits, incentive compensation plans and for
separation benefits payable to employees.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOP)
Texaco recorded ESOP expense of $2 million in 1997, $15 million in 1996 and $28
million in 1995. Company contributions to the Employees Thrift Plan of Texaco
Inc. and the Employees Savings Plan of Texaco Inc. (the Plans) amounted to $2
million in 1997, $26 million in 1996 and $17 million in 1995. These Plans are
designed to provide participants with a benefit of approximately 6% of base pay.
Included in the 1996 and 1995 ESOP expense is $9 million and $11 million,
respectively, in connection with a 1995 employee incentive award program.
In 1997, 1996 and 1995, the company paid $44 million, $46 million and $47
million, respectively, in dividends on Series B and Series F stock. The
dividends are applied by the trustee to fund interest payments which amounted to
$7 million, $10 million and $14 million for 1997, 1996 and 1995, respectively,
as well as to reduce principal on the ESOP loans. Dividends on the shares of
Series B and Series F used to service debt of the Plans are tax deductible to
the company. In December 1997, a portion of the original Thrift Plan ESOP loan
was refinanced through a company loan. The refinancing will extend the ESOP for
a period of up to six years.
Reflected in Texaco's long-term debt are the Plans' original ESOP loans
guaranteed by Texaco Inc. Commensurate with each repayment on the original and
refinanced ESOP loans, there is a reduction in the remaining ESOP-related
unearned employee compensation included as a component of stockholders' equity.
<PAGE>
54 TEXACO INC.
BENEFIT PLAN TRUST
During 1995, Texaco established a benefit plan trust (Trust) for funding company
obligations under certain benefit plans. Texaco transferred eight million shares
of treasury stock to the Trust in 1995 and 1.2 million shares in 1997. The
company intends to continue to pay its obligations under its benefit plans. The
Trust will use the shares, proceeds from the sale of such shares and dividends
on such shares to pay benefits only to the extent not paid by the company. The
shares held in the Trust will be voted by the trustee as instructed by the
Trust's beneficiaries. The shares held by the Trust are not considered
outstanding for earnings per share purposes until distributed or sold by the
Trust in payment of benefit obligations.
TERMINATION BENEFITS
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 1996 to cover the costs of employee separations, including employees
of affiliates. This program has now been completed with reductions of
approximately 920 employees. During the fourth quarter of 1997, an adjustment of
$6 million after tax was recorded to increase reserves from previously estimated
amounts. The amount of unpaid benefits remaining on the Consolidated Balance
Sheet was $20 million at year end.
PENSION PLANS
The company sponsors pension plans that cover the majority of employees.
Generally, these plans provide defined pension benefits based on years of
service and final average pay. However, the level of benefits and terms of
vesting vary among plans. Amounts charged to pension expense, as well as amounts
funded, are generally based on actuarial studies. Pension plan assets are
administered by trustees and are principally invested in equity and fixed income
securities and deposits with insurance companies.
The total worldwide expense for all employee pension plans of Texaco,
including pension supplementations and the smaller non-U.S. plans, was $92
million in 1997, $91 million in 1996 and $86 million in 1995.
The following data are provided for U.S. plans and principal non-U.S.
plans:
- - --------------------------------------------------------------------------------
Components of Pension Expense
<TABLE>
<CAPTION>
United States Plans Non-U.S. Plans
------------------------- -------------------------
(Millions of dollars) 1997 1996 1995 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefits earned during the year $ 54 $ 57 $ 48 $ 17 $ 16 $ 16
Actual investment return on plan assets (gain) loss (307) (226) (279) (166) (102) (123)
Interest cost on projected benefit obligations 117 117 114 85 81 81
Amortization of net deferred amounts 183 104 158 98 38 64
--------------------------------------------------------
Total $ 47 $ 52 $ 41 $ 34 $ 33 $ 38
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed long-term return on plan assets for U.S. plans was 10% for 1997,
1996 and 1995; for non-U.S. plans the weighted average rate was 8.5% for 1997,
and 8.7% for 1996 and 1995.
- - --------------------------------------------------------------------------------
Funded Status of Pension Plans
<TABLE>
<CAPTION>
United States Plans
---------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
------------------------ -------------------------
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Present value of the estimated pension benefits
to be paid in the future
Vested benefits $(1,123) $ (118) $(1,097) $ (97)
Nonvested benefits (114) (5) (94) (2)
---------------------------------------------------
Accumulated benefit obligations (ABO) (1,237) (123) (1,191) (99)
Effect of projected future salary increases (394) (15) (353) (14)
---------------------------------------------------
Total projected benefit obligations (PBO) (1,631) (138) (1,544) (113)
Plan assets at fair value 1,691 11 1,483 --
---------------------------------------------------
Assets in excess of (less than) PBO 60 (127) (61) (113)
Net transition (asset) liability (26) 5 (37) 7
Unrecognized net prior-service costs 73 12 62 14
Unrecognized net (gains) and losses (98) (2) 2 (7)
---------------------------------------------------
Net pension (liability) asset recorded in Texaco's
Consolidated Balance Sheet $ 9 $ (112) $ (34) $ (99)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TEXACO INC. 55
Funded Status of Pension Plans - continued
<TABLE>
<CAPTION>
Non-U.S. Plans
---------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
------------------------ -------------------------
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Present value of the estimated pension benefits
to be paid in the future
Vested benefits $ (497) $ (241) $ (436) $ (274)
Nonvested benefits (33) (20) (21) (32)
---------------------------------------------------
Accumulated benefit obligations (ABO) (530) (261) (457) (306)
Effect of projected future salary increases (31) (13) (19) (19)
---------------------------------------------------
Total projected benefit obligations (PBO) (561) (274) (476) (325)
Plan assets at fair value 900 -- 789 40
---------------------------------------------------
Assets in excess of (less than) PBO 339 (274) 313 (285)
Net transition (asset) liability (26) 3 (39) 7
Unrecognized net prior-service costs 22 24 23 32
Unrecognized net (gains) and losses (39) (14) (25) (20)
---------------------------------------------------
Net pension (liability) asset recorded in Texaco's
Consolidated Balance Sheet $ 296 $ (261) $ 272 $ (266)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Rate Assumptions Used in Estimating Pension
Benefit Obligations
<TABLE>
<CAPTION>
United States Plans Non-U.S. Plans
------------------- -------------------
1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.0% 7.5% 10.9% 12.0%
Rate of increase in compensation levels 4.0% 4.0% 6.2% 7.4%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER POSTRETIREMENT BENEFITS
Texaco sponsors postretirement plans in the U.S. that provide health care and
life insurance for retirees and eligible dependents. The company's U.S. health
insurance obligation is its fixed dollar contribution. The plans are unfunded,
and the costs are shared by the company and its employees and retirees.
The determination of the company's obligation is based on the terms of the
life and health insurance plans, along with applicable actuarial assumptions.
The company continues to fund these benefit costs on a pay-as-you-go basis, with
retirees paying the excess over the company's fixed dollar contribution for
health insurance. For employees who retire from Texaco between age 55 and 65,
most will be eligible to receive health care benefits, similar to those
available to active employees, as well as life insurance benefits. The company's
cost to provide these postretirement benefits for health insurance is currently
equal to the company's cost for an active employee. After attaining age 65, the
retirees' health care coverage is coordinated with available Medicare benefits.
Fixed dollar contributions for health care benefits are determined annually
by the company. For measurement purposes, the fixed dollar contribution is
expected to increase by 4% per annum for both pre-age 65 and post-age 65
retirees for all future years. The assumed fixed dollar contributions do not
necessarily represent an obligation of the company.
Assuming a 1% increase in the annual rate of increase in the fixed dollar
contribution for health insurance, the accumulated postretirement benefit
obligation and annual expense would increase by approximately $52 million and $5
million, respectively.
Certain of the company's non-U.S. subsidiaries have postretirement benefit
plans. However, most retirees outside the U.S. are covered by government
sponsored and administered programs, the cost of which is not significant to the
company.
The following tables provide information on the status of the principal
postretirement plans:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Components of Other Postretirement Benefit Expense
Health Life Health Life Health Life
Care Insurance Total Care Insurance Total Care Insurance Total
--------------------------- --------------------------- -----------------------------
(Millions of dollars) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Benefits earned during the year $ 6 $ -- $ 6 $ 9 $ 3 $ 12 $ 7 $ 2 $ 9
Interest cost on accumulated
postretirement benefit
obligations 28 21 49 30 21 51 33 21 54
Amortization of net deferred
amounts (5) -- (5) (1) -- (1) (3) (1) (4)
-------------------------------------------------------------------------------------------
Total $ 29 $ 21 $ 50 $ 38 $ 24 $ 62 $ 37 $22 $ 59
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
56 TEXACO INC.
Funded Status of Other Postretirement Plans
<TABLE>
<CAPTION>
Health Life Health Life
Care Insurance Total Care Insurance Total
--------------------------- ----------------------------
(Millions of dollars) As of December 31 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated unfunded postretirement benefit obligations
Retirees $ 282 $ 256 $538 $ 266 $ 239 $505
Fully eligible active participants 36 1 37 31 1 32
Other active plan participants 112 69 181 102 60 162
----------------------------------------------------------
Total accumulated unfunded postretirement
benefit obligations 430 326 756 399 300 699
Unrecognized prior service cost -- (5) (5) -- -- --
Unrecognized net gain 78 16 94 110 27 137
----------------------------------------------------------
Net other postretirement benefit liability recorded in
Texaco's Consolidated Balance Sheet $ 508 $ 337 $845 $ 509 $ 327 $836
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Rate Assumptions Used in Estimating Other
Postretirement Benefit Obligations
1997 1996
- - --------------------------------------------------------------------------------
Discount rate 7.0% 7.5%
Rate of increase in compensation levels 4.0% 4.0%
- - --------------------------------------------------------------------------------
NOTE 15 STOCK INCENTIVE PLAN
- - --------------------------------------------------------------------------------
Under the company's 1997 Stock Incentive Plan (Plan) as amended, stock options,
restricted stock and other incentive award forms may be granted to executives,
directors and certain key employees to provide motivation to enhance the
company's success and increase shareholder value. The maximum number of shares
that may be awarded as stock options or restricted stock under the Plan is 1% of
the common stock outstanding on December 31 of the previous year, adjusted for
certain plan provisions. The following table summarizes the number of shares at
December 31, 1997, 1996 and 1995 available for awards during the subsequent
year:
(Shares) As of December 31 1997 1996 1995
- - --------------------------------------------------------------------------------
To all participants 6,970,526 7,027,010 5,703,966
To those participants not
officers or directors 2,362,273 1,932,796 1,374,178
---------------------------------------
Total 9,332,799 8,959,806 7,078,144
- - --------------------------------------------------------------------------------
Restricted shares granted under the Plan contain a performance element which
must be satisfied in order for all or a specified portion of the shares to vest.
Restricted performance shares awarded in each year under the Plan were as
follows:
1997 1996 1995
- - --------------------------------------------------------------------------------
Shares 281,174 282,476 231,610
Weighted average fair value $ 55.09 $ 42.43 $ 33.12
- - --------------------------------------------------------------------------------
Stock options granted under the Plan extend for 10 years from the date of grant
and vest over a two year period at a rate of 50% in the first year and 50% in
the second year. The exercise price cannot be less than the fair market value of
the underlying shares of common stock on the date of the grant. The Plan
provides for restored options. This feature enables a participant who exercises
a stock option by exchanging previously acquired common stock or who has shares
withheld by the company to satisfy tax withholding obligations, to receive new
options equal to the number of shares exchanged or withheld. The restored
options are fully exercisable six months after the date of grant and the
exercise price is the fair market value of the common stock on the day the
restored option is granted.
We apply APB Opinion 25 in accounting for our stock-based compensation
programs. Stock-based compensation expense recognized in connection with the
Plan was $17.9 million in 1997, $12.5 million in 1996 and $7.1 million in 1995.
Had we accounted for our Plan using the accounting method recommended by SFAS
123, net income and earnings per share would have been the pro forma amounts
below:
1997 1996 1995
- - --------------------------------------------------------------------------------
Net Income
(Millions of dollars)
As reported $ 2,664 $ 2,018 $ 607
Pro forma $ 2,621 $ 1,997 $ 601
Earnings per share (dollars)
Basic - As reported $ 4.99 $ 3.77 $ 1.05
- Pro forma $ 4.91 $ 3.73 $ 1.04
Diluted - As reported $ 4.87 $ 3.68 $ 1.05
- Pro forma $ 4.79 $ 3.64 $ 1.04
- - --------------------------------------------------------------------------------
The fair market value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:
1997 1996 1995
- - --------------------------------------------------------------------------------
Expected life 2 yrs 3 yrs 3 yrs
Interest rate 6.0% 6.1% 5.9%
Volatility 18.6% 15.0% 15.0%
Dividend yield 3.0% 3.3% 3.2%
- - --------------------------------------------------------------------------------
<PAGE>
57
Option award activity during 1997, 1996 and 1995 is summarized in the following
table:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Stock Options) Shares Price Shares Price Shares Price
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1 9,436,406 $ 42.73 9,335,288 $33.45 7,928,196 $ 31.88
Granted 2,084,902 55.06 2,040,530 42.43 1,890,734 32.99
Exercised (9,533,861) 44.86 (8,088,040) 34.22 (4,355,260) 31.55
Restored 8,103,502 55.32 6,271,720 45.52 3,871,618 34.73
Canceled (19,642) 51.43 (123,092) 36.77 -- --
Outstanding December 31 10,071,307 53.31 9,436,406 42.73 9,335,288 33.45
Exercisable December 31 3,197,262 51.21 2,853,236 39.20 4,297,486 32.97
- - -------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 6.92 $ 5.50 $ 3.56
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information on stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Exercisable Price Average Average Average
Range (per share) Shares Remaining Life Exercise Price Shares Exercise Price
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$23.39 - 31.84 116,058 4.7 yrs. $30.41 103,502 $ 30.60
$32.06 - 78.08 9,955,249 6.4 yrs. $53.58 3,093,760 $ 51.90
---------- ---------
$23.39 - 78.08 10,071,307 6.4 yrs. $53.31 3,197,262 $ 51.21
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16 OTHER FINANCIAL INFORMATION AND COMMITMENTS
- - --------------------------------------------------------------------------------
ENVIRONMENTAL RESERVES
Texaco Inc. and subsidiary companies have financial reserves relating to
environmental remediation programs which the company believes are sufficient for
known requirements. At December 31, 1997, reserves for future environmental
remediation costs amounted to $531 million and reserves relative to the future
cost of restoring and abandoning existing oil and gas properties were $801
million. Texaco's significant affiliates also have recorded reserves for
environmental remediation and restoration and abandonment costs.
Texaco has provided, to the extent reasonably measurable, financial
reserves for its probable environmental remediation liabilities. The recording
of these obligations is based on technical evaluations of the currently
available facts, interpretation of the regulations and the company's experience
with similar sites. Additional financial reserve requirements relative to
existing and new remediation sites may be necessary in the future when more
facts are known. The potential also exists for further legislation to provide
limitations on liability. It is not possible to project the overall costs or a
range of costs for environmental items beyond that disclosed above due to
uncertainty surrounding future developments, both in relation to remediation
exposure and to regulatory initiatives. However, while future environmental
expenditures that will be incurred by the petroleum industry are expected to be
significant in the absolute, they will be a cost of doing business that will
have to be recovered in the marketplace. Moreover, it is not believed that such
future costs will be material to the company's financial position nor to its
operating results over any reasonable period of time.
PREFERRED SHARES OF SUBSIDIARIES
Minority holders own $602 million of preferred shares of subsidiary companies,
which is reflected as minority interest in subsidiary companies in the
Consolidated Balance Sheet.
MVP Production Inc., a subsidiary, has variable rate cumulative preferred
shares of $75 million owned by one minority holder. The shares have voting
rights and are redeemable in 2003. Dividends on these shares were $4 million in
1997, 1996 and 1995.
Texaco Capital LLC, another subsidiary, has three classes of preferred
shares, all held by minority holders. The first class is 14 million shares
totalling $350 million of Cumulative Guaranteed Monthly Income Preferred Shares,
Series A (Series A). The second class is 4.5 million shares totalling $112
million of Cumulative Adjustable Rate Monthly Income Preferred Shares, Series B
(Series B). The third class, issued in Canadian dollars and hedged for currency
risk, is 3.6 million shares totalling $65 million of Deferred Preferred Shares,
Series C (Series C). Texaco Capital LLC's sole assets are notes receivable from
Texaco Inc. The payment of dividends and payments on liquidation or redemption
with respect to Series A, Series B and Series C are guaranteed by Texaco Inc.
<PAGE>
58 TEXACO INC.
The fixed dividend rate for Series A is 6-7/8% per annum. The annual
dividend rate for Series B averaged 5.9% for both 1997 and 1996 and 6.26% for
1995. The dividend rate on Series B is reset quarterly and is equal to 88% of
the highest of three U.S. Treasury maturities (three-month, ten-year and
thirty-year), but in no event less than 4.5% per annum nor greater than 10.5%
per annum. Dividends on Series A and Series B are paid monthly. Dividends on
Series A for 1997, 1996 and 1995 totaled $24 million for each year. Annual
dividends on Series B totaled $7 million for 1997, 1996 and 1995.
Series A and Series B are redeemable under certain circumstances and, at
the option of Texaco Capital LLC (with Texaco Inc.'s consent) in whole or in
part, from time to time, at $25 per share on or after October 31, 1998 for
Series A and June 30, 1999 for Series B, plus, in each case, accrued and unpaid
dividends to the date fixed for redemption.
Dividends on Series C at a rate of 7.17% per annum, compounded annually,
will be paid at the redemption date of February 28, 2005, unless earlier
redemption occurs. Early redemption may result upon the occurrence of certain
specific events. The par value and dividends payable in Canadian dollars have
been hedged by a swap contract to eliminate foreign currency risk.
Series A, Series B and Series C are non-voting, except under certain
limited circumstances.
The above preferred stock issues currently require annual dividend payments
of approximately $35 million. The company is required to redeem $75 million of
this preferred stock in 2003, $65 million (plus accreted dividends of $59
million) in 2005, $112 million in 2024 and $350 million in 2043. Texaco has the
ability to extend the required redemption dates for the $112 million and $350
million of preferred stock beyond 2024 and 2043, respectively.
FINANCIAL GUARANTEES
The company has guaranteed the payment of certain debt and other obligations of
third parties and affiliate companies. These guarantees totaled $372 million and
$246 million at December 31, 1997 and 1996, respectively.
Exposure to credit risk in the event of non-payment by the obligors is
represented by the contractual amount of these instruments. No loss is
anticipated under these guarantees.
Additionally, in June 1997, Texaco's 50 percent owned affiliate, Caltex
Petroleum Corporation (Caltex) received a claim from the United States Internal
Revenue Service (IRS)for $292 million in excise taxes, $140 million in penalties
and $1.6 billion in interest. The IRS claim relates to sales of crude oil by
Caltex to Japanese customers beginning in 1980. Caltex believes that the
underlying claim for excise taxes and penalties is wrong and that the claim for
interest is flawed. Texaco believes that this claim is without merit and is not
anticipated to be materially important in relation to its consolidated financial
position or results of operations. In February 1998, Caltex arranged for the
issuance of a letter of credit for $2.3 billion to the IRS in order to litigate
this claim. Texaco and its 50 percent partner, Chevron Corporation, have
severally guaranteed Caltex' letter of credit obligation to a syndicate of
banks.
THROUGHPUT AGREEMENTS
Texaco Inc. and certain of its subsidiary companies have entered into certain
long-term agreements wherein they have committed to ship through affiliated
pipeline companies and an offshore oil port sufficient volume of crude oil or
petroleum products to enable these affiliated companies to meet a specified
portion of their individual debt obligations, or, in lieu thereof, to advance
sufficient funds to enable these affiliated companies to meet these obligations.
Additionally, Texaco has entered into long-term purchase commitments with third
parties for take or pay gas transportation. At December 31, 1997 and 1996 the
company's maximum exposure to loss was estimated to be $525 million and $629
million, respectively.
However, based on Texaco's right of counterclaim against third parties in
the event of nonperformance, Texaco's net exposure was estimated to be $422
million and $489 million at December 31, 1997 and 1996, respectively.
No losses are anticipated as a result of these obligations.
OTHER COMMITMENTS
During 1995, 1996 and 1997, Texaco sold leasehold interests in certain equipment
not yet in service and received British pound payments totalling $530 million.
Under a related agreement, in 1997 Texaco leased back these leasehold interests.
Texaco made a British pound payment in 1997, which released Texaco from future
lease commitments under this agreement. This payment effectively repurchased the
leasehold interests previously sold.
NOTE 17 FINANCIAL INSTRUMENTS
- - --------------------------------------------------------------------------------
In the normal course of its business, the company utilizes various types of
financial instruments. These instruments include recorded assets and
liabilities, and also items such as derivatives which principally involve
off-balance sheet risk.
Derivatives are contracts or securities whose value is derived from the
value of an underlying asset or a reference rate. Texaco uses derivatives to
reduce the impact of market price changes in the areas of investments, foreign
currencies, interest rates and oil and natural gas commodities. Texaco does not
enter into derivatives for speculative purposes.
The disclosures below include the following terms. "Held-to-maturity" means
the company intends to hold until stated maturity date. "Available-for-sale"
means that the item may possibly be sold before maturity date. "Amortized cost"
is the remaining cost basis at the balance sheet date. "Fair value" is the
amount that a third party would pay for the item. "Gross unrealized gain or
(loss)" means the change in fair value of the instrument during the holding
period.
Cash and cash equivalents - Fair value approximates cost as reflected in the
Consolidated Balance Sheet at December 31, 1997 and 1996 because of the
short-term maturities of these instruments. Cash equivalents (see Note 1) are
classified as
<PAGE>
TEXACO INC. 59
held-to-maturity. The amortized cost of cash equivalents was as follows:
(Millions of dollars)
As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Time deposits and certificates of deposit $129 $ 62
Commercial paper and other 47 197
----------------
$176 $259
- - --------------------------------------------------------------------------------
Short-term and long-term investments - Fair value is primarily based on quoted
market prices and valuation statements obtained from major financial
institutions. Information concerning investments held at December 31, 1997 and
1996 in short-term and long-term debt securities and in publicly-traded equity
securities that are classified as available-for-sale is shown in the tables that
follow. Excluded from the tables is a $4 million investment in a time deposit at
December 31, 1997 and 1996, which the company intends to hold to its maturity in
the year 2001.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Gross unrealized Gross unrealized
Amortized ---------------- Estimated Amortized ---------------- Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- - ------------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) As of December 31 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities $312 $ 5 $ -- $317 $141 $ 1 $ 2 $140
Foreign government securities 73 5 2 76 189 9 2 196
Corporate and other debt securities 129 3 -- 132 160 2 1 161
---------------------------------------------------------------------------------------
Total available-for-sale debt securities 514 13 2 525 490 12 5 497
Equity securities 73 34 11 96 64 28 4 88
---------------------------------------------------------------------------------------
$587 $ 47 $ 13 $621 $554 $ 40 $ 9 $585
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of available-for-sale securities were $1,040 million in
1997, $1,503 million in 1996 and $1,175 million in 1995. These sales resulted in
gross realized gains of $48 million in 1997, $51 million in 1996 and $81 million
in 1995, and, gross realized losses of $19 million, $17 million, and $27
million, respectively.
At December 31, 1997, available-for-sale debt securities had the following
scheduled maturities:
Amortized Estimated
Cost Fair Value
----------------------
(Millions of dollars) As of December 31 1997
- - --------------------------------------------------------------------------------
Due in one year or less $ 83 $ 83
Due after one year through five years 224 229
Due after five years 207 213
----------------------
$514 $525
- - --------------------------------------------------------------------------------
The estimated fair value of other long-term investments not included above, for
which it is practicable to estimate fair value, approximated the December 31,
1997 and 1996 carrying values of $197 million and $192 million, respectively.
Short-term debt, long-term debt and related derivatives - Shown below are the
carrying amounts and fair values of Texaco's debt and related derivatives as of
year-end 1997 and 1996:
(Millions of dollars) As of December 31 1997 1996
- - --------------------------------------------------------------------------------
Short-term and long-term debt:
Carrying amount $ 6,258 $ 5,455
Fair value $ 6,654 $ 5,712
Related derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value $ 2 $ (3)
- - --------------------------------------------------------------------------------
Refer to Note 9 for additional information about debt and related derivatives
outstanding at December 31, 1997 and 1996.
Forward Exchange and Option Contracts - As an international company, Texaco is
exposed to currency exchange risk. To hedge against adverse changes in foreign
currency exchange rates, the company will enter into forward and option
contracts to buy and sell foreign currencies. Shown below in U.S. dollars are
the notional amounts of outstanding forward exchange contracts to buy and sell
foreign currencies.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Buy Sell Buy Sell
------------------ --------------------
(Millions of dollars) As of December 31 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian dollars $ 203 $ 2 $ 284 $ 18
British pounds 902 363 1,030 54
Danish krone 260 48 173 2
Dutch guilders 220 3 228 29
New Zealand dollars 142 13 130 --
Other European currencies 104 102 114 201
Other currencies 14 75 67 39
--------------------------------------------
$1,845 $ 606 $ 2,026 $ 343
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
60 TEXACO INC.
Market risk exposure on these contracts is essentially limited to currency rate
movements. At year-end 1997, there were $5 million unrealized gains and $29
million unrealized losses related to these contracts. At year-end 1996, there
were $39 million unrealized gains and $2 million unrealized losses. The
company's exposure to credit risk on forward exchange contracts is minimal,
since the counterparties are major financial institutions with strong credit
ratings. The company does not anticipate nonperformance by any of the various
counterparties.
The company uses forward exchange contracts to buy foreign currencies
primarily to hedge the net monetary liability position of its European,
Canadian, Australian and New Zealand operations and to hedge portions of
significant foreign currency capital expenditures and lease commitments. These
contracts generally have terms of 60 days or less. Contracts that hedge foreign
currency monetary positions are marked-to-market monthly. Any resultant gains
and losses are included in income currently as other costs. At year-end 1997 and
1996, hedges of foreign currency commitments principally involve capital
projects requiring expenditure of British pounds and Danish krone. The
percentages of planned capital expenditures hedged at year-end were: British
pounds - 62% in 1997 and 68% in 1996; Danish krone - 74% in 1997 and 49% in
1996. Realized gains and losses on hedges of foreign currency commitments are
initially recorded to deferred charges. Subsequently, the amounts are applied to
the capitalized project cost on a percentage-of-completion basis, and are then
amortized over the lives of the applicable projects. At year-end 1997 and 1996,
net hedging gains of $51 million and $84 million, respectively, had yet to be
amortized.
Contracts to sell foreign currencies are primarily related to a separately
managed program to hedge the value of the company's investment portfolio
denominated in foreign currencies. The company's strategy is to hedge the full
value of this portion of its investment portfolio and to close out forward
contracts upon the sale or maturity of the corresponding investments. These
contracts are valued at market based on the foreign exchange rates in effect on
the balance sheet dates. Changes in the value of these contracts are recorded as
part of the carrying amount of the related investments. Related gains and losses
are recorded, net of applicable income taxes, to stockholders' equity until the
underlying investments are sold or mature.
Preferred Shares of Subsidiaries - Texaco has entered into an interest rate swap
related to dividends payable on Series B preferred shares of Texaco Capital LLC.
The swap has a notional principal amount of $112 million and expires in the year
2007. The swap provides for Texaco to pay a LIBOR-based floating rate and to
receive the contractual dividend rate of the Series B preferred stock monthly.
The fair value of the swap is not material.
Texaco also has entered into an interest rate and currency swap related to
Series C preferred shares of Texaco Capital LLC. The swap matures in the year
2005. Over the life of the interest rate swap component of the contract, Texaco
will make LIBOR-based floating rate interest payments based on a notional
principal amount of $65 million. Canadian dollar interest will accrue to Texaco
at a fixed rate applied to the accreted notional principal amount, which was
Cdn. $87 million at the inception of the swap.
The currency swap component of the transaction calls for Texaco to exchange
$65 million for Cdn. $170 million, which includes Cdn. $87 million plus accrued
interest on the contract's maturity date. The carrying amount of this contract
represents the Canadian dollar accrued interest receivable by Texaco. At
year-end 1997 and 1996, the carrying amount and the fair value of this
transaction were not material.
Petroleum and Natural Gas Hedging - The company hedges a portion of the market
risks associated with its crude oil, natural gas and petroleum product
purchases, sales and exchange activities. All hedge transactions are subject to
the company's corporate risk management policy which sets out dollar, volumetric
and term limits, as well as to management approvals as set forth in the
company's delegations of authorities. Company policy does not permit speculative
position-taking using derivative financial instruments.
The company uses established petroleum futures exchanges, as well as
"over-the-counter" hedge instruments, including futures, options, swaps and
other derivative products. These hedge tools are used to reduce our exposure to
price volatility by establishing margins, costs or revenues on designated
transactions as well as for planned future purchases and sales, inventory,
production and processing. In carrying out its hedging programs, the company
analyzes its major commodity streams for fixed cost, fixed revenue and margin
exposure to market price changes. Based on this corporate risk profile,
forecasted trends, and overall business objectives, a determination is made as
to an appropriate strategy for risk reduction.
Hedge positions are marked-to-market for valuation purposes. Gains and
losses on hedge transactions, which offset losses and gains on the underlying
"cash market" transactions, are recorded to deferred income or charges until the
hedged transaction is closed, or until the anticipated future purchases, sales,
or production occur. At that time, any gain or loss on the hedging contract is
recorded to operating revenues as an increase or decrease in margins, or to
inventory, as appropriate.
Over-the-counter hedge positions expose the company to counterparty credit
risk. However, because the hedge contracts are placed with parties whose
creditworthiness has been pre-determined in accordance with the company's credit
policy, non-performance by any counterparty is not anticipated. Such
over-the-counter commodity contracts do not expose the company to any
concentrations of credit risk because of the dollar limits incorporated in risk
management policies.
At December 31, 1997 and 1996, there were open derivative commodity
contracts required to be settled in cash, consisting mostly of swaps. Notional
contract amounts, excluding unrealized gains and losses, were $974 million and
<PAGE>
TEXACO INC. 61
$1,327 million, respectively, at year-end 1997 and 1996. These amounts
principally represent future values of contract volumes over the remaining
duration of outstanding swap contracts at the respective dates. These contracts
hedge a small fraction of the company's business activities, generally for the
next twelve months. Unrealized gains and losses on contracts outstanding at
year-end 1997 were $93 million and $58 million, respectively. At year-end 1996,
unrealized gains and losses were $63 million and $48 million, respectively.
NOTE 18 CONTINGENT LIABILITIES
- - --------------------------------------------------------------------------------
Texaco and approximately fifty other oil companies are defendants in seventeen
purported class actions in which the plaintiffs allege that the defendants
undervalued oil produced from properties leased from the plaintiffs by
establishing artificially low selling prices, thereby underpaying to plaintiffs
royalties or severance taxes based on those prices. The actions are pending in
Texas, New Mexico, Oklahoma, Louisiana, Utah, Mississippi and Alabama.
Plaintiffs seek to recover royalty underpayments and interest and in some cases
severance taxes and treble and punitive damages. Texaco and twenty-four other
defendants have executed a settlement agreement with some of the plaintiffs that
will resolve many of these disputes in whole or in part. The settlement is
pending approval in federal court in Texas.
oooooooo
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.
NOTE 19 FINANCIAL DATA BY GEOGRAPHIC AREA
- - --------------------------------------------------------------------------------
Texaco Inc. and its subsidiary companies, together with affiliates, represent a
vertically integrated enterprise principally engaged in the worldwide
exploration for and production, transportation, refining and marketing of crude
oil, natural gas and petroleum and other processed products, as well as
nonpetroleum operations such as insurance and alternate energy activities. These
products and services are sold and provided to various purchasers including
wholesale and retail distributors, utilities, industrial end users and
governmental agencies throughout the world. Operations and investments in some
foreign areas are subject to political and business risks, the nature of which
varies from country to country and from time to time. At year-end 1997, net
assets located outside the United States amounted to $1,932 million, $4,072
million and $2,794 million in Other Western Hemisphere, Europe and Other Eastern
Hemisphere areas, respectively.
Operating profit represents total sales and services as shown on the
Statement of Consolidated Income less operating costs and expenses, net of
income taxes. Corporate/ nonoperating includes interest income and expense,
general corporate expenses and other nonoperating items, net of income taxes.
Equity in income or losses of partnership joint-venture companies is reflected
net of taxes, since this income is directly taxable to Texaco.
Intergeographic sales and services shown are based on prices which are
generally representative of market prices or arm's-length negotiated prices.
Identifiable assets are those from continuing operations which can be
directly identified or associated with operations which have been geographically
segregated. Net assets of discontinued operations (see Note 5) are reflected in
corporate/nonoperating to conform to the presentation of net loss from
discontinued operations. Investments in affiliates pertain to those affiliates
which are accounted for on the equity method. Corporate assets include cash and
cash investments, as well as receivables, properties, plant and equipment and
other assets which are corporate in nature.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Other Other Corporate/
United Western Eastern Non-
(Millions of dollars) States Hemisphere Europe Hemisphere operating* Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Sales and services
Outside $ 22,147 $ 7,525 $ 10,947 $ 4,568 $ -- $ 45,187
Intergeographic 784 258 248 1 (1,291) --
-----------------------------------------------------------------------------------
Total sales and services $ 22,931 $ 7,783 $ 11,195 $ 4,569 $ (1,291) $ 45,187
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
Operating profit $ 1,095 $ 323 $ 381 $ 188 $ -- $ 1,987
-----------------------------------------------------------------------------------
Equity in income of affiliates 195 1 (3) 423 -- 616
Corporate/nonoperating -- -- -- -- 61 61
-----------------------------------------------------------------------------------
Total net income $ 1,290 $ 324 $ 378 $ 611 $ 61 $ 2,664
- - ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 14,224 $ 2,454 $ 5,480 $ 1,645 $ -- $ 23,803
Investments in affiliates 1,265 35 198 2,323 -- 3,821
Corporate assets -- -- -- -- 1,976 1,976
-----------------------------------------------------------------------------------
Total assets $ 15,489 $ 2,489 $ 5,678 $ 3,968 $ 1,976 $ 29,600
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(continued on next page)
</FN>
</TABLE>
*Includes intergeographic sales and services eliminations.
<PAGE>
62 TEXACO INC.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Other Other Corporate/
United Western Eastern Non-
(Millions of dollars) States Hemisphere Europe Hemisphere operating* Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Sales and services
Outside $ 23,320 $ 6,486 $ 10,258 $ 4,497 $ -- $ 44,561
Intergeographic 838 31 502 28 (1,399) --
-----------------------------------------------------------------------------------
Total sales and services $ 24,158 $ 6,517 $ 10,760 $ 4,525 $ (1,399) $ 44,561
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
Operating profit $ 1,229 $ 179 $ 93 $ 104 $ -- $ 1,605
Equity in income of affiliates 114 1 16 538 -- 669
Corporate/nonoperating -- -- -- -- (256) (256)
-----------------------------------------------------------------------------------
Total net income (loss) $ 1,343 $ 180 $ 109 $ 642 $ (256) $ 2,018
- - ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 12,477 $ 2,047 $ 4,861 $ 1,628 $ -- $ 21,013
Investments in affiliates 1,098 28 543 2,142 -- 3,811
Corporate assets -- -- -- -- 2,139 2,139
-----------------------------------------------------------------------------------
Total assets $ 13,575 $ 2,075 $ 5,404 $ 3,770 $ 2,139 $ 26,963
- - ------------------------------------------------------------------------------------------------------------------------------------
1995
Sales and services
Outside $ 17,302 $ 5,440 $ 8,906 $ 3,903 $ -- $ 35,551
Intergeographic 410 40 228 59 (737) --
-----------------------------------------------------------------------------------
Total sales and services $ 17,712 $ 5,480 $ 9,134 $ 3,962 $ (737) $ 35,551
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
Operating profit $ 291 $ 166 $ 32 $ 78 $ -- $ 567
Equity in income of affiliates 45 6 21 452 -- 524
Corporate/nonoperating -- -- -- -- (363) (363)
-----------------------------------------------------------------------------------
Net income (loss) before cumulative effect
of accounting change 336 172 53 530 (363) 728
Cumulative effect of accounting change -- -- -- -- (121) (121)
-----------------------------------------------------------------------------------
Total net income (loss) $ 336 $ 172 $ 53 $ 530 $ (484) $ 607
- - ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 11,068 $ 1,800 $ 4,480 $ 1,386 $ -- $ 18,734
Net assets of discontinued operations -- -- -- -- 164 164
Investments in affiliates 1,042 24 540 2,479 -- 4,085
Corporate assets -- -- -- -- 1,954 1,954
-----------------------------------------------------------------------------------
Total assets $ 12,110 $ 1,824 $ 5,020 $ 3,865 $ 2,118 $ 24,937
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes intergeographic sales and services eliminations.
NOTE 20 SUBSEQUENT EVENT
- - --------------------------------------------------------------------------------
On January 15, 1998, Texaco and Shell Oil Company reached agreement on the
formation and operational start-up of Equilon Enterprises LLC (Equilon), a newly
formed Delaware limited liability company. Equilon is a joint venture that
combines 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% and Shell owns 56% of Equilon.
Texaco will account for its interest in Equilon using the equity method.
Commencing 1998, Texaco will record its share of Equilon's results of operations
on a one-line basis in the Consolidated Statement of Income and will reclassify
the net amount of assets and liabilities of the businesses contributed to
Equilon to Investments and Advances in the Consolidated Balance Sheet. The
approximate carrying amounts at December 31, 1997, of the principal assets and
liabilities of these businesses were $.3 billion of net working capital assets,
$2.8 billion of net properties, plant and equipment and $.2 billion of debt. In
addition, Texaco will record a receivable from Equilon of approximately $.5
billion, representing a portion of proceeds from a planned financing by Equilon.
Texaco, Shell and Saudi Refining, Inc. are finalizing agreements for a
separate joint venture involving their eastern and Gulf Coast refining and
marketing businesses in the United States. This transaction is expected to be
completed in early 1998. Initially, Texaco and Saudi Refining, Inc. will each
own 32.5% and Shell will own 35% of the joint venture.
<PAGE>
TEXACO INC. 63
REPORT OF MANAGEMENT
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
We are responsible for preparing Texaco's consolidated financial statements in
accordance with generally accepted accounting principles. In doing so, we must
use judgment and estimates when the outcome of events and transactions is not
certain. Information appearing in other sections of this Annual Report is
consistent with the financial statements.
Texaco's financial statements are based on its financial records. We rely
on Texaco's internal control system to provide us reasonable assurance that
these financial records are being accurately and objectively maintained and that
the company's assets are being protected. The internal control system comprises:
o Corporate Conduct Guidelines that require all employees to obey all applicable
laws, comply with company policies and maintain the highest ethical standards in
conducting company business,
o An organizational structure in which responsibilities are defined and divided,
and
o Written policies and procedures that cover initiating, reviewing, approving
and recording transactions.
We require members of our management team to formally certify each year that the
internal controls for their business units are operating effectively.
Texaco's internal auditors review and report on the effectiveness of
internal controls during the course of their audits. Arthur Andersen LLP,
selected by the Audit Committee and approved by stockholders, independently
audits Texaco's financial statements. Arthur Andersen assesses the adequacy and
effectiveness of Texaco's internal controls when determining the nature, timing
and scope of their audit. We seriously consider all suggestions for improving
Texaco's internal controls that are made by the internal and independent
auditors.
The Audit Committee is comprised of six directors who are not employees of
Texaco. This Committee reviews and evaluates Texaco's accounting policies and
reporting practices, internal auditing, internal controls, security and other
matters. The Committee also evaluates the independence and professional
competence of Arthur Andersen LLP and reviews the results and scope of their
audit. The internal and independent auditors have free access to the Committee
to discuss financial reporting and internal control issues.
/s/ Peter I. Bijur
Peter I. Bijur
Chairman of the Board and Chief Executive Officer
/s/ Patrick J. Lynch
Patrick J. Lynch
Senior Vice President and Chief Financial Officer
/s/ Robert C. Oelkers
Robert C. Oelkers
Vice President and Comptroller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- - --------------------------------------------------------------------------------
To the Stockholders, Texaco Inc.:
We have audited the accompanying consolidated balance sheet of Texaco Inc. (a
Delaware corporation) and subsidiary companies as of December 31, 1997 and 1996,
and the related statements of consolidated income, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texaco Inc. and subsidiary
companies as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
As explained in Note 2 to the Consolidated Financial Statements, in 1995
the company changed its method of accounting for long-lived assets to be held
and used and long-lived assets to be disposed of.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
February 26, 1998
New York, N.Y.
<PAGE>
64 TEXACO INC.
SUPPLEMENTAL OIL AND GAS INFORMATION
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
The following tables reflect the supplemental oil and gas information that is
required by Statement of Financial Accounting Standards No. 69, Disclosures
about Oil and Gas Producing Activities. Additionally, we provide information
concerning recoverable proved oil and gas reserve quantities to the U.S.
Department of Energy and to other government bodies annually. Such information
is consistent with the information presented here.
The first three tables present the estimated quantities of our proved
reserves and the estimated discounted future net cash flows data for these
reserves. The remaining tables provide historical information about our
exploration and producing operations. The "Other West" region includes Canada,
Central America and South America. The "Other East" region includes West Africa,
Eurasia, Asia, the Pacific Rim and the Middle East. Texaco's 50% affiliate is
P.T. Caltex Pacific Indonesia (CPI), and CPI's estimated reserves are based on
our production-sharing contract.
TABLE I - NET PROVED RESERVES
The liquids and gas reserve quantities shown below include only those quantities
that are recoverable. "Net" reserve quantities represent the quantities
estimated to be available to us after deducting any royalties or interests owned
by others. Recoverable quantities are based upon reasonable estimates from sound
geological and engineering principles. As additional information becomes
available, these estimates are subject to revision. In addition to the reported
reserve quantities, we have large potential reserves that we expect will
increase our reserve base, as future investments are made in exploration and
development programs.
TABLE I
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET PROVED RESERVES OF CRUDE OIL AND NATURAL GAS LIQUIDS
Millions of Barrels
Consolidated Subsidiaries Equity
-------------------------------------------------------------------
Affiliate
United Other Other -Other World-
States West Europe East Total East wide
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1994 1,396 73 343 427 2,239 445 2,684
Changes attributable to:
Extensions and discoveries 58 -- 37 71 166 1 167
Improved recovery 56 -- 15 -- 71 45 116
Revisions 78 (2) (3) 25 98 2 100
Purchases 1 -- -- -- 1 -- 1
Sales (109) (11) -- -- (120) -- (120)
Production (139) (6) (42) (48) (235) (55) (290)
-------------------------------------------------------------------
As of December 31, 1995* 1,341 54 350 475 2,220 438 2,658
Changes attributable to:
Extensions and discoveries 82 4 80 29 195 1 196
Improved recovery 20 -- -- -- 20 81 101
Revisions 44 2 6 21 73 (3) 70
Purchases 8 -- 3 -- 11 -- 11
Sales (31) -- -- (1) (32) -- (32)
Production (142) (4) (42) (58) (246) (54) (300)
-------------------------------------------------------------------
As of December 31, 1996* 1,322 56 397 466 2,241 463 2,704
Changes attributable to:
Extensions and discoveries 107 13 34 61 215 4 219
Improved recovery 15 -- 65 -- 80 18 98
Revisions 55 3 11 100 169 22 191
Purchases 416 -- -- -- 416 -- 416
Sales (3) (2) (31) (8) (44) -- (44)
Production (145) (5) (45) (66) (261) (56) (317)
-------------------------------------------------------------------
As of December 31, 1997* 1,767 65 431 553 2,816 451 3,267
- - ----------------------------------------------------------------------------------------------------
*Includes net proved developed
reserves
As of December 31, 1995 1,125 52 142 413 1,732 350 2,082
As of December 31, 1996 1,100 50 165 418 1,733 354 2,087
As of December 31, 1997 1,374 54 210 463 2,101 354 2,455
- - ----------------------------------------------------------------------------------------------------
*Includes net proved NGL
reserves
As of December 31, 1995 206 1 28 -- 235 6 241
As of December 31, 1996 207 1 54 1 263 6 269
As of December 31, 1997 246 -- 71 -- 317 4 321
<CAPTION>
NET PROVED RESERVES OF NATURAL GAS
Billions of Cubic Feet
Consolidated Subsidiaries Equity
-------------------------------------------------------------------
Affiliate
United Other Other -Other World-
States West Europe East Total East wide
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1994 4,407 712 877 47 6,043 150 6,193
Changes attributable to:
Extensions and discoveries 397 100 164 6 667 6 673
Improved recovery 21 -- -- -- 21 -- 21
Revisions 103 103 (15) 39 230 14 244
Purchases 26 -- -- -- 26 -- 26
Sales (287) (6) (2) (1) (296) -- (296)
Production (605) (62) (80) (4) (751) (15) (766)
-------------------------------------------------------------------
As of December 31, 1995* 4,062 847 944 87 5,940 155 6,095
Changes attributable to:
Extensions and discoveries 436 263 34 3 736 15 751
Improved recovery 8 -- -- -- 8 1 9
Revisions (99) (1) 58 13 (29) -- (29)
Purchases 5 -- -- -- 5 -- 5
Sales (58) (7) -- 1 (64) -- (64)
Production (626) (71) (75) (4) (776) (18) (794)
-------------------------------------------------------------------
As of December 31, 1996* 3,728 1,031(a) 961 100 5,820(a) 153 5,973(a)
Changes attributable to:
Extensions and discoveries 692 26 92 346 1,156 2 1,158
Improved recovery 7 -- 22 -- 29 5 34
Revisions 228 75 41 (22) 322 19 341
Purchases 24 -- -- -- 24 -- 24
Sales (14) (118) (7) (310) (449) -- (449)
Production (643) (96) (81) (2) (822) (17) (839)
-------------------------------------------------------------------
As of December 31, 1997* 4,022 918(a) 1,028 112 6,080(a) 162 6,242(a)
- - ----------------------------------------------------------------------------------------------------
*Includes net proved developed
reserves
As of December 31, 1995 3,666 522 452 84 4,724 140 4,864
As of December 31, 1996 3,360 893 452 96 4,801 136 4,937
As of December 31, 1997 3,379 792 576 110 4,857 145 5,002
- - ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Additionally, there is approximately 414 BCF of natural gas in Other West
which will be available from production during the period 2005-2016 under a
long-term purchase associated with a service agreement.
<PAGE>
TEXACO INC. 65
The following chart summarizes our experience in finding new quantities of oil
and gas to replace our related production. Our reserve replacement performance
is calculated by dividing our reserve additions by our production. Our additions
relate to new discoveries, existing reserve extensions and revisions to previous
reserve estimates. The chart excludes oil and gas quantities that were generated
from purchases and sales, such as the Monterey acquisition, which added 420
million barrels of oil equivalent (BOE) to the company's reserve base.
TEXACO'S RESERVE REPLACEMENT PERFORMANCE
Outside
Worldwide United States United States
- - --------------------------------------------------------------------------------
Year 1997 167% 132% 212%
Year 1996 113% 83% 154%
Year 1995 129% 116% 146%
3 Year Average (1995-1997) 137% 110% 172%
5 Year Average (1993-1997) 127% 102% 163%
Increases in proved reserves during 1997 were primarily due to the following:
In the United States, liquid and gas reserves were added from the Monterey
Resources acquisition and drilling that extended the productive limits of
existing fields, such as the McAllen Ranch field in Texas and Caillou Island
field onshore Louisiana. Other drilling-related reserve increases resulted from
the new field discovery of Ewing Bank Block 963 and new sand discovery at Mound
Point, both offshore Louisiana. Liquid reserve increases also resulted from new
horizontal wells and steamflood expansion in the California fields of Kern
River and Midway-Sunset. Extension of contracts and fields supporting gas plants
in New Mexico and Oklahoma added major NGL reserves.
Outside the United States, in the Other West area, significant reserves
were added from offshore Trinidad with the extension of the Dolphin field and
infill drilling in the Soldado field. Revised gas demand added new gas reserves
from the Chuchupa, offshore Colombia. In Europe, three new field
discoveries, Galley, Elgin and Franklin, all in the North Sea, added impressive
reserves. Also in the North Sea, a positive waterflood response at the Captain
field and a waterflood extension at the Dan field added secondary reserves. In
the Other East area, undeveloped reserves were added from planned drilling which
will extend limits of the Wafra field in the Partitioned Neutral Zone between
Kuwait and Saudi Arabia. The Yetagun gas field discovery in Myanmar added large
gas reserves in mid-year (which were later sold).
On a worldwide basis in 1997, we spent $3.99 for each BOE we added. Finding
and development costs averaged $4.02 per BOE for the three-year period 1995-1997
and $3.91 per BOE for the five-year period 1993-1997.
During 1998, Texaco expects that the net production of natural gas will
approximate 2.3 billion cubic feet per day. This estimate is based upon past
performance and on the assumption that such gas quantities can be produced under
operating and economic conditions existing at December 31, 1997. Possible future
changes in prices or world economic conditions were not factored into this
estimate. These expected production volumes, together with normal related supply
arrangements, are sufficient to meet anticipated delivery requirements under
contractual arrangements. Approximately 34% of Texaco's proved natural gas
reserves in the United States at December 31, 1997, 34% at December 31, 1996 and
31% at December 31, 1995 were covered by long-term sales contracts. These
agreements are primarily priced at market.
TABLES II AND III - STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
DATA
The estimated "net" cash flows (after income taxes) are based on the future
income of the recoverable reserves presented in Table I. In accordance with the
requirements of SFAS 69, the standardized measure is calculated at a 10%
discount rate, and future revenues are based on December 31 prices for liquids
and gas. Future production costs for 1997 data are based on 1997 costs, and
future development costs include restoration and abandonment estimates after
deducting any salvage value. Future income taxes are calculated based on each
country's statutory tax rate.
The purpose of this disclosure is to provide a common benchmark among those
companies that engage in exploration and producing activities, and it is not
necessarily indicative of our perception of the future cash flows from our
proved reserves. The standardized measure excludes the effect of future changes
in prices, costs and tax rates which past experience indicates will occur.
Additionally, probable and possible reserves, which may become proved in
the future, are excluded from these calculations. Such future changes could
significantly impact the standardized measure in these tables. Extensive
judgment is used to estimate the timing of production and future costs over the
remaining life of the reserves. However, these calculations should not be relied
upon as an indicator of our future cash flows or value of our oil and gas
reserves.
<PAGE>
66 TEXACO INC.
TABLE II - STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Subsidiaries Equity
--------------------------------------------------------------------------------
Affiliate-
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Future cash inflows from sale of oil & gas,
and service fee revenue $ 34,084 $ 2,305 $ 9,395 $ 7,690 $ 53,474 $ 5,182 $ 58,656
Future production costs (10,980) (807) (2,854) (2,303) (16,944) (1,840) (18,784)
Future development costs (4,693) (132) (1,809) (749) (7,383) (476) (7,859)
Future income tax expense (5,512) (652) (898) (3,445) (10,507) (1,519) (12,026)
---------------------------------------------------------------------------------
Net future cash flows before discount 12,899 714 3,834 1,193 18,640 1,347 19,987
10% discount for timing of future cash flows (5,361) (252) (1,424) (374) (7,411) (519) (7,930)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 7,538 $ 462 $ 2,410 $ 819 $ 11,229 $ 828 $ 12,057
- - ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
Future cash inflows from sale of oil & gas,
and service fee revenue $ 41,807 $ 2,863 $ 11,242 $ 9,261 $ 65,173 $ 6,632 $ 71,805
Future production costs (8,080) (894) (2,368) (1,993) (13,335) (1,776) (15,111)
Future development costs (2,790) (141) (2,094) (551) (5,576) (740) (6,316)
Future income tax expense (10,444) (758) (1,946) (5,099) (18,247) (2,181) (20,428)
---------------------------------------------------------------------------------
Net future cash flows before discount 20,493 1,070 4,834 1,618 28,015 1,935 29,950
10% discount for timing of future cash flows (8,602) (458) (1,740) (489) (11,289) (695) (11,984)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 11,891 $ 612 $ 3,094 $ 1,129 $ 16,726 $ 1,240 $ 17,966
- - ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
Future cash inflows from sale of oil & gas,
and service fee revenue $ 28,603 $ 2,144 $ 8,753 $ 7,820 $ 47,320 $ 5,357 $ 52,677
Future production costs (8,232) (628) (2,150) (2,210) (13,220) (1,448) (14,668)
Future development costs (2,618) (181) (1,352) (439) (4,590) (515) (5,105)
Future income tax expense (5,505) (573) (1,457) (3,862) (11,397) (1,799) (13,196)
---------------------------------------------------------------------------------
Net future cash flows before discount 12,248 762 3,794 1,309 18,113 1,595 19,708
10% discount for timing of future cash flows (4,988) (375) (1,502) (418) (7,283) (553) (7,836)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 7,260 $ 387 $ 2,292 $ 891 $ 10,830 $ 1,042 $ 11,872
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE III - CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS
<TABLE>
<CAPTION>
Worldwide
Including
Consolidated Subsidiaries - Total Equity in Affiliate - Other East
- - ------------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1997 1996 1995 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Standardized measure - Beginning of year $ 16,726 $ 10,830 $ 8,120 $ 17,966 $ 11,872 $ 9,012
Sales of minerals-in-place (79) (458) (679) (79) (458) (679)
---------------------------------------------------------------------
16,647 10,372 7,441 17,887 11,414 8,333
Changes in ongoing oil and gas operations:
Sales and transfers of produced oil and gas,
net of production costs during the period (4,460) (4,349) (3,185) (4,921) (4,859) (3,634)
Net changes in prices, production and development costs (13,744) 8,407 4,265 (14,633) 8,820 4,564
Extensions, discoveries and improved recovery,
less related costs 2,532 2,950 1,770 2,681 3,182 1,891
Development costs incurred during the period 1,810 1,431 1,223 1,977 1,575 1,322
Timing of production and other changes (760) (209) (733) (969) (251) (677)
Revisions of previous quantity estimates 1,374 563 988 1,476 527 990
Purchases of minerals-in-place 449 138 42 449 138 42
Accretion of discount 2,763 1,731 1,238 3,027 1,952 1,428
Net change in discounted future income taxes 4,618 (4,308) (2,219) 5,083 (4,532) (2,387)
---------------------------------------------------------------------
Standardized measure - End of year $ 11,229 $ 16,726 $ 10,830 $ 12,057 $ 17,966 $ 11,872
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TEXACO INC. 67
TABLE IV - CAPITALIZED COSTS
Gross capitalized costs represent the accumulated expenditures for the
exploration and producing operations. The accumulated depreciation, depletion
and amortization includes provision for restoration and abandonment activity
that has not occurred. The net capitalized costs represent the undepreciated
value for these assets.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Subsidiaries Equity
---------------------------------------------------------------------------------
Affiliate-
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Proved properties $ 20,196 $ 581 $ 4,584 $ 1,623 $ 26,984 $ 1,112 $ 28,096
Unproved properties 1,248 16 89 225 1,578 338 1,916
Support equipment and facilities 438 26 37 228 729 578 1,307
---------------------------------------------------------------------------------
Gross capitalized costs 21,882 623 4,710 2,076 29,291 2,028 31,319
Accumulated depreciation,
depletion and amortization (13,849) (298) (3,135) (1,131) (18,413) (1,013) (19,426)
---------------------------------------------------------------------------------
Net capitalized costs $ 8,033 $ 325 $ 1,575 $ 945 $ 10,878 $ 1,015 $ 11,893
- - ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
Proved properties $ 17,450 $ 603 $ 4,102 $ 1,372 $ 23,527 $ 1,018 $ 24,545
Unproved properties 370 15 81 210 676 293 969
Support equipment and facilities 432 32 38 185 687 548 1,235
---------------------------------------------------------------------------------
Gross capitalized costs 18,252 650 4,221 1,767 24,890 1,859 26,749
Accumulated depreciation,
depletion and amortization (13,158) (308) (2,739) (1,012) (17,217) (903) (18,120)
---------------------------------------------------------------------------------
Net capitalized costs $ 5,094 $ 342 $ 1,482 $ 755 $ 7,673 $ 956 $ 8,629
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE V - COSTS INCURRED
Costs incurred represent the amount we spent to explore for and develop our
existing reserve base, and the amount we spent to acquire mineral rights from
others. Our exploration costs include the costs of geological and geophysical
work, carrying and retaining undeveloped properties, and drilling and equipping
exploratory wells. Our development costs are associated with drilling and
equipping development wells, improved recovery systems, facilities for
extraction, treating, gathering and storage, and producing facilities for
existing developed reserves.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Subsidiaries Equity
---------------------------------------------------------------------------------
Affiliate-
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Proved property acquisition $1,099* $ -- $ -- $ -- $1,099 $ -- $1,099
Unproved property acquisition 527* 1 -- 23 551 -- 551
Exploration 480 15 59 234 788 18 806
Development 1,220 62 419 108 1,809 167 1,976
---------------------------------------------------------------------------------
Total $3,326 $ 78 $ 478 $ 365 $4,247 $ 185 $4,432
- - ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1996
Proved property acquisition $ 56 $ -- $ -- $ -- $ 56 $ -- $ 56
Unproved property acquisition 91 5 -- 20 116 -- 116
Exploration 356 18 90 225 689 9 698
Development 827 107 384 113 1,431 144 1,575
---------------------------------------------------------------------------------
Total $1,330 $ 130 $ 474 $ 358 $2,292 $ 153 $2,445
- - ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1995
Proved property acquisition $ 7 $ 31 $ -- $ -- $ 38 $ -- $ 38
Unproved property acquisition 35 3 2 11 51 -- 51
Exploration 151 48 76 117 392 11 403
Development 845 66 207 105 1,223 99 1,322
---------------------------------------------------------------------------------
Total $1,038 $ 148 $ 285 $ 233 $1,704 $ 110 $1,814
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes the acquisition of Monterey Resources on a net cost basis of $1,520
million, which is net of deferred income taxes amounting to $469 million and
$245 million for the acquired proved and unproved properties, respectively.
<PAGE>
68 TEXACO INC.
TABLE VI - RESULTS OF OPERATIONS
This table details the components of our net income from oil and gas activities.
Revenues are based upon our production that is available for sale and will
exclude revenues from resale of third party volumes, equity earnings of certain
smaller affiliates, trading activity and miscellaneous operating income.
Expenses are associated with current year operations but do not include general
overhead and special items.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Subsidiaries Equity
--------------------------------------------------------------------------
Affiliate-
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Gross revenues from:
Sales and transfers $ 3,492 $ -- $ 495 $ 934 $ 4,921 $ 610 $ 5,531
Sales to unaffiliated entities 312 165 499 178 1,154 43 1,197
Production costs (986) (57) (323) (249) (1,615) (192) (1,807)
Exploration costs (238) (10) (60) (195) (503) (16) (519)
Depreciation, depletion and amortization (735) (27) (382) (129) (1,273) (110) (1,383)
Other expenses (249) -- -- (24) (273) 9 (264)
--------------------------------------------------------------------------
Results before estimated income taxes 1,596 71 229 515 2,411 344 2,755
Estimated income taxes (511) (40) (85) (418) (1,054) (173) (1,227)
--------------------------------------------------------------------------
Net results $ 1,085 $ 31 $ 144 $ 97 $ 1,357 $ 171 $ 1,528
- - ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1996
Gross revenues from:
Sales and transfers $ 3,383 $ -- $ 524 $ 863 $ 4,770 $ 648 $ 5,418
Sales to unaffiliated entities 310 140 475 181 1,106 45 1,151
Production costs (937) (54) (321) (215) (1,527) (183) (1,710)
Exploration costs (196) (27) (57) (150) (430) (8) (438)
Depreciation, depletion and amortization (652) (24) (310) (107) (1,093) (110) (1,203)
Other expenses (241) (1) (1) (40) (283) 8 (275)
--------------------------------------------------------------------------
Results before estimated income taxes 1,667 34 310 532 2,543 400 2,943
Estimated income taxes (534) (26) (112) (417) (1,089) (212) (1,301)
--------------------------------------------------------------------------
Net results $ 1,133 $ 8 $ 198 $ 115 $ 1,454 $ 188 $ 1,642
- - ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1995
Gross revenues from:
Sales and transfers $ 2,652 $ -- $ 394 $ 613 $ 3,659 $ 583 $ 4,242
Sales to unaffiliated entities 291 127 485 131 1,034 35 1,069
Production costs (951) (45) (314) (198) (1,508) (169) (1,677)
Exploration costs (87) (35) (79) (96) (297) (9) (306)
Depreciation, depletion and amortization (682) (20) (293) (109) (1,104) (94) (1,198)
Other expenses (254) (6) -- (24) (284) (13) (297)
--------------------------------------------------------------------------
Results before estimated income taxes 969 21 193 317 1,500 333 1,833
Estimated income taxes (295) (14) (74) (260) (643) (177) (820)
--------------------------------------------------------------------------
Net results $ 674 $ 7 $ 119 $ 57 $ 857 $ 156 $ 1,013
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE VII - AVERAGE SALES PRICES AND PRODUCTION COSTS -- PER UNIT
Average sales prices for liquids and natural gas are calculated using our gross
revenues in Table VI. Average production costs include depreciation, depletion
and amortization of support equipment and facilities and lifting costs, and
exclude payments for royalties and income taxes.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Average sales prices
----------------------------------------------------------------------
Natural Natural Natural
gas per gas per gas per
Liquids thousand Liquids thousand Liquids thousand Average production costs
per barrel cubic feet per barrel cubic feet per barrel cubic feet (per composite barrel)
---------------------- ---------------------- ---------------------- ----------------------------
1997 1996 1995 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $16.32 $ 2.32 $16.97 $ 2.10 $14.25 $ 1.62 $ 3.94 $3.82 $ 3.97
Other West 14.40 1.03 16.80 .96 13.34 .87 2.80 3.44 2.92
Europe 18.41 2.42 20.37 2.47 16.57 2.50 5.58 5.95 6.08
Other East 16.87 1.89 18.61 3.20 15.90 2.61 4.11 4.07 4.30
Affiliate - Other East 14.89 -- 16.30 -- 14.27 -- 3.76 3.71 3.37
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TEXACO INC. 69
SUPPLEMENTAL MARKET RISK DISCLOSURES
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
Texaco only uses derivative financial instruments for hedging purposes. These
instruments principally include interest rate and/or currency swap contracts,
forward and option contracts to buy and to sell foreign currencies, and
commodity futures, options, swaps, and other derivative instruments. Gains and
losses on these derivatives are entirely offset by losses and gains on the
respective hedged exposures. Hedged market risk exposures include certain
portions of assets, liabilities, future commitments and anticipated production
and sales. We continually adjust our positions in derivative financial
instruments for the ongoing changes in the exposures being hedged. However,
since Texaco hedges only a portion of its market risk exposures, we bear market
risk exposure on the unhedged portion of such exposures, including the exposure
to non-cash currency translation impacts related to deferred income taxes
denominated in British pounds. Notes 9 and 17 to the financial statements
provide data related to derivatives and related accounting policies.
The estimated sensitivity effects below assume that valuations of all items
within a risk category will move in tandem. This cannot be assured for exposures
involving interest rates, currency exchange rates, petroleum and natural gas.
The hypothetical changes in interest rates, currency exchange rates and
prices chosen for the estimated sensitivity effects are generally based upon a
review of past fluctuations for each risk category in this disclosure. We
caution users of this information that past fluctuations in rates and prices may
not necessarily be an indicator of probable future fluctuations, as illustrated
by the recent currency crisis in Asia.
Following are disclosures regarding our market risk sensitive instruments
by major category. The information has been prepared with all due care in
accordance with current requirements of the U.S. Securities and Exchange
Commission. We caution investors and other users to avoid simplistic use of
these disclosures. Disclosed estimated impacts are based upon Texaco's year-end
1997 risk exposure profile. Users should realize that actual impacts from future
interest rate, currency exchange and petroleum and natural gas price movements
will likely differ from the disclosed impacts due to ongoing changes in risk
exposure levels and concurrent adjustments of hedging derivative positions.
Additionally, actual results would be affected by changes in assumed tax rates.
It is not possible to accurately predict future movements in interest rates,
currency exchange rates, and petroleum and natural gas prices.
DEBT AND DEBT-RELATED DERIVATIVES
- - --------------------------------------------------------------------------------
Texaco is exposed to interest rate risk on short-term and long-term debt
carrying short-term interest rates. The amount of our variable rate debt was
approximately $2.0 billion at December 31, 1997, before effects of related
interest rate swaps. Under our interest rate exposure management, the company
seeks to balance the benefit of the lower cost of debt based on short-term
rates, having inherent increased risk, with more expensive fixed rate debt based
on long-term rates, having less market risk. This is accomplished through a mix
of long-term and short-term debt as well as the use of derivative financial
instruments, principally interest rate swaps.
During 1997 and 1996, derivative usage was limited to interest rate swaps,
where the company either paid or received the net effect of a fixed rate versus
a floating rate. At December 31, 1997, the notional principal amount and fair
value of outstanding floating rate pay interest rate swaps were respectively
$544 million and a gain of $1 million. The notional principal amount and fair
value of outstanding fixed rate pay interest rate swaps were respectively $300
million and a loss of $3 million.
Not included above is a combined interest rate and equity swap with a
notional principal amount of $200 million. In this transaction, Texaco pays
floating rate and receives fixed rate. The counterparty assumes all risk for the
equity-based cash redemption premium on the related hedged debt. The fair value
of this swap was not material at year-end 1997.
Based on our overall interest rate exposure on variable rate debt and
interest rate swaps at December 31, 1997 (including the interest rate and equity
swap), a hypothetical 2% increase or decrease in interest rates would not
materially affect the company's consolidated financial position, net income or
cash flows. The effect on fair value of the interest rate and equity swap from a
$10 per share change in Texaco common share price would not be material.
FOREIGN EXCHANGE AND OPTION CONTRACTS
- - --------------------------------------------------------------------------------
As an international company, Texaco is exposed to currency exchange risk. To
hedge against adverse changes in foreign currency exchange rates, the company
enters into forward and option contracts to buy and sell foreign currencies.
<PAGE>
70 TEXACO INC.
The company uses forward exchange contracts to buy and sell foreign
currencies primarily to hedge the net monetary liability position of its
European, Canadian, Australian, and New Zealand operations, to hedge investments
in foreign currency denominated investments in debt and equity securities, and
to hedge portions of significant foreign currency capital expenditures and lease
commitments.
The effect on fair value of Texaco's forward exchange contracts at year-end
1997 from a hypothetical 10% change in currency exchange rates would be an
increase or decrease of approximately $124 million, respectively. This would be
offset by an opposite effect on the related hedged exposures.
Outstanding forward exchange contracts at year-end 1997 ($1,239 million net
buy contracts) decreased by $444 million from the net year-end 1996 level. The
decrease principally resulted from a net decrease related to hedged capital
projects and to the termination of British pound forward exchange contracts that
hedged the 1997 repurchase of leasehold interests.
PETROLEUM AND NATURAL GAS HEDGING
- - --------------------------------------------------------------------------------
Texaco hedges a portion of the market risks associated with its crude oil,
natural gas and petroleum product purchases, sales and exchange activities. The
company uses established petroleum futures exchanges, as well as
"over-the-counter" hedge instruments, including futures, options, swaps and
other derivative products. These hedge tools reduce the company's exposure to
price volatility in the physical markets. Utilizing them establishes margins,
costs or revenues for designated transactions as well as for planned future
purchases and sales, inventory, production and processing. In carrying out the
hedging program, major petroleum and natural gas streams are reviewed for fixed
cost, fixed revenue and margin exposure to market price changes. Based on this
risk profile, forecasted trends and overall business objectives, we determine
appropriate strategies for risk reduction.
For commodity derivatives permitted to be settled in cash or another
financial instrument, sensitivity effects are as follows. At year-end 1997, the
aggregate effect of a hypothetical 22% change in natural gas prices and a 13%
change in crude oil and petroleum product prices would not materially affect
Texaco's consolidated financial position, net income or cash flows.
PUBLICLY TRADED INVESTMENTS IN DEBT AND EQUITY SECURITIES
- - --------------------------------------------------------------------------------
Texaco is subject to price risk on its unhedged portfolio of publicly traded
investments in debt and equity securities. These securities were classified as
available-for-sale as of year-end 1997 and 1996. The fair value of these
securities at December 31, 1997 was approximately $621 million. During 1997,
market risk exposure increased approximately $36 million principally due to
security purchases. At year-end 1997, a 10% appreciation or depreciation in debt
and equity prices would increase or decrease portfolio fair value by
approximately $62 million. This assumes no fluctuations in currency exchange
rates.
PREFERRED SHARES OF SUBSIDIARIES
- - --------------------------------------------------------------------------------
Texaco is exposed to interest rate risk on dividend requirements of Series B
preferred shares of Texaco Capital LLC. An interest rate swap adjusts the
contractual dividend cash requirement to a LIBOR-based floating rate. This swap
expires in the year 2007.
Texaco is exposed to currency exchange risk on the Canadian dollar
denominated Series C preferred shares of Texaco Capital LLC. Texaco has entered
into an interest rate and currency swap contract that matures in the year 2005.
That contract fixes the Canadian dollar value (including dividends payable) in
U.S. dollars. It also adjusts the fixed-rate dividends to a floating short-term
rate.
At December 31, 1997, the total carrying amount and fair value of the two
swap contracts was not material.
Based on Texaco's interest rate exposure on the two swaps and the Series B
preferred shares at December 31, 1997, a hypothetical 2% increase or decrease in
the applicable variable interest rates would not materially affect the company's
consolidated financial position, net income or cash flows. This estimate assumes
a constant Canadian dollar exchange rate.
Based on Texaco's exposure to foreign currency risk on the Canadian dollar
swap and the Series C preferred shares at December 31, 1997, a hypothetical 10%
appreciation or depreciation in the Canadian dollar exchange rate would not
materially affect the company's consolidated financial position, net income or
cash flows. This estimate assumes a constant average floating LIBOR interest
rate.
Actual impacts of changes in the Canadian dollar exchange rate and interest
rates on contract fair values and after-tax cash flows would be entirely offset
by opposite impacts to the fair values and after-tax cash flows related to the
hedged Series B and Series C preferred shares.
MARKET AUCTION PREFERRED SHARES (MAPS)
- - --------------------------------------------------------------------------------
Texaco is exposed to interest rate risk on dividend requirements of MAPS as
determined by Dutch auctions, or, as negotiated short-term rates. A hypothetical
2% increase or decrease in interest rates would not materially affect the
company's consolidated financial position or cash flows. There are no
derivatives related to MAPS.
<PAGE>
TEXACO INC. 71
SELECTED FINANCIAL DATA
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------ ------------------------------------------
(Millions of dollars) 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Sales and services $ 11,813 $ 10,983 $ 10,834 $ 11,557 $ 10,059 $ 10,817 $10,901 $ 12,784
Equity in income of affiliates,
interest, asset sales and other 216 513 259 492 212 444 196 87
---------------------------------------------------------------------------------------
12,029 11,496 11,093 12,049 10,271 11,261 11,097 12,871
---------------------------------------------------------------------------------------
Deductions
Purchases and other costs 9,298 8,671 8,355 8,906 7,782 8,345 8,399 10,117
Operating expenses 716 728 740 806 684 700 721 873
Selling, general and administrative
expenses 397 395 427 443 400 399 406 488
Maintenance and repairs 87 84 89 94 88 90 88 101
Exploratory expenses 99 93 114 165 69 90 84 136
Depreciation, depletion and amortization 385 372 388 488 350 354 364 387
Interest expense, taxes other than income
taxes and minority interest 261 247 220 272 234 252 253 263
---------------------------------------------------------------------------------------
11,243 10,590 10,333 11,174 9,607 10,230 10,315 12,365
---------------------------------------------------------------------------------------
Income before income taxes 786 906 760 875 664 1,031 782 506
Provision for (benefit from) income taxes (194) 335 270 252 278 342 348 (3)
---------------------------------------------------------------------------------------
Net income $ 980 $ 571 $ 490 $ 623 $ 386 $ 689 $ 434 $ 509
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income per common share (dollars)
Basic $ 1.86 $ 1.07 $ .91 $ 1.15 $ .71 $ 1.30 $ .81 $ .95
Diluted $ 1.80 $ 1.05 $ .90 $ 1.12 $ .70 $ 1.26 $ .79 $ .93
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Millions of dollars) 1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year:
Revenues from continuing operations $ 46,667 $ 45,500 $ 36,787 $ 33,353 $ 34,071
Net income (loss) before cumulative effect of accounting change
Continuing operations $ 2,664 $ 2,018 $ 728 $ 979 $ 1,259
Discontinued operations -- -- -- (69) (191)
Cumulative effect of accounting change -- -- (121) -- --
-------------------------------------------------------
Net income $ 2,664 $ 2,018 $ 607 $ 910 $ 1,068
-------------------------------------------------------
Net income per common share (dollars)
Basic
Net income (loss) before cumulative effect of accounting change
Continuing operations $ 4.99 $ 3.77 $ 1.29 $ 1.72 $ 2.24
Discontinued operations -- -- -- (.14) (.37)
Cumulative effect of accounting change -- -- (.24) -- --
-------------------------------------------------------
Net income $ 4.99 $ 3.77 $ 1.05 $ 1.58 $ 1.87
-------------------------------------------------------
Diluted
Net income from continuing operations $ 4.87 $ 3.68 $ 1.28 $ 1.72 $ 2.21
Net income $ 4.87 $ 3.68 $ 1.05 $ 1.58 $ 1.87
Cash dividends per common share (dollars) $ 1.75 $ 1.65 $ 1.60 $ 1.60 $ 1.60
Total cash dividends paid on common stock $ 918 $ 859 $ 832 $ 830 $ 828
At end of year:
Total assets $ 29,600 $ 26,963 $ 24,937 $ 25,505 $ 26,626
Debt and capital lease obligations
Short-term $ 885 $ 465 $ 737 $ 917 $ 669
Long-term 5,507 5,125 5,503 5,564 6,157
-------------------------------------------------------
Total debt and capital lease obligations $ 6,392 $ 5,590 $ 6,240 $ 6,481 $ 6,826
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
72 TEXACO INC.
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TEXACO INC. AND SUBSIDIARY COMPANIES
SHAREHOLDER COMMUNICATIONS
For information about Texaco or assistance with your account, please contact:
Texaco Inc.
Investor Services
2000 Westchester Avenue
White Plains, NY 10650-0001
Phone: 1-800-283-9785
Fax: (914) 253-6286
E-mail: [email protected]
Security analysts and institutional investors should contact:
Elizabeth P. Smith
Vice President, Texaco Inc.
Phone: (914) 253-4478
Fax: (914) 253-6269
E-mail: [email protected]
COMMON STOCK - MARKET AND DIVIDEND INFORMATION
Texaco Inc. common stock (symbol TX) is traded principally on the New York Stock
Exchange. As of February 26, 1998, there were 212,887 shareholders of record.
Texaco's common stock split, two-for-one, effective September 29, 1997. Texaco's
common stock price reached a post-split high of $63 7/16, and closed December
31, 1997, at $54 3/8. The stock appreciation, plus quarterly dividends, provided
a total return to Texaco shareholders of 14.3% for the year. The dividend was
increased by 5.9% in the third quarter of 1997.
<TABLE>
<CAPTION>
Common Stock Price Range*
---------------------------------------------------
High Low High Low Dividends*
------------------------- ------------------------- -----------------
1997 1996 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 55 3/4 $ 48 7/8 $ 44 3/8 $ 37 3/4 $.425 $.40
Second Quarter 57 7/16 50 1/2 44 1/4 39 7/16 .425 .40
Third Quarter 61 11/16 54 11/32 48 1/16 41 9/16 .45 .425
Fourth Quarter 63 7/16 51 1/8 53 9/16 45 3/4 .45 .425
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflects two-for-one stock split, effective September 29, 1997.
STOCK TRANSFER AGENT
Texaco Inc.
Investor Services
2000 Westchester Avenue
White Plains, NY 10650-0001
Phone: 1-800-283-9785
Fax: (914) 253-6286
NY DROP AGENT
ChaseMellon Shareholder Services
120 Broadway - 13th Floor
New York, NY 10271
Phone: (212) 374-2500
Fax: (212) 571-0871
CO-TRANSFER AGENT
Montreal Trust Company
151 Front Street West - 8th Floor
Toronto, Ontario, Canada M5J 2N1
Phone: 1-800-663-9097
Fax: (416) 981-9507
ANNUAL MEETING
Texaco Inc.'s Annual Shareholders Meeting will be held at the Rye Town Hilton,
Rye Brook, NY, on Tuesday, April 28, 1998. A formal notice of the meeting,
together with a proxy statement and proxy form, is being mailed to shareholders
with this report.
INVESTOR SERVICES PLAN
The company's Investor Services Plan offers a variety of benefits to individuals
seeking an easy way to invest in Texaco Inc. common stock. Enrollment in the
Plan is open to anyone, and investors may make initial investments directly
through the company. The Plan features dividend reinvestment, optional cash
investments, and custodial service for stock certificates. Texaco's Investor
Services Plan is an excellent way to start an investment program for family or
friends. For a complete informational package, including a Plan prospectus, call
1-800-283-9785, e-mail at [email protected], or visit Texaco's Internet home
page at www.texaco.com.
PUBLICATIONS FOR SHAREHOLDERS
In addition to the Annual Report, Texaco issues several financial and
informational publications that are available free of charge to interested
shareholders on request from Investor Services at the above address:
Texaco Inc.'s 1997 Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission.
Financial and Operational Supplement - Comprehensive data on Texaco's 1997
activities.
Equal Opportunity and Texaco: A Report - A description of Texaco's programs that
foster equal employment opportunity.
Equality and Fairness Task Force Report - A report prepared pursuant to the
settlement in the civil rights action Roberts v. Texaco Inc.
Environment, Health and Safety Review - A report on Texaco's programs, policies
and results in the areas of corporate responsibility.
EXHIBIT 21
--------------------------
Subsidiaries of Registrant
1997
Parents of Registrant
None
Registrant
Texaco Inc.
The significant subsidiaries included in the consolidated financial statements
of the Registrant are as follows:
<TABLE>
<CAPTION>
Organized
under
the laws of
-----------------
<S> <C>
Four Star Oil and Gas Company Delaware
Heddington Insurance Ltd. Bermuda
MVP Production Inc. Delaware
Refineria Panama, S.A. Panama
S.A. Texaco Belgium N.V. Belgium
Saudi Arabian Texaco Inc. Delaware
TEPI Holdings Inc. Delaware
TRMI Holdings Inc. Delaware
Texaco Brazil S.A. - Produtos de Petroleo Brazil
Texaco Britain Limited England
Texaco California Inc. Delaware
Texaco Canada Petroleum Inc. Canada
Texaco Caribbean Inc. Delaware
Texaco Cogeneration Company Delaware
Texaco Denmark Inc. Delaware
Texaco Exploration and Production Inc. Delaware
Texaco International Trader Inc. Delaware
Texaco Investments (Netherlands), Inc. Delaware
Texaco Limited England
Texaco Natural Gas Inc. Delaware
Texaco Nederland B.V. Netherlands
Texaco North Sea U.K. Company Delaware
Texaco Overseas Holdings Inc. Delaware
Texaco Panama Inc. Panama
Texaco Pipeline Inc. Delaware
Texaco Raffinaderij Pernis B.V. Netherlands
Texaco Refining and Marketing Inc. Delaware
Texaco Refining and Marketing (East) Inc. Delaware
Texaco Trading and Transportation Inc. Delaware
Texaco Trinidad Inc. Delaware
Texas Petroleum Company New Jersey
</TABLE>
Names of certain subsidiary companies are omitted because, considered in the
aggregate as a single subsidiary company, they do not constitute a significant
subsidiary company.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 26, 1998 incorporated by reference in
Texaco Inc.'s Form 10-K for the year ended December 31, 1997, into the following
previously filed Registration Statements:
<TABLE>
<S> <C> <C>
1. Form S-3 File Number 2-37010
2. Form S-3 File Number 33-31148
3. Form S-8 File Number 2-67125
4. Form S-8 File Number 2-76755
5. Form S-8 File Number 2-90255
6. Form S-8 File Number 33-34043
7. Form S-3 File Number 33-40309
8. Form S-8 File Number 33-45952
9. Form S-8 File Number 33-45953
10. Form S-3 File Number 33-50553 and 33-50553-01
11. Form S-8 File Number 333-11019
12. Form S-3 File Number 333-46527 and 333-46527-01
</TABLE>
ARTHUR ANDERSEN LLP
New York, N.Y.
March 18, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
15th day of January, 1998.
PETER I. BIJUR
--------------
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
15th day of January, 1998.
PATRICK J. LYNCH
----------------
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
16th day of January, 1998.
ROBERT C. OELKERS
-----------------
Vice President and Comptroller
(Principal Accounting Officer)
EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
27th day of February, 1998.
JOHN BRADEMAS
-------------
EXHIBIT 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set her name as of the
14th day of February, 1998.
MARY K. BUSH
------------
EXHIBIT 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
2nd day of February, 1998.
WILLARD C. BUTCHER
------------------
EXHIBIT 24.7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
2nd day of February, 1998.
EDMUND M. CARPENTER
-------------------
EXHIBIT 24.8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
30th day of January, 1998.
MICHAEL C. HAWLEY
-----------------
EXHIBIT 24.9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
30th day of January, 1998.
FRANKLYN G. JENIFER
-------------------
EXHIBIT 24.10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
30th day of January, 1998.
SAM NUNN
--------
EXHIBIT 24.11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
19th day of January, 1998.
CHARLES H. PRICE, II
--------------------
EXHIBIT 24.12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set her name as of the
15th day of January, 1998.
ROBIN B. SMITH
--------------
EXHIBIT 24.13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
21st day of January, 1998.
WILLIAM C. STEERE, JR.
----------------------
EXHIBIT 24.14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
15th day of January, 1998.
THOMAS A. VANDERSLICE
---------------------
EXHIBIT 24.15
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints CARL B. DAVIDSON, KJESTINE M. ANDERSEN and ROBERT E.
KOCH, signing singly, as the undersigned's true and lawful attorneys-in-fact and
agents, with full power and authority to act in any and all capacities for and
in the name, place and stead of the undersigned in connection with the filing
of: (i) any and all registration statements and all amendments and
post-effective amendments thereto (collectively, "Registration Statements")
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, and any and all registrations, qualifications or notifications under
the applicable securities laws of any and all states and other jurisdictions,
with respect to the securities of the Company of whatever class, including
without limitation thereon the Company's Common Stock, par value $3.125 per
share, and preferred stock, par value $1.00 per share, however offered, sold,
issued, distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1997, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents are hereby granted full power and authority,
on behalf of and in the name, place and stead of the undersigned, to execute and
deliver all such Registration Statements, registrations, qualifications, or
notifications, the Company's Form 10-K, any and all amendments thereto,
statements of changes, and any and all other documents in connection with the
foregoing, and take such other and further action as such attorneys-in-fact and
agents deem necessary or appropriate. The powers and authorities granted herein
to such attorneys-in-fact and agents also include the full right, power and
authority to effect necessary or appropriate substitutions or revocations. The
undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all
action lawfully taken pursuant to the powers and authorities herein granted by
such attorneys-in-fact and agents, or either of them, or by their respective
substitutes. This Power of Attorney expires by its terms and shall be of no
further force and effect on March 31, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
27th day of January, 1998.
WILLIAM WRIGLEY
---------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TEXACO INC.'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 311
<SECURITIES> 84
<RECEIVABLES> 4,252
<ALLOWANCES> 22
<INVENTORY> 1,483
<CURRENT-ASSETS> 6,432
<PP&E> 38,956
<DEPRECIATION> 21,840
<TOTAL-ASSETS> 29,600
<CURRENT-LIABILITIES> 5,994
<BONDS> 5,507
0
644
<COMMON> 2,230
<OTHER-SE> 9,892
<TOTAL-LIABILITY-AND-EQUITY> 29,600
<SALES> 45,187
<TOTAL-REVENUES> 46,667
<CGS> 35,230
<TOTAL-COSTS> 38,220
<OTHER-EXPENSES> 4,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> 3,327
<INCOME-TAX> 663
<INCOME-CONTINUING> 2,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,664
<EPS-PRIMARY> 4.99
<EPS-DILUTED> 4.87
<FN>
EPS-PRIMARY REPRESENTS BASIC EARNINGS PER SHARE IN ACCORDANCE WITH STATEMENT
OF FINANCIAL ACCOUNTING STANDARD 128.
</FN>
</TABLE>
