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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 Commission file number 1-27
TEXACO INC.
(Exact name of the registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
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Texaco Inc. (1) HAS FILED all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) HAS BEEN subject to such filing requirements for the past 90 days.
As of July 31, 1998, there were outstanding 535,859,243 shares of Texaco
Inc. Common Stock - par value $3.125.
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<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
---------------------------------------------------------
(Millions of dollars, except as noted)
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales and services $15,651 $22,796 $ 7,729 $10,983
Equity in income of affiliates, interest,
asset sales and other 540 729 315 513
------- ------- -------- -------
16,191 23,525 8,044 11,496
------- ------- -------- -------
DEDUCTIONS
Purchases and other costs 12,086 17,969 5,972 8,671
Operating expenses 1,225 1,571 645 790
Selling, general and administrative expenses 572 836 296 417
Exploratory expenses 231 192 90 93
Depreciation, depletion and amortization 763 757 375 372
Interest expense 234 203 116 102
Taxes other than income taxes 225 268 109 129
Minority interest 30 37 15 16
------- ------- -------- -------
15,366 21,833 7,618 10,590
------- ------- -------- -------
Income before income taxes 825 1,692 426 906
Provision for income taxes 224 141 84 335
------- ------- -------- -------
NET INCOME $ 601 $ 1,551 $ 342 $ 571
------- ------- -------- -------
Preferred stock dividend requirements $ 27 28 $ 13 $ 14
------- ------- -------- -------
Net income available for common stock $ 574 $ 1,523 $ 329 $ 557
======= ======= ======== =======
Per common share (dollars)
Basic net income $ 1.08 $ 2.93 $ 0.62 $ 1.07
Diluted net income $ 1.07 $ 2.85 $ 0.61 $ 1.05
Cash dividends paid $ 0.90 $ 0.85 $ 0.45 $ 0.425
Average shares outstanding for computation
of earnings per share (thousands)
Basic 531,232 519,328 530,550 519,375
Diluted 550,598 539,963 549,775 539,863
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
-----------------------------------------
(Millions of dollars)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
-----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 345 $ 311
Short-term investments - at fair value 48 84
Accounts and notes receivable, less allowance for doubtful
accounts of $20 million in 1998 and $22 million in 1997 3,931 4,230
Inventories 1,214 1,483
Deferred income taxes and other current assets 344 324
------- -------
Total current assets 5,882 6,432
Investments and Advances 7,234 5,097
Properties, Plant and Equipment - at cost 35,056 38,956
Less - accumulated depreciation, depletion and amortization 20,281 21,840
------- -------
Net properties, plant and equipment 14,775 17,116
Deferred Charges 904 955
------- -------
Total $28,795 $29,600
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 689 $ 885
Accounts payable and accrued liabilities
Trade liabilities 1,866 2,669
Accrued liabilities 1,266 1,480
Estimated income and other taxes 945 960
------- -------
Total current liabilities 4,766 5,994
Long-Term Debt and Capital Lease Obligations 6,281 5,507
Deferred Income Taxes 1,803 1,825
Employee Retirement Benefits 1,241 1,224
Deferred Credits and Other Noncurrent Liabilities 1,548 1,639
Minority Interest in Subsidiary Companies 641 645
------- -------
Total 16,280 16,834
------- -------
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 440 457
Unearned employee compensation and benefit plan trust (354) (389)
Common stock (authorized: 700,000,000 shares, $3.125 par
value; 567,606,290 shares issued) 1,774 1,774
Paid-in capital in excess of par value 1,669 1,688
Retained earnings 10,083 9,987
Other accumulated nonowner changes in equity
Currency translation adjustment (107) (105)
Minimum pension liability adjustment (14) (16)
Unrealized net gain on investments 33 26
------- -------
Total other accumulated nonowner changes in equity (88) (95)
------- -------
13,824 13,722
Less - Common stock held in treasury, at cost 1,309 956
------- -------
Total stockholders' equity 12,515 12,766
------- -------
Total $28,795 $29,600
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
-----------------------------------------------
(Millions of dollars)
(Unaudited)
-----------------------
For the six months
ended June 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 601 $ 1,551
Reconciliation to net cash provided by (used in)
operating activities
Receivable for refund of IRS deposits - (700)
Depreciation, depletion and amortization 763 757
Deferred income taxes (21) 185
Exploratory expenses 231 192
Minority interest in net income 30 37
Dividends from affiliates less than
equity in income (116) (144)
Gains on asset sales (58) (287)
Changes in operating working capital (316) (89)
Other - net 9 (52)
------- -------
Net cash provided by operating activities 1,123 1,450
INVESTING ACTIVITIES
Capital and exploratory expenditures (1,503) (1,451)
Proceeds from asset sales 113 742
Purchases of investment instruments (405) (608)
Sales/maturities of investment instruments 458 657
Payments from Equilon Enterprises LLC for prior years' capital expenditures 463 -
Other - net 25 (142)
------- -------
Net cash used in investing activities (849) (802)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 967 221
Repayments (454) (180)
Net increase (decrease) in other borrowings 201 (85)
Purchases of common stock (404) (36)
Dividends paid to the company's stockholders
Common (479) (441)
Preferred (28) (28)
Dividends paid to minority shareholders (35) (40)
------- -------
Net cash used in financing activities (232) (589)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (8) (6)
------- -------
Increase during period 34 53
Beginning of year 311 511
------- -------
End of period $ 345 $ 564
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED NONOWNER CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
--------------------------------------------------------------
(Millions of dollars)
(Unaudited)
----------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $ 601 $1,551 $ 342 $ 571
Other nonowner changes in equity (net of tax)
Currency translation adjustment (2) (15) - 15
Minimum pension liability adjustment 2 - - -
Unrealized net gain (loss) on investments 7 (1) 2 10
------- ------ ------- ------
7 (16) 2 25
------- ------ ------- ------
TOTAL NONOWNER CHANGES IN EQUITY $ 608 $1,535 $ 344 $ 596
======= ====== ======= ======
</TABLE>
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Formation of Equilon Enterprises LLC
- --------------------------------------------
On January 15, 1998, Texaco and Shell Oil Company reached agreement on the
formation and operational start-up, effective January 1, 1998, of Equilon
Enterprises LLC (Equilon), a 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 percent and Shell owns
56 percent of Equilon.
Beginning January 1, 1998, we are accounting for our interest in Equilon using
the equity method. Under this method, we reclassified the net amount of assets
and liabilities of the businesses contributed to Equilon to Investments and
Advances in the Consolidated Balance Sheet. We record our share of Equilon's
results of operations on a one-line basis to Equity in Income of Affiliates in
the Consolidated Statement of Income. Since Equilon is a limited liability
company, we record the provision for income taxes and related liability
applicable to our share of Equilon's income in our consolidated financial
statements. Additionally, we now record transactions between Texaco and Equilon
as outside third-party transactions. This change to the equity method of
accounting results in significant variances between the 1998 and 1997 periods in
the individual line captions appearing in our financial statements.
The carrying amounts at January 1, 1998, of the principal assets and liabilities
of the businesses we contributed to Equilon were $.2 billion of net working
capital assets, $2.8 billion of net properties, plant and equipment and $.2
billion of debt.
Summarized unaudited financial information for Equilon, for the six and three
month periods ended June 30, 1998, is presented below on a 100% Equilon basis
(in millions of dollars):
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, 1998 ended June 30, 1998
------------------- -------------------
<S> <C> <C>
Gross revenues $12,095 $6,070
Income before income taxes $ 310 $ 198
</TABLE>
In April, 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
the joint venture. In July 1998, we received $149 million from Equilon for
certain specifically identified assets transferred for value to Equilon.
- 4 -
<PAGE>
Under the terms of a consent agreement accepted by the Federal Trade Commission
and similar agreements with the attorneys general of California, Hawaii, Oregon
and Washington, certain assets will be divested, including Shell's Anacortes,
Washington refinery, certain Texaco and Shell marketing assets in southern
California and Hawaii, and certain pipeline interests.
On August 10, 1998, Shell Oil Company sold its ownership in the Anacortes
refinery to Tesoro Petroleum Corporation, effective August 1, 1998. The total
cash purchase price was $237 million, plus $39.6 million for estimated working
capital, which will be adjusted at a later date to reflect actual net working
capital. Equilon is entitled to the net proceeds of the sale and any resulting
gain or loss.
Note 2. Formation of Motiva Enterprises LLC
- -------------------------------------------
Texaco, Shell Oil Company and Saudi Aramco reached agreement on the formation
and operational start up, effective July 1, 1998, of Motiva Enterprises LLC
(Motiva), a Delaware limited liability company. Motiva is a joint venture that
combines Texaco's and Saudi Aramco's interests and major elements of Shell's
Eastern and Gulf Coast U.S. refining and marketing businesses. Texaco's and
Saudi Aramco's interest in these businesses were previously conducted by Star
Enterprise (Star), a joint-venture partnership owned 50 percent by Texaco and 50
percent by Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Texaco
and Saudi Refining, Inc., each owns 32.5 percent and Shell owns 35 percent of
Motiva.
Beginning July 1, 1998, we are accounting for our interest in Motiva using the
equity method. Previously, our interest in Star was also accounted for on the
equity method of accounting. Accordingly, our investment in Motiva approximates
our previous investment in Star.
Note 3. Inventories
- -------------------
The inventory accounts of Texaco Inc. and consolidated subsidiary companies are
presented below (in millions of dollars):
<TABLE>
<CAPTION>
As of
--------------------------------------
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Crude oil $ 232 $ 308
Petroleum products and petrochemicals 757 893
Other merchandise 37 59
Materials and supplies 188 223
------ ------
Total $1,214 $1,483
====== ======
</TABLE>
Note 4. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 16 and 18, pages 57-58 and 61,
respectively, of Texaco Inc.'s 1997 Annual Report to Stockholders.
----------
In the company's opinion, while it is impossible to ascertain the ultimate legal
and financial liability with respect to contingent liabilities and commitments,
the aggregate amount of such liability in excess of financial reserves is not
anticipated to be materially important in relation to the consolidated financial
position or results of operations of Texaco.
- 5 -
<PAGE>
Note 5. Caltex Group of Companies
- ---------------------------------
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% by Texaco and 50% by Chevron Corporation, is presented below on a 100%
Caltex Group basis (in millions of dollars):
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenues $8,555 $9,127 $4,249 $4,433
Income before income taxes $ 589 $ 639 $ 270 $ 319
Net income $ 426 $ 386 $ 222 $ 200
* * * * * * * * * * *
In the determination of preliminary and unaudited financial statements for the
six-month and three-month periods ended June 30, 1998 and 1997, our accounting
policies have been applied on a basis consistent with the application of such
policies in our financial statements issued in our 1997 Annual Report to
Stockholders. In our opinion, we have made all adjustments and disclosures
necessary to present fairly our results of operations for such periods. These
adjustments include normal recurring adjustments. The information is subject to
year-end audit by independent public accountants. We make no forecasts or
representations with respect to the level of net income for the year 1998.
* * * * * * * * * * *
SUPPLEMENTAL MARKET RISK DISCLOSURES
------------------------------------
Information relative to Texaco's market risk sensitive instruments by major
category at December 31, 1997 is presented in the Supplemental Market Risk
Disclosures on pages 69 and 70 of Texaco Inc.'s Annual Report to Stockholders.
Texaco's forward exchange contracts outstanding at June 30, 1998 of
approximately $2,167 million net buy contracts increased by $928 million from
the $1,239 million outstanding at December 31, 1997. This increase principally
resulted from the hedging of increased exposures to foreign currency denominated
net monetary assets and liabilities and from the hedging of increased exposures
related to foreign currency denominated capital projects. As of June 30, 1998, a
hypothetical 10% change in currency exchange rates would generate an increase or
decrease in fair value of approximately $217 million, compared to $124 million
at December 31, 1997. This would be offset by an opposite effect on the related
hedged exposures.
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Texaco's net income for the second quarter of 1998 was $342 million, or $0.61
per share, as compared with $571 million, or $1.05 per share, for the second
quarter of 1997. Net income for the first six months of 1998 was $601 million,
or $1.07 per share, as compared with $1,551 million, or $2.85 per share, for the
first six months of 1997. Both the 1998 and 1997 periods included special items.
Net income before special items for the second quarter of 1998 was $335 million,
or $0.60 per share, as compared with $440 million, or $0.81 per share, for the
second quarter of 1997. For the first six months of 1998, net income before
special items was $594 million, or $1.06 per share, as compared with $932
million, or $1.71 per share, for the first six months of 1997.
Continuing weak crude oil prices lowered second quarter results. Improved
margins and higher sales volumes in the international downstream and an 11
percent increase in worldwide production only partially offset the effects of
lower oil prices.
During the second quarter of 1998:
o International downstream margins and volumes were strong;
o Worldwide daily production increased 11 percent;
o Year-to-date cash operating expenses per barrel decreased six percent; and
o Year-to-date stock repurchases totaled $400 million.
The combination of excessive crude oil inventories and slower demand growth
continues to keep downward pressure on prices. Recently announced production
cuts by certain oil producing nations should lead to a better supply/demand
balance and a recovery in prices. In this environment, we continue to
strategically position the company for long-term profitability by focusing on
increasing our reserve base.
Lower crude oil prices helped to improve downstream margins in the second
quarter. Texaco's increasing presence in Latin American markets and the
company's operational performance in Europe contributed to improved results.
Additionally, profitability has been maintained in the Caltex area of
operations, despite the highly volatile business environment.
Texaco, Shell Oil Company and Saudi Refining, Inc., a corporate affiliate of
Saudi Aramco, finalized agreements for the July 1, 1998 operational start-up of
Motiva Enterprises LLC. This U.S. downstream alliance combines Eastern and Gulf
Coast refining and marketing operations. Earlier in the year, Equilon
Enterprises LLC, a U.S. joint venture combining Texaco's and Shell's Western and
Midwestern downstream assets, began operations.
Results for 1998 and 1997 are summarized in the following table. Details on
special items are included in the functional analysis which follows this table.
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
-----------
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net income before special items $ 594 $ 932 $ 335 $ 440
------- ------ ------ ----
Gains on major asset sales 20 174 20 174
Tax benefits on asset sales 19 - 19 -
Alliance formation expenses (32) - (32) -
Financial reserves for various issues - (43) - (43)
U.S. tax issue - 488 - -
------- ------ ------ ----
7 619 7 131
------- ------ ------ ----
Total net income $ 601 $1,551 $ 342 $571
======= ====== ====== ====
</TABLE>
- 7 -
<PAGE>
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the second quarter of 1998
were $120 million, as compared with $189 million for the second quarter of 1997.
For the first six months of 1998 and 1997, earnings were $227 million and $500
million, respectively. Results for 1998 included a second quarter special gain
of $20 million from the sale of an interest in a natural gas pipeline. Excluding
the special gain, results for the second quarter and first six months of 1998
totaled $100 million and $207 million, respectively. Results for 1997 included a
second quarter special charge of $43 million for the establishment of financial
reserves for royalty and severance tax issues. Excluding the special charge,
results for the second quarter and first six months of 1997 totaled $232 million
and $543 million, respectively.
U.S. exploration and production earnings in the second quarter and the first
half of 1998 were below last year's levels due to the continued deterioration of
crude oil prices. Average realized crude oil prices for the second quarter and
first half of 1998 were $10.72 and $11.26 per barrel; more than 36 percent lower
than the 1997 periods. The dramatic declines in price resulted from rising
inventory levels and slowing worldwide demand growth. Slightly higher natural
gas prices benefited second quarter 1998 results. For the first half of 1998,
average natural gas prices were $2.10 per MCF, $.26 lower than last year. The
lower natural gas prices were the result of milder weather, as well as increased
inventory levels in this year's first quarter.
Production increased 10 percent for the second quarter and 11 percent for the
first half of 1998. The increased production in the second quarter 1998 included
new production from the Arnold, Oyster and Barite South fields located in the
Gulf of Mexico. Both periods of 1998 included production from the Monterey
properties acquired in November of 1997.
The company continued to pursue new reserve opportunities in the Gulf of Mexico,
leading to higher exploration expenses this year. Exploration expenses for the
second quarter and first half of 1998 were $51 million and $147 million before
tax, $17 million and $71 million higher than the same periods of 1997.
International
Exploration and production earnings outside the U.S. for the second quarter of
1998 were $51 million, as compared with $240 million for the second quarter of
1997. For the first six months of 1998 and 1997, earnings were $91 million and
$396 million, respectively. Results for 1997 included second quarter special
gains of $161 million from the sales of a 15 percent interest in the Captain
Field in the U.K. North Sea, an interest in Canadian gas properties and an
interest in an Australian pipeline system. Excluding the special gains, results
for the second quarter and first six months of 1997 totaled $79 million and $235
million, respectively.
International exploration and production earnings for the second quarter and
first half of 1998 declined from 1997 as a result of lower crude oil prices.
Average realized crude oil prices were $11.42 per barrel for the quarter, and
$11.68 for the first half of 1998, decreasing 32 percent for the quarter and 36
percent for the first half.
Production increased 13 percent for the second quarter and 16 percent for the
first half of 1998. Volumes in the U.K. North Sea increased from the Captain,
Erskine and Galley fields. The Galley field began production in the second
quarter of this year. Production also increased in the Partitioned Neutral Zone
and Colombia, and as a result of our first quarter 1998 acquisition of a 20
percent interest in the Karachaganak field in Kazakhstan. Also, exploratory
expenses in both periods were lower.
- 8 -
<PAGE>
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the second
quarter of 1998 were $64 million, as compared with $100 million for the second
quarter of 1997. For the first six months of 1998 and 1997, earnings were $111
million and $106 million, respectively. Results for 1998 included a second
quarter special charge of $32 million for alliance formation expenses, mainly
our share of announced employee severance programs. Excluding the special
charge, results for the second quarter and first six months of 1998 totaled $96
million and $143 million, respectively. Results for 1997 included a second
quarter special gain of $13 million from the sale of credit card operations.
Excluding the special gain, results for the second quarter and first six months
of 1997 totaled $87 million and $93 million, respectively.
In the U.S. downstream, earnings for 1998 reflect the change in operations from
the formation of Equilon Enterprises LLC, Texaco's downstream alliance with
Shell Oil Company.
During this year's second quarter, margins benefited from lower crude oil
prices. Refining operations improved in the West and Midwest, while in the East,
results were adversely affected by downtime at several plants.
For the first half of this year, lower crude prices benefited product and
lubricant margins. Crude oil trading operations also contributed to higher
results. However, in the first quarter, weather conditions weakened demand for
heating oil on the East Coast and gasoline on the West Coast. Also, first
quarter refining results were affected by maintenance at the Martinez and Wood
River plants.
Earnings for 1997 included the adverse effects of intense competition that
squeezed margins in the West Coast marketplace, primarily in the first quarter.
Refinery fires late in 1996 and early in 1997 negatively affected product yields
and caused casualty loss expenses.
International
Manufacturing, marketing and distribution earnings outside the U.S. for the
second quarter of 1998 were $194 million, as compared with $132 million for the
second quarter of 1997. For the first six months of 1998 and 1997, earnings were
$376 million and $236 million, respectively.
Refining margins improved in the U.K. and Panama due to lower crude costs.
Improved marketing results reflected increased sales volumes and higher margins,
primarily in the U.K., Brazil and other Latin America areas where operations
have expanded. Scandinavian earnings improved following the 1997 price war in
Norway.
In the Caltex area, higher 1998 earnings were a result of lower crude costs and
partial recovery of the fourth quarter 1997 currency losses in Korea. However, a
significantly higher volume of product was sold into the lower margin export
market.
NONPETROLEUM
Nonpetroleum losses for the second quarter of 1998 were $2 million, as compared
with earnings of $1 million for the second quarter of 1997. For the first six
months of 1998, there were no earnings, as compared with earnings of $13 million
for the first six months of 1997.
- 9 -
<PAGE>
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the second quarter of 1998 were $85
million, as compared with charges of $91 million for the second quarter of 1997.
Corporate and nonoperating charges for the first six months of 1998 were $204
million, as compared with earnings of $300 million for the first six months of
1997. Results for 1998 included a second quarter special item of $19 million for
tax benefits attributable to the sale of an interest in a subsidiary. Excluding
the special gain, charges for the second quarter and first six months of 1998
totaled $104 million and $223 million, respectively. Results for the first six
months of 1997 included a first quarter special benefit of $488 million
associated with an IRS settlement. Excluding this benefit, corporate and
nonoperating charges totaled $188 million for the first six months of 1997.
Corporate and nonoperating results for the second quarter and first half of 1998
included increased interest expense due to higher debt levels. Additionally,
results for 1998 included expenses for Texaco's corporate advertising campaign
introduced in the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $393 million at June
30, 1998, as compared with $395 million at year-end 1997.
During 1998, our operations provided cash of $1,123 million. We raised an
additional $711 million from net borrowings and $113 million from asset sales.
We spent $1,503 million on our capital and exploratory program and paid $542
million in dividends to common, preferred and minority shareholders.
At June 30, 1998, our ratio of debt to total borrowed and invested capital was
34.6%, as compared with 32.3% at year-end 1997. At June 30, 1998, our long-term
debt included $1.6 billion of debt scheduled to mature within one year, which we
have both the intent and ability to refinance on a long-term basis. We maintain
revolving credit facilities with commitments of $1.7 billion, which were unused
at June 30, 1998.
Major debt activity during the first six months of 1998 follows:
o Borrowed $300 million at 6% for seven years and $153 million of
Medium-Term Notes.
o Borrowed $150 million at 5.92% for seven years to cover expenditures at
our Erskine field in the U.K. North Sea.
o Borrowed $131 million for four years and entered into an associated
LIBOR-based floating rate swap to cover expenditures at our Tartan Field in
the U.K. North Sea.
o Borrowed $94 million from the issuance of Zero Coupon Notes due 2005.
o Increased commercial paper by $400 million, to a total of $1.3 billion at
June 30, 1998.
o Repurchased approximately $200 million of 10.61% Notes that we assumed in last
year's acquisition of Monterey Resources.
During the first quarter of 1998, we purchased about $100 million of common
stock in the open market. This completed a program under which we purchased $650
million of our common stock during the last two years. On March 30, 1998, we
announced that we will purchase up to an additional $1 billion of our common
stock, subject to market conditions, through open market purchases or privately
negotiated transactions. Under this additional program we purchased about $300
million during the second quarter of 1998 and an additional $80 million in July
1998.
In April 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
Equilon. In addition, we received $149 million from Equilon in July 1998 for
certain specifically identified assets transferred for value to Equilon.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
- 10 -
<PAGE>
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires that we report
information about our business segments on the same basis used internally when
assessing performance and allocating resources. We will adopt SFAS 131 for our
1998 audited financial statements. Presently, we disclose in our audited
financial statements information about geographic segments only. We expect that
our business segments will be substantially similar to those we presently
identify in the Management's Discussion and Analysis section of our Forms 10-K
and 10-Q.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure about Pension
and Other Postretirement Benefits." We are required to adopt SFAS 132 for our
1998 audited financial statements and will modify our disclosures accordingly.
SFAS 132 does not affect how we measure expense for pension or other
postretirement benefits.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective in the first quarter 2000. SFAS 133
establishes new accounting rules and disclosure requirements for derivative
instruments. We will be assessing the impacts of SFAS 133.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures were $1,881 million for the first half of
1998 and $1,798 million in 1997.
In the U.S. upstream, development continued in the deepwater Gulf of Mexico.
Expenditures in 1998 also increased for enhanced oil recovery projects using
advanced thermal recovery techniques which raised production from the acquired
Monterey properties and other core producing fields. Exploratory expenses
increased as the company continued its program to grow oil and gas production
and reserves.
Internationally, slightly higher upstream expenditures included our investment
in the Karachaganak venture in Kazakhstan, a discovered reserve opportunity.
Development work continued in the U.K. North Sea, Indonesia and other promising
areas, while exploratory spending decreased in China.
Lower international downstream expenditures in the Caltex marketing areas were
due to higher 1997 service station investments in Hong Kong.
Texaco continues to carefully assess investment projects given the current and
projected industry environment. The company anticipates some adjustment in
spending by deferring non-critical projects into future periods should the
current low crude price environment persist.
YEAR 2000
- ---------
The Year 2000 ("Y2K") problem concerns the inability of information and
technology-based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. This could result in
systems failures and miscalculations which could cause business disruptions.
Equipment that uses a date, such as computers and operating control systems, may
be affected. This includes equipment used by our customers and suppliers, as
well as by utilities and governmental entities that provide critical services to
us.
Many of our systems and related software are already Y2K compliant. We have an
ongoing Y2K compliance program. This program is actively reviewing all hardware
and software associated with our mainframe computers, personal computers and
client/servers, telecommunications and embedded systems found in equipment
throughout our producing, refining, transportation and marketing operations.
This program consists of identifying and inventorying all software applications
and systems, making required modifications, and testing. There are similar
ongoing compliance programs in our major affiliates.
- 11 -
<PAGE>
Based on information currently available, we estimate that the costs to modify
our systems to achieve Y2K compliance will not exceed $75 million, of which
about $20 million has been spent through June 30, 1998.
We are also gathering information about the Y2K readiness of utilities and
governmental entities and of our customers and suppliers. Since we cannot state
with certainty whether our operations will be materially adversely affected by
their compliance problems, we are developing contingency plans in order to
minimize the negative impacts on Texaco if they are not Y2K ready.
Our goal is to have all critical Texaco systems Y2K compliant during the first
half of 1999. This should allow time before the millennium change to validate
the system modifications and complete contingency plans for customers, suppliers
and others who may not be Y2K compliant. While there can be no assurance that
all such modifications and plans will be successful, we do not expect that any
disruptions will have a material adverse effect on our overall financial
position, results of operations, or liquidity.
The foregoing constitutes a "forward-looking statement" within the meaning of
Section 27A of the Securities Act of 1933. It is based on management's current
expectations, estimates and projections, which could ultimately prove to be
inaccurate. Factors which could affect our ability to be Y2K compliant by the
end of 1999 include the failure of customers, suppliers, governmental entities
and others to achieve compliance, the inaccuracy of certifications received from
them, and a shortage of necessary programmers, hardware and software.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 4 to the
Consolidated Financial Statements of this Form 10-Q, Item 1 of Texaco Inc.'s
Form 10-Q for the quarterly period ended March 31, 1998 and to Item 3 of Texaco
Inc.'s 1997 Annual Report on Form 10-K, which are incorporated herein by
reference.
- 12 -
<PAGE>
Item 5. Other Information
- -------------------------
<TABLE>
<CAPTION>
(Unaudited)
-----------
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of dollars)
FUNCTIONAL NET INCOME
- ---------------------
<S> <C> <C> <C> <C>
Operating earnings
Petroleum and natural gas
Exploration and production
United States $ 227 $ 500 $ 120 $ 189
International 91 396 51 240
------ ------ ------- ------
Total 318 896 171 429
------ ------ ------- ------
Manufacturing, marketing and distribution
United States 111 106 64 100
International 376 236 194 132
------ ------ ------- ------
Total 487 342 258 232
------ ------ ------- ------
Total petroleum and natural gas 805 1,238 429 661
Nonpetroleum - 13 (2) 1
------ ------ ------- ------
Total operating earnings 805 1,251 427 662
Corporate/Nonoperating (204) 300 (85) (91)
------ ------ ------- ------
Total net income $ 601 $1,551 $ 342 $ 571
====== ====== ======= ======
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Exploration and production
United States $ 899 $ 781 $ 423 $ 429
International 551 546 261 264
------ ------ ------- ------
Total 1,450 1,327 684 693
------ ------ ------- ------
Manufacturing, marketing and distribution
United States 183 152 95 92
International 228 308 129 207
------ ------ ------- ------
Total 411 460 224 299
------ ------ ------- ------
Other 20 11 6 7
------ ------ ------- ------
Total $1,881 $1,798 $ 914 $ 999
Exploratory expenses included above
United States $ 147 $ 76 $ 51 $ 34
International 84 116 39 59
------ ------ ------- ------
Total $ 231 $ 192 $ 90 $ 93
====== ====== ======= ======
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
Exploration and Production
- --------------------------
<S> <C> <C> <C> <C>
United States
- -------------
Net production of crude oil and natural
gas liquids (000 BPD) 449 385 447 385
Net production of natural gas - available
for sale (000 MCFPD) 1,721 1,666 1,703 1,677
Total net production (000 BOEPD) 736 663 731 665
Natural gas sales (000 MCFPD) 3,908 3,700 3,934 3,561
Average U.S. crude (per bbl) $11.26 $18.29 $10.72 $16.95
Average U.S. natural gas (per mcf) $ 2.10 $ 2.36 $ 2.05 $ 2.02
Average WTI (Spot) (per bbl) $15.26 $21.38 $14.62 $19.97
Average Kern (Spot) (per bbl) $ 8.31 $15.07 $ 7.75 $14.11
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 154 116 149 118
Indonesia 155 147 156 153
Partitioned Neutral Zone 106 92 105 94
Other 69 67 67 68
------ ------ ------ ------
Total 484 422 477 433
Net production of natural gas - available
for sale (000 MCFPD)
Europe 251 207 245 172
Colombia 196 156 185 173
Other 118 93 112 83
------ ------ ------ ------
Total 565 456 542 428
Total net production (000 BOEPD) 578 498 567 504
Natural gas sales (000 MCFPD) 721 574 665 528
Average International crude (per bbl) $11.68 $18.22 $11.42 $16.91
Average U.K. natural gas (per mcf) $ 2.64 $ 2.73 $ 2.64 $ 2.59
Average Colombia natural gas (per mcf) $ 0.91 $ 1.09 $ 0.92 $ 1.12
Worldwide
- ---------
Total net production (000 BOEPD) 1,314 1,161 1,298 1,169
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
<S> <C> <C> <C> <C>
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
Refinery input (000 BPD)
Western U.S. 377 413 396 418
Eastern U.S. 323 332 333 328
----- ----- ----- -----
Total 700 745 729 746
Refined product sales (000 BPD)
Gasolines 530 505 554 512
Avjets 168 92 164 94
Middle Distillates 184 215 188 216
Residuals 107 72 119 59
Other 165 119 181 117
----- ----- ----- -----
Total 1,154 1,003 1,206 998
International
- -------------
Refinery input (000 BPD)
Europe 371 341 367 335
Caltex 428 411 419 414
Latin America/West Africa 64 59 70 55
----- ----- ----- -----
Total 863 811 856 804
Refined product sales (000 BPD)
Europe 582 495 602 494
Caltex 589 574 586 561
Latin America/West Africa 444 391 460 406
Other 51 55 56 74
----- ----- ----- -----
Total 1,666 1,515 1,704 1,535
</TABLE>
- 15 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (2) Copy of the Asset Transfer and Liability Assumption Agreement
dated as of July 1, 1998, among the parties, for the
formation of Motiva Enterprises LLC.
-- (11) Computation of Earnings Per Share of Common Stock.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on
a Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 1997)
and a copy of Texaco Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998, as previously filed
by the Registrant with the Securities and Exchange Commission,
File No. 1-27.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K:
During the second quarter of 1998, the Registrant filed Current Reports on
Form 8-K for the following events:
1. April 1, 1998 (date of earliest event reported: March 30, 1998)
Item 5. Other Events -- reported that Texaco announced a stock
repurchase program for up to $1 billion.
2. April 23, 1998 (date of earliest event reported: April 23, 1998)
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the first quarter 1998.
3. April 29, 1998 (date of earliest event reported: April 28, 1998)
Item 5. Other Events -- reported that stockholders of Texaco approved
an amendment to the company's Rights Agreement dated March 16, 1989.
The amendment extends the expiration date of the Rights Agreement
until May 1, 2004.
- 16 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Texaco Inc.
---------------------
(Registrant)
By: R.C. Oelkers
---------------------
(Comptroller)
By: R.E. Koch
---------------------
(Assistant Secretary)
Date: August 11, 1998
---------------
- 17 -
Exhibit 2
================================================================================
ASSET TRANSFER
AND
LIABILITY ASSUMPTION AGREEMENT
among
STAR ENTERPRISE,
SAUDI REFINING, INC.,
TEXACO REFINING AND MARKETING (EAST) INC.,
SHELL OIL COMPANY,
SHELL NORCO REFINING COMPANY,
AND
MOTIVA ENTERPRISES LLC
dated as of
July 1, 1998
================================================================================
ASSET TRANSFER AGREEMENT
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I DEFINITIONS AND USAGE..................................................................... 1
SECTION 1.1. Defined Terms................................................................. 1
ARTICLE II CONTRIBUTIONS TO THE COMPANY............................................................. 2
SECTION 2.1. Contribution of Assets........................................................ 2
SECTION 2.2. Transfer Subject to Permitted Exceptions and Agreement Terms.................. 2
SECTION 2.3. Excluded Assets............................................................... 2
SECTION 2.4. Assignment of Contracts and Rights; Equitable Ownership....................... 2
ARTICLE III ASSUMPTION OF LIABILITIES............................................................... 4
SECTION 3.1. Assumed Liabilities and Obligations; Exclusions............................... 4
ARTICLE IV INSTRUMENTS OF TRANSFER.................................................................. 4
SECTION 4.1. Shell Instruments of Transfer................................................. 4
SECTION 4.2. Star Instruments of Transfer.................................................. 5
ARTICLE V CERTAIN POST-CLOSING MATTERS.............................................................. 6
SECTION 5.1. Post-Closing Recordings....................................................... 6
SECTION 5.2. Access to and Retention of Records............................................ 7
SECTION 5.3. Availability of Personnel..................................................... 8
SECTION 5.4. Mail; Payments................................................................ 8
SECTION 5.5. Existing Insurance Coverage................................................... 9
ARTICLE VI REPRESENTATIONS AND WARRANTIES........................................................... 10
SECTION 6.1. Representations and Warranties of Shell and Shell Norco....................... 10
</TABLE>
(i)
ASSET TRANSFER AGREEMENT
<PAGE>
<TABLE>
<S> <C>
(a) Good, Indefeasible or Marketable Title.................................... 10
(b) Pro Forma Financial Information........................................... 11
(c) Shell Contributed Assets.................................................. 11
SECTION 6.2. Representations and Warranties Regarding Star................................. 11
(a) Good, Indefeasible or Marketable Title.................................... 12
(b) Financial Information..................................................... 12
(c) Star Contributed Assets................................................... 12
ARTICLE VII MISCELLANEOUS........................................................................... 13
SECTION 7.1. Further Assurance............................................................. 13
SECTION 7.2. Effectiveness................................................................. 13
SECTION 7.3. Exclusivity................................................................... 13
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule A Usage and Definitions
Schedule B Procedural Conventions and Dispute Resolution
Schedule C Shell Shared Assets
Schedule D Shell Common Contracts
Schedule 2.1A Shell Asset List
Schedule 2.1B Star Asset List
Schedule 2.3A Shell Excluded Assets
Schedule 2.3B Star Excluded Assets
Schedule 3.1A Shell Assumed Liabilities
Schedule 3.1B Star Assumed Liabilities
</TABLE>
(ii)
ASSET TRANSFER AGREEMENT
<PAGE>
EXHIBITS
- --------
<TABLE>
<CAPTION>
<S> <C>
Exhibit A-1 Shell Contributed Asset Master Bill of Sale
Exhibit A-2 Star Contributed Asset Master Bill of Sale
Exhibit B-1 Shell Contributed Asset Master Assignment
and Assumption of Contracts
Exhibit B-2 Star Contributed Asset Master Assignment
and Assumption of Contracts
Exhibit C-1 Shell Contributed Asset Master Assignment
and Assumption of Leases
Exhibit C-2 Star Contributed Asset Master Assignment
and Assumption of Leases
Exhibit D-1 Shell Contributed Asset Master Deed
Exhibit D-2 Star Contributed Asset Master Deed
Exhibit E-1 Shell Contributed Asset Master Assignment of Permits
Exhibit E-2 Star Contributed Asset Master Assignment of Permits
Exhibit F-1 Shell Contributed Asset Master Subleases
and Assignment and Assumption of Sublessor's
Interest in User Subleases (Financing Leases)
Exhibit F-2 Shell Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Operating Leases)
Exhibit F-3 Star Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Financing Leases)
Exhibit F-4 Star Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Operating Leases)
Exhibit G-1 Shell Deed
Exhibit G-2 Star Deed
Exhibit H-1 Shell Assignment and Assumption of Leases
Exhibit H-2 Star Assignment and Assumption of Leases
Exhibit Y-1 Description of Norco Refinery
Exhibit Y-2 Description of Delaware City Refinery
Exhibit Y-3 Description of Convent Refinery
Exhibit Y-4 Description of Port Arthur Refinery
</TABLE>
(iii)
ASSET TRANSFER AGREEMENT
<PAGE>
ASSET TRANSFER AND LIABILITY ASSUMPTION AGREEMENT (the "Asset Transfer
Agreement"), dated as of July 1, 1998, among Star Enterprise, a New York general
partnership ("Star"), Saudi Refining, Inc., a Delaware corporation ("SRI"),
Texaco Refining and Marketing (East) Inc., a Delaware corporation ("TRMI
(East)"), Shell Oil Company, a Delaware corporation ("Shell"), Shell Norco
Refining Company, a Delaware corporation ("Shell Norco") and Motiva Enterprises
LLC, a Delaware limited liability company (the "Company").
R E C I T A L S :
- - - - - - - -
WHEREAS, Texaco, Shell and SRI have entered into a Master Agreement,
dated as of June 22, 1998, whereby they have agreed, inter alia, to enter into,
and to cause the Company, Star and Shell Norco to enter into this Asset Transfer
Agreement and certain other Motiva Joint Venture Documents for the purpose of
organizing and operating the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and adequacy of which are acknowledged by each of the
parties hereto, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
SECTION 1.1. Defined Terms. Unless the context shall otherwise require,
terms used and not defined herein shall have the meanings assigned thereto in
Schedule A hereto and all rules as to usage set forth therein shall apply
hereto. Schedule B hereto contains provisions regarding the Procedural
Conventions and Dispute Resolution which shall govern this Asset Transfer
Agreement. Such Schedules A and B are hereby incorporated herein by reference.
0000FQNS.W51
ASSET TRANSFER AGREEMENT
<PAGE>
ARTICLE II
CONTRIBUTIONS TO THE COMPANY
SECTION 2.1. Contribution of Assets. At the Effective Time:
(a) First, SRI and TRMI (East), severally, shall (i) cause Star to
transfer directly to the Company all of Star's right, title and interest in the
Star Contributed Assets and (ii) transfer directly to the Company all of their
respective right, title and interest in StarStaff Inc.; and
(b) Second, Shell and Shell Norco shall each transfer or cause to be
transferred directly to the Company all of its and its Affiliates' right, title
and interest in the Shell Contributed Assets.
SECTION 2.2. Transfer Subject to Permitted Exceptions and Agreement
Terms. The Contributed Assets shall be transferred to the Company subject to
Permitted Exceptions and in accordance with, and subject to, all provisions of
the Master Agreement and this Asset Transfer Agreement whether or not any of the
Transfer Instruments contains a specific exception for or reference to Permitted
Exceptions, the Master Agreement or this Asset Transfer Agreement.
SECTION 2.3. Excluded Assets. No party to this Asset Transfer Agreement
nor any of its Affiliates shall transfer any right, title or interest with
respect to the Excluded Assets.
SECTION 2.4. Assignment of Contracts and Rights; Equitable Ownership.
(a) Without limitation to any representation, warranty or indemnification
obligation set forth in the Master Agreement, this Asset Transfer Agreement
shall not constitute an agreement to assign or assume any Contributed Contract
or any claim, right, benefit, or liability thereunder, if such assignment,
without the approval or consent of a Third Party thereto, would be ineffective
or would constitute a breach or other contravention thereof or give rise to any
right of termination thereof and such approval or consent is not obtained. The
party required to contribute such Contributed Contract shall use its reasonable
efforts (which shall not require any payment of money to any Third Party by such
party or any of its Affiliates) to obtain the approval or consent of such Third
Party for the assignment to or assumption by the Company of any such Contributed
Contract, claim, right, benefit or liability arising thereunder. If as of the
Effective Time such assignment or assumption will be ineffective or will give
rise to any right of termination
-2-
ASSET TRANSFER AGREEMENT
<PAGE>
thereof, the parties will cooperate in arranging a mutually agreeable
alternative to enable the Company to obtain the benefits and assume the
obligations under such Contributed Contract as of the Effective Time or as soon
as practicable thereafter (including through a sub-contracting, sub-licensing,
sub-participation or sub-leasing arrangement, or an arrangement under which the
Person contributing such Contributed Contract would enforce such Contract for
the benefit of the Company, with the Company, to the extent permissible,
assuming such Person's executory obligations and any and all rights of such
Person against the other party thereto). If the approval of the other party to
such Contributed Contract is obtained, such approval will, as between the Person
contributing such Contributed Contract and the Company, constitute a
confirmation (automatically and without further action of the parties) that such
Contributed Contract is assigned to the Company as of the Effective Time, and
(automatically and without further action of the parties) that the liabilities
with respect to such Contributed Contract are assumed as of the Effective Time.
(b) The parties hereto agree that if any Contributed Assets or any
claim, right, benefit or liability thereunder are not transferred to the Company
at the Effective Time as a result of any restriction under any Applicable Law or
Contract that prohibits such transfer or makes such transfer unduly burdensome,
the party required to contribute such Contributed Assets will use its reasonable
efforts (which shall not require any payment of money to any Third Party by such
party or any of its Affiliates) to obtain such Contractual Consents or
Governmental Consents as might be required to consummate the contributions in
respect of such assets as soon as practicable after the Effective Time. During
the period between the Effective Time and the consummation of such contribution,
such party shall operate all such assets pursuant to instructions from the
Company and all benefits of, and risks arising out of or related to, the
ownership and operation of such assets shall be for the account of the Company.
The parties hereto agree that, at or as promptly as practicable after the
Effective Time, they will enter (and will cause the Company and each applicable
Affiliate and Specified Subsidiary to enter) into such agreements as might be
reasonably required to carry out the intent of the immediately preceding
sentence, including agreements (i) specifying, to the extent feasible, such
assets, (ii) setting up separate accounting systems for such assets, (iii)
providing for undertaking by the Company of any indemnity obligations of the
contributing party in respect of such assets (other than such obligations set
forth in the Motiva Joint Venture Documents), (iv) providing that until the
legal ownership is transferred to the Company, each party will treat such assets
in every respect as being equitably owned by the Company as of the Effective
Time and (v) providing such further specific assurances as the Company or
another party may reasonably request.
-3-
ASSET TRANSFER AGREEMENT
<PAGE>
ARTICLE III
ASSUMPTION OF LIABILITIES
SECTION 3.1. Assumed Liabilities and Obligations; Exclusions. (a) At the
Effective Time, the Company shall assume and thereafter pay, perform or
discharge the Assumed Liabilities. Such assumption may be effectuated by the
Company making full payments in respect of any Assumed Liability at the time of
the discharge of such Assumed Liability to any Person which, after the Effective
Time, remained liable in respect of such Assumed Liability and thereafter
discharged such Assumed Liability in accordance with the terms of the agreement
or instrument under which such Assumed Liability arose (but only to the extent
that such discharge was in accordance with the terms of the relevant agreement
or instrument as in effect at the Effective Time).
(b) Upon the terms and subject to the conditions hereof and in
consideration of the transfer of the Contributed Assets, the Company shall,
effective as of the Effective Time, perform and discharge all obligations of
Shell, Shell Norco and Star under the Contributed Contracts.
(c) Except as otherwise provided in Section 3.1(a) above, after the
Effective Time, neither Shell nor its Affiliates nor Star nor its Affiliates
shall pay, perform or discharge, in whole or in part, any Assumed Liability or
any obligation under the Contributed Contracts without the prior written consent
of the Company.
ARTICLE IV
INSTRUMENTS OF TRANSFER
SECTION 4.1. Shell Instruments of Transfer. At the Closing, Shell and
Shell Norco shall deliver such Shell Transfer Instruments (other than those
referred to in Section 5.1(a)), in form and substance reasonably satisfactory to
TRMI (East) and SRI, as shall be necessary or desirable to convey the Shell
Contributed Assets to the Company, including:
(a)(i) the Shell Contributed Asset Master Bill of Sale, (ii)
the Shell Contributed Asset Master Assignment and Assumption of
Contracts, (iii) the Shell Contributed Asset Master Assignment and
Assumption of Leases, (iv) the
-4-
ASSET TRANSFER AGREEMENT
<PAGE>
the Shell Contributed Asset Master Deed, (v) the Shell Contributed
Asset Master Subleases and Assignment and Assumption of Sublessor's
Interest in User Subleases;
(b) a deed or deeds, in respect of the Norco Refinery and the
Shell Terminals, substantially in the form of Exhibit G-1 annexed
hereto; provided, however, that such modifications shall be made as are
necessary to conform Exhibit G-1 to the requirements of Applicable Law
in the jurisdictions where the real property conveyed by the deed or
deeds in question is located; and
(c) any other bills of sale, endorsements, assignments and
instruments necessary to transfer the Shell Contributed Assets, other
than those provided for in Section 5.1(a).
SECTION 4.2. Star Instruments of Transfer. At the Closing, Star shall
deliver such Star Transfer Instruments (other than those referred to in Section
5.1(b)), in form and substance reasonably satisfactory to Shell, as shall be
necessary or desirable to convey the Star Contributed Assets to the Company,
including:
(a)(i) the Star Contributed Asset Master Bill of Sale, (ii)
the Star Contributed Asset Master Assignment and Assumption of
Contracts, (iii) the Star Contributed Asset Master Assignment and
Assumption of Leases, (iv) the Star Contributed Asset Master Deed, (v)
the Star Contributed Asset Master Subleases and Assignment and
Assumption of Sublessor's Interest in User Subleases;
(b) a deed or deeds, in respect of the Star Refineries and the
Star Terminals, substantially in the form of Exhibit G-2 annexed
hereto; provided, however, that such modifications shall be made as are
necessary to conform Exhibit G-2 to the requirements of Applicable Law
in the jurisdictions where the real property conveyed by the deed or
deeds in question is located; and
(c) any other bills of sale, endorsements, assignments and
instruments necessary to transfer the Star Contributed Assets, other
than those provided for in Section 5.1(b).
-5-
ASSET TRANSFER AGREEMENT
<PAGE>
ARTICLE V
CERTAIN POST-CLOSING MATTERS
SECTION 5.1. Post-Closing Recordings. (a) Shell agrees that it will
use its best efforts to submit those deeds described in Section 4.1(b) to be
recorded on behalf of the Company within ninety (90) Business Days after the
later of the Closing Date or the Effective Time. Shell will use its best efforts
to (i) deliver or cause to be delivered to the Company (x) deeds to be recorded
substantially in the form of Exhibit G-1 (with such modifications as are
necessary to conform Exhibit G-1 to the requirements of Applicable Law in the
jurisdictions where the real property conveyed by the deed or deeds in question
is located) for all real property owned by Shell or Shell Norco that is included
in the Shell Contributed Assets, deeds for which were not delivered to the
Company in accordance with Section 4.1(b), (y) all transfer and gains tax
returns required by any Governmental Entity in respect of the properties
transferred by such deeds, and (z) subject to Section 2.4 hereof, assignments of
lease to be recorded substantially in the form of Exhibit H-1 with respect to
all real property leased by Shell or Shell Norco that is included in the Shell
Contributed Assets and (ii) cause such deeds and such assignments of leases
(with respect to recorded leases) to be recorded, in each case, within one
hundred eighty (180) days after the later of the Closing Date or the Effective
Time. Promptly upon receipt of any evidence of recordation in connection with
the recording of deeds provided for in this Section 5.1(a), Shell shall provide
the Company with evidence of such recording. Costs of title and survey
documentation, recordation, transfer taxes, deed stamps, sales taxes and similar
charges relating to Shell Transfer Instruments delivered under Section 4.1 or
under this Section 5.1(a) or otherwise arising out of the transfers contemplated
pursuant to this Asset Transfer Agreement shall be borne by Shell or Shell
Norco.
(b) Star agrees that it will use its best efforts to submit those deeds
described in Section 4.2(b) to be recorded on behalf of the Company within
ninety (90) Business Days after the later of the Closing Date or the Effective
Time. Star will use its best efforts to (i) deliver or cause to be delivered to
the Company (x) deeds to be recorded substantially in the form of Exhibit G-2
(with such modifications as are necessary to conform Exhibit G-2 to the
requirements of Applicable Law in the jurisdictions where the real property
conveyed by the deed or deeds in question is located) for all real property
owned by Star that is included in the Star Contributed Assets, deeds for which
were not delivered to the Company in accordance with Section 4.2(b), (y) all
transfer and gains tax returns required by any Governmental Entity in respect of
the properties
-6-
ASSET TRANSFER AGREEMENT
<PAGE>
transferred by such deeds, and (z) subject to Section 2.4 hereof, assignments of
lease to be recorded substantially in the form of Exhibit H-2 with respect to
all real property leased by Star that is included in the Star Contributed Assets
and (ii) cause such deeds and such assignments of leases (with respect to
recorded leases) to be recorded, in each case, within one hundred eighty (180)
days after the later of the Closing Date or the Effective Time. Promptly upon
receipt of any evidence of recordation in connection with the recording of deeds
provided for in this Section 5.1(b), Star shall provide the Company with
evidence of such recording. Costs of title and survey documentation,
recordation, transfer taxes, deed stamps, sales taxes and similar charges
relating to Star Transfer Instruments delivered under Section 4.2 or under this
Section 5.1(b) or otherwise arising out of the transfers contemplated pursuant
to this Asset Transfer Agreement shall be borne by Star.
(c) Except with respect to Contributed Assets covered under Section
2.4, all deeds and assignments of lease shall be dated the Effective Time, and
notwithstanding the date of recordation thereof, as between the parties hereto
the date of transfer with respect to the Contributed Assets shall be the
Effective Time. Notwithstanding the foregoing, in the event that any penalties
or interest will be payable to any Governmental Entity with respect to any
recording or transfer tax or fee due to any difference in the date of the deeds
and the recorded assignments of lease and the date of actual recordation, the
party submitting such deed or assignment of lease may date such document as of
such later date as may be necessary to prevent the incurrence of such penalties
or interest, it being agreed that notwithstanding the date of such deed or
assignment of lease, as between the parties, the date of transfer shall be the
Effective Time. During the period between the Effective Time and the date of
recordation of the deeds and any recorded assignments of lease, the transferor
of the relevant Contributed Assets shall take no action adversely affecting the
Company's title thereto.
SECTION 5.2. Access to and Retention of Records. As of the Effective
Time, the Company shall acquire and take possession of the Books and Records,
provided, that if any part of such Books and Records cannot without unreasonable
effort be separated from books, records, files and other data that do not
constitute Books and Records or relate to services to be provided to the
Company, then Shell, Star, TRMI (East), SRI or their relevant Affiliates, as the
case may be, shall retain such part of the Books and Records and make such part
available to the Company as provided herein. Each of the parties hereto agrees
that it shall, and shall cause its relevant Affiliates to, (i) preserve and keep
the Books and Records or the parts thereof in its possession, as the case may
be, (A) in accordance with their respective records retention programs, or (B)
for any longer period as may be required by any Governmental Entity or ongoing
litigation or a
-7-
ASSET TRANSFER AGREEMENT
<PAGE>
required by any of the Motiva Joint Venture Documents and (ii) during such
period, subject to the Confidentiality Agreement, shall allow each other party's
counsel, accountants, officers, employees and other representatives access to
such Books and Records upon such other party's reasonable request and during
normal business hours for the purpose of examining and, at the examining party's
expense, copying them, to the extent reasonably required by such party in
connection with (A) any insurance claims by, legal proceedings against or
governmental investigations of such party, (B) the preparation of any tax return
required to be filed by such party, the defense of any audit, examination,
administrative appeal or litigation of any tax return, or (C) any other
reasonable business purpose reasonably related to such party's or its
Affiliates' Ownership Interest; provided that Star may transfer any Books or
Records in its possession to the Company, SRI or TRMI (East) upon or in
anticipation of its dissolution.
SECTION 5.3. Availability of Personnel. Each of the parties hereto
shall afford, and shall cause their respective Affiliates to afford, to each
other on a reasonable basis their respective personnel as necessary to permit
the Company, as the case may be, to provide background information necessary to
(i) prepare tax returns, (ii) prosecute Claims or (iii) investigate, defend
against, or otherwise oppose any pending or threatened Claim against any party
or any of such party's Affiliates, as the case may be, in each case, in
connection with the Contributed Assets. The party affording its, or its
Affiliates', personnel shall be reimbursed by the other party for its reasonable
incremental out-of-pocket expenses of such personnel, but shall not charge any
other fee to any other party hereto.
SECTION 5.4. Mail; Payments. (a) Each of Shell, Star, TRMI (East),
Shell Norco and SRI authorizes and empowers the Company from and after the
Effective Time to receive and open all mail and other communications directed to
any of Shell, Star, TRMI (East), Shell Norco, SRI or their Affiliates and
received by the Company, and, except for matters as to which Shell, TRMI (East),
SRI or any of their respective Affiliates is providing indemnification under any
Motiva Joint Venture Document, to act with respect to such communications in
such manner as the Company may elect if such communications relate to the
Contributed Assets. If such communications do not relate to the Contributed
Assets or relate to matters as to which Shell, TRMI (East) or SRI is providing
indemnification under any Motiva Joint Venture Document, the Company shall
forward the same promptly to the party (or parties) providing such
indemnification or to whom such communications relate. Each of Shell, Star, TRMI
(East), Shell Norco and SRI shall, and shall cause their respective Affiliates
to, promptly deliver to the Company any cash, checks, other instruments of
payment and funds to which the
-8-
ASSET TRANSFER AGREEMENT
<PAGE>
Company is entitled and shall hold such cash, checks, other instruments of
payment and funds in trust for the Company until such delivery. The Company
shall promptly deliver to Shell, Star, TRMI (East), SRI, Shell Norco or their
Affiliates, as applicable, any cash, checks or other instruments of payment to
which such entity is entitled and shall hold such cash, checks or other
instruments of payment in trust for such entity until such delivery.
(b) The Company authorizes and empowers Shell, Star, TRMI (East), Shell
Norco, SRI and their Affiliates from and after the Effective Time to receive and
open all mail and other communications directed to the Company and received by
any such entity, and to act with respect to such communications in such manner
as such entity may elect if such communications do not relate to the Contributed
Assets or do relate to matters as to which such entity or any of its Affiliates
is providing indemnification under any Motiva Joint Venture Document or, if such
communications do relate to the Contributed Assets and not to such indemnified
matters, to forward the same promptly to the Company.
SECTION 5.5. Existing Insurance Coverage. If, after December 1, 1997,
any of Shell, Star, TRMI (East), Shell Norco, SRI or their Affiliates receives,
directly or indirectly, from any insurer cash proceeds attributable to (i)
casualty and property (but not liability or business interruption for periods
prior to the Effective Time) insurance coverage applicable to any of the
Contributed Assets with respect to any occurrence or any series of related
occurrences on or after December 1, 1997 or (ii) real property title insurance
in respect of any of the Contributed Assets, which proceeds, in either the case
of clause (i) or (ii), aggregate in excess of $1,000,000 for such occurrence or
series of related occurrences, then such recipient shall pay over such cash
proceeds to the Company (net of any deductible, co-payment, retro fees,
premiums, costs or other charges payable to the insurance carrier or obligations
to reimburse the insurance carrier for which it is liable and net of the cost of
collection) except to the extent that (x) the damage or loss incurred as a
result of such occurrence or series of occurrences was repaired, restored or
reimbursed by or on behalf of such recipient prior to the Effective Time or will
be obligated to be reimbursed by such recipient pursuant to the Motiva Joint
Venture Documents or (y) Shell, SRI and Texaco have otherwise expressly agreed
in writing that such proceeds shall not be paid over to the Company. Any such
payment paid over to the Company shall reduce any amounts payable by such
recipient or its Affiliates with respect to such occurrence under Article 8 of
the Master Agreement. Any other insurance proceeds received by any of Shell,
Star, TRMI (East), Shell Norco, SRI or their Affiliates with respect to any
occurrence or series of occurrences prior to the Effective Time shall be
retained by such recipient.
-9-
ASSET TRANSFER AGREEMENT
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.1. Representations and Warranties of Shell and Shell Norco.
Each of Shell and Shell Norco represents and warrants to each of the other
parties hereto as follows; provided that Shell and Shell Norco shall have no
liability to any other party hereto or any other Person (including any Person
indemnified under Article 8 of the Master Agreement) for the breach of any
representation or warranty hereunder to the extent that the facts or
circumstances that gave rise to such breach:
(i) were actually disclosed in writing in the Due Diligence
Process to any of the Due Diligence Representatives of such
other party;
(ii) would reasonably be expected to be discovered by such other
party based on facts or circumstances so disclosed in writing
during the Due Diligence Process; or
(iii) were actually known to such other party or such other party's
Due Diligence Representatives on or prior to the Closing Date.
(a) Good, Indefeasible or Marketable Title. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect, each entity contributing Shell
Contributed Assets pursuant to Section 2.1 has good (and in the case of
interests in real property, indefeasible or marketable) title to all
Shell Contributed Assets so contributed thereby, free of all Liens
other than (x) Permitted Exceptions and (y) provisions in contracts,
licenses and agreements which prohibit or otherwise restrict assignment
and upon the granting of the deeds and other instruments of transfer
provided for herein, the Company shall receive good (and in the case of
interests in real property, indefeasible or marketable) title to the
Shell Contributed Assets as described above.
For the avoidance of doubt, in the event that any
representation or warranty with respect to title to the Shell
Contributed Assets set forth in any of the Shell Transfer Instruments
or implied by Applicable Law may be interpreted to create
representations or warranties other than those set forth in this
Section 6.1(a), the representation and warranty set forth in this
Section 6.1(a) shall
-10-
ASSET TRANSFER AGREEMENT
<PAGE>
govern and such other representations and warranties shall be
without force or effect.
(b) Pro Forma Financial Information. With such exceptions as
would not, individually and in the aggregate, have a Company
Material Adverse Effect:
(i) the Shell Pro Forma Financial Information
represents Shell's good faith allocation of the results of
operations and cash flows of Shell's oil products business
segment, for the periods indicated therein, among (A) the
Shell Valuated Units, (B) the businesses being contributed to
Equilon (including the assets to be held separately pursuant
to the Consent Order), (C) Shell's interest in the business
conducted by DPRLP and (D) the Shell Excluded Assets;
(ii) the Shell oil products business segment
information referred to in clause (i) was included in Shell's
audited financial statements for the periods indicated
therein; and
(iii) the Shell Pro Forma Financial Information was
not necessarily prepared in accordance with GAAP, but was
prepared with due care after reasonable inquiry and is a fair
presentation of the financial performance of the Shell
Valuated Units for the periods indicated therein.
(c) Shell Contributed Assets. With such exceptions as would
not, individually and in the aggregate, have a Company Material
Adverse Effect, except for the Shell Excluded Assets and the Shell
Intellectual Property Rights, the Shell Contributed Assets constitute
all of the assets used for or necessary to the operation of the Shell
Valuated Units in the ordinary course of business and in substantially
the same manner as such Shell Valuated Units were operated as of
December 1, 1997.
SECTION 6.2. Representations and Warranties Regarding Star. Each of
Star, TRMI (East) and SRI represents and warrants to each of the other parties
hereto as follows; provided that Star, TRMI (East) and SRI shall have no
liability to any other party hereto or any other Person (including any Person
indemnified under Article 8 of the Master Agreement) for the breach of any
representation or warranty hereunder to the extent that the facts or
circumstances that gave rise to such breach:
-11-
ASSET TRANSFER AGREEMENT
<PAGE>
(i) were actually disclosed in writing in the Due Diligence
Process to any of the Due Diligence Representatives of such
other party;
(ii) would reasonably be expected to be discovered by such other
party based on facts or circumstances so disclosed in writing
during the Due Diligence Process; or
(iii) were actually known to such other party or such other party's
Due Diligence Representatives on or prior to the Closing Date.
(a) Good, Indefesible or Marketable Title. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect, Star has good (and in the case of
interests in real property, indefeasible or marketable) title to all
Star Contributed Assets so contributed thereby, free of all Liens other
than (x) Permitted Exceptions and (y) provisions in contracts, licenses
and agreements which prohibit or otherwise restrict assignment and upon
the granting of the deeds and other instruments of transfer provided
for herein, the Company shall receive good (and in the case of
interests in real property, indefeasible or marketable) title to the
Star Contributed Assets as described above.
For the avoidance of doubt, in the event that any
representation or warranty with respect to title to the Star
Contributed Assets set forth in any of the Star Transfer Instruments or
implied by Applicable Law may be interpreted to create representations
or warranties other than those set forth in this Section 6.2(a), the
representation and warranty set forth in this Section 6.2(a) shall
govern and such other representations and warranties shall be without
force or effect.
(b) Financial Information. With such exceptions as would not,
individually and in the aggregate, have a Company Material Adverse
Effect, the Star Financial Statement (i) has been prepared with due
care after reasonable inquiry and (ii) is a fair presentation of the
financial performance and cash flow of Star.
(c) Star Contributed Assets. With such exception as would
not, individually and in the aggregate, have a Company Material
Adverse Effect, except for the Star Excluded Assets and the Texaco
Intellectual Property Rights, the Star Contributed Assets constitute
all of the assets used for or necessary to
-12-
ASSET TRANSFER AGREEMENT
<PAGE>
the operation of Star in the ordinary course of business and in
substantially the same manner as Star was operated as of December 1,
1997.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Further Assurance. (a) From and after the Effective Time,
each of the parties hereto shall, at any time and from time to time, at the
request of any other party hereto, make, execute and deliver, or use its best
efforts to cause to be made, executed and delivered, such assignments,
conveyances, deeds, bills of sale, filings and other instruments, agreements
(including any agreements which may be necessary or desirable in connection with
the making of any filing or the obtaining of any approval in any jurisdiction),
consents and assurances and take or cause to be taken all such action as the
parties hereto may reasonably request for the effectual consummation of this
Asset Transfer Agreement and the Motiva Joint Venture Transactions. It is
understood that this Section 7.1(a) may be applied to require the assignment or
conveyance (i) to the Company of assets owned or leased by any party or its
Affiliates that constitute Shell Contributed Assets or Star Contributed Assets
but by mistake were not assigned or conveyed to the Company at the Effective
Time, or (ii) to any party or Affiliate of a party of assets transferred to the
Company that were not listed on the Asset List (or was listed on the Asset List
but was an Excluded Asset or the non-contributed portion of a Shell Common
Contract or Shell Shared Asset) and are not Shell Contributed Assets or Star
Contributed Assets, but were assigned or conveyed by mistake to the Company.
(b) From time to time after the Effective Time, as and when requested
by the Company, TRMI (East) shall, or shall cause its Worldwide Affiliates to
execute and deliver, or cause to be executed and delivered, all such documents
and instruments and shall take, or cause to be taken, all such further or other
actions as any other party may reasonably deem necessary or desirable to
transfer legal or beneficial title to any Star Contributed Asset which should
have been transferred by TRMI (East) or its Worldwide Affiliates to Star
effective as of December 31, 1988 in accordance with the transaction documents
by which Star was formed which for any reason was not transferred.
SECTION 7.2. Effectiveness. This Asset Transfer Agreement shall be
effective as of the Effective Time.
-13-
ASSET TRANSFER AGREEMENT
<PAGE>
SECTION 7.3. Exclusivity. For avoidance of doubt, Section 8.01 of the
Master Agreement shall constitute the exclusive remedy for any misrepresentation
or breach of warranty or covenant contained in or arising under this Asset
Transfer Agreement.
-14-
ASSET TRANSFER AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Asset Transfer
Agreement to be duly executed as of the day and year first above written.
STAR ENTERPRISE
By: SAUDI REFINING, INC.
PARTNER
By /s/ F. R. Woelfel
-------------------
Title: President and Chief
Executive Officer
By: TEXACO REFINING AND
MARKETING (EAST) INC.
PARTNER
By /s/ L. Wilson Berry Jr.
-------------------------
Title: Vice President
-15-
ASSET TRANSFER AGREEMENT
<PAGE>
SAUDI REFINING, INC.
By /s/ F. R. Woelfel
------------------------
Title: President and Chief Executive Officer
-16-
ASSET TRANSFER AGREEMENT
<PAGE>
TEXACO REFINING AND
MARKETING (EAST) INC.
By /s/ G. F. Tilton
-------------------
Title: Chairman
-17-
ASSET TRANSFER AGREEMENT
<PAGE>
SHELL OIL COMPANY
By /s/ J. M. Morgan
----------------
Title: Senior Vice President
-18-
ASSET TRANSFER AGREEMENT
<PAGE>
SHELL NORCO REFINING COMPANY
By /s/ W. G. Hougland
------------------
Title: Attorney-in-Fact
-19-
ASSET TRANSFER AGREEMENT
<PAGE>
MOTIVA ENTERPRISES LLC
By /s/ L. Wilson Berry Jr.
-----------------------
Title: CEO
-20-
ASSET TRANSFER AGREEMENT
EXHIBIT 11
<TABLE>
<CAPTION>
TEXACO INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
-----------------------------------------------------------
(millions of dollars, except as noted)
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997(a) 1998 1997(a)
---- ------- ---- -------
<S> <C> <C> <C> <C>
Basic Net Income Per Common Share:
Net income less preferred stock dividend requirements $ 574 $ 1,523 $ 329 $ 557
======= ======= ======= =======
Average shares outstanding (thousands) 531,232 519,328 530,550 519,375
======= ======= ======= =======
Basic net income per share (dollars) $ 1.08 $ 2.93 $ 0.62 $ 1.07
======= ======= ======= =======
Diluted Net Income Per Common Share:
Net income less preferred stock dividend requirements $ 574 $ 1,523 $ 329 $ 557
Adjustments, mainly ESOP preferred stock dividends 17 18 8 9
------- ------- ------- -------
Net income for diluted net income per share $ 591 $ 1,541 $ 337 $ 566
======= ======= ======= =======
Average shares outstanding (thousands) 531,232 519,328 530,550 519,375
Adjustments, mainly ESOP preferred stock 19,366 20,635 19,225 20,488
------- ------- ------- -------
Shares outstanding for diluted computation (thousands) 550,598 539,963 549,775 539,863
======= ======= ======= =======
Diluted net income per share (dollars) $ 1.07 $ 2.85 $ 0.61 $ 1.05
======= ======= ======= =======
<FN>
(a) Reflects two-for-one stock split, effective September 29, 1997.
</FN>
</TABLE>
EXHIBIT 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
OF TEXACO ON A TOTAL ENTERPRISE BASIS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1997
--------------------------------------------------
(Millions of dollars)
For the Six Years Ended December 31,
Months Ended -------------------------------------------
June 30, 1998 1997 1996 1995 1994(a) 1993(a)
------------- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-95..................... $ 919 $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................ (4) (11) (4) 1 (1) (8)
Minority interest in net income............................ 30 68 72 54 44 17
Previously capitalized interest charged to
income during the period................................ 9 25 27 33 29 33
------ ------ ------ ------ ------ ------
Total earnings..................................... 954 3,596 3,545 1,289 1,481 1,434
------ ------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges...................................... 319 528 551 614 594 546
Interest factor attributable to operating
lease rentals.................................... 45 112 129 110 118 91
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc......................... 17 33 35 36 31 4
------ ------ ------ ------ ------ ------
Total items charged to income...................... 381 673 715 760 743 641
Interest capitalized.................................... 12 27 16 28 21 57
Interest on ESOP debt guaranteed by Texaco Inc.......... 2 7 10 14 14 14
------ ------ ------ ------ ------ ------
Total fixed charges................................ 395 707 741 802 778 712
------ ------ ------ ------ ------ ------
Earnings available for payment of fixed charges............ $1,335 $4,269 $4,260 $2,049 $2,224 $2,075
(Total earnings + Total items charged to income) ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges of Texaco
on a total enterprise basis............................. 3.38 6.04 5.75 2.55 2.86 2.91
====== ====== ====== ====== ====== ======
<FN>
(a) Excludes discontinued operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TEXACO INC.'S SECOND QUARTER 1998 FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 345
<SECURITIES> 48
<RECEIVABLES> 3,951
<ALLOWANCES> 20
<INVENTORY> 1,214
<CURRENT-ASSETS> 5,882
<PP&E> 35,056
<DEPRECIATION> 20,281
<TOTAL-ASSETS> 28,795
<CURRENT-LIABILITIES> 4,766
<BONDS> 6,281
0
659
<COMMON> 1,861
<OTHER-SE> 9,995
<TOTAL-LIABILITY-AND-EQUITY> 28,795
<SALES> 15,651
<TOTAL-REVENUES> 16,191
<CGS> 12,086
<TOTAL-COSTS> 13,311
<OTHER-EXPENSES> 1,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> 825
<INCOME-TAX> 224
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
