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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, 1999 Commission file number 1-27
T e x a c o I n c .
(Exact name of registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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:
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Name of each exchange
Title of each class on which registered
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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 3/4% Debentures, due March 15, 2020** New York Stock Exchange
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* 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.
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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 common stock of Texaco Inc. held
by non-affiliates at the close of business on February 29, 2000 based on the New
York Stock Exchange composite sales price, was approximately $26,222,000,000.
As of February 29, 2000, there were 553,126,475 outstanding shares of
Texaco Inc. Common Stock.
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Documents incorporated by reference
(to the extent indicated herein)
Part of
Form 10-K
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Texaco Inc. Annual Report to Stockholders for the year 1999................................. I, II
Proxy Statement of Texaco Inc. relating to the 2000 Annual Meeting of Stockholders.......... III
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TABLE OF CONTENTS
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Page
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Texaco Inc.
Texaco Inc. 1999 Texaco Inc.
1999 Annual Report March 14, 2000
Form 10-K Item Form 10-K to Stockholders Proxy Statement
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PART I
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1. and 2. Business and Properties
Development and Description of Business................... 1 -- --
Industry Review of 1999................................... 1-2 -- --
Worldwide Operations...................................... 3-23 -- --
Additional Information Concerning Our Business............ 24 28-29 and 38-39 --
Forward-Looking Statements and
Factors That May Affect Our Business.................... 25 -- --
3. Legal Proceedings............................................. 26 55 --
4. Submission of Matters to a Vote of Security Holders........... 26 -- --
Executive Officers of Texaco Inc................................. 27 -- --
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PART II
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5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................. 28 68 --
6. Selected Financial Data........................................ 28 65 --
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 28 14-29 --
7A. Quantitative and Qualitative Disclosures about Market Risk..... 28 63 --
8. Financial Statements and Supplementary Data
-- Financial Statements........................ 28 30-55 --
-- Report of Independent Public Accountants.... 28 56 --
-- Supplemental Oil and Gas Information........ 28 57-62 --
-- Selected Quarterly Financial Data........... 28 64 --
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 28 -- --
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PART III
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10. Directors and Executive Officers of the Registrant............ 29 -- 8-12
11. Executive Compensation........................................ 29 -- 7 and 20-24
12. Security Ownership of Certain Beneficial Owners
and Management............................................. 29 -- 1 and 8
13. Certain Relationships and Related Transactions................ 29 -- 7
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PART IV
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30-32 -- --
Report of Independent Public Accountants....................... 33 -- --
Schedule II - Valuation and Qualifying Accounts................ 34 -- --
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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 to a corporation incorporated in Texas in 1902.
When we use the term "Texaco Inc." in this Form 10-K and in the documents we
have incorporated by reference into this Form 10-K, we mean Texaco Inc., a
Delaware corporation. We use terms such as "Texaco," "company," "organization,"
"unit," "we," "us," "our," and "its" for convenience only. These terms may mean
either Texaco Inc. and its consolidated subsidiaries or Texaco Inc.'s
subsidiaries and affiliates, either individually or collectively.
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 liquids, natural gas and petroleum products,
power generation and gasification.
INDUSTRY REVIEW OF 1999
Introduction
International petroleum market conditions changed dramatically during 1999.
Over the first few months, crude oil prices were very weak. While economic
activity and oil demand were beginning to show signs of increasing, oil supplies
were excessive. Then, in April, the Organization of Petroleum Exporting
Countries (OPEC) along with other oil producing countries cut output sharply.
Oil prices increased and remained strong over the balance of the year.
The increase in crude oil prices boosted revenues from crude oil
operations. However, higher crude oil costs, together with other factors such as
excess gasoline and distillate stocks, tended to hurt the financial performance
of refineries in most markets.
Review of 1999
After slowing sharply in 1998 due to a severe global economic crisis, the
rate of world economic growth increased last year. Growth accelerated from a
meager 2.3% in 1998 to 2.9% in 1999.
Economic activity varied among regions. The U.S. economy continued to grow
at a strong pace with low inflation, due in part to a technology-led surge in
labor productivity. Economic expansion in Western Europe also picked up in the
second half of the year, benefiting from increased domestic demand and the
favorable impact of a weak euro currency on exports.
World economic expansion was reinforced by the beginning of economic
recovery in Asia. Several of the key economies in the Asian region, including
South Korea, Malaysia, the Philippines, Singapore and Thailand sustained solid
economic upturns in 1999. Other regional economies, such as Hong Kong, also
turned around. Similarly, Japan, the world's second largest economy, showed
signs of emerging from its worst downturn in the post-war period. This
improvement was due to extraordinarily low interest rates and increased
government spending. However, consumer demand had yet to recover.
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The Latin American region, which was hard hit earlier in the year, also
began to grow again toward year-end. This renewed growth was propelled by
turnarounds in Brazil, Mexico, Argentina and Chile. Moreover, world commodity
prices started to rebound from the low levels which resulted from the 1998
economic crisis. This, in turn, spurred economic growth in other areas,
particularly the oil producing countries of the Middle East and Africa. In
addition, the Russian economy turned upward after many years of decline. This
improvement was due to factors such as higher oil prices, increased agricultural
output and the substitution of domestically produced goods for imports.
This rebound in economic activity led to a significant increase in the
demand for petroleum products worldwide. During 1999, consumption averaged 75.5
million barrels per day (BPD), a 1.3 million BPD, or 1.7% gain over the prior
year. This growth, however, was not evenly distributed among regions.
o In the more advanced economies, oil demand rose by 700,000 BPD, boosted by
the U.S. and to a lesser extent by Japan
o In the less developed countries, Asian oil demand recovered from its 1998
slump and rose by 500,000 BPD, while growth in Latin America exceeded
100,000 BPD
o Demand in Eastern Europe rose by 100,000 BPD but was offset by an equal
decline in the former Soviet Union
o In other regions, demand registered no growth.
Demand growth alone may have been insufficient to boost prices.
Consequently, OPEC and some non-OPEC producers agreed to cut production. Oil
output from these countries, which had been cut twice during 1998, was scaled
back further during the early part of 1999 by an additional 1.8 million BPD --
bringing the total reduction to a significant 4 million BPD.
The production curtailment and the resultant tightening balance between
supply and demand caused the price of crude oil to soar from its depressed 1998
and early 1999 levels. The market price of West Texas Intermediate (WTI)
averaged $19.31 per barrel, an increase of 34% from the prior year. During the
final months of 1999, oil prices reached their highest levels in several years
and continued to increase in early 2000.
Near-Term Outlook
We expect global economic expansion to accelerate from 2.9% in 1999 to a
3.7% gain this year, reflecting several factors:
o Continued, but slower, gains in the United States as the Federal Reserve moves
to moderate growth by raising interest rates
o Continued economic expansion in Western Europe
o Further strengthening in the developing world, particularly the developing
nations of Asia and Latin America
o Continued low growth in Russia.
On the other hand, the outlook for the large Japanese economy remains
clouded by the apparent inability of the economy to grow without strong
government spending. Private demand must eventually substitute for government
spending if the recovery is to be sustained. Furthermore, Japanese export growth
could be jeopardized by a pronounced appreciation in the value of the yen.
Accordingly, we expect the Japanese economy to register only minimal growth this
year.
With the increase in global economic activity, the demand for crude oil
will be greater. An increase in worldwide oil consumption of about 1.6 million
BPD is expected. Non-OPEC production should recover considerably and may boost
output to levels close to the one million BPD mark. OPEC may therefore choose to
relax its quotas and increase production.
The crude oil price outlook is highly uncertain. In the past, high crude
oil prices have often encouraged OPEC to increase production sharply, causing
prices to drop. Higher petroleum demand and a potential weakening in crude oil
costs could benefit downstream margins.
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WORLDWIDE OPERATIONS
Our worldwide operations encompass three main businesses:
o Upstream (exploration and production)
o Downstream (refining, marketing and distribution)
o Global Gas and Power.
In the following pages, we discuss each of these businesses and technology.
UPSTREAM
Higher prices boosted our upstream financial performance significantly even
though worldwide production of crude oil and natural gas was down by some 6%.
However, as a result of continuing cost savings initiatives and the
restructuring of our worldwide upstream organization, our cash operating
expenses decreased by 7% in 1999. More importantly, we made key moves in 1999 to
shift our upstream portfolio to high-margin, high-impact projects. In 1999:
o The appraisal well at Agbami in Nigeria confirmed a major discovery
o We acquired a 45% interest in the Malampaya gas project in the Philippines
o We increased our stake in the Hamaca project in Venezuela from 20% to 30%
o We acquired an interest in six deepwater blocks in Brazil
o Our worldwide reserve replacement of 111%, excluding purchases and sales,
enabled us to achieve our highest year-end reserve total in 15 years
o Our worldwide finding and development cost was a competitive $4.37 per barrel
of oil equivalent (BOE)
o We announced a program to sell producing properties that no longer fit our
business strategy. We will sell over 100,000 BOE of daily production,
enabling us to focus on high-margin, high return projects.
Exploration
The year 1999 saw a continuation of our efforts to focus our worldwide
exploration program on a few key regions. West Africa continues to be a focus
area, following our 1998 discoveries at Agbami and Nnwa in Nigeria. We continue
to pursue attractive exploration acreage in both Nigeria and Angola. In
addition, we have gained an excellent position in the opening of Brazil's
deepwater basins. The U. S. Gulf of Mexico and Australia also continue to be key
focus areas.
West Africa
The appraisal well to our 1998 discovery in Nigeria Block OPL-216, named
Agbami, exceeded our expectations and we believe the structure contains
significant potential recoverable reserves. Texaco's share of this resource is
expected to be greater than 50% based on contracts that have production-sharing
type terms.
Located in the central Niger Delta region, approximately 70 miles offshore,
the appraisal well was drilled in 4,800 feet of water and encountered over 500
net feet of oil pay in multiple zones. One of the intervals tested at a rate of
10,000 barrels of oil per day of light, sweet crude. It is believed to be among
the largest single finds in deepwater West Africa.
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We hold significant exploration acreage (approximately 2.7 million gross
acres) in this deepwater trend off Nigeria. In addition to Block 216, we hold
interests in Blocks 213, 215, 217 and 218, and we continue to evaluate new
blocks as they become available. Our plans are to drill wells in all five of
these blocks in 2000. We are well positioned to expand resource finds in this
exciting new play.
In Angola, we hold an interest in approximately 4.7 million gross acres.
Included in this total are Blocks 1, 9, 20 and 22, all of which are in their
exploration period. We plan to drill two exploration wells in Angola in 2000.
Brazil
In order to continue finding significant new resources, we must acquire new
lease positions in developing exploration plays.
At Brazil's First License Round in Rio de Janeiro in June 1999, we were the
successful bidder on three deepwater blocks, consisting of a 100% interest in
BM-C-5 (Campos Basin), a 100% interest in BM-S-2 (Santos Basin), and a 32%
interest in BM-ES-2 (Espirito Santo Basin). We acquired about 3.2 million gross
acres in the sale.
In addition to the License Round, we negotiated an interest in two
exploration blocks with Petrobras, consisting of a 42.5% interest in BC-4
(Campos Basin) and a 20% interest in BS-4 (Santos Basin). In addition to the
exploration blocks, we obtained a 42.5% interest in the Frade development
(immediately east of Block BC-4), which contains a discovered reserve
opportunity. As a result, we acquired about 2.9 million gross acres.
Gulf of Mexico
We have the fourth largest acreage position in the deepwater Gulf of
Mexico, where we hold about 2.4 million gross acres. We consider the Gulf of
Mexico as one of our prime exploration focus areas. In 2000, we plan to drill up
to five wells. The program will be focused on the highly prospective deepwater
area that has yielded several significant industry discoveries.
Australia
We continue to build a large gas resource base in Western Australia, where
we currently hold 7.6 million gross acres. During 1999, we had two discoveries
in Block WA-267-P at water depths greater than 3,500 feet. Geryon Well No. 1
revealed over 300 feet of net gas pay in three high-quality reservoir zones.
Orthrus Well No. 1 found over 150 feet of net gas pay in a high-quality
interval. We hold a 25% interest in Block WA-267-P, which is located
north-northwest of the Gorgon complex. We plan to drill up to five exploration
wells in 2000 in Blocks WA-267-P and WA-268-P, including Urania Well No. 1, a
discovery announced in early 2000.
Development
Our upstream strategy is centered on the development of high-margin,
high-impact reserves. Results of this shift started to be realized in 1999.
Agbami
Following the successful appraisal of the Agbami discovery well, we began
engineering studies to develop this resource. Due to the water depth (greater
than 4,500 feet of water), development concepts will include a floating
production, storage and offloading unit (FPSO). Pre-qualification of contractors
has begun for the FPSO and other items involving long lead times. We project
that initial production will begin before 2004 and early estimates of plateau
production rates range from 150,000 to 200,000 barrels of oil per day (100%
basis).
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Malampaya
In October, we signed an agreement to acquire a 45% interest in the
Malampaya Deep Water Natural Gas Project from Shell. The Malampaya field is
located just northwest of the Philippine Island of Palawan. During 1999, we
added 140 million BOE to our proved reserve base, which increased our
international gas reserve base by 30%. The project is scheduled to deliver first
gas by the end of 2001. We expect that our share of production will reach 240
million cubic feet per day by 2003.
The Malampaya development was designed as an integrated natural
gas-to-power project. Texaco's interest in the project only includes the
installation and operation of the deepwater gas field along with the onshore gas
plant. Under a 22-year supply agreement, the Malampaya Natural Gas Project will
provide gas to three new gas turbine power plants on Luzon Island (total
generation capacity of 7,100 megawatts). Other supply contracts are being
contemplated.
Construction of the field facilities is underway. In addition, the drilling
of five development wells is planned for 2000.
Hamaca
During 1999, we increased our equity in the Hamaca Project from 20% to 30%.
The Hamaca Project is located in Venezuela's Orinoco Belt. It encompasses some
657 square kilometers and is believed to contain significant quantities of
recoverable oil. The project consists of field development, which includes wells
and production facilities, a pipeline to the port of Jose on the northern coast,
and an upgrader plant. The upgrader plant will process the 16-degree API crude
into a high-value 26 degree API oil. We anticipate that the project will produce
up to 190,000 barrels of upgraded crude per day (100% basis) by 2004.
Karachaganak
During 1999, we reached agreement with the Government of the Republic of
Kazakhstan to amend the Karachaganak Final Production Sharing Agreement to allow
for the construction of a 460-kilometer pipeline from Bolshoi-Chagan to Aytrau,
Kazakhstan. The pipeline will link to the Caspian Pipeline Consortium pipeline
and it is expected that it will ultimately provide the liquid transportation
capability needed to increase production to 195,000 barrels of hydrocarbon
liquids and 1.1 billion cubic feet of gas per day (100% basis). Presently,
Karachaganak is producing approximately 65,000 barrels of hydrocarbon liquids
and 340 million cubic feet of gas per day.
Karachaganak is a world-class oil and natural gas field located in
northwest Kazakhstan. The field was discovered in 1979 and contains significant
quantities of recoverable oil and natural gas. The field will be developed in
phases to match the capacity of export pipelines as they become available. The
Government of the Republic of Kazakhstan approved our entry into the project in
1997. Texaco's interest in the field is 20%.
North Buzachi
The successful conclusion of the pilot phase and the first lifting of crude
at the North Buzachi field occurred during 1999. North Buzachi is located 120
miles north of the Caspian port city of Aktau, and contains significant
quantities of recoverable oil and natural gas. We acquired our interest in 1998
and are operator of the project with a 65% interest.
During this initial pilot phase, four wells were drilled, completed and
placed in production. The primary purpose of the pilot project was to test the
productivity of the reservoir. The tests exceeded expectations. An additional
benefit was the testing of available export routes, which were also successful.
Further studies will ascertain the percentage of recovery that is possible in
the field.
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Captain Expansion in the U. K. North Sea
During 1999, we began construction of the facilities for the Captain
Expansion Project. The project is expected to increase production capacity from
the Captain field from 60,000 barrels of oil per day to 100,000 barrels of oil
per day (100% basis). The expansion project involves the development of the
eastern half of the Captain reservoir that was left undeveloped during the
initial phase. The project consists of the installation of a subsea facility,
the addition of a "bridge-linked platform" and the drillng of some development
wells. We hold an 85% interest in the Captain field.
Gulf of Mexico
During 1999, construction began on a production module for the Petronius
project to replace the module that was dropped and sank during installation in
December 1998. Production was originally scheduled to begin in mid-1999. The new
module will be installed during the spring of 2000, and production is expected
to commence by the fourth quarter.
The Petronius field is located 130 miles southeast of New Orleans in 1,750
feet of water. The project consists of the installation of a compliant tower
platform, production and water injection facilities, a gas export pipeline, and
the completion of 14 development wells (six pre-drilled and eight new wells).
Plateau production will be up to 60,000 barrels of oil per day and 100 million
cubic feet of gas per day (100% basis). Our share of the field is 50%.
Other
Construction of facilities has begun or will begin soon on the following
three developments in the North Sea:
o The Jade gas development was sanctioned by the U.K. Government in January
2000. The field is located in U.K. Block 30/2c in 250 feet of water. First
production is scheduled for the fourth quarter of 2000 and the plateau
production rate is expected to be 180 million cubic feet of gas per day and
16,000 barrels of condensate per day (100% basis). We have a 19.9% interest
in the project.
o The Elgin-Franklin development is expected to begin production during 2000.
The field is located in U.K. Blocks 22/30b, 22/30c, and 29/5b in 300 feet
of water. Plateau production is expected to be 440 million cubic feet of
gas per day and 125,000 barrels of condensate per day (100% basis). Our
share of the development is 3.9%.
o In 1999, we and our partners began development of the Halfdan field, which
was discovered earlier in the year. The field, originally called Nana, is
located adjacent to the Dan and Gorm fields in the Danish sector of the
North Sea. The field's close proximity to infrastructure is allowing for
its rapid development and we expect production from the expanded facilities
by 2001. Our share of the development is 15%.
In China, development of the Qinhuangdao 32-6 field began in 1999. The
field lies in 65 feet of water approximately 155 miles southeast of Beijing in
the Bohai Bay. The development includes six platforms drilling about 170 wells
over the next 2 1/2 years, a floating oil storage vessel, and an offshore
mooring and offloading facility for export. We expect the field to start up in
late 2001 with plateau production rates of 60,000 barrels of oil per day (100%
basis). We entered the development in 1998 with a 24.5% interest.
In Indonesia, development of the South Natuna Sea Block B Gas Project began
in 1999. The project consists of the development of six offshore gas fields,
including the associated wells, platforms, floating facilities, pipelines and a
28-inch, 300-mile gas transmission line to Singapore. First production is
expected in 2001. Our share of the development is 25%. In 1999, Indonesia and
Singapore executed the West Natuna Gas Sales Agreement, which marks the first
international, conventional natural gas sales from Indonesia.
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Production
Our worldwide production of crude oil and natural gas declined by
approximately 6% in 1999 to 1.2 million barrels of oil equivalent per day. U.S.
production accounted for some 52% of total worldwide production, as compared to
55% in 1998. The production decline was most pronounced in the domestic areas
due to natural field declines, asset sales and reduced investment in mature
properties consistent with our focus on capital efficiency. International
production was 579,000 BOE per day.
California
In 1999, California production was level with 1998 at 169,000 BOE per day.
Kern River continues to produce more than 100,000 barrels of oil per day for
Texaco after celebrating its 100th year in May. Early in 1999, we traded our
interest in six fields and two gas plants where we had a small interest for Aera
Energy's interest in the Kern River field.
Gulf of Mexico
Production from the Gemini subsea development began in July 1999. The field
is located in Mississippi Canyon Blocks 292 and 247, approximately 90 miles
southeast of New Orleans, Louisiana. Situated in 3,400 feet of water, the field
is one of the first subsalt deepwater developments in the Gulf of Mexico. The
field has produced at rates up to 200 million cubic feet per day of gas (100%
basis). We operate the field and have a 60% interest.
North Sea
Despite operational problems early in the year at the Captain and Erskine
fields, the North Sea provided 191,000 barrels of oil equivalent per day in
1999. Production in Denmark was flat with 1998 while the U.K. sector was down
10%. Mechanical problems with the separation equipment on the Captain FPSO
accounted for most of the shortfall.
Indonesia
During 1999, production from Indonesia was 152,000 barrels of oil per day,
down about 8% compared to 1998. Most of our Indonesia production comes from P.T.
Caltex Indonesia (CPI), an exploration and production company owned 50% each by
Texaco and Chevron. CPI operates under production-sharing contracts in Central
Sumatra. We had lower production volumes as higher prices reduced our lifting
entitlements for cost recovery under these production-sharing contracts.
Partitioned Neutral Zone
During 1999, production from the Partitioned Neutral Zone increased almost
15%, to 124,000 barrels per day of crude oil. The increase was due to new wells
drilled mainly at the Wafra and South Umm Gudair fields.
Reserves
We replaced 111% of our worldwide combined oil and gas production in 1999,
excluding purchases and sales. When purchases and sales are included, production
replacement jumps to 137%. We also increased our worldwide gas reserves by 25%.
Our overall reserve base grew by 4% to just over 4.8 billion BOE, our highest
level since 1984. This increased the average life of our reserves to 10.3 years,
the longest reserve life in over 20 years.
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As a result of our strategy to focus on high-margin, high-impact projects,
reserves are growing faster internationally than in the U.S. Our U.S. reserves
remained relatively flat at approximately 2.5 billion BOE. Approximately 49%
(2.3 billion BOE) of worldwide reserves are now located in international areas.
International production replacement for 1999 was 124%, excluding purchases and
sales. However, including the effects of purchases and sales (primarily the
Malampaya acquisition), production replacement increases to 186%.
Capital and Exploratory Expenditures
During 1999, our upstream capital and exploratory expenditures were $2.7
billion. We spent approximately $900 million in the U.S. and $1.8 billion
internationally. Our 1999 finding and development costs were $4.12 per BOE in
the U.S. and $4.56 per BOE internationally. As we change the nature of our
portfolio, there could be larger variations in our year-to-year finding and
development costs. However, on a three-year or five-year moving average, we
expect to stay very competitive. In fact, on a worldwide basis, our 1997-1999
average finding and development cost was $3.80 per BOE and our 1995-1999 average
was $3.88 per BOE.
We project our spending for 2000 on upstream projects to be $3.2 billion.
Our spending profile reflects the shift to high-margin, high-impact projects.
Spending on major development projects will increase to $1.5 billion.
Exploration spending will remain at approximately $500 million for 2000.
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SUPPLEMENTARY EXPLORATION AND PRODUCTION INFORMATION
The following tables provide supplementary information concerning the oil
and gas exploration, development and production activities of Texaco Inc. and
consolidated subsidiaries, as well as our equity in CPI, a 50%-owned affiliate
operating in Other Eastern Hemisphere. Supplemental oil and gas information
required by Statement of Financial Accounting Standards No. 69, "Disclosures
About Oil and Gas Producing Activities," is incorporated herein by reference
from pages 57 through 62 of our 1999 Annual Report to Stockholders.
Reserves Reported to Other Agencies
We provide information concerning recoverable, proved oil and gas reserve
quantities to the U.S. Department of Energy and to other governmental bodies
annually. Such information is consistent with the reserve quantities presented
in Table I, Net Proved Reserves, beginning on page 57 of our 1999 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 61 of our 1999 Annual
Report to Stockholders.
Delivery Commitments
During 2000, we expect that our net production of natural gas will
approximate 2.1 billion cubic feet per day. This estimate is based upon our past
performance and on our assumption that such gas quantities can be produced under
operating and economic conditions existing at December 31, 1999. We did not
factor in possible future changes in prices or world economic conditions into
this estimate. These expected production volumes, together with the normal
related supply arrangements, are sufficient to meet our anticipated delivery
requirements under contractual arrangements. Over the last three years,
approximately 31% of our proved developed natural gas reserves in the U.S. were
covered by long-term sales contracts. These agreements are primarily priced at
market.
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Oil and Gas Acreage
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As of December 31, 1999
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Thousands of acres Gross Net
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Producing
Texaco Inc. and Subsidiaries
United States................................................ 3,076 1,739
Other Western Hemisphere ................................... 59 28
Europe ..................................................... 342 125
Other Eastern Hemisphere ................................... 2,201 991
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Total ................................................... 5,678 2,883
Equity in Affiliate............................................... 210 105
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Total worldwide .................................. 5,888 2,988
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Undeveloped
Texaco Inc. and Subsidiaries
United States................................................ 8,054 5,805
Other Western Hemisphere ................................... 19,597 12,014
Europe ..................................................... 6,123 2,281
Other Eastern Hemisphere..................................... 36,375 19,470
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Total ................................................... 70,149 39,570
Equity in Affiliate............................................... 1,746 873
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Total worldwide................................. 71,895 40,443
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Total oil and gas acreage....................... 77,783 43,431
====== ======
</TABLE>
Number of Wells Capable of Producing*
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------
Oil wells Gross Net
----- -----
<S> <C> <C>
Texaco Inc. and Subsidiaries
United States................................................ 34,934 17,683
Other Western Hemisphere ................................... 689 230
Europe ..................................................... 236 69
Other Eastern Hemisphere ................................... 1,678 648
------ ------
Total ................................................... 37,537 18,630
Equity in Affiliate............................................... 5,085 2,543
------ ------
Total worldwide**............................... 42,622 21,173
====== ======
Gas wells
Texaco Inc. and Subsidiaries
United States................................................ 7,785 3,516
Other Western Hemisphere ................................... 33 17
Europe ..................................................... 55 9
Other Eastern Hemisphere ................................... 54 11
------ ------
Total ................................................... 7,927 3,553
Equity in Affiliate ............................................ 55 28
------ ------
Total worldwide** ............................. 7,982 3,581
====== ======
<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 522 gross and 172 net multiple completion oil wells and 25 gross
and 19 net multiple completion gas wells.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Oil, Gas and Dry Wells Completed For the years ended December 31,
-----------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
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 Subsidiaries
United States................................. 3 15 10 14 14 26 32 22 35
Other Western Hemisphere...................... -- 1 2 -- 2 2 1 -- 1
Europe........................................ -- -- -- -- -- 1 4 -- 1
Other Eastern Hemisphere...................... 2 2 4 4 4 2 1 3 5
--- --- -- ----- --- -- ----- --- --
Total ..................................... 5 18 16 18 20 31 38 25 42
Equity in Affiliate............................. -- -- -- 3 -- -- 2 -- --
--- --- -- ----- --- -- ----- --- --
Total worldwide........................... 5 18 16 21 20 31 40 25 42
=== === == ===== === == ===== === ==
Net development wells
Texaco Inc. and Subsidiaries
United States................................. 345 100 7 585 106 14 769 165 23
Other Western Hemisphere...................... 9 -- -- 109 3 -- 107 1 3
Europe....................................... 2 4 -- 21 2 -- 6 3 --
Other Eastern Hemisphere...................... 58 6 1 38 27 -- 45 1 --
--- --- -- ----- --- -- ----- --- --
Total ...................................... 414 110 8 753 138 14 927 170 26
Equity in Affiliate............................. 219 -- -- 271 -- -- 143 1 --
--- --- -- ----- --- -- ----- --- --
Total worldwide........................... 633 110 8 1,024 138 14 1,070 171 26
=== === == ===== === == ===== === ==
<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 water
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, 1999
----------------------------------------------------
Pressure Maintenance
Wells in the --------------------
process of
drilling
------------------------ Installations
Gross Net in operation
----- --- ------------
<S> <C> <C> <C>
Texaco Inc. and Subsidiaries
United States............................................ 83 72 333
Other Western Hemisphere................................. 1 -- 21
Europe................................................... 6 1 12
Other Eastern Hemisphere................................. 21 7 258
--- -- ---
Total ................................................. 111 80 624
Equity in Affiliate......................................... 5 3 8
--- -- ---
Total worldwide...................................... 116 83 632
=== == ===
</TABLE>
11
<PAGE>
DOWNSTREAM
Texaco International Marketing and Manufacturing
Our Texaco International Marketing and Manufacturing (TIMM) unit sells
high-quality fuel, lubricant and convenience products in over 60 countries
throughout Latin America, the Caribbean, Europe and West Africa. TIMM also has
four refineries located in the United Kingdom, the Netherlands, Panama and
Guatemala.
Our downstream business faced a difficult year in 1999 because of low
margins resulting from rising crude prices, high product inventories, and the
pervasive surplus of refining capacity. It was also a year of slow to negative
economic growth and currency devaluation in Brazil and some Latin American
countries. However, the resilience of our portfolio of businesses in Europe and
Latin America enabled us to weather the storm very competitively.
In the Caribbean and Latin America, we are a market leader. Fuel market
shares are as high as 25% in most Caribbean and Central American countries, and
one-fourth of our worldwide lubricant sales are in Latin America. The largest
business is in Brazil, where sales are over 46 million barrels per year and our
market share is 13.6% in retail fuels and 22% in lubricants. We have over 3,200
service stations in Brazil. Although petroleum growth in Brazil was negative in
1999, it is expected to rebound in 2000.
We have over 500 service stations in the Andean Region, which is composed
of Colombia, Ecuador, Peru and Venezuela. Excluding Venezuela, retail market
share in the region is 16% and lubricant market share is 21%. In Venezuela, we
are positioned to expand in the retail sector as privatization takes hold and
the timing and economics become more favorable.
In 1999, our business in Brazil and the Andean Region was significantly
impacted by the economic recession and currency devaluation. To mitigate the
effects of these problems, we took prompt actions, such as significant
reductions in capital expenditures and expenses. In addition, we took steps to
reduce our overall currency exposure in Latin America. In 1999, capital
expenditures in South America were limited primarily to retail maintenance,
environmental compliance and improvements in our distribution and manufacturing
infrastructure.
Economic forecasts for Brazil and the Andean region for the year 2000 are
improved over 1999. Economically, Brazil is in better condition to react to
tight global monetary conditions than it was a year ago. In the Andean region,
country views are mixed. Of the four countries in the region, only Peru had
positive real GDP growth last year. All of the other countries suffered through
a severe economic recession. All are expected to recover somewhat this year,
aided by higher commodity prices. However, there is still much uncertainty
surrounding their economies.
In the Caribbean and Central America, we operate in 34 countries through a
network of over 1,300 service stations. The countries in this region were not
significantly affected by the economic crisis in South America and Asia.
Petroleum demand growth is projected to be about 3% per year. In this region, we
have built on our excellent market share by investing in areas with the greatest
potential. We will continue to grow by aligning ourselves with suppliers, major
industrial customers, and other oil companies where we can capture
infrastructure efficiencies.
In 1999, refined product sales volumes in Latin America and West Africa,
including our trading operations, increased almost 7%, led by our Caribbean and
Central American operations. Throughout our marketing area, we achieved a $.43
per barrel expense reduction compared to 1998 as a result of our cost savings
initiatives.
12
<PAGE>
The Latin America manufacturing segment consists of two equity refineries
- -- one in Escuintla, Guatemala, with a crude capacity of 16,000 barrels per day,
and the other in Bahia Las Minas, Panama, with a crude capacity of 60,000
barrels per day. The Panama refinery manufactures finished products for local
sales, canal sales, and export markets, while the Guatemala refinery supplies
only internal country requirements.
We continue to maximize returns from our substantial retail properties by
increasing non-fuel retail income. One of our most successful non-fuel retail
initiatives has been the development of the Star Mart(R) convenience store
brand. We now have close to 250 Star Mart convenience stores throughout Latin
America and the Caribbean and over 550 in Europe. Growth of the Star Mart
concept has paralleled the strong growth of the regional economies and the
increase in disposable income, making the convenience store concept more
appealing to consumers. Non-fuel income represents a strategic growth
opportunity for our international areas.
In Europe, we have focused on regional markets, with our assets
concentrated in the United Kingdom, Ireland and the Benelux countries. We also
have a 50% interest in Hydro Texaco, a Scandinavian marketing joint venture with
Norsk Hydro. In addition, we market lubricants in all other major European
countries, ranking among the top ten lubricant marketers. We are the number one
supplier of lubricants and coolants to original equipment manufacturers in
Europe. Our lubricants group recently started two joint ventures: one in Romania
and one with Tyumen Oil in Russia. Both joint ventures are expected to expand
our lubricant presence in Eastern Europe.
During the past two years, the U.K. market has recovered somewhat from the
effects of price wars triggered by the aggressive growth of hypermarkets. With
the stabilization of margins, we are growing our market share, primarily through
the acquisition of dealers and asset swaps. In exchange for Texaco retail assets
in Poland and Greece, we will receive Shell retail assets in the U.K. The Poland
asset swap has been completed and the Greek asset swap is near completion. The
addition of these assets will increase our U.K. retail market share from 8.2% to
10.0%. Our commercial sales business has expanded by more than 50% and now shows
a more balanced portfolio of end-users, equity distributors, authorized
distributors, resellers and spot sales. Our total gasoline market share in the
U.K. has more than doubled from 7.5% in 1996 to 15.5% in 1999. Our lubricants
division has made similar progress with a 41% increase in volume since 1997. A
major factor in this increase is that 50% of all vehicles leaving U.K. assembly
lines are being filled with our lubricants. All of our progress is the result of
focused strategy, organizational efficiencies, reduced costs and increased
customer focus.
In our other European retail markets, we have double-digit market share and
a strong presence. In Ireland, we have over 330 stations and a 17% market share.
In the Benelux countries, we have over 1,000 stations and an 11% market share.
In our Scandinavian joint venture, Hydro Texaco has over 930 stations and an 18%
market share. Our strategies for these highly competitive markets are to grow
the non-fuel and lubricant income, to reduce costs, and to optimize the network.
In Europe, we have an interest in two refineries with a total capacity for
Texaco of 328,000 barrels per day. We own the Pembroke refinery in Wales, U. K.,
which has the largest Fluid Catalytic Cracker and Alkylation units in Europe. It
is one of the most modern and advanced refineries in Europe with very high motor
gasoline yields and qualities. This refinery, with a crude capacity of 200,000
barrels a day, supplies our marketing requirements in the United Kingdom and
Ireland, and also exports its high-quality gasoline to other parts of the world.
It has a highly skilled, talented and innovative workforce, which provides
competitive strength in the areas of health and safety performance and overall
plant reliability. Pembroke has also aggressively reduced its costs as well,
lowering its break-even margin by more than $.50 per barrel during the past two
years.
13
<PAGE>
We also own a 31% interest in the 380,000-barrel-per-day Nerefco refinery
in Rotterdam, a joint venture with British Petroleum. This refinery provides the
main supply to our Netherlands marketing operations and, due to its excellent
location in Rotterdam harbor, is a key supplier to the Rotterdam fuel market and
to the German light products market. Both Pembroke and Nerefco are well
positioned to economically comply with the European Union's fuel specifications
for the year 2000 and beyond.
U.S. Downstream Alliances
Our U.S. downstream operations include the operations of Equilon
Enterprises LLC and Motiva Enterprises LLC. Equilon and Motiva jointly own
Equiva Trading Company, which functions as the trading unit for both companies.
They also jointly own Equiva Services LLC, which provides common financial,
administrative, technical and other operational support to both companies.
The formation of the U. S. Downstream Alliances created the opportunity to
capture synergies and measurable business improvement initiatives. During the
two years since the formation of the Alliances, the companies have remained
focused on identifying and implementing the synergies as quickly as possible.
Such an effort has enabled Equilon and Motiva, along with Equiva Trading and
Equiva Services, to realize combined pre-tax cost savings and synergies in
excess of $800 million, surpassing the Alliances' goal a full year ahead of
schedule.
The combination of Equilon and Motiva is the largest retail gasoline
marketer in the U.S., having approximately a 15% share of the domestic gasoline
market. The two companies have nine refineries with a combined capacity of about
1.6 million barrels per day and interests in about 30,600 miles of pipelines and
distribute gasoline through about 23,700 retail outlets.
Equilon Enterprises LLC
Equilon was formed and began operations in January 1998 as a joint venture
between Texaco and Shell. Equilon, which is headquartered in Houston, Texas,
combines major elements of Texaco's and Shell's western and midwestern U.S.
refining and marketing businesses and their nationwide transportation and
lubricants businesses. We own 44% and Shell owns 56% of the company.
Equilon refines and markets gasoline and other petroleum products under
both the Texaco and Shell brand names in all or parts of 32 states. Equilon is
the seventh largest refining company in the U.S. with five refineries located
in:
o Anacortes, Washington
o Bakersfield, California
o Martinez, California
o Los Angeles, California
o Wood River, Illinois
Equilon owns or has interests in 76 crude oil and product terminals. It is
estimated to be the fifth largest retail gasoline marketer in the U.S.,
distributing products through approximately 9,700 service stations. Equilon has
an estimated 6.8% share of the national gasoline market and an estimated 13.1%
share of the gasoline market in its geographic area.
During 1999, Equilon continued to integrate the operations that it acquired
when the company was formed. Equilon Lubricants sold its Metairie (Louisiana)
blending plant and shut down its base oil plant at Wood River (Illinois) during
the year. In addition, as part of its refining system restructuring, Equilon
sold its El Dorado, Kansas, refinery to Frontier Oil Corporation in November
1999 and expects to sell its Wood River, Illinois, refinery in 2000. In December
1999, Equilon purchased 12 product terminals, primarily located in the Midwest,
further strengthening its
14
<PAGE>
distribution assets. Equilon began to implement plans that will enable it to
restructure and strengthen its retail marketing system over the next several
years. It also began a major initiative to improve supply chain management and
to leverage the combined strength of Equilon and Motiva in supply acquisition.
Motiva Enterprises LLC
Motiva was formed and began operations in July 1998 as a joint venture
among Shell, Texaco and Saudi Refining, Inc., a corporate affiliate of Saudi
Aramco. Motiva 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
and Saudi Refining, Inc., each owns 32.5% and Shell owns 35% of Motiva. Texaco's
and Saudi Aramco's interests in these businesses were previously conducted by
Star Enterprise, a joint-venture partnership owned 50% by Texaco and 50% by
Saudi Refining, Inc.
Motiva refines and markets gasoline and other petroleum products under the
Shell and Texaco brand names in all or part of 26 states and the District of
Columbia, providing product to almost 14,000 Shell- and Texaco-branded retail
outlets. Motiva has an estimated 8.0% share of the national gasoline market and
an estimated 16.7% market share in its geographic area.
Motiva is the sixth largest refiner in the U.S., capable of refining about
849,000 barrels a day. Motiva's refineries are located in:
o Convent, Louisiana
o Delaware City, Delaware
o Norco, Louisiana
o Port Arthur, Texas.
Motiva also owns or has interests in 49 product terminals.
In 1999, Motiva continued to undertake actions to identify and capture
synergies. These efforts included the hydrotreater realignment at the Convent,
Louisiana, refinery, a gasoline additives synergy, consolidation of the
marketing staff, marketing retailer rent program standardization, and the
reduction of insurance expense. Additional savings were realized through the
coordinated procurement of certain hydrocarbon and non-hydrocarbon supplies.
Equiva Trading Company
Equiva Trading provides supply and trading services for Equilon, Motiva and
other affiliates of Texaco and Shell. In addition, Equiva Trading conducts a
large and growing trading activity on behalf of Equilon. Equiva Trading buys and
sells in excess of 7 million barrels of hydrocarbons per day in the physical
markets, making it one of the largest petroleum supply and trading organizations
in the world. Specific lines of business include acquisition, sales and trades
of domestic and international crude oil and products; lease crude oil
acquisition and marketing; marine chartering; and risk management support and
services.
Equiva Services LLC
Equiva Services provides common services to both Equilon and Motiva in
areas such as brand management, retail operations, accounting, tax, treasury,
information technology, safety, health and environment. Combining these common
services, rather than having a separate service organization for each company,
is one way that Equilon and Motiva are capturing the synergies of combination
despite different ownership.
15
<PAGE>
Caltex Corporation
Caltex Corporation is jointly owned 50% each by Texaco and Chevron. Caltex
operates in approximately 55 countries in Asia, Africa, the Middle East, New
Zealand and Australia. Caltex refines crude oil and markets petroleum and
convenience products through its subsidiaries and affiliates, and is also
involved in distribution, shipping, storage, supply and trading operations.
Caltex sales of crude oil and petroleum products were 1.8 million barrels per
day in 1999.
Caltex has been an active participant in the Asia-Pacific region for many
years. The region is comprised of mature and developing markets. Caltex has
followed strategies to compete in each of these markets. It competes
aggressively in mature markets such as Hong Kong, Singapore, South Korea,
Australia and New Zealand; and in developing countries such as Malaysia,
Thailand, and the Philippines. Caltex is also actively pursuing opportunities in
countries where demand is expected to grow significantly, such as Vietnam, Laos,
Cambodia, Sri Lanka, India, and portions of Central and East Africa.
Caltex is also active in the Middle East and eastern and southern Africa.
In South Africa, Caltex has been a brand leader in gasoline, diesel and
lubricants sales for many years, with about 1,100 retail outlets. Caltex also
operates a major refinery in Capetown, South Africa.
Caltex has interests in 11 fuel refineries with equity refining capacity of
850,000 barrels per day. Additionally, it has interests in two lubricant
refineries, 17 lubricating oil blending plants and a network of ocean terminals
and depots. Caltex continues to be a major supplier of refined products through
its interests in large refineries in South Korea, Singapore and Thailand, where
its Star refinery began to achieve significant economic benefits through
synergies resulting from an operating alliance with a neighboring Shell
refinery.
Caltex conducts international crude oil and petroleum product logistics and
trading operations from the South East Asia region oil hub in Singapore,
providing 24-hour service to the Caltex system and to third parties that require
crude oil, feedstocks, base oils and refined products.
Caltex and its affiliates maintain a strong marketing presence through a
network of 7,800 retail outlets, of which 4,500 are branded as Caltex. It also
operates over 850 convenience stores, of which 650 are Star Marts. In addition
to 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 LPG.
An affiliate in South Korea is a major supplier of polypropylene, benzene,
toluene and paraxylene to Korea's petrochemical industry.
In 1999, Caltex completed a structural reorganization, changing from a
geographic to a functional organizational structure. The new organization is
flatter, and has improved channels of communication to manage and allocate
resources more effectively. Caltex restructured its executive leadership team
and relocated its corporate center from Dallas, Texas, to Singapore to be closer
to its main operating areas. Caltex is already experiencing efficiencies from
this new structure and anticipates future improvements.
The year 1999 was an extremely difficult one for Caltex' South East Asian
marketing operations. Consumer fuel demand recovered slowly following the 1997
Asian economic crisis, partly due to rapidly escalating international crude oil
and refined product prices during the year. The market was oversupplied, demand
growth was slow, and margins were under constant pressure. Caltex' response has
been to maintain its focus on the factors that it can control - revenue
enhancement, operating cost control and working capital reduction. Activities in
East Africa and the Middle East were generally less significantly affected by
the Asian economic crisis, and continued to provide reasonable returns
throughout 1999.
16
<PAGE>
Refining margins in 1999 were at their lowest level in more than 10 years,
due to worldwide oversupply of capacity, which was partly a result of the
economic disruption in many Asian countries. However, the operating performance
of Caltex' refineries has continued to improve, mitigating the effect of low
margins to the extent possible. This was accomplished by focusing on full
utilization of assets, incident-free operation, cost reductions, cost-effective
investments and initiatives to improve efficiency and maintain the integrity of
the refining assets. Additionally, as part of its refining system restructuring,
Caltex sold its 50% interest in Koa Oil Company, Limited, a Japanese refining
company.
To achieve top competitive performance in each market, Caltex' business
strategies are to:
o improve the financial performance of its established business operations
o selectively grow in emerging markets
o increase non-fuel earnings through convenience stores
o continue to focus on retail marketing in preferred areas
o pursue initiatives to further reduce operating expenses and boost margins.
Fuel and Marine Marketing LLC (FAMM)
FAMM was formed and began operations in November 1998 as a joint venture
between Texaco and Chevron. FAMM, which is headquartered in White Plains, New
York, combines the worldwide residual fuel and marine lubricants marketing
businesses of both companies. We own 69% and Chevron owns 31% of the venture.
FAMM has annual sales of 158 million barrels of fuel and 70 million gallons
of marine lubricants. FAMM is a leading supplier of marine fuels, lubricants,
coolants and industrial fuels, serving customers in over 400 ports and over 100
countries worldwide. FAMM's industrial customers include power plants throughout
the world. During 1999, FAMM was successful in integrating the two companies and
capturing the anticipated synergies and cost savings.
GLOBAL GAS AND POWER
Our Global Gas and Power operations include the marketing of natural gas
and natural gas liquids, gas processing plants, pipelines, power generation
plants, gasification licensing and equity plants, and our
hydrocarbons-to-liquids and fuel cell technology units. During 1999,
responsibility for these activities was combined under a single senior
executive, forming the Global Gas and Power segment. We can leverage our
expertise in all aspects of fuels management and power project development and
operations to bring forward projects utilizing a wide array of fuels.
Global Gas Marketing
Texaco Natural Gas - North America (TNG) is a fully integrated midstream
organization that offers a wide range of services including gas gathering,
processing, transportation, storage, sales and purchases, and risk management
for natural gas and natural gas liquids. TNG's primary objective is to grow
shareholder worth by extracting value across the entire energy value chain -
from the wellhead to the burner tip.
The majority of TNG's assets are strategically located in the U.S. Gulf
Coast area. TNG owns and/or operates one of the largest producer-owned gas
pipeline systems in the U.S. consisting of more than 2,150 miles of pipe with
over 50 interconnects to other intrastate and interstate pipelines. The system
is comprised of three pipeline companies: Sabine Pipeline Company, Bridgeline
Holdings, L.P., and Discovery Gas Transmission LLC.
17
<PAGE>
Sabine Pipeline features an open-access interstate natural gas pipeline
that extends from Port Arthur, Texas, to the Henry Hub near Erath, Louisiana.
The Henry Hub is the official delivery mechanism for the New York Mercantile
Exchange's natural gas futures contracts. This is due in large part to Sabine's
reputation for service, flexibility, and reliability.
Effective March 1, 2000, Texaco and Enron Corp. formed a joint venture,
Bridgeline Holdings, L. P., that combines their regional marketing services,
intrastate pipelines and gas storage assets in southeast Louisiana. The new
venture, to be headquartered in Houston, Texas, will have combined facilities
consisting of more than 1,000 miles of transmission and distribution pipeline, 7
billion cubic feet (BCF) of salt dome storage capacity, with an additional 6 BCF
in development and 33,050 horsepower of compression. Bridgeline Holdings expects
to have sales of more than 1 BCF of natural gas per day. We own 60% and Enron
owns 40% of the new venture.
Bridgeline Holdings has physical connections with many of the major
industrial companies, including some of the largest petrochemical, refining,
ammonia and gas-fired electric utility firms in the world. With interconnects to
pipelines from the Gulf of Mexico, customers are presented with access to
abundant offshore supplies. The system also includes excellent delivery access
to several interstate and intrastate pipelines that connect to the Northeast,
Southeast and Mid-continent regions. In addition, the combined capabilities and
interconnections of Bridgeline Holding's gas storage facilities at Sorrento and
Napoleonville will substantially increase the flexibility and range of services
that will be available to customers. The storage capacity will provide the
flexibility to meet many gas needs, including emergency back-up, needle and
seasonal peaking, winter/summer price hedging and gas future hedging.
Discovery Gas Transmission, a major natural gas gathering and transmission
pipeline in the offshore waters of the Gulf of Mexico, adds significant value
from this key area in the Gulf. The 30-inch pipeline stretches 105 miles into
the Gulf with numerous laterals to deepwater drilling fields and provides
crucial capacity to a currently under-served area. The project also includes a
gas processing plant in Larose, Louisiana, giving Gulf Coast producers a
convenient means for gathering, processing, and transporting gas to market. In
addition, Discovery has installed a 42,000-barrel-a-day fractionator at the site
of our Paradis gas processing plant. We hold a one-third ownership interest in
Discovery with partners, Williams Companies and British-Borneo.
In addition to the Larose gas processing plant, TNG operates four natural
gas processing plants located in South Louisiana, which have a combined capacity
of 1.2 billion cubic feet a day. TNG also has an ownership interest in two other
plants. These assets strategically position TNG to take advantage of the
significant influx of natural gas, which we expect from deepwater developments
in the Gulf of Mexico.
TNG also has substantial natural gas liquid (NGL) assets in the state of
Louisiana. We recently constructed the Texaco Expanded NGL Distribution System
(TENDS) to further leverage our strategic position in South Louisiana and take
advantage of increasing volumes of gas coming on shore from deepwater
developments. This system integrates newly constructed and purchased pipelines
with our existing assets. The result is an integrated bi-directional natural gas
liquid pipeline, fractionation, and underground storage system with a combined
pipeline length of about 500 miles, extending from Lake Charles to Alliance,
Louisiana. The TENDS project has already provided a platform for expansion of
our Louisiana infrastructure through numerous new connections and opportunities.
The NGL Marketing Group transports and markets NGLs throughout the world,
although its primary focus is North America. With sales averaging nearly 300,000
barrels a day, TNG is one of the largest marketers of NGLs in the industry.
Marketing of propane to wholesale customers in the U.S. has provided a
significant financial contribution for many years.
18
<PAGE>
In Ferndale, Washington, the NGL Marketing Group operates the largest NGL
import/export terminal on the West Coast. This facility includes 750,000 barrels
of storage for butane and propane. Drawing on product from Canada and local
refineries, this terminal provides strategic access to markets including the
Pacific Rim.
The Gas Marketing Group markets 3.2 billion cubic feet per day of equity
and third party gas to major North American utilities, industrial customers, and
other marketing/trading companies. TNG ensures that we receive the highest
netback price for its equity production as well as optimizing pipeline capacity.
This unit provides customized and comprehensive risk management and other
financial tools to enable customers and suppliers to structure deals consistent
with their specialized needs. TNG also leases natural gas storage in strategic
locations to take advantage of price arbitrage as well as handle production
fluctuations. Further, TNG provides fuels management services to a number of our
cogeneration partnerships.
Internationally, during March 1999, we completed the sale of our United
Kingdom retail gas marketing business and exited this low margin market. We
exited our U. K. wholesale gas marketing business in late 1998.
Gasification
Our gasification technology converts a wide variety of hydrocarbon
feedstocks into a synthesis gas (syngas) comprised of hydrogen and carbon
monoxide. The syngas can be used as a feedstock for other chemical processes or
as a fuel for use in a gas turbine to produce power. We license this technology,
develop and invest in projects using the technology, and operate gasification
facilities.
Recognized as the world leader in gasification technology, our proprietary
Texaco Gasification Process (TGP) has been licensed to 69 plants under
development, under construction or in operation in the refining, chemical and
power generation sectors worldwide. Syngas production at these facilities
exceeds 5.1 billion standard cubic feet per day. TGP projects that have recently
been, or are soon to be, completed include:
o In Florida, Tampa Electric Company is licensing our integrated gasification
combined-cycle (IGCC) technology for its 250-megawatt coal-fired power
plant.
o In China, there are currently nine TGP plants in operation and three under
construction, each producing syngas for chemical production. TGP's success
in China led to the signing of a multi-plant agreement with Sinopec and the
former Ministry of Chemical Industry to retrofit an additional nine plants
that are currently using competitive technology.
o The $350 million Delaware Clean Power Project at Motiva's Delaware City
Refinery will use TGP in the world's cleanest process for producing power
(steam and electricity) from petroleum coke.
o In Italy, three refineries are constructing large, world-class IGCC power
plants (we have taken a 24% equity interest in one of them). These TGP
units will enable the refineries to convert high-sulfur residues into
higher-value products such as hydrogen, electricity and steam that are used
within the refineries or sold, if surplus to the refineries' needs. TGP
will provide these refineries with wider flexibility with respect to crude
selection, which can provide substantial financial savings, while
minimizing wastes at these plants.
Power Generation
Our power business includes conventional power generation and cogeneration
of power and steam from a single facility. We also develop, operate and invest
in power projects.
19
<PAGE>
Cogeneration is a process that produces two useful forms of energy from a
single fuel, such as natural gas. The energy products are thermal energy, such
as steam, and electric power. Whether applied in a refinery or to steamflood a
heavy oil field, cogeneration boosts profitability by improving efficiency. In
the narrower context of producing oil, cogeneration is the most efficient way to
generate the steam required for steamflooding.
To date, our largest U.S. cogeneration operations have burned natural gas
to produce heat for steamflooding our Kern River oil field in California while
simultaneously generating electricity. We are now adding to the list of 10
cogeneration facilities we presently operate with our partners in the U.S. These
facilities produce enough electricity to power more than one million homes.
Including projects under construction or development in which we have an equity
share, our cogeneration and conventional power portfolio exceeds 2,000
megawatts.
A major new project is in Indonesia, where subsidiaries of Texaco and
Chevron and a private partner are building the largest cogeneration plant of its
kind. The $190 million, 300-megawatt gas-fired plant will supply power and steam
for use in steamflooding the Duri field in Indonesia's Central Sumatra.
A key new gas turbine combined cycle power project in Thailand is nearing
completion of construction. Developed with our partners Banpu and Edison
Mission, this $400 million, 700-megawatt gas-fired plant will help to meet the
growing power demands of a rapidly expanding economy.
Through our gasification and cogeneration businesses, we are currently
involved in power projects, either directly or indirectly, that will produce
over 8,500 megawatts of power.
Texaco Energy Systems Inc.
Texaco Energy Systems Inc. (TESI) was created in 1999 to explore
opportunities to broaden our energy portfolio. Leveraging the strength of a
global corporation, TESI is developing businesses related to fuel cells,
hydrocarbons-to-liquids (HTL), and alternate fuels. As a technology-based
company, we plan to apply energy expertise and proprietary technologies to make
these emerging energy businesses a reality.
With the creation of the new division, we systematically began evaluating
opportunities in the fuel cell industry. We sought to determine whether we could
leverage our recognized industry leadership in fuel processing and feed
conversion into a joint-venture opportunity with a fuel cell supplier. That
investigation led us to:
o Create a Fuel Cell Technology Center at our Bellaire office complex;
o Begin the installation of an actual fuel cell to power part of the office
complex load (which complex incidentally houses our major computing
center); and
o Further investments in the area of feed conversion at our Montebello
Technology Center.
HTL technology makes possible the conversion of low-value carbon-bearing
material such as stranded gas and heavy oil/petroleum coke from producing
operations and refineries into high-quality diesel fuel as well as specialty
products. The technology consists of syngas generation followed by conversion
into liquids through the Fischer-Tropsch process. Our world-renowned
gasification technology is a leading synthesis gas generating technology
especially for liquid and solid feedstocks.
20
<PAGE>
We currently have agreements with more than one Fischer-Tropsch technology
provider to ensure that the best technology is available for commercial
deployment. The clean, high-quality diesel has high potential for use as a
blending component with conventional refinery diesel. Such a blend, at least
initially because of the limited availability of Fischer-Tropsch diesel, would
be best suited for dedicated fleets in cities that are out of environmental
compliance. Fischer-Tropsch diesel has the potential to be used also as a fuel
for fuel cells. HTL is being evaluated as a potential solution for our natural
gas production in Nigeria and for petroleum coke production from our Hamaca
heavy oil upgrader in Venezuela.
In 1999, TESI led a team of major industrial companies that was awarded a
contract from the U.S. Department of Energy. The contract calls for the team to
design an Early Entrance Co-Production plant for the production of electricity
and high-quality diesel fuel using a combination of our proprietary gasification
and Rentech Inc.'s Fischer-Tropsch technologies.
TECHNOLOGY
Technology drives growth in our industry --and we are generating new
technology and capturing greater value through fast, effective applications of
technology. Below are a few key examples of how we are applying our technologies
to create increased value.
Ultra-deepwater Drilling
We are active in the development of Mudlift Drilling Technology, the
largest single advancement in offshore drilling technology since the development
of semi-submersible drilling rigs. The application of this technology will make
offshore drilling in water depths beyond 10,000 feet a reality. This technology
will reduce the cost of casing programs and allow greater productivity per well
in water depths greater than 3,000 feet. It will also increase the safety of our
drilling operations. This technology holds the key to making many deepwater
developments economically feasible since it has the potential to reduce our
costs by up to $10 million per well.
Stimulating Production - Encapsulated Acid
We have developed and are commercializing a wellbore stimulation technique
that will result in a vast improvement in oil and gas production rates and
additional recovery of reserves from hydrocarbon formations. This will increase
the profitability of our oil and gas fields in the United States, the Middle
East, Kazakhstan and the U. K. North Sea. However, increased performance is only
part of the story.
In environmentally sensitive areas around the world (such as the U.K. North
Sea), the use of conventional acid treatment systems has been severely curtailed
due to environmental concerns. Our new wellbore stimulation technology is unique
because it uses a "food grade" acid, which eliminates many of the concerns
associated with the conventional acid treatment systems. This new technology
will allow us to greatly improve the performance of our oil and gas reservoirs,
while further demonstrating our environmental stewardship.
Heavy Oil Upgrading
We have a comprehensive oil-upgrading technology program aimed at
developing and applying methods to enhance the value of our oil assets. The
program targets oils that are heavy and contain significant amounts of sulfur,
metals and acid, or that have low value with respect to benchmark crudes.
21
<PAGE>
Our strategy is to develop and apply upgrading technologies at the
producing site to capture extra value from heavy crude production. For example,
we have developed technology for effective sulfur removal and API gravity
upgrading of heavy crude oil. During 1999, this technology was particularly
effective in pilot testing with Middle Eastern crudes such as Arab Heavy, Ratawi
and Eocene. In the case of the Eocene crude, it was effective in reducing sulfur
content from 4.5% to 0.3%, while upgrading the crude oil from 20 degree API to
35 degree API.
We are also focusing on the development of a radical new technology for
sulfur and metals removal and for API upgrading. This includes low pressure and
temperature sulfur oxidation technology and biodesulfurization. When
commercialized, these new technologies will result in significant additional
value.
Hydocarbons/Gas to Liquids Technology
During 1999, we applied a "technology portfolio" approach to develop
conversion technologies for both natural gas and low-value hydrocarbon products.
The primary objective of this program is to develop technologies to convert
remote natural gas resources to valuable middle distillates and increase the
commercial value of these assets. The portfolio approach includes both in-house
research and partnerships with various corporations and universities. We have
established partnerships with Syntroleum Corp. and Rentech Inc. to advance the
catalyst-based technologies to commercial viability. Through the Syntroleum
venture, we are currently involved in a pilot test utilizing a promising new
catalyst.
Furthermore, we have been selected by the U.S. Department of Energy for
multiple programs to develop conversion technologies employing our proprietary
gasification process. The coupling of our gasification technology with new
gas-to-liquids technology should provide an integral process that will improve
the economics of the project and make more effective use of the total energy
resources.
Extended-life Coolants
Our commitment to advances in our downstream business is exemplified by the
success of our extended-life motor-vehicle coolants. These products, which our
scientists formulated from mixtures of carboxylic acids, increase protection
capability for heavy-duty vehicles by up to 600,000 miles and keep cars going
strong for at least 150,000 miles without a change. Today, our extended-life
coolants are in new cars built by General Motors in the United States and by
Ford, Volkswagen and Renault in Europe and in Caterpillar heavy-duty engines
worldwide.
Leading Lubricant Technology
Our lubricant technology is an industry leader in delivering products to
automotive manufacturers that foster higher fuel economy and reduced
environmental emissions, while extending equipment life and service intervals.
We have pioneered advances in both Havoline passenger car engine and
transmission lubrication, as well as Ursa Heavy Duty truck oils. This technology
is currently used by a wide range of Original Equipment Manufacturers and their
customers around the world, including the Ford Group, Renault, Nissan, Volvo,
General Motors and Daimler Chrysler. Our most recent noteworthy addition is
Toyota, which selected Texaco lubricant technology for its newly constructed
engine, transmission and vehicle manufacturing plants throughout Europe.
22
<PAGE>
Technology Services Via the Internet
To provide our marine customers with up-to-date analytical results,
comments and recommendations on the condition of the lubricants being used
aboard their vessels, we have implemented a program that provides a quick,
direct transmission of test results from Texaco's Ghent laboratory via the
Internet. Customers can also access historical analysis data for all individual
equipment onboard the vessel. FAMM, our fuel and marketing joint venture with
Chevron Corporation, successfully launched this program in October 1999. On a
yearly basis, some 45,000 sample analyses will be transmitted electronically to
customers. The program, called FAST (FAMM Analysis Service Trending), will lower
handling and reporting costs, while providing better and faster service to
customers.
Technology Leadership
In 1999, we implemented a new model for technology development,
commercialization and value growth. This model continues our focus on extracting
value from technology through its application to Texaco's resources. It also
provides for added value from further development and application of these
technologies beyond the scope of our current business focus.
During 1999, we and our partners formed two new companies that will help to
promote the broader development of two of Texaco's outstanding technologies.
The first of these companies is Alto Technology, a wholly owned subsidiary
that will further develop and commercialize the TEEMS (Texaco Energy and
Environmental Multispectral Imaging Spectrometer) remote sensing technology. The
market opportunities for this unique technology extend beyond the business focus
of Texaco operations and include agriculture, land management and ecological
activities.
Alto Technology will continue to provide Texaco with remote sensing
capability to help us identify potential oil deposits in environmentally
sensitive areas, as we have previously done in the United States, Colombia, the
Partitioned Neutral Zone and Indonesia.
Similarly, we formed Magic Earth, LLC to further develop and expand the
applications of Texaco's 3-D visualization technology. We will continue to use
this technology to help discover large reserves and improve recovery from
existing fields. Texaco holds a substantial interest in Magic Earth and will
participate in defining the future direction of this revolutionary technology.
Through the formation of Magic Earth, our 3-D visualization efforts will be
expanded into other industries, and will lead to new technology products and
applications from which our company can benefit.
23
<PAGE>
ADDITIONAL INFORMATION CONCERNING OUR BUSINESS
Research Expenditures
Worldwide expenditures of Texaco Inc. and subsidiary companies for
research, development and technical support amounted to approximately $96
million in 1999, $138 million in 1998 and $147 million in 1997.
Environmental Expenditures
Information regarding capital environmental expenditures of Texaco Inc.
and subsidiary companies, including equity in affiliates, during 1999, and
projections for 2000 and 2001, for air, water and solid waste pollution
abatement, and related environmental projects and facilities, is incorporated
herein by reference from pages 28 and 29 of Texaco Inc.'s 1999 Annual Report to
Stockholders.
Employees
The number of employees of Texaco Inc. and subsidiary companies as of
December 31, 1999 totaled 18,443 and as of December 31, 1998 totaled 24,628.
Sales to Significant Affiliates
Sales by Texaco Inc. and subsidiary companies to significant affiliates
totaled $4,839 million in 1999, $4,169 million in 1998 and $3,633 million in
1997.
Geographical Financial Data
Information regarding geographical financial data of Texaco Inc. and
subsidiary companies appears in Note 1, Segment Information, on pages 38 and 39
of Texaco Inc.'s 1999 Annual Report to Stockholders.
Stock Repurchase Program
On March 20, 2000, we announced that we will resume our $1 billion common
stock repurchase program. The program was suspended in 1998, with $474 million
of common shares repurchased. We intend to purchase shares of our stock, subject
to market conditions, through open market purchases or privately negotiated
transactions.
Incorporation by Reference
We have incorporated some data and information appearing in our 1999
Annual Report to Stockholders into Items 1, 2, 3, 5, 6, 7, 8 and 14 of this
Form 10-K. No other data and information in our Annual Report to Stockholders
is incorporated by reference into, or filed as part of, this Annual Report on
Form 10-K.
24
<PAGE>
FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT OUR BUSINESS
This Form 10-K may contain or incorporate by reference to other documents
"forward-looking statements" that are based on our current expectations,
estimates, projections, beliefs and assumptions about our company and the
industries in which we operate. We use words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "potential," and similar
expressions to identify such forward-looking statements. Section 27A of the
Securities Act of 1933 protects us from liability in private actions under the
Securities Act based on "forward-looking statements" which later prove to be
inaccurate. We have based our forward-looking statements on a number of
assumptions, any or all of which could ultimately prove to be inaccurate. We
cannot predict with any certainty the overall effect of changes in these
assumptions on our business. Following are some of the important factors that
could change these assumptions and that could adversely affect our business:
Business Risks
o incorrect estimation of reserves
o inaccurate seismic data
o mechanical failures
o decreased demand for motor fuels, natural gas and other products
o above-average temperatures
o pipeline failures
o oil spills
o worldwide and industry economic conditions
o inaccurate forecasts of crude oil, natural gas and petroleum product prices
o increasing price and product competition
o higher costs, expenses and interest rates
o the outcome of pending and future litigation and governmental proceedings
o continued availability of financing
o strikes and other industrial disputes.
Laws, Regulations and Legislation. In the U.S. and other countries in which
we operate, various laws and regulations that affect the petroleum industry are
either now in force, in standby status or under consideration, dealing with such
matters as:
o production restrictions
o import and export controls
o price controls
o crude oil and refined product allocations
o refined product specifications
o environmental, health and safety regulations
o retroactive and prospective tax increases
o cancellation of contract rights and concessions by host governments
o expropriation of property
o divestiture of operations
o foreign exchange rate changes and restrictions as to convertibility of
currencies
o tariffs and other international trade restrictions.
Euro Conversion. Factors that could alter the financial impact of our euro
conversion include:
o changes in current governmental regulations and interpretations of such
regulations
o unanticipated implementation costs
o the effect of the euro conversion on product prices and margins.
We have no obligation to publicly update our forward-looking statements,
whether they become inaccurate as a result of new information, future events or
otherwise.
25
<PAGE>
Item 3. Legal Proceedings
Litigation--We have provided information about legal proceedings pending
against Texaco Inc. and subsidiary companies in Note 15, "Other Financial
Information, Commitments and Contingencies - Litigation" on page 55 of our 1999
Annual Report to Stockholders. Note 15 is incorporated here by reference.
The Securities and Exchange Commission (SEC) requires us to report
proceedings that were instituted or contemplated by governmental authorities
against us under laws or regulations relating to the protection of the
environment. None of these proceedings is material to our business or financial
condition. Following is a brief description of those proceedings that were
either pending as of December 31, 1999, or settled during the fourth quarter of
1999.
o On June 9, 1992, the U.S. Environmental Protection Agency (EPA), Region VI,
served an administrative complaint on Texaco Chemical Company (TCC). The
complaint alleges that TCC violated the State Implementation Plan at its
Port Neches, Texas chemical plant. We sold TCC to Huntsman Corporation on
April 21, 1994, and, by agreement, we retained obligations applicable to
events occurring at the plant prior to the closing date. The EPA is seeking
civil penalties of $149,000.We are contesting liability.
o On December 28, 1992, the EPA, Region VI served an administrative complaint
on TCC. The complaint alleged 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. We are
contesting liability and agreed with the EPA to consolidate this complaint
with the June 9, 1992 complaint, described above. The consolidated matter
is pending before an EPA administrative law judge.
o In March 1998, the U.S. Department of Justice (DOJ) filed a complaint
against us regarding spills of oil and produced water at the Aneth
Producing Field in Utah in violation of the Clean Water Act. The DOJ is
seeking a penalty of approximately $2.3 million. We are contesting
liability.
o On November 24, 1999, Texaco California Inc. (TCI) and the San Joaquin
Valley Unified Air Pollution Control District (SJVUAPCD) settled a series
of notices of violation filed in August 1999 by the SJVUAPCD. The notices
alleged improper storage of organic material in tanks having a true vapor
pressure in excess of 1.5 psia without vapor control. Under the settlement,
TCI paid a penalty of $56,000 and agreed to sample and test materials in
the tanks on a periodic basis. TCI also agreed to install vapor recovery on
various facilities in the Midway-Sunset Field in Kern County, California.
o In December 1999, the SJVUAPCD issued 37 Notices of Violation to TCI
alleging various permit violations, primarily in connection with a project
to refurbish, replace, and expand the number of steam generators used in
the Midway-Sunset Field in Kern County, California. It is possible that the
agency might seek penalties in excess of $100,000.
o In December 1999, the DOJ notified us that it would file a complaint
alleging that the Aneth gas plant, located near Montezuma Creek, Utah,
violated Clean Air Act regulations when renovation work was done on the
plant in 1991 and when asbestos-containing debris was cleaned up after an
explosion in December 1997. The notice also alleged the Aneth Producing
Field in Utah violated section 304 of the Emergency Planning and Community
Right-to-Know Act for failing to provide proper notice to emergency
response authorities about releases of sulfur dioxide in December 1997. The
DOJ is expected to seek more than $100,000 in penalties. We are contesting
liability.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
26
<PAGE>
Executive Officers of Texaco Inc.
The executive and other elected officers of Texaco Inc. as of March 6, 2000
are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter I. Bijur................... 57 Chairman of the Board and Chief Executive Officer
Patrick J. Lynch................. 62 Senior Vice President and Chief Financial Officer
John J. O'Connor ............... 53 Senior Vice President
Glenn F. Tilton ............... 51 Senior Vice President
William M. Wicker ............... 50 Senior Vice President
Bruce S. Appelbaum............... 52 Vice President
Eugene G. Celentano.............. 61 Vice President
James F. Link.................... 55 Vice President
James R. Metzger................. 52 Vice President
Robert C. Oelkers................ 55 Vice President
Deval L. Patrick................. 43 Vice President and General Counsel
Elizabeth P. Smith............... 50 Vice President
Robert A. Solberg................ 54 Vice President
Janet L. Stoner.................. 51 Vice President
Michael N. Ambler................ 63 General Tax Counsel
George J. Batavick............... 52 Comptroller
Ira D. Hall...................... 55 Treasurer
Michael H. Rudy.................. 56 Secretary
</TABLE>
For more than five years, each of the above listed officers of Texaco Inc.,
except for Messrs. Wicker, O'Connor, Patrick and Hall, 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. During the eight years prior
to joining Texaco, Mr. Wicker had been with First Boston and Credit Suisse First
Boston, most recently as the Managing Director and Co-Head of the Global Energy
Group for Credit Suisse First Boston.
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.
Effective February 8, 1999, Mr. Patrick joined Texaco as Vice President and
General Counsel. Prior to joining Texaco, Mr. Patrick had been a partner with
the Boston law firm of Day Berry & Howard LLP since 1997. Mr. Patrick was also
Assistant Attorney General of the United States and chief of the U.S. Justice
Department's Civil Rights Division from 1994-97, where he was responsible for
enforcing federal laws prohibiting discrimination.
Effective June 1, 1998, Mr. Hall joined Texaco as General Manager of
Alliance Management. He was elected Treasurer of Texaco Inc. effective October
1, 1999. Prior to joining Texaco, Mr. Hall had been with International Business
Machines (IBM) Corporation since 1985. Mr. Hall held a series of positions with
IBM including Director of International Operations, Treasurer of IBM (US),
Controller of IBM World Trade Corporation and Chairman and Chief Executive
Officer of IBM WTC Insurance Corporation.
There are no family relationships among any of the officers of Texaco Inc.
27
<PAGE>
PART II
The following information, contained in Texaco Inc.'s 1999 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1999 Annual Report to Stockholders, as
provided to stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
1999
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 68 (a)
Item 6. Selected Financial Data
Five-Year Comparison of Selected Financial Data 65
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Supplemental Market Risk Disclosures 63
Item 8. Financial Statements and Supplementary Data
Description of Significant Accounting Policies 30-31
Statement of Consolidated Income 32
Consolidated Balance Sheet 33
Statement of Consolidated Stockholders' Equity 34-35
Statement of Consolidated Non-owner Changes in Equity 36
Statement of Consolidated Cash Flows 37
Notes to Consolidated Financial Statements 38-55
Report of Independent Public Accountants 56
Supplemental Oil and Gas Information 57-62
Selected Quarterly Financial Data 64
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>
28
<PAGE>
PART III
The following information, contained in Texaco Inc.'s Proxy Statement dated
March 14, 2000 relating to our 2000 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 this Proxy Statement 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 2000 Proxy Statement, as provided to
stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
March 14, 2000
Proxy Statement
Form 10-K Item Page Reference
- -------------- --------------
<S> <C>
Item 10. Directors and Executive Officers of the Registrant
--The Board of Directors
Section 16(a) Beneficial Ownership Reporting Compliance 8
--Item 1- Election of Directors 9-12
Item 11. Executive Compensation
--The Board of Directors
Compensation of Directors 7
Transactions With Directors and Officers 7
--Summary Compensation Table 20
--Option Grants in 1999 21-22
--Aggregated Option Exercises in 1999 and Year-End Option Values 23
--Retirement Plan 24
Item 12. Security Ownership of Certain Beneficial Owners and Management
--Description of Capital Stock 1
--Security Ownership of Directors and Management 8
Item 13. Certain Relationships and Related Transactions
--Transactions With Directors and Officers 7
</TABLE>
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following information, contained in Texaco Inc.'s 1999 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1999 Annual Report to Stockholders, as
provided to stockholders:
<TABLE>
<CAPTION>
(a) The following documents are filed as part of this report: Texaco Inc.
1999
Annual Report
1. Financial Statements (incorporated by reference from the indicated to Stockholders
pages of Texaco Inc.'s 1999 Annual Report to Stockholders): Page Reference
---------------
<S> <C>
Description of Significant Accounting Policies............................ 30-31
Statement of Consolidated Income for the three years
ended December 31, 1999................................................ 32
Consolidated Balance Sheet at December 31, 1999 and 1998.................. 33
Statement of Consolidated Stockholders' Equity
for the three years ended December 31, 1999............................ 34-35
Statement of Consolidated Non-owner Changes in Equity
for the three years ended December 31, 1999 ........................... 36
Statement of Consolidated Cash Flows for the three years
ended December 31, 1999 ............................................... 37
Notes to Consolidated Financial Statements................................ 38-55
Report of Independent Public Accountants.................................. 56
2. Financial Statement Schedules
</TABLE>
We have included on page 34 of this Annual Report on Form 10-K Financial
Statement Schedule II, Valuation and Qualifying Accounts.
We have filed as part of this Annual Report on Form 10-K the following sets
of financial statements, for which we use the equity method of accounting:
o Caltex Group of Companies Combined Financial Statements
o Equilon Enterprises LLC Consolidated Financial Statements
o Motiva Enterprises LLC Financial Statements.
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 I, III, IV and V 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 August 4, 1999, including
Certificate of Designations, Preferences and Rights of
Series D Junior Participating Preferred Stock and Series G,
H, I and J Market Auction Preferred Shares, filed as Exhibit
3.1 to Texaco Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, dated August 12, 1999,
incorporated herein by reference, SEC File No. 1-27.
-- (3.2) Copy of By-Laws of Texaco Inc., as amended to and including
April 27, 1999, filed as Exhibit 3.2 to Texaco Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999, dated May 14, 1999, incorporated herein by
reference, SEC File No. 1-27.
-- (4.1) Form of Amended Rights Agreement, dated as of March 16,
1989, as amended as of April 28, 1998, between Texaco Inc.
and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, filed as Exhibit I, pages 40 through 78, of Texaco
Inc.'s proxy statement dated March 17, 1998, incorporated
herein by reference, SEC File No. 1-27.
30
<PAGE>
-- (4.2) 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)) Form of severance agreement between Texaco Inc. and elected
officers of Texaco Inc., filed as Exhibit 10(iii)(a) to
Texaco Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, dated March 25, 1999, incorporated herein
by reference, SEC File No. 1-27.
--(10(iii)(b)) Employment agreement dated December 30, 1997, between
Texaco Inc. and Mr. John J. O'Connor, Senior Vice President
of Texaco Inc., filed as Exhibit 10(iii)(b) to Texaco Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1998, dated March 25, 1999, incorporated herein by
reference, SEC File No. 1-27.
--(10(iii)(c)) Employment agreements dated July 18, 1997, between Texaco
Inc. and Mr. William M. Wicker, Senior Vice President of
Texaco Inc., filed as Exhibit 10(iii)(c) to Texaco Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1998, dated March 25, 1999, incorporated herein by
reference, SEC File No. 1-27.
--(10(iii)(d)) 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)(e)) 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.
--(10(iii)(f)) 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)(g)) 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)(h)) 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)(i)) 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)(j)) 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 1999 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.
-- (23.1) Consent of Arthur Andersen LLP.
-- (23.2) Consent of KPMG LLP.
-- (23.3) Consent of Independent Accountants of Equilon Enterprises
LLC.
31
<PAGE>
-- (23.4) Consent of Independent Accountants of Motiva Enterprises
LLC.
-- (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 1999, Texaco Inc. filed a Current Report on
Form 8-K relating to the following event:
1. October 25, 1999
Item 5. Other Events -- reported that Texaco issued an
Earnings Press Release for the third quarter and first
nine months of 1999.
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders, Texaco Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements included in Texaco Inc. and
subsidiary companies' annual report to stockholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 24, 2000. Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in Item 14 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
New York, N.Y.
February 24, 2000
33
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Texaco Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998 and 1997
(In Millions of Dollars)
Balance at Additions-Charged Balance at
Beginning to Costs and End
Description of Year Expenses Deductions of Year
- ----------- ---------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
1998 Employee Termination Benefits $100 $ 48 $121* $ 27
==== ==== ==== ====
1996 Employee Termination Benefits $ 12 $ -- $ 4 $ 8
==== ==== ==== ====
Maintenance and Repairs -
Major Facilities $ 40 $ 45 $ 59 $ 26
==== ==== ==== ====
Year ended December 31, 1998
1998 Employee Termination Benefits $ -- $115 $ 15 $100
==== ==== ==== ====
1996 Employee Termination Benefits $ 20 $ -- $ 8 $ 12
==== ==== ==== ====
Maintenance and Repairs -
Major Facilities $120 $ 36 $116 $ 40
==== ==== ==== ====
Year ended December 31, 1997
1996 Employee Termination Benefits $ 72 $ 10 $ 62 $ 20
==== ==== ==== ====
Maintenance and Repairs -
Major Facilities $103 $135 $118 $120
==== ==== ==== ====
<FN>
* Includes cash payments of $109 million and transfers to long-term obligations of $12 million.
</FN>
</TABLE>
34
<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 24th day of March, 2000.
Texaco inc.
(Registrant)
MICHAEL H. RUDY
By ............................
(MICHAEL H. RUDY)
Secretary
Attest:
CALLI P. CHECKI
By .................................
(CALLI P. CHECKI)
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.
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)
GEORGE J. BATAVICK ........... Comptroller
(Principal Accounting Officer)
Directors:
A. CHARLES BAILLIE SAM NUNN
PETER I. BIJUR CHARLES H. PRICE, II
MARY K. BUSH CHARLES R. SHOEMATE
EDMUND M. CARPENTER ROBIN B. SMITH
MICHAEL C. HAWLEY WILLIAM C. STEERE, JR.
FRANKLYN G. JENIFER THOMAS A. VANDERSLICE
MICHAEL H. RUDY
By .......................................
(MICHAEL H. RUDY)
Attorney-in-fact for the above-named
officers and directors
March 24, 2000
35
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
December 31, 1999
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
INDEX
<TABLE>
<S> <C>
Page
----
General Information 1-3
Independent Auditors' Report 4
Combined Balance Sheet 5-6
Combined Statement of Income 7
Combined Statement of Comprehensive Income 7
Combined Statement of Stockholders' Equity 8
Combined Statement of Cash Flows 9
Notes to Combined Financial Statements 10-22
<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. (collectively, the Stockholders) 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 Corporation, a company incorporated in Delaware with its corporate
headquarters in Singapore, that, through its many subsidiaries and
affiliates, conducts refining, transporting, trading, 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.
A brief description of each company's operations and other items follows. All
reported amounts are in U.S. dollars.
Caltex Corporation (Caltex)
- ---------------------------
Through its subsidiaries and affiliates, Caltex operates in approximately
55 countries, principally in Africa, Asia, the Middle East, New Zealand and
Australia. These geographic areas comprise a broad diversity of mature,
developing, and emerging markets. At the end of 1999, it had total assets of
$7.9 billion, sales of 1.8 million barrels of crude oil and petroleum products
per day, and total revenues of $13.8 billion for the year. Caltex is involved in
all aspects of the downstream business: marketing, refining, distribution,
transportation, storage, supply and trading operations; the corporation is also
active in the petrochemical business through its affiliate in Korea. At year-end
1999, Caltex had more than 7,200 employees.
The majority of refining and certain marketing operations are conducted
through joint ventures. Caltex has equity interests in 11 refineries with equity
refining capacity of approximately 850,000 barrels per day. Additionally, it has
interests in two lubricant refineries, 17 lubricant blending plants, and a
network of ocean terminals and depots. Caltex also has an interest in a fleet of
vessels, and owns or has equity interests in numerous pipelines. Caltex conducts
international crude oil and petroleum product logistics and trading operations
from a subsidiary in Singapore.
P. T. Caltex Pacific Indonesia (CPI)
- ------------------------------------
CPI holds a Production Sharing Contract (PSC) 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. At
the end of 1999, CPI had total assets of $2.4 billion, which generated total
revenues of $1.1 billion for the year. Exploration is pursued over 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 1999 was over 746,000 barrels of crude oil per day. CPI entitlements are
sold to its Stockholders, who use them in their systems or sell them to third
parties. At year-end 1999, CPI had approximately 5,900 employees, all located in
Indonesia.
American Overseas Petroleum Limited (AOPL)
- ------------------------------------------
AOPL and its subsidiary provide services for CPI and manage certain
exploration, production operations, and geothermal and power generation projects
in Indonesia in which Chevron and Texaco have interests, but not necessarily
jointly. At year-end 1999, AOPL had approximately 213 employees, of which 8%
were located in the United States.
1
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Supplemental Market Risk Disclosures
- -------------------------------------
The Group uses various derivative financial instruments for hedging and
trading 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, exposure remains on the unhedged portion. The
Notes to the Combined Financial Statements provide additional 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 $2.2 billion and $2.0 billion,
before the effects of related net interest rate swaps of $0.4 billion and $0.5
billion, at December 31, 1999 and 1998, respectively). The Group seeks to
balance the benefit of lower cost variable rate debt, having inherent increased
risk, with more expensive, but lower risk 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 at December 31, 1999 and 1998, a hypothetical change in the
interest rates of 2% would change net income by approximately $25 million and
$21 million in 1999 and 1998, respectively.
Crude oil and petroleum product derivatives
The Group uses established petroleum futures exchanges, as well as
"over-the-counter" instruments, including futures, options, swaps, and other
derivative products to hedge a portion of the market risks associated with its
crude oil and petroleum product purchases and sales. The Group also enters into
derivative contracts as part of its crude oil and petroleum product trading
activities.
The Group had net open petroleum derivative sales contracts of
approximately $127 million at December 31, 1999, and net open petroleum
derivative purchase contracts of approximately $68 million at December 31, 1998.
As a sensitivity for these contracts, a hypothetical 10% change in crude oil and
petroleum product prices would change net income by approximately $9 million and
$5 million in 1999 and 1998, respectively.
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 options contracts. Depending on the exposure being hedged, the Group either
purchases or sells selected foreign currencies. The Group had net foreign
currency purchase contracts of approximately $279 million and $370 million at
December 31, 1999 and 1998 respectively, 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 in 1999 or 1998.
2
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
New Accounting Standard
- -----------------------
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued by
the Financial Accounting Standards Board (FASB) in 1998. SFAS No. 133
establishes new accounting rules and disclosure requirements for derivative
instruments and hedge transactions. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective date of SFAS 133. The Group will adopt SFAS No. 133
effective January 1, 2001, and is currently assessing the effects of adoption on
its results of operations and financial position.
Year 2000 Compliance
- --------------------
The Group and its subsidiaries and affiliates experienced no major
disruptions or other system or equipment problems resulting from the Year 2000
(Y2K) issue. During the year 1999 and the first few weeks of 2000, the Group,
including its share of affiliates, spent approximately $17 million on Y2K
issues, bringing the total spent since 1998 to approximately $32 million. The
Group does not anticipate spending any significant additional funds on Y2K
related activities.
3
<PAGE>
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, 1999 and 1998, and the related combined
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1999, all
expressed in United States of America dollars. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 12 to the combined financial statements, the Group
changed its method of accounting for start-up costs in 1998 to comply with the
provisions of the AICPA's Statement of Position 98-5 - "Reporting on the Costs
of Start-up Activities".
KPMG
Singapore
February 7, 2000
4
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions of U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including time deposits of
$12 in 1999 and $17 in 1998 $ 225 $ 178
Marketable securities 117 106
Accounts and notes receivable, less allowance for doubtful accounts of $43
in 1999 and $31 in 1998:
Trade 1,048 629
Affiliates 541 256
Other 132 194
--------- -------
1,721 1,079
Inventories:
Crude oil 170 167
Petroleum products 427 418
Materials and supplies 26 26
--------- -------
623 611
Deferred income taxes 19 -
--------- -------
Total current assets 2,705 1,974
Investments and advances:
Equity in affiliates 2,127 2,254
Miscellaneous investments and long-term receivables,
less allowance of $24 in 1999 and $21 in 1998 96 109
--------- -------
Total investments and advances 2,223 2,363
Property, plant, and equipment, at cost:
Producing 4,732 4,386
Refining 1,350 1,319
Marketing 3,194 3,125
Other 14 15
--------- -------
9,290 8,845
Accumulated depreciation, depletion and amortization (4,120) (3,747)
--------- -------
Net property, plant and equipment 5,170 5,098
Prepaid and deferred charges 211 223
--------- -------
Total assets $ 10,309 $ 9,658
========= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
5
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions of U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
Current liabilities:
Short-term debt $ 1,588 $ 1,475
Accounts payable:
Trade and other 1,440 1,005
Stockholders 44 28
Affiliates 61 39
--------- -------
1,545 1,072
Accrued liabilities 163 181
Deferred income taxes - 25
Estimated income taxes 99 86
--------- -------
Total current liabilities 3,395 2,839
Long-term debt 1,054 930
Employee benefit plans 85 122
Deferred credits and other non-current liabilities 1,271 1,130
Deferred income taxes 206 208
Minority interest in subsidiary companies 23 31
--------- -------
Total 6,034 5,260
Stockholders' equity:
Common stock 355 355
Capital in excess of par value 2 2
Retained earnings 4,117 4,151
Accumulated other comprehensive loss (199) (110)
--------- -------
Total stockholders' equity 4,275 4,398
--------- -------
Total liabilities and stockholders' equity $ 10,309 $ 9,658
========= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
6
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales and other operating revenues(1) $ 14,583 $ 11,300 $ 15,262
Gain on sale of investment in affiliate 18 - -
Income in equity affiliates 252 108 390
Dividends, interest and other income 62 97 47
--------- --------- ---------
Total revenues 14,915 11,505 15,699
Costs and deductions:
Cost of sales and operating expenses(2) 12,775 9,541 13,251
Selling, general and administrative expenses 582 676 580
Depreciation, depletion and amortization 459 431 421
Maintenance and repairs 154 147 143
Foreign exchange - net 11 16 (55)
Interest expense 152 172 146
Minority interest 2 3 3
--------- --------- ---------
Total costs and deductions 14,135 10,986 14,489
--------- --------- ---------
Income before income taxes 780 519 1,210
Provision for income taxes 390 326 364
--------- --------- ---------
Income before cumulative effect of accounting change 390 193 846
Cumulative effect of accounting change (no tax benefit) - (50) -
--------- --------- ---------
Net income $ 390 $ 143 $ 846
========= ========= =========
(1) Includes sales to:
Stockholders $1,916 $1,333 $1,562
Affiliates 3,970 2,121 2,906
(2) Includes purchases from:
Stockholders $1,491 $1,233 $2,041
Affiliates 1,121 1,353 1,701
</TABLE>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 390 $ 143 $ 846
Other comprehensive income:
Currency translation adjustments:
Change during the year (5) (10) (84)
Reclassification to net income for sale of investment in affiliate (63) - -
Unrealized gains/(losses) on investments:
Change during the year 32 8 (23)
Reclassification of gains included in net income (64) - (3)
Related income tax benefit (expense) 11 (1) 14
--------- --------- ---------
Total other comprehensive loss (89) (3) (96)
--------- --------- ---------
Comprehensive income $ 301 $ 140 $ 750
========= ========= =========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
7
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Common stock and capital in excess of par value $ 357 $ 357 $ 357
========= ========= =========
Retained earnings:
Balance at beginning of year $ 4,151 $ 4,342 $ 3,910
Net income 390 143 846
Cash dividends (424) (334) (414)
--------- --------- ---------
Balance at end of year $ 4,117 $ 4,151 $ 4,342
========= ========= =========
Accumulated other comprehensive loss:
Cumulative translation adjustments:
Balance at beginning of year $ (130) $ (120) $ (36)
Change during the year (5) (10) (84)
Reclassification to net income for sale of investment
in affiliate (63) - -
--------- --------- ---------
Balance at end of year $ (198) $ (130) $ (120)
========= ========= =========
Unrealized holding gain on investments, net of tax:
Balance at beginning of year $ 20 $ 13 $ 25
Change during the year 19 7 (11)
Reclassification of gains included in net income (40) - (1)
--------- --------- ---------
Balance at end of year $ (1) $ 20 $ 13
========= ========= =========
Accumulated other comprehensive loss - end of year $ (199) $ (110) $ (107)
========= ========= =========
Total stockholders' equity - end of year $ 4,275 $ 4,398 $ 4,592
========= ========= =========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
8
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 390 $ 143 $ 846
Reconciliation to net cash provided by operating activities:
Depreciation, depletion and amortization 459 431 421
Dividends less than income in equity affiliates (181) (8) (347)
Net losses on asset disposals/write-downs 34 50 16
Deferred income taxes (58) 92 (51)
Prepaid charges and deferred credits 154 59 103
Changes in operating working capital (190) 316 (150)
Gain on sale of investment in affiliate (18) - -
Other (25) 35 (13)
--------- --------- ---------
Net cash provided by operating activities 565 1,118 825
Investing activities:
Capital expenditures (580) (761) (905)
Investments in and advances to affiliates (1) (211) (10)
Purchase of investment instruments (11) (114) (39)
Sale of investment instruments - 90 73
Proceeds from sale of investments in affiliates 249 - -
Proceeds from asset sales 16 9 156
--------- --------- ---------
Net cash used for investing activities (327) (987) (725)
Financing activities:
Debt with terms in excess of three months :
Borrowings 959 849 845
Repayments (824) (701) (628)
Net increase (decrease) in other debt 118 (22) 323
Funding provided by minority interest - 17 -
Dividends paid, including minority interest (424) (334) (414)
--------- --------- ----------
Net cash (used for) provided by financing activities (171) (191) 126
Effect of exchange rate changes on cash and cash equivalents (20) (44) (150)
--------- --------- ---------
Cash and cash equivalents:
Net change during the year 47 (104) 76
Beginning of year balance 178 282 206
--------- --------- ---------
End of year balance $ 225 $ 178 $ 282
========= ========= =========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
9
<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 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% except
cases in which control does not rest with the Group. The Group's accounting
policies are in accordance with U.S. generally accepted accounting principles,
and the Group's reporting currency is the U.S. dollar.
Translation of foreign currencies The U.S. dollar is the functional currency for
all principal subsidiary and affiliate operations. Prior to October 1, 1997, the
Group used the local currency as the functional currency for its affiliates in
Korea and Japan due to the regulatory environments in those countries. The
regulatory environments in Korea and Japan changed in 1997. The Group concluded
that deregulation in Korea and Japan represented a significant change in
economic facts and circumstances. Accordingly, 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. The change in functional currency was
applied on a prospective basis.
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 Inventories are valued at the lower of cost or current market,
except as noted below. Crude oil and petroleum product inventory costs are
primarily determined using the last-in, first-out (LIFO) method, and include
applicable acquisition and refining costs, duties, import taxes, freight, etc.
Materials and supplies are stated at average cost. Certain trading-related
inventory, which is highly transitory in nature, is marked-to-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.
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.
Long-lived assets, including proved developed oil and gas properties, are
assessed for possible impairment by comparing their carrying values to the
undiscounted-future-net-before-tax cash flows. Impaired assets are written down
to their fair values, and impaired assets held for sale are recorded at their
fair value less cost to sell.
10
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Deferred credits Deferred credits primarily represent the Indonesian
government's interest in specific property, plant and equipment balances. Under
the Production Sharing Contract (PSC), the Indonesian government retains a
majority equity share of current production profits. Intangible development
costs (IDC) are capitalized for U.S. generally accepted accounting principles
under the successful efforts method, but are treated as period expenses for PSC
reporting. Other capitalized amounts are depreciated at an accelerated rate for
PSC reporting. The deferred credit balances recognize the government's share of
IDC and other reported capital costs that over the life of the PSC will be
included in income as depreciation, depletion and amortization and will be
applied against future production related profits.
Derivative financial instruments and energy trading contracts The Group uses
various derivative financial instruments for hedging purposes. These instruments
include interest rate and/or currency swap contracts, forward and options
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 non-monetary 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
instruments that do not qualify as hedges are recognized currently in income.
The Group also enters into energy contracts as a part of its crude oil and
petroleum product trading activities. Trading contracts are recorded at market
value and related gains and losses are recorded on a net basis in cost of sales
and operating expenses as the market values change. The net gains and losses
from trading contracts were not material to the Group's results of operations
for 1999 and 1998.
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, is 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.
Revenue recognition In general, revenue is recognized for crude oil, natural gas
and refined product sales when title passes as specified in the sales contract.
11
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Reclassifications Certain reclassifications have been made to the prior year
amounts of sales and cost of sales in the combined statement of income to
conform to the 1999 presentation of gains and losses related to certain
commodity contracts.
Note 2 - Asset Sale
In 1997 Caltex Trading and Transport Corporation, a subsidiary of the
Group, sold for cash its 40% interest in its Bahrain refining joint venture plus
related assets at net book value of approximately $140 million.
Note 3 - Inventories
The reported value of inventory at December 31 1999 was less than its
current cost by approximately $104 million. The reported value of inventory at
December 31, 1998 approximated its current cost. In 1998 and 1997, certain
inventories were recorded at market, which was lower than the LIFO carrying
value. Adjustments to market reduced net income $18 million in 1998 and $36
million in 1997. The market valuation adjustment reserves established in prior
years were eliminated as market prices improved in 1999 and the physical units
of inventory were sold. Elimination of these reserves increased net income in
1999 by $71 million. At December 31, 1999, inventories were reported at LIFO
carrying cost.
Inventory quantities valued on the LIFO basis were reduced at certain
locations during the periods presented. Such inventory reductions increased net
income in 1999 by $41 million, and decreased net income by $4 million and $5
million (net of related market valuation adjustments of $1 million and $14
million) in 1998 and 1997, respectively.
Note 4 - Equity in affiliates
Investments in affiliates at equity include the following:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions of U.S. Dollars)
Equity % 1999 1998
-------- ---- ----
<S> <C> <C> <C>
Caltex Australia Limited 50% $ 260 $ 324
Koa Oil Company, Limited (sold August, 1999) 50% - 298
LG-Caltex Oil Corporation 50% 1,441 1,170
Star Petroleum Refining Company, Ltd. 64% 269 304
All other Various 157 158
--------- ---------
$ 2,127 $ 2,254
========= =========
</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 1999, Caltex Corporation sold its 50% interest in Koa Oil Company,
Limited (Koa) with a net book value of approximately $219 million, to Nippon
Mitsubishi Oil Corp, for approximately $237 million in cash. As a result of the
sale, Caltex incurred additional U.S. tax liabilities of approximately $81
million.
12
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Equity in affiliates - continued
On December 31, 1997, Caltex Australia Limited (CAL), then a subsidiary of
the Group, acquired the remaining 50% of Australian Petroleum Pty. Limited
(APPL) from 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 declined from
75% to 50% and its indirect equity in APPL 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 are excluded from the Group's
consolidated financial statements.
The remaining interest in Star Petroleum Refining Company Ltd. (SPRC) is
owned by a governmental entity of the Kingdom of Thailand. 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 before the year 2001; however, it is likely that this
requirement will be delayed in view of the current economic difficulties in the
region.
Shown below is summarized combined financial information for affiliates at
equity (in Millions of U.S. Dollars):
<TABLE>
<CAPTION>
100% Equity Share
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Current assets $ 3,005 $ 3,689 $ 1,535 $ 1,855
Other assets 6,333 7,689 3,287 4,004
Current liabilities 3,351 3,547 1,816 1,795
Other liabilities 1,883 3,505 937 1,866
------- -------- ------- -------
Net worth $ 4,104 $ 4,326 $ 2,069 $ 2,198
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
100% Equity Share
---------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 12,796 $ 11,811 $ 14,669 $ 6,511 $ 5,968 $ 7,452
Operating income 726 1,101 1,078 358 539 532
Net income 539 193 853 252 58 390
</TABLE>
Cash dividends received from these affiliates were $71 million, $50
million, and $43 million in 1999, 1998, and 1997, respectively.
The summarized combined financial information shown above includes the
cumulative effect of the accounting change in 1998 as described in note 12.
Retained earnings as of December 31, 1999 and 1998 includes $1.4 billion
which represents 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, 1999
and 1998 were 6.5% and 7.3%, respectively. Unutilized lines of credit available
for short-term financing totaled $0.8 billion as of December 31, 1999.
13
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Long-term debt
Long-term debt, with related interest rates for 1999 and 1998 consist of
the following:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions of U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
U.S. dollar debt:
Variable interest rate loans with average rates
of 6.4% and 5.5%, due 2001-2009 $ 481 $ 454
Fixed interest rate term loans with average rates of 6.1%
and 6.4%, due 2001-2004 246 130
Australian dollar debt:
Fixed interest rate loan with 12.4% rate due 2001 205 211
New Zealand dollar debt:
Variable interest rate loans with average rates
of 5.6% and 5.0%, due 2001-2003 70 78
Fixed interest rate loan with 8.09% rate - 5
Malaysian ringgit debt:
Fixed interest rate loans with average rates of 7.81%
and 9.16%, due 2001 24 33
South African rand debt:
Fixed interest rate loan with 17.8% rate due 2003 8 8
Other - variable interest rate loans with average rates
of 15.3% and 5.8%, due 2001-2007 20 11
-------- -------
$ 1,054 $ 930
======== =======
</TABLE>
Aggregate maturities of long-term debt by year are as follows (in Millions
of U.S. Dollars): 2000 - $148 (included in short-term debt); 2001- $508; 2002 -
$333; 2003 - $110; 2004 - $21; and thereafter - $82.
Note 7 - Operating leases
The Group has operating leases involving various marketing assets for
which net rental expense was $112 million, $103 million, and $105 million in
1999, 1998, and 1997, respectively.
Future net minimum rental commitments under operating leases having
non-cancelable terms in excess of one year are as follows (in Millions of U.S.
Dollars): 2000 - $66; 2001 - $42; 2002 - $30; 2003 - $13; 2004 - $10; and 2005
and thereafter - $37.
14
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee benefit plans
The Group has various retirement plans, including defined benefit pension
plans, covering substantially all of its employees. The benefit levels, vesting
terms and funding practices vary among plans. The following provides a
reconciliation of benefit obligations, plan assets, and funded status of the
various plans, primarily foreign, and inclusive of affiliates at equity.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------
(Millions of U.S. Dollars)
Other Post-retirement
---------------------
Pension Benefits Benefits
---------------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at January 1, $ 400 $ 405 $ 79 $ 64
Service cost 23 19 1 2
Interest cost 26 31 8 6
Actuarial (gain) loss 7 32 (5) 11
Benefits paid (39) (72) (4) (4)
Settlements and curtailments (117) (26) - 5
Foreign exchange rate changes 7 11 (1) (5)
------ ------ ------ -----
Benefit obligation at December 31, $ 307 $ 400 $ 78 $ 79
====== ====== ====== =====
Change in plan assets:
Fair value at January 1, $ 333 $ 322 $ - $ -
Actual return on plan assets 37 47 - -
Group contribution 42 62 4 4
Benefits paid (39) (72) (4) (4)
Settlements (105) (26) - -
Foreign exchange rate changes 11 - - -
----- ------ ------ -----
Fair value at December 31, $ 279 $ 333 $ - $ -
====== ====== ====== =====
Accrued benefit costs:
Funded status $ (28) $ (67) $ (78) $ (79)
Unrecognized net transition liability 2 4 - -
Unrecognized net actuarial losses 23 11 17 23
Unrecognized prior service costs 7 9 - -
------ ------ ------ -----
Prepaid (accrued) benefit cost recognized $ 4 $ (43) $ (61) $ (56)
====== ====== ====== =====
Amounts recognized in the Combined Balance Sheet:
Prepaid benefit cost $ 32 $ 27 $ - $ -
Equity in affiliates - (30) - -
Accrued benefit liability (28) (40) (61) (56)
------ ------ ------- ------
Prepaid (accrued) benefit cost recognized $ 4 $ (43) $ (61) $ (56)
====== ====== ====== =====
Weighted average rate assumptions:
Discount rate 8.9% 7.6% 10.9% 10.0%
Rate of increase in compensation 6.9% 5.4% 4.0% 4.0%
Expected return on plan assets 10.4% 9.6% n/a n/a
<FN>
Settlements and curtailments in 1999 include sale of investment in Koa. (see Note 4)
</FN>
</TABLE>
15
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee benefit plans - continued
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(Millions of U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
Pension plans with accumulated benefit obligations in excess of assets
Projected benefit obligation $ 25 $184
Accumulated benefit obligation 13 157
Fair value of assets - 87
</TABLE>
The 1999 reduction is due to sale of investment in Koa (see Note 4)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Components of Pension Expense
Service cost $ 23 $ 19 $ 26
Interest cost 26 31 44
Expected return on plan assets (27) (28) (36)
Amortization of prior service cost 3 1 3
Recognized net actuarial loss 1 5 3
Curtailment/settlement loss 16 21 -
----- ------ ------
Total $ 42 $ 49 $ 40
===== ====== ======
Components of Other Post-retirement Benefits
Service cost $ 1 $ 2 $ 2
Interest cost 8 6 6
Special termination benefit recognition - 3 -
Curtailment recognition - 3 -
----- ------ ------
$ 9 $ 14 $ 8
===== ====== ======
</TABLE>
Other post-retirement benefits are comprised of contributory healthcare
and life insurance plans. A one percentage point change in the assumed health
care cost trend rate of 8.9% would change the post-retirement benefit obligation
by $8 million and would not have a material effect on aggregate service and
interest components.
Note 9 - Commitments and contingencies
In 1997, Caltex received a claim from the United States Internal Revenue
Service (IRS) for $292 million in excise tax, along with penalties and interest,
bringing the total to approximately $2 billion. Caltex was required to provide
the IRS with a standby letter of credit securing the performance of Caltex'
obligations to the IRS if the claim was upheld by the courts. Pursuant to
Caltex' ongoing discussions with the IRS and the Justice Department, Caltex'
offer to settle the claim was accepted and the remaining amount of the
assessment was conceded. On December 22, 1999, Caltex settled the claim in the
amount of tax of $9.1 million plus accrued interest of $55.7 million due under
the terms of the settlement. Accordingly, the letter of credit was terminated
and the parties filed a stipulation with the United States Court of Federal
Claims to dismiss the case and the case was dismissed. The majority of the
settlement was applied against reserves established prior to 1999 and there was
no significant impact on 1999 net income.
Caltex also is involved in IRS tax audits for years 1987 to 1993. While no
claims by the IRS are outstanding 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.
16
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies - continued
Caltex 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 products for Caltex
(Philippines) Inc. (a subsidiary of Caltex) in connection with a contract of
affreightment. Although Caltex had no direct or indirect ownership in or
operational responsibility for either vessel, various theories of liability have
been alleged against Caltex. 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. Caltex is actively pursuing dismissal of
all Philippine litigation on the strength of a Philippine Supreme Court decision
absolving it of any responsibility for the collision. Caltex is also seeking
dismissal of the Louisiana litigation in reliance on various statutory,
procedural and substantive 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.
A Caltex subsidiary has a contractual commitment until 2007 to purchase
petroleum products in conjunction with the financing of a refinery owned by an
affiliate. Total future estimated commitments under this contract, based on
current pricing and projected growth rates, are approximately $700 million per
year. Purchases (in billions of U.S. dollars) under this and other similar
contracts were $0.7, $0.8 and $1.0 in 1999, 1998 and 1997, respectively.
Caltex is contingently liable for sponsor support funding for a maximum of
$278 million in connection with an affiliate's project finance obligations. The
project has been operational since 1996 and has successfully completed all
mechanical, technical and reliability tests associated with the plant physical
completion covenant. However, the affiliate has been unable to satisfy a
covenant relating to a working capital requirement. As a result, a technical
event of default exists which has not been waived by the lenders. The lenders
have not enforced their rights and remedies under the finance agreements and
they have not indicated an intention to do so. The affiliate is current on these
financial obligations and anticipates resolving the issue with its secured
creditors during further restructuring discussions. During 1999, Caltex and the
other sponsor provided temporary short-term extended trade credit related to
crude oil supply with an outstanding balance owing to Caltex at December 31,
1999 of $149 million.
17
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
Interest rate swaps - Pay Fixed, Receive Floating $ 632 $ 653
Interest rate swaps - Pay Floating, Receive Fixed 245 202
Commitments to purchase foreign currencies 360 395
Commitments to sell foreign currencies 81 25
</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 ten years. Net unrealized gains and (losses) on
contracts outstanding at December 31, 1999 and 1998 were $4 million and ($7
million), respectively.
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 two
years. Net unrealized losses applicable to outstanding forward exchange
contracts at December 31, 1999 and 1998 were $5 million and $23 million,
respectively.
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. Gains and losses on
hedges are deferred and recognized concurrently with the underlying commodity
transactions. Deferred gains on hedging contracts outstanding at year-end were
$4 million in 1999 and $8 million in 1998.
The Group's recorded value of long-term debt exceeded the fair value by
$22 million and $34 million as of December 31, 1999 and 1998, 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.
The Group had investments in debt securities available-for-sale at
amortized costs of $120 million and $105 million at December 31, 1999 and 1998,
respectively. The fair value of these securities at December 31, 1999 and 1998
approximated amortized costs. As of December 31, 1999 and 1998, investments in
debt securities available-for-sale had maturities less than ten years. The
Group's carrying amount for investments in affiliates accounted for at equity
included $2 million and $19 million, as of December 31, 1999 and 1998,
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
counter-parties to financial instruments. For financial instruments with
institutions, the Group does not expect any counter-party 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.
18
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes
Taxes charged to income consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Taxes other than income taxes:
Duties, import and excise taxes $ 1,077 $ 1,218 $ 1,409
Other 16 17 19
-------- -------- -------
Total taxes other than income taxes $ 1,093 $ 1,235 $ 1,428
======== ======== =======
Income taxes:
U.S. taxes :
Current $ 72 $ 6 $ 8
Deferred - 23 (2)
-------- -------- -------
Total U.S. 72 29 6
-------- -------- -------
International taxes:
Current $ 376 $ 228 $ 407
Deferred (58) 69 (49)
-------- -------- -------
Total International 318 297 358
-------- -------- -------
Total provision for income taxes $ 390 $ 326 $ 364
======== ======== =======
</TABLE>
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,
------------------------------------
1999 1998 1997
---- ---- ----
<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) (7.3) (11.3)
Effect of dividends received from
subsidiaries and affiliates 0.4 (0.3) (0.3)
Income subject to foreign taxes at other
than U.S. statutory tax rate 18.4 26.0 5.2
Effect of sale of investment in an affiliate 6.6 - -
Deferred income tax valuation allowance 2.4 8.7 1.4
Other (1.5) 0.7 -
------ ------- ------
Effective tax rate 50.0% 62.8% 30.0%
====== ======= ======
</TABLE>
For 1999, the increase in effective tax rate resulting from the sale of
investment in an affiliate is net of the effect of previously unrecorded foreign
tax credit carry-forwards of $29 million. The 1998 increase in effective tax
rate is primarily due to the larger proportion of earnings from higher tax rate
foreign jurisdictions, and the effect of foreign currency translation on pre-tax
income.
19
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Deferred income taxes are provided in each tax jurisdiction for temporary
differences between the financial reporting and the tax basis of assets and
liabilities. Temporary differences and tax loss carry-forwards which give rise
to deferred tax liabilities (assets) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
(Millions of U.S. Dollars)
1999 1998
---- ----
<S> <C> <C>
Depreciation $ 322 $ 316
Miscellaneous 17 38
----- ------
Deferred tax liabilities 339 354
----- ------
Inventory (24) (1)
Investment allowances (62) (62)
Tax loss carry-forwards (100) (63)
Foreign exchange (13) (8)
Retirement benefits (33) (48)
Miscellaneous (11) (11)
----- ------
Deferred tax assets (243) (193)
Valuation allowance 91 72
----- ------
Net deferred taxes $ 187 $ 233
===== ======
</TABLE>
A valuation allowance has been established to reduce deferred income tax
assets to amounts which, in the Group's judgement are more likely than not (more
than 50%) to be utilized against current and future taxable income when those
temporary differences become deductible.
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, 1999 and December 31, 1998, respectively. 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. Excess U.S. foreign income tax credits are not recorded until
realized.
Note 12 - Accounting change
An affiliate of the Group capitalized certain start-up costs, primarily
organizational and training, over the period 1992-1996 related to a grassroots
refinery construction project in Thailand. These costs were considered part of
the effort required to prepare the refinery for operations. With the issuance of
the AICPA's Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", these costs would be accounted for as period expenses. The Group
elected early adoption of this pronouncement effective January 1, 1998 and
accordingly, recorded a cumulative effect charge to income as of January 1, 1998
of $50 million representing the Group's share of the applicable start-up costs.
Excluding the cumulative effect, the change in accounting for start-up costs did
not materially affect net income for 1998.
20
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 13 - Restructuring/Reorganization
Caltex recorded a charge to selling, general and administrative expenses
of $37 million and $86 million in 1999 and 1998, respectively, for various
restructuring and reorganization activities undertaken to realign its downstream
operations along functional lines and reduce redundant operating activities. The
charges included severance and other termination benefits of $23 million and $60
million for approximately 200 employees and 500 employees in 1999 and 1998,
respectively. Less than 100 of the affected employees remained as of the end of
1999 and almost all of these are scheduled to leave by the end of March, 2000.
The charges also included $12 million and $10 million for asset and lease
commitment write-offs, and other reorganization costs of $2 million and $16
million, in 1999 and 1998, respectively. In addition, 1999 net income includes a
$27 million after tax charge for restructuring activities of affiliates.
Approximately $22 million of the total restructuring and reorganization
charges remained as recorded liabilities as of December 31, 1999, which
primarily relates to future lease commitments on vacated office space over the
remaining lease term ending in 2002, and severance payments to be paid to
affected employees during the first quarter of 2000. Adjustments made in 1999 to
the liability recorded at December 31, 1998 were insignificant.
The following table summarizes the restructuring/reorganization costs
related to severance and other termination benefits for 1999 and 1998 (Millions
of U.S. Dollars):
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Balance at Balance at
December 31 Payments Accruals December 31 Payments Accrual
----------- -------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Headquarters and expatriates:
Severance and
other termination benefits $ 8 $ (19) $ 3 $ 24 $ (2) $ 26
Employee benefit
curtailment/settlement 2 (35) 17 20 (6) 26
Foreign staff severance benefits - (3) 3 - (8) 8
----- ----- ----- ----- ----- -----
$ 10 $ (57) $ 23 $ 44 $ (16) $ 60
===== ===== ===== ===== ===== =====
</TABLE>
Note 14 - Assets Held for Disposal
The Group continually reviews its asset portfolio and periodically sells
or otherwise disposes of various assets that no longer fit into the Group's
strategic direction. The Group recorded a charge to earnings of approximately
$30 million in both 1999 and 1998, and $12 million in 1997 related to various
marketing assets (primarily service station land and buildings) which have been
removed from operation and are awaiting disposal or sale as buyers are located.
Carrying value of these assets, which is based on appraisals or estimated
selling prices, as of December 31, 1999 is approximately $25 million. The effect
of suspending depreciation on assets held for sale in 1999, 1998 and 1997 was
not material.
21
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 15 - Combined statement of cash flows
Changes in operating working capital consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
(Millions of U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Accounts and notes receivable $ (653) $ 404 $ 33
Inventories (12) (28) 85
Accounts payable 484 (105) (252)
Accrued liabilities (23) 41 1
Estimated income taxes 14 4 (17)
------ ------- --------
Total $ (190) $ 316 $ (150)
======= ======= ========
</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 U.S. Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest paid (net of capitalized interest) $ 142 $ 182 $ 138
Income taxes paid $ 404 $ 237 $ 440
</TABLE>
The deconsolidation of Caltex Australia Limited as of December 31, 1997,
as described in Note 4, resulted in a non-cash reduction in the following
combined balance sheet captions for 1997, which have not been included in the
combined statement of cash flows (Millions of U.S. Dollars):
<TABLE>
<S> <C>
Net working capital $ 60
Equity in affiliates 94
Long-term debt 45
Minority interest 109
</TABLE>
No significant non-cash investing or financing transactions occurred in
1999 and 1998.
Note 16 - 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.
22
<PAGE>
EQUILON
ENTERPRISES LLC
Shell & Texaco Working Together
YEAR 1999 FINANCIAL STATEMENTS
<PAGE>
EQUILON ENTERPRISES LLC
CONSOLIDATED 1999 FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management.......................................................................... 1
Report of Independent Accountants ............................................................ 2
Statement of Consolidated Income ............................................................. 3
Consolidated Balance Sheet ................................................................... 4
Statement of Consolidated Cash Flows ......................................................... 5
Statement of Owners' Equity................................................................... 6
Notes to the Consolidated Financial Statements ............................................... 7-23
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
---------------------
EQUILON ENTERPRISES LLC
The management of Equilon Enterprises LLC ("Equilon") is responsible for
preparing the consolidated financial statements of Equilon in accordance with
generally accepted accounting principles. In doing so, management must make
estimates and judgements when the outcome of events and transactions is not
certain.
In preparing these financial statements from the accounting records,
management relies on an effective internal control system in meeting its
responsibility. The objective of this system of internal controls is to provide
reasonable assurance that assets are safeguarded and that the financial records
are accurately and objectively maintained. Equilon's internal auditors conduct
regular and extensive internal audits throughout the company. During these
audits they review and report on the effectiveness of the internal controls and
make recommendations for improvement. Due primarily to difficulties associated
with the adoption of a new computer system in 1999, the internal control system
was compromised in certain areas. Significant progress has been made in
correcting various processes and procedures to enhance the system of internal
controls, however work continues in fiscal 2000 to restore the effectiveness of
the internal control system.
The independent accounting firms of PricewaterhouseCoopers LLP and Arthur
Andersen LLP are engaged to provide an objective, independent audit of Equilon's
financial statements. Their accompanying report is based on an audit conducted
in accordance with generally accepted auditing standards, which includes a
review and evaluation of the effectiveness of the company's internal controls.
This review establishes a basis for their reliance thereon in determining the
nature, timing and scope of their audit. The audit scope for 1999 was expanded
to compensate for the previously mentioned control weaknesses.
The Audit Committee of the Board of Directors is comprised of two directors
who review and evaluate Equilon's accounting policies and reporting, internal
controls, internal audit program and other matters as deemed appropriate. The
Audit Committee also reviews the performance of PricewaterhouseCoopers LLP and
Arthur Andersen LLP and evaluates their independence and professional
competence, as well as the results and scope of their audit.
James M. Morgan Nick J. Caruso David C. Cable
President and Chief Chief Financial Officer - Acting Controller
Executive Officer
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Equilon Enterprises LLC:
We have audited the accompanying consolidated balance sheets of Equilon
Enterprises LLC ("Equilon") and its subsidiaries as of December 31, 1999 and
1998, and the related statements of consolidated income, owners' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of Equilon's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Equilon
Enterprises LLC and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
PricewaterhouseCoopers LLP Arthur Andersen LLP
Houston, Texas Houston, Texas
March 3, 2000 March 3, 2000
2
<PAGE>
EQUILON ENTERPRISES LLC
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
REVENUES
Sales and services $ 29,174 $ 22,006
Equity in income of affiliates 154 109
Other revenue 70 131
--------- ---------
Total revenues 29,398 22,246
--------- ---------
COSTS AND EXPENSES
Purchases and other costs 24,714 17,540
Operating expenses 2,033 2,274
Selling, general and administrative expenses 1,308 1,251
Depreciation, amortization and impairment expenses 878 543
Interest expense 115 134
Minority interest 3 2
--------- ---------
Total costs and expenses 29,051 21,744
--------- ---------
NET INCOME $ 347 $ 502
========= =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
</FN>
</TABLE>
3
<PAGE>
EQUILON ENTERPRISES LLC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 161 $ 11
Accounts and notes receivable (less allowance for doubtful
accounts of $7 million in 1999 and $14 million in 1998) 3,239 1,672
Accounts receivable from affiliates 161 157
Inventories 620 699
Other current assets 28 109
---------- ---------
Total Current Assets 4,209 2,648
Investments and Advances 529 467
Property, Plant and Equipment, Net 6,312 7,052
Deferred Charges and Other Noncurrent Assets 367 239
---------- ---------
Total Assets $ 11,417 $ 10,406
========== =========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Commercial paper and current portion
of long-term debt $ 2,157 $ 2,155
Accounts payable - trade 2,481 696
Accounts payable to affiliates 589 563
Accrued liabilities and other payables 409 644
---------- ---------
Total Current Liabilities 5,636 4,058
Long-term Debt and Capital Lease Obligations 5 160
Long-term Payables to Affiliates 466 -
Long-term Liabilities, Deferred Credits and Minority Interest 264 222
---------- ---------
Total 6,371 4,440
Owners' Equity 5,046 5,966
---------- ---------
Total Liabilities and Owners' Equity $ 11,417 $ 10,406
========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
</FN>
</TABLE>
4
<PAGE>
EQUILON ENTERPRISES LLC
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Operating activities:
Net Income $ 347 $ 502
Reconciliation to net cash provided by operating activities
Depreciation, amortization and impairment expenses 878 543
Dividends from affiliates less than equity in income (10) (41)
Gains on asset sales (12) (118)
Changes in working capital
Accounts and notes receivable (1,567) (20)
Accounts receivable from affiliates (4) (157)
Inventories 23 26
Accounts payable - trade 1,785 (533)
Accounts payable to affiliates (6) 307
Accrued liabilities and other payables (235) 246
Other, net 88 (29)
---------- ----------
Net cash provided by operating activities 1,287 726
---------- ---------
Investing activities:
Capital expenditures (582) (651)
Proceeds from asset sales 371 409
---------- ---------
Net cash used in investing activities (211) (242)
----------- ----------
Financing activities:
Repayments of borrowings having original terms in excess of
three months (155) (9)
Repayment of formation costs - (1,613)
Net increase in other short term borrowings 2 1,846
Distributions paid to owners (773) (698)
----------- ----------
Net cash used in financing activities (926) (474)
----------- ----------
Cash and Cash Equivalents:
Increase in cash during year 150 10
Balance at beginning of year 11 1
---------- ---------
Balance at end of year $ 161 $ 11
========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
</FN>
</TABLE>
5
<PAGE>
EQUILON ENTERPRISES LLC
STATEMENT OF OWNERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
(Millions of Dollars)
<S> <C> <C>
Owners' Equity balance at January 1 $ 5,966 $ 6,122
Net income 347 502
Distributions paid (773) (698)
Contribution adjustments:
Employee benefit obligations from owners (Note 8) (543) -
Other 49 40
---------- ---------
Owners' Equity balance at December 31 $ 5,046 $ 5,966
========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
</FN>
</TABLE>
6
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Equilon Enterprises LLC ("Equilon") is a limited liability company formed
by Shell Oil Company ("Shell") and Texaco Inc. ("Texaco") effective January 1,
1998 under the Delaware Limited Liability Act, with equity interests of 56
percent and 44 percent, respectively. The joint venture combined the major
elements of Shell and Texaco's Western and Midwestern U.S. refining and
marketing businesses and their nationwide trading, transportation and lubricants
businesses. Despite the ownership interests, Shell and Texaco jointly control
Equilon, as many significant governance decisions require unanimous approval.
A second joint venture company, Motiva Enterprises LLC ("Motiva"), was
formed on July 1, 1998, combining the major elements of the Eastern and Gulf
Coast U.S. refining and marketing businesses of Shell, Texaco and Saudi
Refining, Inc. ("SRI"). Equiva Trading Company and Equiva Services LLC were also
formed on July 1, 1998 and are owned equally by Equilon and Motiva. Equiva
Trading Company, a general partnership, functions as the trading unit for both
Equilon and Motiva. Equiva Services LLC provides common financial,
administrative, technical and other operational support to both companies and
bills their services at cost.
Equilon refines, distributes and markets petroleum products under both the
Shell and Texaco brands through wholesalers and its network of company owned and
contractor operated service stations. Products are manufactured at five
refineries located in Puget Sound, Washington; Bakersfield, Los Angeles, and
Martinez, California; and Wood River, Illinois. In November of 1999, Equilon
sold its refinery in El Dorado, Kansas as part of its strategic initiative to
strengthen its portfolio of assets. The Wood River, Illinois refinery is on the
market for sale.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements The accompanying financial statements are
presented using Shell and Texaco's historical basis of the assets and
liabilities contributed to Equilon on January 1, 1998. The consolidated
financial statements generally include the accounts of Equilon and subsidiaries
in which Equilon directly or indirectly owns more than a 50 percent voting
interest. Intercompany accounts and transactions are eliminated. Investments in
entities in which Equilon has a significant ownership interest, generally 20 to
50 percent, and entities where Equilon has greater than 50 percent ownership
but, as a result of contractual agreement or otherwise, does not exercise
control, are accounted for using the equity method. Other investments are
carried at cost. Equilon's investments in Equiva Services LLC and Equiva Trading
Company are accounted for using the equity method. Transactions by Equiva
Trading Company that are made on behalf of Equilon are recorded directly to
Equilon's records.
7
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates These financial statements were prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions. These assumptions affect the reported amounts of
assets and liabilities and 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.
Significant estimates include the recoverability of assets, environmental
remediation, employee benefit liabilities, litigation, claims and assessments.
Amounts are recognized when it is probable that an asset has been impaired or a
liability has been incurred, and the cost can be reasonably estimated. Actual
results could differ from those estimates.
Recent Pronouncement In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes new accounting and reporting standards for derivatives and hedging
activities. SFAS 133 will require Equilon to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on Equilon's rights or obligations under the applicable derivative
contract. In June 1999, the FASB issued SFAS 137 that deferred the effective
date of adoption of SFAS 133 for one year. Equilon will adopt SFAS 133 no later
than January 1, 2001. Equilon has not yet determined the impact that the
adoption of SFAS 133 will have on Equilon's consolidated results of operations
or financial position.
Revenues Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract. Revenues on forward sales
where cash has been received are recorded to deferred income until title passes.
Cash Equivalents Highly liquid investments with maturity when purchased of three
months or less are considered to be cash equivalents.
Inventories Inventories are valued at the lower of cost or market. Hydrocarbon
inventory cost is initially determined on the last-in, first-out (LIFO) method.
The cost of other merchandise inventories is initially determined on the
first-in, first-out (FIFO) method. Average cost is utilized for inventories of
materials and supplies.
Investments and Advances The equity method of accounting is generally 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 pre-tax income or losses of limited liability companies and
partnerships, and the net income or losses of corporate joint venture companies
are reflected in revenues as they are generated, rather than when realized
through dividends or distributions.
The cost method is used to account for affiliates in which Equilon's
ownership interest is less than 20 percent. Income from these investments is
recognized as dividends or distributions are declared and received.
8
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, Plant and Equipment Depreciation of property, plant and equipment is
generally provided on composite groups, using the straight-line method, with
depreciation rates based upon the estimated useful lives of the groups.
Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, or when the retirement is due to an
extraordinary loss, the cost and related depreciation are retired, and any gain
or loss is reflected in income.
Capitalized leases are amortized over the estimated useful life of the
asset or the lease term, as appropriate, using the straight-line method.
All maintenance and repairs, including major refinery maintenance, are
charged to expense as incurred. Renewals, betterments and major repairs that
materially extend the life of the properties are capitalized. Interest incurred
during the construction period of major additions is capitalized.
The evaluation of impairment for property, plant and equipment is based on
comparisons of carrying values 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 valued at the lower of net
book value or fair value less cost to sell.
Derivatives Equilon utilizes futures, purchased options and swaps to manage the
price risk of crude oil and refined products. These transactions meet the
requirements for hedge accounting, including designation and correlation. Gains
and losses on closed positions are deferred until corresponding physical
transactions occur. At that time, any gain or loss is accounted for as part of
the transactions being hedged. Deferred gains and losses are included in current
assets and liabilities on the balance sheet. Equilon also uses written options
to manage price risk. Unrealized gains and losses on these transactions are
recognized in current earnings.
Equilon conducts petroleum-related trading activities. As of January 1,
1999 Equiva Trading Company adopted mark-to-market accounting in compliance with
Emerging Issues Task Force Issue 98-10, "Accounting for Energy Trading and Risk
Management Activities." Under mark-to-market accounting, gains and losses
resulting from changes in market prices on contracts entered into for trading
purposes are reflected in current earnings.
Fair Market Value of Financial Instruments The estimated fair value of long-term
debt is disclosed in Note 7 to the financial statements. The carrying amount of
long-term debt with variable rates of interest approximates fair value at
December 31, 1999 and 1998, because borrowing terms equivalent to the stated
rates were available in the marketplace. Fair value for long-term debt with a
fixed rate of interest is determined based on discounted cash flows using
estimated prevailing interest rates.
Other financial instruments are included in current assets and liabilities
on the balance sheet and approximate fair value because of the short maturity of
such instruments. These include cash, short-term investments, notes and accounts
receivable, accounts payable and short-term debt.
9
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 be
resolved only when one or more future events occur or fail to occur. Equilon's
management and legal counsel assess such contingent liabilities. The assessment
of loss contingencies necessarily involves an exercise of judgement 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, Equilon'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 has been incurred and the amount of the loss can be
estimated, then the estimated liability is 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 is
disclosed. Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the nature of the guarantee is
disclosed.
Environmental Expenditures Equilon accrues for environmental remediation
liabilities when it is probable that such liabilities exist, based on past
events or known conditions, and the amount of such liability can be reasonably
estimated. If Equilon can only estimate a range of probable liabilities, the
minimum future undiscounted expenditure necessary to satisfy Equilon's future
obligation is accrued.
Equilon determines the appropriate amount of each obligation by considering
all of the available data, including technical evaluations of the currently
available facts, interpretation of existing laws and regulations, prior
experience with similar sites and the estimated reliability of financial
projections.
Equilon adjusts the environmental liabilities, as required, based on the
latest experience with similar sites, changes in environmental laws and
regulations or their interpretation, development of new technology or new
information related to the extent of Equilon's obligation.
Other environmental expenditures, principally maintenance or preventive in
nature, are expensed or capitalized as appropriate.
Reclassifications Certain 1998 amounts have been reclassified to conform with
current year presentation.
10
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Crude oil $ 211 $ 292
Petroleum products 316 304
Other merchandise 21 17
Materials and supplies 72 86
---------- ---------
Total $ 620 $ 699
========== ========
</TABLE>
The excess of estimated market value over the book value of inventories
carried at cost on the LIFO basis of accounting was approximately $771 million
at December 31, 1999 and $135 million at December 31, 1998.
Partial liquidation of inventories valued on a LIFO basis increased net
income by $13 million in 1999.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including capitalized lease assets, were as
follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------
1999 1998
--------------------------- --------------------------
Gross Net Gross Net
----- --- ----- ---
(Millions of Dollars)
<S> <C> <C> <C> <C>
Refining $ 6,510 $ 3,148 $ 7,106 $ 3,847
Marketing 2,478 1,856 2,757 2,032
Transportation 2,280 1,203 2,098 1,051
Other 186 105 181 122
--------- --------- -------- ---------
Total $ 11,454 $ 6,312 $12,142 $ 7,052
========= ========= ======== =========
Capital lease amounts included above $ 2 $ - $ 65 $ 20
========= ========= ======= =========
</TABLE>
Accumulated depreciation and amortization totaled $5,142 million at
December 31, 1999 and $5,090 million at December 31, 1998. Interest capitalized
as part of property, plant and equipment during 1999 and 1998 was $2 million and
$1 million, respectively.
11
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT (continued)
Long-Lived Assets
Under the provisions of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," Equilon recorded
a charge of $397 million, during 1999, for the impairment of the El Dorado
refinery and the Wood River refinery and lubricants plant. These impairments,
which were recognized in anticipation of the sale of these refineries and for
the write-off of abandoned lubricants base oil assets at Wood River, were
reflected as increased depreciation, amortization and impairment expenses on the
Statement of Consolidated Income. In the fourth quarter of 1999, Equilon
recorded an additional charge of $11 million upon completion of the sale of the
El Dorado refinery. This included the recognition of a liability for wastewater
treatment. The Wood River refinery, which is expected to be sold during 2000,
was carried at estimated sales value at year-end 1999.
During 1998, Equilon recognized the impairment of surplus assets resulting
from the consolidation and optimization of assets contributed by Shell and
Texaco. Impairments from this activity totaled over $77 million, including the
write-off of abandoned assets at the Odessa refinery, shut down in October 1998,
and the write-down to estimated realizable value of three lubricant blending
plants either closed in 1998 or sold in 1999. The impairments were primarily
reflected in increased depreciation, amortization and impairment expenses on the
Statement of Consolidated Income.
NOTE 5 - INVESTMENTS AND ADVANCES
Investments in affiliates, including corporate joint ventures and
partnerships, owned 50% or less are generally accounted for on the equity
method. Equilon's total investments and advances are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Investments in affiliates accounted for on the equity method
Pipeline affiliates $ 415 $ 378
Other affiliates 82 52
---------- ---------
Total equity method affiliates 497 430
Other investments and advances 32 37
---------- ---------
Total investments and advances $ 529 $ 467
========== =========
</TABLE>
12
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENTS AND ADVANCES (continued)
Undistributed earnings of equity companies included in Equilon's
accumulated earnings as of December 31, 1999 and 1998 were $51 million and $41
million, respectively. Summarized financial information for these investments
and Equilon's equity share thereof is as follows:
Equity Companies at 100%
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Current assets $ 1,684 $ 373
Noncurrent assets 3,601 2,750
Current liabilities (1,585) (530)
Noncurrent liabilities and deferred credits (2,543) (1,684)
---------- ---------
Net assets $ 1,157 $ 909
========== =========
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Revenues $ 2,002 $ 1,500
Income before income taxes 664 519
Net income 494 362
</TABLE>
Equity Companies at Equilon's Percentage Ownership
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Current assets $ 750 $ 115
Noncurrent assets 1,097 842
Current liabilities (629) (136)
Noncurrent liabilities and deferred credits (692) (384)
---------- ---------
Net assets $ 526 $ 437
========== =========
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Revenues $ 615 $ 430
Income before income taxes 176 123
Net income 154 109
Dividends received 144 68
</TABLE>
13
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASE COMMITMENTS AND RENTAL EXPENSE
Equilon has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which Equilon is lessee.
Equilon has a one year lease agreement for a cogeneration plant at the El
Dorado refinery. This lease may be renewed each year until 2016 at Equilon's
option. The lease has been renewed with a minimum lease rental of $4 million for
2000. Equilon has guaranteed a minimum recoverable residual value to the lessor
of $72 million, if the lease is not renewed for the year 2001. In connection
with the sale of the El Dorado refinery, Equilon has entered into a long term
sublease arrangement with a subsidiary of Frontier Oil Corporation (Frontier)
for Frontier's use of the cogeneration facility at the refinery. While the
sublease payments from the sublessee fully cover Equilon's lease obligation,
Equilon remains primarily liable with regard to payment of its original
obligation. The original term of the sublease is 17 years, although it is
subject to early termination upon the occurance of certain events specified in
the sublease. Upon expiration of the initial term of the sublease, Frontier has
the option of purchasing the cogeneration facility, from Equilon, at a price not
less than the fair market value of the facility at the time the option is
exercised.
Rental expense relative to operating leases, including contingent rentals,
is provided in the table below:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Rental Expense:
Minimum lease rentals $ 121 $ 178
Contingent rentals 3 7
---------- ---------
Total 124 185
Less rental income on properties subleased to others 59 54
---------- ---------
Net rental expense $ 65 $ 131
========== =========
</TABLE>
14
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASE COMMITMENTS AND RENTAL EXPENSE (continued)
As of December 31, 1999 Equilon had estimated minimum commitments for
payment of rentals under leases that, at inception, had a non-cancelable term of
more than one year, as follows:
<TABLE>
<CAPTION>
Operating Leases
---------------------
(Millions of Dollars)
<S> <C> <C>
2000 $ 76
2001 63
2002 62
2003 61
2004 59
After 2004 775
----------
Total 1,096
Less sublease rental income 75
Total lease commitments $ 1,021
==========
</TABLE>
In addition, Equilon has a capital lease obligation for equipment at Wood
River refinery scheduled to be completed in February 2002. The amounts are not
material for separate disclosure.
NOTE 7 - DEBT
Equilon has revolving credit facilities with commitments of $1,875 million,
as support for the company's commercial paper program, as well as for working
capital and other general purposes. Equilon pays a nominal quarterly facility
fee for the $1,875 million availability. No amounts were outstanding during
1999.
Commercial Paper and Current Portion of Long-term Debt
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Commercial Paper $ 1,850 $ 1,846
Anacortes Pollution Control Bonds due 2019 34 34
Butler County Industrial Revenue Bonds due 2024 30 25
California Pollution Control Bonds due 2000 through 2024 185 185
Southwestern Illinois Industrial Revenue Bonds
due 2021 through 2025 58 58
Current portion of long-term debt and capital lease obligations - 7
---------- ---------
Total $ 2,157 $ 2,155
========== =========
Average interest rate of short term debt 5.12% 5.01%
</TABLE>
15
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEBT (continued)
Long-term Debt and Capital Lease Obligations
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Bakersfield-CA Pollution 1978 Series A (Revenue) 7.0% due 2009 $ - $ 6
Bakersfield-CA Pollution 1978 Series A (Industrial) 7.0% due 2008 - 1
Butler County Tax Abatement Bonds 7.38 to 9.75% due 2020 - 101
Other variable notes 8.625% due 2006 through 2008 5 4
8.000% notes due 2007 - 1
---------- ---------
Total 5 113
Capital lease obligations (see Note 6) - 54
---------- ---------
5 167
Less current portion of long-term debt and capital lease obligations - 7
---------- ---------
Total long-term debt and capital lease obligations $ 5 $ 160
========== =========
Fair market value of the company's long-term debt $ 5 $ 114
========== =========
</TABLE>
The Pollution Control Bonds outstanding at December 31, 1999 shown above
consisted of five issues assumed from Shell and one from Texaco. The Industrial
Revenue Bonds outstanding at December 31, 1999 consisted of three issues from
Shell and one from Texaco. Interest rates are currently reset daily for these
issues and the bonds may be converted from time to time to other modes.
Bondholders have the right to tender their bonds under certain conditions,
including on interest rate resets. Pursuant to the terms of the underlying
indentures, Shell and Texaco retain liability for debt service on the issues
assumed by Equilon in the event that Equilon fails to perform on its
obligations. All other Equilon borrowings are unsecured general obligations of
Equilon and not guaranteed by any other entity.
Interest paid during 1999 and 1998 was $128 million and $95 million,
respectively.
NOTE 8 - LONG-TERM PAYABLES TO AFFILIATES, FORMATION PAYABLES AND OWNERS' EQUITY
CONTRIBUTION ADJUSTMENTS
On April 1, 1999, Shell and Texaco employees designated as performing
duties supporting Equilon, were transferred to Equiva Services LLC. At that time
certain benefit liabilities were transferred to Equiva Services LLC from Shell
and Texaco through their interests in Equilon and Motiva. Such obligations
transferred from Shell and Texaco, applicable to Equilon, were recorded as
reductions to Equilon's investment in Equiva Services LLC. A related party
obligation of $520 million at December 31, 1999 represents Equilon's obligation
to Equiva Services LLC for all employee benefit liabilities. Of this amount,
$466 million was classified as long-term at December 31, 1999. Additional
information is disclosed in Note 11 - Employee Benefits.
16
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LONG-TERM PAYABLES TO AFFILIATES, FORMATION PAYABLES AND OWNERS' EQUITY
CONTRIBUTION ADJUSTMENTS (continued)
The foregoing contribution of liabilities that were transferred from Shell
and Texaco through Equilon to Equiva Services LLC for employee benefit
liabilities at April 1, 1999 reduced Equilon's owners' equity by $543 million
and included $357 million for pension related affiliate obligations, $147
million of post-employment medical benefits and $39 million for vacation
benefits. Other contribution adjustments in 1999 related primarily to certain
environmental remediation obligations transferred to Equilon at formation, which
were reassumed by Shell in 1999, increased owners' equity by $49 million.
In accordance with the joint venture agreements, Equilon owed Shell $1,001
million and Texaco $612 million at formation. These amounts were separate from
normal trade payables and reflect amounts to reimburse Shell and Texaco for
certain capital expenditures incurred prior to the formation of the venture and
certain other items specified in the formation documents. Equilon paid these
amounts to Shell and Texaco prior to December 31, 1998. Interest was accrued on
these amounts until paid.
In addition to the foregoing payable amounts, Texaco retained $240 million
of receivables related to the contributed business as part of these
arrangements.
NOTE 9 - TRANSACTIONS WITH RELATED PARTIES
Equilon has entered into transactions with Shell, Texaco, Motiva and Equiva
Services LLC, including the affiliates of these companies. Such transactions are
in the ordinary course of business and include the purchase, sale and
transportation of crude oil and petroleum products, and numerous service
agreements.
The aggregate amounts of such transactions were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Sales and other operating revenue $ 3,409 $ 1,368
Purchases and transportation costs 6,961 4,900
Service and technology expense 1,057 794
</TABLE>
17
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - TAXES
Equilon, as a limited liability company, is not liable for income taxes.
Income taxes are the responsibility of the owners, with earnings of Equilon
included in the owners' earnings for the determination of income tax liability.
Direct taxes other than income taxes, which are included in operating
expenses, were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Direct taxes
Property $ 78 $ 41
Licenses and permits 7 5
Other 12 26
---------- ---------
Total direct taxes $ 97 $ 72
========== =========
</TABLE>
Other taxes collected from consumers for governmental agencies that are not
included in revenues or expenses were $3,405 million for 1999 and $3,646 million
for 1998.
NOTE 11 - EMPLOYEE BENEFITS
In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting Equilon remained
employees of the owner companies and their affiliates until April 1, 1999.
Beginning April 1, 1999 Equilon's affiliate, Equiva Services LLC, employed
personnel necessary for ongoing operations. Obligations and accrued liabilities
for certain employee benefits, including pension and other post-employment
benefits, were transferred to Equiva Services LLC at that time. On January 1,
2000, employees directly supporting Equilon became employees of Equilon.
Employees providing common financial, administrative, technical and other
operational support to both Equilon and Motiva remain employees of Equiva
Services LLC. Employee related obligations, including liabilities for pension
and other post-employment benefits for employees transferred to Equilon, will be
recorded as Equilon liabilities on January 1, 2000 with a corresponding
reduction in the affiliate payable to Equiva Services.
18
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (continued)
Pension Related Affiliate Obligations
Concurrently with their transfer from the owner companies, employees
retained certain pension benefits for future pay increases under the owner
company pension plans. Under agreements with Shell and Texaco, the owner
companies will be reimbursed for past service pension benefits attributable to
these future pay benefits at April 1, 1999, as well as future increases in the
related projected benefit obligation under the owner companies' qualified
pension plans. These reimbursements will be made at the time the applicable
employees retire. The following summarizes the reimbursement owed to the owner
companies:
<TABLE>
<CAPTION>
Employees Transferred
to Equilon on
January 1, 2000
----------------------
(Millions of Dollars)
<S> <C>
Projected benefit obligation at April 1, 1999 $ 338
Interest cost for the period April 1, 1999 to December 31, 1999 16
Actuarial gain (56)
Divestiture (12)
--------
Projected benefit obligation at December 31, 1999 $ 286
========
</TABLE>
Other Post-Employment Benefits
Equilon and Equiva Services LLC currently provide health care benefits for
retired employees and their dependents through a common plan. Eligibility for
such benefits requires that a retired employee be at least 50 years of age, with
at least 10 years of service and the sum of age and service of at least 70
years. Past service with the owner companies is credited for determining benefit
eligibility.
The company's obligation is a percentage of the total premiums required.
This percentage varies from 60% to 80% of total cost depending on the sum of the
employees total years of age plus service at the time of retirement. The assumed
annual health care cost trend rate used in measuring the accumulated
post-employment benefit obligation (APBO) was 7.0% in 1999, decreasing to 5.5%
by 2002 and remaining at that level thereafter. Assuming a 1% increase in the
annual rate of increase of required medical premiums, the APBO and annual
expense would increase by approximately $11 million and $1 million,
respectively.
In addition to medical benefits, Equilon and Equiva Services LLC are
providing retiree life insurance benefits to certain former owner employees from
Texaco and Star Enterprise (Star). These employees must be of age 50 at April 1,
1999 with 5 years of service at the time of transfer and must retire at a
minimum age of 55 with at least 10 years of service in order to be eligible.
19
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (continued)
Other Post-Employment Benefits (continued)
Net post-employment benefit costs for April 1,1999 to December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Employees Transferred
to Equilon on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Service cost $ 6
Interest cost 7
Amortization of prior service cost (1)
-------
Accrued expense $ 12
=======
</TABLE>
Funded status of other post-employment plans as of December 31, 1999, was
as follows:
<TABLE>
<CAPTION>
Employees Transferred
to Equilon on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Accumulated post-employment benefit obligation $ 121
Unrecognized prior service cost 8
Unrecognized gain 24
-------
Accrued post-employment benefit obligation $ 153
=======
</TABLE>
Pension Plans
Effective April 1,1999, Equiva Services LLC established a cash balance
defined benefit pension plan covering substantially all of its employees.
Company contributions under the plan are between 3% and 7% of compensation based
on years of service, age, and covered compensation. Individual employee accounts
are credited each year with employer contributions and interest on the account
balance at the rate of 6.5% per annum. Assets of the plan are comprised of fixed
income securities. Equilon and Equiva Services LLC's funding policy is to
contribute all pension costs accrued to the extent required by federal tax
regulations. The following table sets forth information related to changes in
the benefit obligations, change in plan assets, a reconciliation of the funded
status of the plans and components of the expense recognized related to
Equilon's pension plan.
20
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (continued)
Pension Plans (continued)
<TABLE>
<CAPTION>
Employees Transferred
to Equilon on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Change in benefit obligation
Projected benefit obligation at April 1, 1999 $ -
Service cost 24
Actuarial gain (2)
Acquisition/divestiture/plan merger/spin-off (1)
-----------
Projected benefit obligation at December 31, 1999 $ 21
===========
Change in plan assets
Fair value of plan assets at April 1, 1999 $ -
Actual return on plan assets (1)
Employer contributions 1
----------
Fair value of plan assets at December 31, 1999 $ -
==========
Funded status at December 31, 1999
Obligation greater than assets $ 21
Unrecognized net gain 2
----------
Accrued pension liability $ 23
==========
Weighted-average assumptions at December 31, 1999
Discount rate 8%
Expected return on plan assets 9%
Rate of compensation increase 4.5%
Components of net periodic benefit costs for the period
April 1, 1999 to December 31, 1999
Service cost $ 24
==========
</TABLE>
21
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (continued)
Pension Plans (continued)
Sponsorship for the Texas-New Mexico Pipeline Company retirement and group
pension plans was transferred from Texaco to Equilon in 1998. The plan is
accounted for as a defined benefit plan; therefore employees will receive a
defined amount upon retirement based on their number of years of service and
final average compensation. Actuarial studies provide the amounts for inclusion
in the audited financial statements.
At year-end 1999, the plans' assets of $15 million exceeded the accumulated
benefit obligation of $8 million. The weighted-average discount rate used in
determining the present value of the projected benefit obligation was 8% for the
fiscal 1999. For compensation based plans, the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation and service cost was based upon an
experience-related table and approximated 4% on current salaries through 1999,
in accordance with plan terms. The expected long-term rate of return on plan
assets was 10% for 1999. The majority of plan assets are invested in a
diversified portfolio of insurance company deposits and fixed income securities.
Employee Termination Benefits
The joint venture agreements provide for Equilon and Motiva to determine
the appropriate staffing levels for their businesses. To the extent those
staffing needs resulted in the elimination of positions from the ranks of Shell,
Texaco and Star, affected employees were entitled to termination benefits
provided for under the benefit plans of the applicable companies. Shell, Texaco
and Star, as the employer companies, are responsible for administering the
payment of benefits under their respective benefit plans. Equilon and Motiva are
obligated to reimburse the employer companies for all costs resulting from the
elimination of positions in accordance with a formula included in the joint
venture agreements.
The formation of Equilon and Motiva resulted in the termination of 1,658
employees. The separations were substantially complete as of December 31, 1999.
In 1998, Equilon recorded a charge of $61 million for its share of reimbursable
severance and other benefit costs as selling, general and administrative
expenses in the Statement of Consolidated Income. An additional provision of $2
million was recorded to selling, general and administrative expenses in 1999.
Equilon reimbursed the employer companies $47 million in 1999 and $7 million in
1998 for the termination benefits. Reimbursement for the remaining benefits is
expected in 2000.
NOTE 12 - DERIVATIVES
At December 31, 1999, open derivative instruments held for hedging purposes
consisted mostly of futures. Notional contract amounts were $31 million and $59
million at year-end 1999 and 1998, respectively. These amounts principally
represent future values of contract volumes over the remaining duration of the
outstanding futures contracts at the respective dates. These contracts hedge a
small fraction of the company's business activities, generally for the next
twelve months.
22
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - DERIVATIVES (continued)
Equilon entered into a relatively small number of petroleum-related
derivative transactions for trading purposes. The results of derivative trading
activities are marked to market, with gains and losses recorded in operating
revenue. All derivative instruments are straightforward futures, swaps and
options, with no leverage or multiplier features. At December 31, 1999, the open
derivative instruments held for trading purposes consisted primarily of futures
and options. The notional contract amounts of derivative instruments were $813
million and $3 million at year-end 1999 and 1998, respectively.
The earnings impact of hedging and trading activities in 1999 was a charge,
to revenues, of $92 million and was immaterial in 1998. The unrealized gains and
losses on open positions at December 31, 1999 and 1998 were not material.
NOTE 13 - CONTINGENT LIABILITIES
Equilon is subject to possible loss contingencies including actions or
claims based on environmental laws, federal regulations, and other matters.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to many such contingent liabilities and commitments, Equilon has
accrued amounts (undiscounted) related to certain such liabilities where the
outcome is deemed both probable and reasonably measurable.
Equilon has been named as a defendant or a potentially responsible party in
several contamination matters and has certain obligations for remediation of
adverse environmental conditions related to certain of its operating assets
under existing laws and regulations.
On November 25, 1998, a fire occurred at the Equilon Puget Sound Refinery
in Anacortes, Washington, which resulted in six worker fatalities - four
employees of a contractor and two Texaco employees working on behalf of Equilon.
On June 10, 1999, there was a rupture and resulting fire in the Olympic Pipe
Line Company pipeline at Bellingham, Washington, in which there were three
civilian fatalities. Equilon Pipeline Company LLC is the operator of Olympic
Pipe Line Company and holds a 37.5 percent interest. Regulatory and governmental
investigations are ongoing and wrongful death lawsuits have been filed in both
of these incidents.
Equilon has assumed crude and refined product throughput commitments
previously made by Shell and Texaco to ship through affiliated pipeline
companies and an offshore oil port, some of which relate to financing
arrangements. As of December 31, 1999 and 1998, the maximum exposure was
estimated to be $297 million and $333 million, respectively. No advances have
resulted from these obligations.
In management's opinion, the aggregate amount of liability for contingent
liabilities, in excess of financial liabilities already accrued or anticipated
insurance recoveries, is not anticipated to be material in relation to the
consolidated financial position or results of operations of Equilon.
23
<PAGE>
- --------------------------------------------------------------------------------
MOTIVA
ENTERPRISES LLC
Shell, Texaco & Saudi Aramco Working Together
1999 FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<PAGE>
MOTIVA ENTERPRISES LLC
1999 FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management ......................................................... 1
Report of Independent Accountants ............................................ 2
Statements of Income ........................................................... 3
Balance Sheets ............................................................. 4
Statements of Cash Flows ..................................................... 5
Statements of Owners' Equity ................................................. 6
Notes to Financial Statements .............................................. 7-21
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
--------------------
MOTIVA ENTERPRISES LLC
The management of Motiva Enterprises LLC (Motiva) is responsible for preparing
the financial statements of Motiva in accordance with generally accepted
accounting principles. In doing so, management must make estimates and judgments
when the outcome of events and transactions is not certain.
In preparing these financial statements from the accounting records, management
relies on an effective internal control system in meeting its responsibility.
The objective of this system of internal controls is to provide reasonable
assurance that assets are safeguarded and that the financial records are
accurately and objectively maintained. Motiva's internal auditors conduct
regular and extensive internal audits throughout Motiva. During these audits
they review and report on the effectiveness of the internal controls and make
recommendations for improvement. Due primarily to difficulties associated with
the implementation of a new computer system in early 1999, the internal control
environment was adversely impacted in certain areas. Significant progress has
been made to address the control issues, however, work continues in fiscal year
2000 to restore the effectiveness of the internal control system.
The independent accounting firms of PricewaterhouseCoopers LLP, Deloitte &
Touche LLP and Arthur Andersen LLP are engaged to provide an objective,
independent audit of Motiva's financial statements. Their accompanying report is
based on an audit conducted in accordance with generally accepted auditing
standards, which includes a review and evaluation of the effectiveness of
Motiva's internal controls. This review establishes a basis for their reliance
thereon in determining the nature, timing and scope of their audit. The audit
scope for 1999 was expanded to compensate for the previously mentioned control
concerns.
The Audit Committee of the Board of Directors is comprised of three,
non-employee directors who review and evaluate Motiva's accounting policies and
reporting, internal controls, internal audit program and other matters as deemed
appropriate. The Audit Committee also reviews the performance of
PricewaterhouseCoopers LLP, Deloitte & Touche LLP and Arthur Andersen LLP and
evaluates their independence and professional competence, as well as the results
and scope of their audit.
L. Wilson Berry Jr. W. M. Kaparich Randy J. Braud
President and Chief Chief Financial Officer Controller
Executive Officer
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of Motiva Enterprises LLC:
We have audited the accompanying balance sheets of Motiva Enterprises LLC
("Motiva") as of December 31, 1999 and 1998, and the related statements of
income, owners' equity and cash flows for the year ended December 31, 1999 and
the six months ended December 31, 1998. These financial statements are the
responsibility of Motiva's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Motiva Enterprises LLC as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1999 and the six months ended December 31, 1998
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Deloitte & Touche LLP
PricewaterhouseCoopers LLP
Houston, Texas
March 10, 2000
2
<PAGE>
MOTIVA ENTERPRISES LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
For the Six Months
Year Ended Ended
December 31, December 31,
1999 1998
------------ ------------
(Millions of Dollars)
<S> <C> <C>
REVENUES
Sales and other revenue $ 12,196 $ 5,371
---------- ---------
COSTS AND EXPENSES
Purchases and other costs 9,809 4,079
Operating expenses 1,108 512
Selling, general and administrative expenses 805 464
Depreciation and amortization 378 174
Interest expense 94 43
Taxes other than income taxes 71 21
---------- ---------
Total costs and expenses 12,265 5,293
---------- ---------
NET INCOME (LOSS) $ (69) $ 78
=========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
statements.
</FN>
</TABLE>
3
<PAGE>
MOTIVA ENTERPRISES LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 23 $ 25
Accounts receivable, less allowance for doubtful
accounts of $3 million and $9 million at
December 31, 1999 and 1998, respectively 574 608
Accounts receivable from affiliates - 73
Inventories 651 692
Other current assets 23 83
---------- ---------
Total current assets 1,271 1,481
---------- ---------
Investments and Advances 180 44
Property, Plant and Equipment
At cost 7,335 7,167
Less accumulated depreciation 2,361 2,112
---------- ---------
Net property, plant and equipment 4,974 5,055
---------- ---------
Deferred Charges and Other Noncurrent Assets 153 158
---------- ---------
Total Assets $ 6,578 $ 6,738
========== =========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Commercial paper and current portion of
long-term debt $ 363 $ 441
Accounts payable and accrued liabilities 377 434
Accounts payable to affiliates 301 175
Accrued taxes 237 193
---------- ---------
Total current liabilities 1,278 1,243
Long-Term Debt and Capital Lease Obligation 1,451 1,425
Long-Term Payables to Affiliates 408 -
Accrued Environmental Remediation Liability 221 232
Deferred Credits and Other Noncurrent Liabilities 15 10
---------- ---------
Total Liabilities 3,373 2,910
---------- ---------
Owners' Equity 3,205 3,828
---------- ---------
Total Liabilities and Owners' Equity $ 6,578 $ 6,738
========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
statements.
</FN>
</TABLE>
4
<PAGE>
MOTIVA ENTERPRISES LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Six Months
Year Ended Ended
December 31, December 31,
1999 1998
------------ ------------
(Millions of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ (69) $ 78
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 378 174
(Gain) loss on sale of assets (13) 1
Changes in operating working capital
Accounts receivable 92 (42)
Inventories 41 (39)
Other current assets 60 (35)
Accounts payable and accrued liabilities 72 (71)
Other - net (16) 4
---------- ---------
Net cash provided by operating activities 545 70
---------- ---------
INVESTING ACTIVITIES
Capital expenditures (310) (182)
Proceeds from sale of assets 41 13
---------- ---------
Net cash used in investing activities (269) (169)
---------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 417 1,278
Repayment of debt (495) (911)
Distributions to owners (200) (243)
---------- ---------
Net cash provided by (used in) financing activities (278) 124
---------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease) during the period (2) 25
Beginning of period 25 -
---------- ---------
End of period $ 23 $ 25
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 84 $ 43
========== =========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
5
<PAGE>
MOTIVA ENTERPRISES LLC
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
(Millions of Dollars)
<S> <C>
INITIAL OWNERS' CAPITAL CONTRIBUTION, JULY 1, 1998 $ 3,993
Net Income 78
Distributions (243)
---------
BALANCE AT DECEMBER 31, 1998 3,828
Contributed Liabilities:
Employee benefit obligation from owners (Note 10) (337)
Other (17)
Net Loss (69)
Distributions (200)
---------
BALANCE AT DECEMBER 31, 1999 $ 3,205
=========
<FN>
- --------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
statements.
</FN>
</TABLE>
6
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Motiva Enterprises LLC (Motiva) is a joint venture combining the major
elements of Shell Oil Company (Shell), Texaco Inc. (Texaco) and Saudi Aramco's
Gulf and East Coast U.S. refining and marketing businesses. Motiva is a limited
liability company established by Shell Norco Refining Company (Shell Norco),
Shell, Texaco Refining and Marketing (East) Inc. (TRMI East) and Saudi Refining
Inc. (SRI) effective July 1, 1998 under the Delaware Limited Liability Company
Act. In accordance with the Limited Liability Company Agreement (the
"Agreement"), initial provisional ownership percentages are 35% for Shell Norco
and Shell together and 32.5% for each of TRMI East and SRI, effective through
the first full fiscal year. Also in accordance with the Agreement, subsequent
provisional ownership percentages will be determined for Motiva's second through
seventh full fiscal years and final ownership percentages will be determined for
Motiva's eighth full fiscal year. On December 7, 1998, the ownership in Motiva
attributable to Shell Norco and Shell was transferred to SOPC Holdings East LLC,
a wholly owned subsidiary of Shell.
A second joint venture company, Equilon Enterprises LLC (Equilon), was
formed on January 1, 1998, combining the major elements of Shell and Texaco's
Western and Midwestern U.S. refining and marketing businesses and their
nationwide trading, transportation and lubricants businesses. Equiva Trading
Company (Equiva Trading) and Equiva Services LLC (Equiva Services) were formed
on July 1, 1998 and are owned equally by Motiva and Equilon. Equiva Trading
functions as the trading unit for both Motiva and Equilon. Equiva Services
provides common financial, administrative, technical and other operational
support to both Motiva and Equilon. Equiva Trading and Equiva Services bill
their services at cost.
Motiva refines, distributes and markets petroleum products under both the
Shell and Texaco brands through its network of wholesalers, retailers and
company owned and contractor operated service stations in all or part of 26
states and the District of Columbia. Products are manufactured at four
refineries located in Delaware City, Delaware; Convent, Louisiana; Norco,
Louisiana; and Port Arthur, Texas.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation Effective July 1, 1998, Shell Norco, Shell, TRMI East and
SRI contributed assets and liabilities to Motiva pursuant to the terms of the
Asset Transfer and Liability Assumption Agreement, one of the joint venture
agreements establishing Motiva. TRMI East and SRI contributed the assets and
liabilities of Star Enterprise (Star). The accompanying financial statements are
presented using the historical basis of the assets and liabilities contributed
to Motiva on July 1, 1998.
Use of Estimates These financial statements are prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions. These assumptions affect the reported amounts of
assets and liabilities and 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. Significant estimates include the
recoverability of assets, environmental remediation, litigation and claims and
assessments. Amounts are recognized when it is probable that an asset has been
impaired or a liability has been incurred and the cost can be reasonably
estimated. Actual results could differ from those estimates.
7
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Standard In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes new accounting and reporting standards for derivatives and hedging
activities. SFAS 133 requires Motiva to measure all derivatives at fair value
and to recognize them in the balance sheet as an asset or liability, depending
on Motiva's rights or obligations under the applicable derivative contract. In
June 1999, the FASB issued SFAS 137 which deferred the effective date of
adoption of SFAS 133 for one year. Motiva will adopt SFAS 133 no later than
January 1, 2001. Motiva has not yet determined the impact that the adoption of
SFAS 133 will have on Motiva's results of operations or financial position.
Revenues Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract.
Cash Equivalents Cash equivalents consist of highly liquid investments with a
maturity of three months or less when purchased.
Inventories All inventories are valued at the lower of cost or market. The cost
of inventories of crude oil and petroleum products is initially determined on
the last-in, first-out (LIFO) method, while the cost of other merchandise
inventories is initially determined on the first-in, first-out (FIFO) method,
and materials and supplies are stated at average cost.
Property, Plant And Equipment Depreciation of property, plant and equipment is
provided generally on composite groups, using the straight-line method, with
depreciation rates based upon the estimated useful lives of the groups.
Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, the cost and related depreciation are retired,
and any gain or loss is reflected in earnings.
Capitalized leases are amortized over the estimated useful life of the
asset or the lease term, as appropriate, using the straight-line method.
Maintenance and repairs, including major refinery maintenance, are charged
to expense as incurred. Renewals, betterments and major repairs that materially
extend the life of the properties are capitalized.
Interest incurred during the construction period of major additions is
capitalized.
The evaluation of impairment for property, plant and equipment is based on
a 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 valued at the lower of net
book value or fair value less cost to sell.
8
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles Of Consolidation Entities where Motiva has greater than 50 percent
ownership but as a result of contractual agreement or otherwise does not
exercise control, are accounted for using the equity method. The equity method
of accounting is generally 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 pre-tax income or losses of
limited liability companies and partnerships, and the net income or losses of
corporate joint venture companies is reflected in revenue, rather than when
realized through dividends or distributions. Other investments are carried at
cost. Intercompany accounts and transactions are eliminated.
Environmental Expenditures Motiva accrues for environmental remediation
liabilities when it is probable that such liability exists, based on past events
or known conditions, and the amount of such loss can be reasonably estimated. If
Motiva can only estimate a range of probable liabilities, the minimum
undiscounted expenditure necessary to satisfy Motiva's future obligation is
accrued.
Motiva determines the appropriate amount of each obligation considering all
of the available data, including technical evaluations of the currently
available facts, interpretation of existing laws and regulations, prior
experience with similar sites and the estimated reliability of financial
projections.
Motiva adjusts financial liabilities, as required, based on the latest
experience with similar sites, changes in environmental laws and regulations or
their interpretation, development of new technology or new information related
to the extent of Motiva's obligation.
Derivatives Motiva uses interest rate swap derivative financial transactions to
manage its exposure to changes in interest rates. Amounts receivable or payable
based on the interest rate differentials of interest rate swaps are accrued
monthly and are reflected in interest expense.
Motiva uses futures, purchased options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. Unrealized gains
and losses on such transactions are deferred and recognized in income when the
transactions and cash are settled. Motiva also uses written options. The
unrealized gains and losses on these transactions are recognized in current
earnings.
Fair Value Of Financial Instruments The estimated fair value of long-term debt
is disclosed in Note 7 to the financial statements. The carrying amount of
long-term debt with variable rates of interest approximates fair value at
December 31, 1999 and 1998 because borrowing terms equivalent to the stated
rates were available in the marketplace. Fair value for long-term debt with a
fixed rate of interest and interest rate swaps is determined based on discounted
cash flows using estimated prevailing interest rates.
Other financial instruments are included in current assets and liabilities
on the balance sheet and approximate fair value because of the short maturity of
such instruments. These include cash, short-term investments, notes and accounts
receivable, accounts payable and short-term debt.
9
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contingencies Certain conditions may exist as of the date financial statements
are issued, which may result in a loss to Motiva, but which will only be
resolved when one or more future events occur or fail to occur. Motiva's
management and legal counsel assess such contingent liabilities. 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 Motiva or unasserted claims that may result in such
proceedings, Motiva's legal counsel evaluates the perceived merits of any legal
proceeding 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 Motiva'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, Motiva may disclose contingent liabilities of an unusual nature which,
in the judgment of management and its legal counsel, may be of interest to the
owners or others.
Reclassifications Certain prior year amounts have been reclassified to conform
with current year presentation.
NOTE 3 - TRANSACTIONS WITH RELATED PARTIES
Motiva has entered into transactions with Shell, Texaco, SRI, Equilon,
Equiva Services, and Equiva Trading, including the affiliates of these
companies. Such transactions are in the ordinary course of business and include
the purchase, sale and transportation of crude oil and petroleum products and
numerous service agreements.
The aggregate amounts of such transactions were as follows:
<TABLE>
<CAPTION>
For the
For the Six Months
Year Ended Ended
December 31, December 31,
1999 1998
------------ ------------
(Millions of Dollars)
<S> <C> <C>
Sales and other operating revenue $ 1,701 $ 857
Purchases and transportation 5,602 2,642
Service and technology expense 659 297
</TABLE>
10
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - SALE OF RECEIVABLES
Motiva has a third-party accounts receivable agreement under which it has
the right to sell up to $200 million of trade accounts receivable on a
continuing basis subject to limited recourse. The discount recorded on sales of
trade receivables amounted to $1 million for the year ended December 31, 1999
and $1 million for the six months ended December 31, 1998.
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
As of December 31,
------------------------
1999 1998
---- ----
(Millions of Dollars)
<S> <C> <C>
Crude oil and petroleum products $ 558 $ 597
Other merchandise 13 13
Materials and supplies 80 82
---------- ---------
Total $ 651 $ 692
========== =========
</TABLE>
Due to declines in prices, the carrying value of crude oil and petroleum
products inventories at December 31, 1998 is net of a valuation allowance of $23
million to adjust from cost to market value.
In early 1999, prices recovered and the associated physical units of
inventory were sold, resulting in the reversal of the $23 million valuation
allowance. At December 31, 1999, the excess of market value over the LIFO
carrying value of crude oil and petroleum products inventories was approximately
$147 million.
Partial liquidation of inventories valued on a LIFO basis improved net
income by $23 million in 1999.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
1999 1998
--------------------- -------------------
Gross Net Gross Net
----- --- ----- ---
(Millions of Dollars)
<S> <C> <C> <C> <C>
Refining $ 4,583 $ 2,967 $ 4,377 $ 2,966
Marketing 2,752 2,007 2,780 2,084
Other - - 10 5
------- -------- -------- --------
Total $ 7,335 $ 4,974 $ 7,167 $ 5,055
======= ======== ======== ========
Capital lease amounts included above $ 24 $ 11 $ 24 $ 12
======= ======== ======== ========
</TABLE>
Interest expense capitalized as part of property, plant and equipment was
$6 million for the year ended December 31, 1999 and $4 million for the six
months ended December 31, 1998.
11
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT
Short-Term
Debt due within one year from the dates indicated below consisted of the
following:
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1999 1998
---------- ----------
(Millions of Dollars)
<S> <C> <C>
Commercial paper $ 1,133 $ 1,211
Pollution control revenue bonds 304 277
---------- ---------
1,437 1,488
Current maturities of long-term debt and capital
lease obligation 1 1
---------- ---------
1,438 1,489
Less: Short-term obligations intended to be
refinanced:
Commercial paper 900 900
Pollution control revenue bonds 175 148
---------- ---------
Total $ 363 $ 441
========== =========
</TABLE>
The weighted average interest rates for the commercial paper outstanding at
December 31, 1999 and 1998 were 5.99% and 5.42%, respectively.
The pollution control revenue bonds outstanding at December 31, 1999 and
1998 include five individual issues assumed from Shell totaling $129 million.
Interest rates are currently reset on a daily basis for four of those issues and
on a weekly basis for the remaining issue; the bonds may be converted from time
to time to other modes. The weighted average interest rates for those issues at
December 31, 1999 and 1998 were 5.29% and 5.02%, respectively. The bonds mature
between 2005 and 2023, although bondholders have the right to tender their bonds
under certain conditions, including on interest rate resets. Pursuant to the
terms of the underlying indentures, Shell retains liability for debt service on
the issues Motiva assumed from Shell in the event that Motiva fails to perform
its obligations.
Of the remaining $175 million in pollution control revenue bonds, $133
million have interest rates currently reset on a weekly basis and the other $42
million are marketed in a commercial paper mode. Any or all of these bonds may
also be converted from time to time to other modes. Weighted average interest
rates for the bonds reset weekly at December 31, 1999 and 1998 were 5.46% and
4.0%, respectively. Of the bonds reset weekly, $27 million are currently
supported by an irrevocable bank letter of credit, for which Motiva pays a fee
based on the face amount of the letter of credit. For the issue marketed in a
commercial paper mode, the weighted average interest rates at December 31, 1999
and 1998 were 6.03% and 5.35%, respectively. The bonds mature between 2014 and
2029, although bondholders have the right to tender their bonds under certain
conditions, including on interest rate resets or commercial paper maturity.
These bonds, as well as $900 million of Motiva's commercial paper obligations
scheduled to mature in 2000, are reclassified to long-term debt at December 31,
1999, recognizing Motiva's intent and ability to refinance those issues on a
long-term basis, if necessary, through the use of its $1.5 billion revolving
credit facility.
12
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT (continued)
Motiva has entered into borrowing agreements with a number of financial
institutions to obtain funds on an "as available" basis at negotiated rates. The
maximum amounts outstanding under these agreements during 1999 and 1998 were $84
million and $125 million, respectively. These facilities were unused as of
December 31, 1999 and 1998.
Long-Term
Long-term debt as of the dates indicated below consisted of the following:
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1999 1998
---------- ---------
(Millions of Dollars)
<S> <C> <C>
Private placements $ 360 $ 360
Capital lease obligation 17 18
---------- ---------
377 378
Less: Amounts due within one year 1 1
---------- ----------
376 377
Add: Short-term obligations intended to be
refinanced:
Commercial paper 900 900
Pollution control revenue bonds 175 148
---------- ---------
Total $ 1,451 $ 1,425
========== =========
</TABLE>
At December 31, 1999 and 1998, Motiva was party to a $1.5 billion
extendible 364-day revolving credit facility with a syndicate of major U.S. and
international banks. This facility, originally established in 1998 and renewed
in October 1999, is available as support for the issuance of Motiva's commercial
paper and certain of its pollution control revenue bonds, as well as for working
capital and for other general corporate purposes. Motiva had no amounts
outstanding under this facility during 1999 or 1998. Motiva pays a facility fee
on this facility, based on its total amount. Under this agreement, interest on
any amounts borrowed would be based on short-term rates at the time of
borrowing.
Private placements of $360 million at December 31, 1999 and 1998 were
assumed from Star, and consist of $110 million and $250 million issued to
various insurance companies in 1991 and 1992, respectively. All of the notes
carry fixed interest rates; the weighted average interest rates were 8.6% for
the 1991 issue and 7.6% for the 1992 issue. These notes have varying maturities
lasting until the year 2009.
All of Motiva's borrowings are unsecured and with the exception of the
pollution control revenue bonds assumed from Shell, are non-recourse to the
owners. Long-term debt borrowing agreements include financial covenants
regarding net worth, leverage and liens.
13
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT (continued)
The amounts of long-term debt maturities during each of the next five years
are $0 million, $45 million, $63 million, $65 million and $35 million,
respectively. The preceding maturities are before consideration of short-term
obligations intended to be refinanced and also exclude capital lease
obligations.
Fair Value Of Financial Instruments
The estimated fair values, at the dates indicated below, of Motiva's
long-term debt and related derivative financial instruments were as follows:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1999 1998
--------------------- ---------------------
(Millions of Dollars)
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Long-term debt $ 1,451 $ 1,460 $ 1,425 $ 1,472
Interest rate swaps - (1) - 2
</TABLE>
NOTE 8 - DERIVATIVES
Debt-Related Derivatives
Many of Motiva's interest-bearing liabilities reflected on its balance
sheet are floating rate instruments. To reduce the impact of changes in interest
rates on this floating rate debt, Motiva assumed certain interest rate swap
agreements in the notional amount of $100 million previously entered into by
Star. All such interest rate swaps require the counterparty of the swap to pay
to Motiva a floating rate of interest on notional amounts of principal, and for
Motiva to pay to the counterparty a fixed rate of interest on the same amounts
of notional principal. In all cases, Motiva remains obligated to pay the
variable rate owing to the holder of the underlying obligations. These interest
rate swaps effectively convert $100 million of floating rate debt to a fixed
rate of 6.4% through all or a portion of the year 2000.
Each party to any interest rate swap agreement is exposed to credit risk
for nonperformance of the other party. Motiva has such exposure, but since the
counterparties are major financial institutions, does not anticipate
nonperformance by counterparties.
14
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - DERIVATIVES (continued)
Commodity Derivatives
Motiva utilizes futures, purchased options and swaps to hedge the effects
of fluctuations in the prices of crude oil and refined products. These
transactions meet the requirements for hedge accounting. The resulting gains or
losses, measured by quoted market prices, are accounted for as part of the
transactions being hedged. On the balance sheet, deferred gains and losses are
included in current assets and liabilities. Motiva also uses written options to
manage its price risk. Written options do not meet the requirement for hedge
accounting. Accordingly, these transactions are marked to market and recognized
in income monthly.
A significant factor impacting earnings during the year ended December 31,
1999 was the rapid increase in crude oil prices throughout the year. As a result
of the rapid price increases, Motiva realized a positive impact to earnings
through increased refining margins associated with the holding period for
inventory.
At December 31, 1999 and 1998, Motiva had open derivative commodity
contracts required to be settled in cash, consisting mostly of futures. Notional
contract amounts were $192 million and $101 million at December 31, 1999 and
1998, respectively. These amounts principally represent future values of
contract volumes over the remaining duration of outstanding futures contracts at
the respective dates. These contracts hedge a small fraction of Motiva's
business activities, generally for the next twelve months.
Unrealized gains on open hedging positions at December 31, 1999 were not
significant, and unrealized losses on open hedging positions at December 31,
1998 were $5 million. The earnings impact of closed hedging positions and open
and closed written options was a loss of $89 million for the year ended December
31, 1999 and was not significant for the six months ended December 31, 1998. The
favorable impact of refining margins in 1999 associated with the holding period
for inventory was offset by the impact of hedging.
NOTE 9 - LEASE COMMITMENTS AND RENTAL EXPENSE
Motiva has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which Motiva is lessee.
15
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LEASE COMMITMENTS AND RENTAL EXPENSE (continued)
Motiva has a one-year lease agreement for a cogeneration plant being
constructed in proximity to Motiva's Delaware City refinery. The lease commences
upon completion of the facility's construction, which is estimated to be in
April 2000. The lease may be renewed at Motiva's option for seventeen
consecutive one-year terms. The minimum lease commitment for the first year
(year 2000) is expected to be approximately $20 million (not included in the
table below). Motiva, as construction agent for the project, is obligated to
reimburse the lessor for approximately 89 percent of the project's construction
cost if certain agreed-upon requirements are not met. The accumulated
expenditures to date at December 31, 1999 and 1998 were $339 million and $168
million, respectively. Total project expenditures are expected to be
approximately $365 million. At the end of the first one-year lease, if not
renewed, Motiva has guaranteed a minimum recoverable residual value to the
lessor of approximately 89 percent of the total project construction cost.
As of December 31, 1999, Motiva had estimated minimum commitments for
payment of rentals under leases which, at inception, had a noncancelable term of
more than one year, as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(Millions of Dollars)
<S> <C> <C>
2000 $ 51 $ 4
2001 49 4
2002 47 4
2003 39 4
2004 38 4
After 2004 410 9
---------- -------
Total lease commitments $ 634 29
==========
Less amounts representing interest 12
-------
Present value of total capital lease obligation 17
Less current portion of capital lease obligation 1
-------
Present value of long-term portion of capital lease obligation $ 16
=======
</TABLE>
Rental expense relative to operating leases, including contingent rentals,
is provided in the table below:
<TABLE>
<CAPTION>
For the
For the Six Months
Year Ended Ended
December 31, December 31,
1999 1998
------------ ------------
(Millions of Dollars)
<S> <C> <C>
Rental expense:
Minimum lease rentals $ 74 $ 52
Contingent rentals 2 5
---------- ---------
Total 76 57
Less rental income on properties subleased to others 48 25
---------- ---------
Net rental expense $ 28 $ 32
========== =========
</TABLE>
16
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - AFFILIATE OBLIGATIONS AND CONTRIBUTED LIABILITIES
On April 1, 1999, Shell, Texaco and Star employees designated as performing
duties supporting Motiva were transferred to Equiva Services. At that time
certain benefit liabilities were transferred to Equiva Services from Shell,
Texaco and Star through their interests in Motiva and Equilon. Equiva Services'
obligations transferred from Shell, Texaco and Star applicable to Motiva were
recorded as reductions to Motiva's investment in Equiva Services. A related
party obligation of $440 million at December 31, 1999 represents Motiva's
obligation to Equiva Services for these employee benefit liabilities. Of this
amount, $408 million was classified as long-term at December 31, 1999. The
foregoing contribution of liabilities that were transferred from Shell, Texaco,
and Star through Motiva to Equiva Services for employee benefit liabilities at
April 1, 1999 was $337 million and included $202 million for pension related
affiliate obligations, $110 million of post-employment medical benefits and $25
million for vacation benefits. Additional information is disclosed in Note 11 -
EMPLOYEE BENEFIT PLANS.
The other contributed liability of $17 million in the Statement of Owners'
Equity represents a post formation adjustment which will result in an $11
million receivable from Shell and an $11 million payable to Star.
NOTE 11 - EMPLOYEE BENEFIT PLANS
In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting Motiva remained
employees of the owner companies and their affiliates until April 1, 1999.
Beginning April 1, 1999, Motiva's affiliate, Equiva Services, employed personnel
necessary for ongoing operations. Obligations and accrued liabilities for
certain employee benefits, including pension and other post-employment benefits,
were transferred to Equiva Services at that time. On January 1, 2000, employees
directly supporting Motiva became employees of Motiva. Employees providing
common financial, administrative, technical and other operational support to
both Motiva and Equilon remain employees of Equiva Services.
17
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Pension Related Affiliate Obligations
Concurrently with their transfer from the owner companies, employees
retained certain pension benefits for future pay increases under the owner
company pension plans. Under agreements with Shell, Texaco and SRI, the owner
companies will be reimbursed for past service pension benefits attributable to
these future pay benefits at April 1, 1999, as well as future increases in the
related projected benefit obligation under the owner companies' qualified
pension plans. These reimbursements will be made at the time the applicable
employees retire. The following summarizes the reimbursement owed to the owner
companies:
<TABLE>
<CAPTION>
Employees Transferred
to Motiva on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Projected benefit obligation at April 1, 1999 $ 159
Interest cost for the period April 1, 1999 to December 31, 1999 9
Actuarial gain (15)
--------
Projected benefit obligation at December 31, 1999 $ 153
=======
</TABLE>
The projected benefit obligation above of $153 million will be recorded as
a Motiva liability on January 1, 2000 with a concurrent reduction in the
affiliate payable to Equiva Services.
Post-Employment Benefits
Motiva and Equiva Services currently provide health care benefits for
retired employees and their dependents through a common plan. Eligibility for
such benefits requires that a retired employee be at least 50 years of age, with
at least 10 years of service and the sum of age and service of at least 70
years. Past service with the owner companies is credited for determining benefit
eligibility.
Motiva's obligation is a percentage of the total premiums required. This
percentage varies from 60% to 80% of total cost depending on the sum of the
employees total years of age plus service at the time of retirement. The assumed
annual health care cost trend rate used in measuring the accumulated
post-employment benefit obligation (APBO) was 7.0% in 1999, decreasing to 5.5%
by 2002 and remaining at that level thereafter. Assuming a 1% increase in the
annual rate of increase of required medical premiums, the APBO and annual
expense would increase by approximately $6 million and $1 million, respectively.
In addition to medical benefits, Motiva and Equiva Services are providing
retiree life insurance benefits to certain former employees from Texaco and
Star. These employees must be of age 50 at April 1, 1999 with 5 years of service
at the time of transfer and retire at a minimum age of 55 with at least 10 years
of service in order to be eligible.
18
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Post-Employment Benefits (continued)
Net post-employment benefit costs for April 1, 1999 to December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Employees Transferred
to Motiva on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Service cost $ 2
Interest cost 5
Amortization of prior service cost (2)
--------
Accrued expense $ 5
========
</TABLE>
Funded status of other post-employment plans as of December 31, 1999, was
as follows:
<TABLE>
<CAPTION>
Employees Transferred
to Motiva on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Accumulated post-employment benefit obligation $ 74
Unrecognized prior service cost 22
-------
Accrued post-employment benefit obligation $ 96
=======
</TABLE>
The accrued post-employment benefit obligation above of $96 million will be
recorded as a Motiva liability on January 1, 2000 with a concurrent reduction in
the affiliate payable to Equiva Services.
Pension Plans
Effective April 1, 1999, Equiva Services established a cash balance defined
benefit pension plan covering substantially all of its employees. Company
contributions under the plan are between 3% and 7% of compensation based on
years of service, age, and covered compensation. Individual employee accounts
are credited each year with the employer contribution and interest on the
account balance at the rate of 6.5% per annum. Assets of the plan are comprised
primarily of equity securities and fixed income securities. Motiva and Equiva
Services' funding policy is to contribute all pension costs accrued to the
extent required by federal tax regulations. The following table sets forth
information related to changes in the benefit obligations, change in plans
assets, a reconciliation of the funded status of the plans and components of the
expense recognized related to Motiva's pension plan.
19
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Pension Plans (continued)
<TABLE>
<CAPTION>
Employees Transferred
to Motiva on
January 1, 2000
---------------------
(Millions of Dollars)
<S> <C>
Change in benefit obligation
Projected benefit obligation at April 1, 1999 $ -
Service cost 11
Actuarial gain (1)
----------
Projected benefit obligation at December 31, 1999 $ 10
==========
Change in plan assets
Fair value of plan assets at April 1, 1999 $ -
Actual return on plan assets (1)
Employer contributions 1
----------
Fair value of plan assets at December 31, 1999 $ -
==========
Funded status at December 31, 1999
Obligation greater than assets $ 10
Unrecognized net gain 1
----------
Accrued pension obligation $ 11
==========
Weighted-average assumptions at December 31, 1999
Discount rate 8%
Expected return on plan assets 9%
Rate of compensation increase 4.5%
Components of net periodic benefit costs for the period
April 1, 1999 to December 31, 1999
Service cost $ 11
==========
</TABLE>
The projected benefit obligation above of $11 million will be recorded as a
Motiva liability on January 1, 2000 with a concurrent reduction in the affiliate
payable to Equiva Services.
Employee Termination Benefits
The joint venture agreements provide for Motiva and Equilon to determine
the appropriate staffing levels for their businesses. To the extent those
staffing needs resulted in the elimination of positions from the ranks of Shell,
Texaco and Star, affected employees were entitled to termination benefits
provided for under the benefit plans of the applicable companies. Shell, Texaco
and Star, as the employer companies, are responsible for administering the
payment of benefits under their respective benefit plans. Motiva and Equilon are
obligated to reimburse the employer companies for all costs resulting from the
elimination of positions in accordance with a formula included in the joint
venture agreements.
20
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Employee Termination Benefits (continued)
The formation of Motiva and Equilon resulted in the termination of 1,658
employees. The separations were substantially complete as of December 31, 1999.
In 1998, Motiva recorded a charge of $28 million for its share of reimbursable
severance and other benefit costs as selling, general and administrative
expenses in the Statement of Income. An additional provision of $3 million was
recorded in 1999. Motiva reimbursed the employer companies $23 million in 1999
and $3 million in 1998 for the termination benefits. Reimbursement of the
remaining benefits is expected in 2000.
NOTE 12 - CONTINGENT LIABILITIES
Except for environmental obligations, Motiva generally did not assume any
contingent liabilities with respect to events occurring before July 1, 1998.
While it is impossible to ascertain the ultimate legal and financial
liability with respect to many contingent liabilities and commitments (including
lawsuits, claims, guarantees, federal regulations, environmental issues, etc.),
Motiva has accrued amounts related to certain such liabilities. Motiva does not
expect that the aggregate amount of commitments and contingent liabilities in
excess of amounts accrued at December 31, 1999 and 1998, if any, will have a
material effect on the financial position or results of operations of Motiva.
NOTE 13 - TAXES
Motiva, as a limited liability company, is not liable for income taxes.
Income taxes are the responsibility of the owners, with earnings of Motiva
included in the owners' earnings for the determination of income tax liability.
Excise taxes collected from consumers for governmental agencies that are
not included in revenues or expenses were $3,527 million for the year ended
December 31, 1999 and $2,062 million for the six months ended December 31, 1998.
21
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC/IMAGE/ILLUSTRATION MATERIAL INCLUDED IN EXHIBIT 13 -
TEXACO INC.'S 1999 ANNUAL REPORT TO STOCKHOLDERS
The following information is depicted in graphic/image/illustration form in
Texaco Inc.'s 1999 Annual Report to Stockholders filed as Exhibit 13 to Texaco
Inc.'s 1999 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 1999 Annual Report to Stockholders as provided to Texaco Inc.'s
stockholders:
This Appendix describes the graphic material contained in the portion of Texaco
Inc.'s 1999 Annual Report to Stockholders which is incorporated by reference
into Texaco Inc.'s 1999 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.
1. The first graph is located on Page 15. The bar graph is entitled
"Average Price Per Barrel of West Texas Intermediate (WTI) Crude Oil"
and is reflected in dollars. The average price per barrel of West Texas
Intermediate crude oil, in dollars, for each year are depicted as
follows:
<TABLE>
<S> <C> <C>
1997 $20.61
1998 $14.39
1999 $19.31
</TABLE>
Below the graph a footnote appears which states, "Prices in 1999
recovered from historically low levels in 1998."
2. The second graph is located on Page 15. The bar graph is entitled
"Average OPEC Crude Oil Production (Excluding Iraq)" and is reflected
in millions of barrels a day. The average OPEC crude oil production
(excluding Iraq), in millions of barrels a day, for each year are
depicted as follows:
<TABLE>
<S> <C> <C>
1997 26.0
1998 25.8
1999 24.0
</TABLE>
Below the graph a footnote appears which states, "OPEC reduced
production dramatically since 1998."
<PAGE>
3. The third graph is located on Page 17. The bar graph is entitled "Cash
Expenses Per Barrel" and is reflected in dollars. The cash expenses per
barrel, in dollars, for each year are depicted as follows:
<TABLE>
<S> <C> <C>
1997 $4.08
1998 $3.74
1999 $3.54
</TABLE>
Below the graph a footnote appears which states, "Tight expense control
led to a 5% per barrel reduction in 1999."
4. The fourth graph is located on Page 19. The bar graph is entitled "U.S.
Finding and Development Cost Per Barrel of Oil Equivalent" and is
reflected in dollars. The U.S. finding and development cost per barrel
of oil equivalent, in dollars, for each year are depicted as follows:
<TABLE>
<S> <C> <C>
1997 $5.37
1998 $4.41
1999 $4.12
</TABLE>
Below the graph a footnote appears which states, "We continue to reduce
our per barrel finding and development costs."
5. The fifth graph is located on Page 19. The bar graph is entitled "U. S.
Production Costs Per Barrel" and is reflected in dollars. The U. S.
production costs per barrel, in dollars, for each year are depicted as
follows:
<TABLE>
<S> <C> <C>
1997 $3.94
1998 $4.07
1999 $4.01
</TABLE>
Below the graph a footnote appears which states, "Cost savings
initiatives lowered our per barrel production costs in 1999."
6. The sixth graph is located on Page 20. The bar graph is entitled
"International Net Proved Reserves" and is reflected in millions of
barrels of oil equivalent. The International net proved reserves, in
millions of barrels of oil equivalent, for each year are depicted as
follows:
<TABLE>
<CAPTION>
Crude Oil Natural Gas Total
--------- ----------- -----
<S> <C> <C> <C> <C>
1997 1,500 370 1,870
1998 1,749 402 2,151
1999 1,698 650 2,348
</TABLE>
Below the graph a footnote appears which states, "Net proved reserves
increased due to the Malampaya and Karachaganak projects."
7. The seventh graph is located on Page 21. The bar graph is entitled
"International Upstream Capital and Exploratory Expenditures" and is
reflected in billions of dollars. The International upstream capital
and exploratory expenditures, in billions of dollars, for each year are
depicted as follows:
<TABLE>
<S> <C> <C>
1997 $1.377
1998 $1.219
1999 $1.823
</TABLE>
Below the graph a footnote appears which states, "The growth in
international upstream investments shows our focus on high-impact
projects."
8. The eighth graph is located on Page 24. The bar graph is entitled
"International Refined Product Sales" and is reflected in thousands of
barrels a day. The International refined product sales, in thousands of
barrels a day, for each year and geographical location are depicted as
follows:
<TABLE>
<CAPTION>
Caltex Europe Other LA/WA Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1997 571 509 65 418 1,563
1998 593 571 59 462 1,685
1999 669 606 76 493 1,844
</TABLE>
Below the graph a footnote appears which states, "International sales
volumes increased by more than 9% in 1999."
9. The ninth graph is located on Page 27. 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>
Acquisition of
United States International Monterey Resources Total
------------- ------------- ------------------ -----
<S> <C> <C> <C> <C> <C>
1997 $2.221 $2.261 $1.448 $5.930
1998 $2.020 $1.999 $ - $4.019
1999 $1.400 $2.493 $ - $3.893
</TABLE>
Below the graph a footnote appears which states, "Our investment in
Malampaya contributed to the increase in international spending in
1999."
<PAGE>
10. The tenth graph is located on Page 27. 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>
Refining, marketing,
Exploration and Global gas distribution Acquisition of
production And power and other Monterey Resources Total
---------- --------- -------------------- ------------------ -----
<S> <C> <C> <C> <C> <C> <C>
1997 $2.994 $0.172 $1.316 $1.448 $5.930
1998 $2.655 $0.185 $1.179 $ - $4.019
1999 $2.723 $0.279 $0.891 $ - $3.893
</TABLE>
Below the graph a footnote appears which states, "We continue emphasis
on exploration and production projects."
BGM
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 August 4, 1999, including Certificate of
Designations, Preferences and Rights of Series D Junior
Participating Preferred Stock and Series G, H, I and J Market
Auction Preferred Shares, filed as Exhibit 3.1 to Texaco Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1999, dated August 12, 1999, incorporated herein by reference,
SEC File No. 1-27. *
(3.2) Copy of By-Laws of Texaco Inc., as amended to and including April 27, 1999,
filed as Exhibit 3.2 to Texaco Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, dated May 14, 1999, incorporated
herein by reference, SEC File No. 1-27. *
(4.1) Form of Amended Rights Agreement, dated as of March 16, 1989, as
amended as of April 28, 1998, between Texaco Inc. and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, filed as Exhibit
I, pages 40 through 78, of Texaco Inc.'s proxy statement dated
March 17, 1998, incorporated herein by reference, SEC File No. 1-27. *
(10(iii)(a)) Form of severance agreement between Texaco Inc. and elected officers of
Texaco Inc., filed as Exhibit 10(iii)(a) to Texaco Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998, dated March 25, 1999,
incorporated herein by reference, SEC File No. 1-27. *
(10(iii)(b)) Employment agreement dated December 30, 1997, between Texaco Inc.
and Mr. John J. O'Connor, Senior Vice President of Texaco Inc., filed as
Exhibit 10(iii)(b) to Texaco Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998, dated March 25, 1999, incorporated herein
by reference, SEC File No. 1-27. *
(10(iii)(c)) Employment agreements dated July 18, 1997, between Texaco Inc. and
Mr. William M. Wicker, Senior Vice President of Texaco Inc., filed as
Exhibit 10(iii)(c) to Texaco Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998, dated March 25, 1999,
incorporated herein by reference, SEC File No. 1-27. *
(10(iii)(d)) 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)(e)) 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)(f)) 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)(g)) 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. *
<PAGE>
(10(iii)(h)) 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)(i)) 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)(j)) 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)(k)) 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. *
(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 1999 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.
(23.1) Consent of Arthur Andersen LLP.
(23.2) Consent of KPMG LLP.
(23.3) Consent of Independent Accountants of Equilon Enterprises LLC.
(23.4) Consent of Independent Accountants of Motiva Enterprises LLC.
(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, 1999
(In Millions of Dollars)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-98 and 1-1-95........ $1,955 $ 892 $3,514 $3,450 $1,201
Dividends from less than 50% owned companies
more or (less) than equity in net income.............. 189 -- (11) (4) 1
Minority interest in net income.......................... 83 56 68 72 54
Previously capitalized interest charged to
income during the period.............................. 14 22 25 27 33
------ ------ ------ ------ ------
Total earnings................................... 2,241 970 3,596 3,545 1,289
------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges.................................... 587 664 528 551 614
Interest factor attributable to operating
lease rentals.................................. 90 120 112 129 110
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc....................... 55 33 33 35 36
------ ------ ------ ------ ------
Total items charged to income.................... 732 817 673 715 760
Interest capitalized.................................. 28 26 27 16 28
Interest on ESOP debt guaranteed by Texaco Inc........ -- 3 7 10 14
------ ------ ------ ------ ------
Total fixed charges.............................. 760 846 707 741 802
------ ------ ------ ------ ------
Earnings available for payment of fixed charges.......... $2,973 $1,787 $4,269 $4,260 $2,049
(Total earnings + Total items charged to income) ====== ====== ====== ====== ======
Ratio of earnings to fixed charges of Texaco
on a total enterprise basis........................... 3.91 2.11 6.04 5.75 2.55
====== ====== ====== ====== ======
</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.
<PAGE>
TEXACO 1999 ANNUAL REPORT 13
Financial Table of Contents
Management's Discussion and Analysis 14
Description of Significant Accounting Policies 30
Statement of Consolidated Income 32
Consolidated Balance Sheet 33
Statement of Consolidated Stockholders' Equity 34
Statement of Consolidated Non-owner Changes in Equity 36
Statement of Consolidated Cash Flows 37
Notes to Consolidated Financial Statements
Note 1 Segment Information 38
Note 2 Adoption of New Accounting Standards 40
Note 3 Income Per Common Share 40
Note 4 Inventories 41
Note 5 Investments and Advances 41
Note 6 Properties, Plant and Equipment 43
Note 7 Foreign Currency 44
Note 8 Taxes 44
Note 9 Short-Term Debt, Long-Term Debt, Capital Lease Obligations 45
and Related Derivatives
Note 10 Lease Commitments and Rental Expense 47
Note 11 Employee Benefit Plans 48
Note 12 Stock Incentive Plan 50
Note 13 Preferred Stock and Rights 52
Note 14 Financial Instruments 52
Note 15 Other Financial Information, Commitments and Contingencies 54
Report of Management 56
Report of Independent Public Accountants 56
Supplemental Oil and Gas Information 57
Supplemental Market Risk Disclosures 63
Selected Financial Data
Selected Quarterly Financial Data 64
Five-Year Comparison of Selected Financial Data 65
Texaco Inc. Board of Directors 66
Texaco Inc. Officers 67
Investor Information 68
<PAGE>
14 TEXACO 1999 ANNUAL REPORT
Management's Discussion and Analysis (MD&A)
INTRODUCTION
We use the MD&A to explain Texaco's operating results and general financial
condition. A table of financial highlights that provides a financial picture of
the company is followed by four main sections: Industry Review, Results of
Operations, Analysis of Income by Operating Segments and Other Items.
Industry Review -- we discuss the economic factors that affected our
industry in 1999. We also provide our near-term outlook for the industry.
Results of Operations -- we explain changes in consolidated revenues,
costs, expenses and income taxes. Summary schedules, showing results before and
after special items, complete this section. Special items are significant
benefits or charges outside the scope of normal operations.
Analysis of Income by Operating Segments -- we discuss the performance of
our operating segments: Exploration and Production (Upstream), Refining,
Marketing and Distribution (Downstream) and Global Gas and Power. We also
discuss Other Business Units and our Corporate/Non-operating results.
Other Items section includes:
o Liquidity and Capital Resources: How we manage cash, working capital and
debt and other actions to provide financial flexibility
o Reorganizations, Restructurings and Employee Separation Programs: A
discussion of our reorganizations and other cost-cutting initiatives
o Capital and Exploratory Expenditures: Our program to invest in the
business, especially in projects aimed at future growth
o Environmental Matters: A discussion about our expenditures relating to
protection of the environment
o New Accounting Standards: A description of a new accounting standard to be
adopted
o Euro Conversion: The status of our program to adapt to the euro currency
o Year 2000 (Y2K): A discussion of how we successfully dealt with the Y2K
issue
- --------------------------------------------------------------------------------
Our discussions in the MD&A and other sections of this Annual Report contain
forward-looking statements that are based upon our best estimate of the trends
we know about or anticipate. Actual results may be different from our estimates.
We have described in our 1999 Annual Report on Form 10-K the factors that could
change these forward-looking statements.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Millions of dollars, except per share and ratio data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 35,691 $ 31,707 $ 46,667
Income before special items and cumulative
effect of accounting change $ 1,214 $ 894 $ 1,894
Special items (37) (291) 770
Cumulative effect of accounting change -- (25) --
---------------------------------------------
Net income $ 1,177 $ 578 $ 2,664
Diluted income per common share (dollars)
Income before special items and
cumulative effect of accounting change $ 2.21 $ 1.59 $ 3.45
Special items (.07) (.55) 1.42
Cumulative effect of accounting change -- (.05) --
---------------------------------------------
Net income $ 2.14 $ .99 $ 4.87
Cash dividends per common share (dollars) $ 1.80 $ 1.80 $ 1.75
Total assets $ 28,972 $ 28,570 $ 29,600
Total debt $ 7,647 $ 7,291 $ 6,392
Stockholders' equity $ 12,042 $ 11,833 $ 12,766
Current ratio 1.05 1.07 1.07
Return on average stockholders' equity* 10.0% 4.9% 23.5%
Return on average capital employed before
special items* 8.3% 6.5% 13.0%
Return on average capital employed* 8.1% 5.0% 17.3%
Total debt to total borrowed and invested capital 37.5% 36.8% 32.3%
======================================================================================================
</TABLE>
*Returns for 1998 exclude the cumulative effect of accounting change (see Note 2
to the financial statements).
<PAGE>
TEXACO 1999 ANNUAL REPORT 15
INDUSTRY REVIEW
Introduction
International petroleum market conditions changed dramatically during 1999. Over
the first few months, crude oil prices were very weak. While economic activity
and oil demand were beginning to show signs of increasing, oil supplies were
excessive. Then, in April, the Organization of Petroleum Exporting Countries
(OPEC) along with other oil producing countries cut output sharply. Oil prices
increased and remained strong over the balance of the year. For 1999, WTI crude
oil prices averaged $19.31 per barrel, or 34% above the 1998 average.
ITEM 1
AVERAGE PRICE PER BARREL OF WEST TEXAS INTERMEDIATE (WTI) CRUDE OIL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 1.]
- --------------------------------------------------------------------------------
The increase in crude oil prices boosted revenues from crude oil operations.
However, higher crude oil costs, together with other factors such as excess
gasoline and distillate stocks, tended to hurt the financial performance of
refineries in most markets.
Review of 1999
After slowing sharply in 1998 due to a severe global economic crisis, the rate
of world economic growth increased last year. Growth accelerated from a meager
2.3% in 1998 to 2.9% in 1999.
Economic activity varied among regions. The U.S. economy continued to grow
at a strong pace with low inflation, due in part to a technology-led surge in
labor productivity. Economic expansion in Western Europe also picked up in the
second half of the year, benefiting from increased domestic demand and the
favorable impact of a weak euro currency on exports.
World economic expansion was reinforced by the beginning of economic
recovery in Asia. Several of the key economies in the Asian region, including
South Korea, Malaysia, the Philippines, Singapore and Thailand sustained solid
economic upturns in 1999. Other regional economies, such as Hong Kong, also
turned around. Similarly, Japan, the world's second largest economy, showed
signs of emerging from its worst downturn in the post-war period. This
improvement was due to extraordinarily low interest rates and increased
government spending. However, consumer demand had yet to recover.
The Latin American region, which was hard hit earlier in the year, also
began to grow again toward year-end. This renewed growth was propelled by
turnarounds in Brazil, Mexico, Argentina and Chile. Moreover, world commodity
prices started to rebound from the low levels which resulted from the 1998
economic crisis. This, in turn, spurred economic growth in other areas,
particularly the oil producing countries of the Middle East and Africa. In
addition, the Russian economy turned upward after many years of decline. This
improvement was due to factors such as higher oil prices, increased agricultural
output and the substitution of domestically produced goods for imports.
This rebound in economic activity led to a significant increase in the
demand for petroleum products worldwide. During 1999, consumption averaged 75.5
million barrels per day (BPD), a 1.3 million BPD, or 1.7% gain over the prior
year. This growth, however, was not evenly distributed among regions.
o In the more advanced economies, oil demand rose by 700,000 BPD, boosted by
the U.S. and to a lesser extent by Japan
o In the less developed countries, Asian oil demand recovered from its 1998
slump and rose by 500,000 BPD, while growth in Latin America exceeded
100,000 BPD
o Demand in Eastern Europe rose by 100,000 BPD but was offset by an equal
decline in the former Soviet Union
o In other regions, demand registered no growth
Demand growth alone may have been insufficient to boost prices. Consequently,
OPEC and some non-OPEC producers agreed to cut production. Oil output from these
countries, which had been cut twice during 1998, was scaled back further during
the early part of 1999 by an additional 1.8 million BPD -- bringing the total
reduction to a significant 4 million BPD.
ITEM 2
AVERAGE OPEC CRUDE OIL PRODUCTION (EXCLUDING IRAQ)
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 2.]
- --------------------------------------------------------------------------------
The production curtailment and the resultant tightening balance between supply
and demand caused the price of crude oil to soar from its depressed 1998 and
early 1999 levels. The market price of West Texas Intermediate (WTI) averaged
$19.31 per barrel, an increase of 34% from the prior year. During the final
months of 1999, oil prices reached their highest levels in several years and
continued to increase in early 2000.
<PAGE>
16 TEXACO 1999 ANNUAL REPORT
Near-Term Outlook
We expect global economic expansion to accelerate from 2.9% in 1999 to a 3.7%
gain this year, reflecting several factors:
o Continued, but slower, gains in the United States as the Federal Reserve
moves to moderate growth by raising interest rates
o Continued economic expansion in Western Europe
o Further strengthening in the developing world, particularly the developing
nations of Asia and Latin America
o Continued low growth in Russia
On the other hand, the outlook for the large Japanese economy remains clouded by
the apparent inability of the economy to grow without strong government
spending. Private demand must eventually substitute for government spending if
the recovery is to be sustained. Furthermore, Japanese export growth could be
jeopardized by a pronounced appreciation in the value of the yen. Accordingly,
we expect the Japanese economy to register only minimal growth this year.
With the increase in global economic activity, the demand for crude oil
will be greater. An increase in worldwide oil consumption of about 1.6 million
BPD is expected. Non-OPEC production should recover considerably and may boost
output to levels close to the one million BPD mark. OPEC may therefore choose to
relax its quotas and increase production.
The crude oil price outlook is highly uncertain. In the past, high crude
oil prices have often encouraged OPEC to increase production sharply, causing
prices to drop. Higher petroleum demand and a potential weakening in crude oil
costs could benefit downstream margins.
RESULTS OF OPERATIONS
Revenues
Our consolidated worldwide revenues were $35.7 billion in 1999, $31.7 billion in
1998 and $46.7 billion in 1997. Our revenues benefited from higher commodity
prices, especially crude oil in the second half of 1999. We also benefited from
higher refined product sales volumes in 1999. The decrease in 1998 resulted
largely from the accounting for Equilon, a downstream joint venture in the
United States we formed in January 1998. Under accounting rules, the significant
revenues of the operations we contributed to this joint venture are no longer
included in our consolidated revenues. Revenues, costs and expenses of the joint
venture are reported net as "equity in income of affiliates" in our income
statement.
Sales Revenues - Price/Volume Effects
Our sales revenues were higher in 1999 due to an increase of 38% in our realized
crude oil prices. Crude oil and natural gas liquids production, however, was 5%
lower, due to natural field declines and asset sales in the U.S. and temporary
operating problems in the U.K.
Sales revenues from petroleum products increased in 1999 led by higher
prices and stronger international volumes. Volume growth for marine fuel sales
benefited from our joint venture with Chevron formed late in 1998.
Our volumes of natural gas sold in 1999 decreased in the U.S. due to lower
production and reduced sales of purchased gas. Internationally, we withdrew from
the U.K. retail gas marketing business.
Our sales revenues decreased in 1998 due to historically low crude oil,
natural gas and refined product prices. Partly offsetting the decline in prices
were higher liquids production and sales volumes.
Other Revenues
Other revenues include our equity in the income of affiliates, income from asset
sales and interest income. Results for 1999 were lower than 1998 due to reduced
interest income on notes and marketable securities and lower asset sales. Equity
in income of affiliates in 1999 was consistent with 1998 results. Lower
downstream margins in the Caltex Asia-Pacific Region and Motiva's U.S. East and
Gulf Coast areas depressed results. However, we realized higher refining margins
in Equilon's West Coast operating areas. We also benefited from stronger crude
oil prices in our Indonesian producing affiliate.
Results for 1998 show a decrease in other revenues from 1997. Equity in
income of affiliates decreased in 1998, mostly due to a decline in Caltex'
results. This decline was partly offset by the inclusion of results for Equilon.
Income from asset sales was also lower in 1998.
Our share of special charges by our affiliates included in other revenues
amounted to $153 million in 1999 and $159 million in 1998. In 1999, these major
special charges included refinery asset write-downs in the U.S. and a loss on
the sale of an interest in a Japanese affiliate. These charges were reduced by
inventory valuation benefits in the U.S. and abroad, as well as tax revaluation
benefits in Korea. The 1998 special charges included inventory valuation
adjustments, net U.S. alliance formation costs and Caltex restructuring charges.
In 1997, special gains included $416 million from upstream asset sales in
the U.K. North Sea and Myanmar.
Costs and Expenses
Costs and expenses from operations were $33.3 billion in 1999, $30.5 billion in
1998 and $42.9 billion in 1997. Higher prices and product volumes increased our
cost of goods sold in 1999. While costs have increased, reflecting world oil
prices, operating expenses declined in 1999. This improvement reflects our
continued emphasis on cost containment and operational efficiency. Similar to
the discussion of revenue above, the decrease in both costs and expenses for
1998 is largely due to the accounting treatment for Equilon.
Special items recorded by our subsidiaries increased costs and operating
expenses by $121 million in 1999, $382 million in 1998 and $136 million in 1997.
Major special items in 1999 included inventory valuation benefits in
subsidiaries, which reversed similar
<PAGE>
TEXACO 1999 ANNUAL REPORT 17
charges recorded in 1998 when commodity prices were very depressed. The year
1998 also included higher asset write-downs and employee separation costs.
Asset write-downs in 1999, which increased depreciation, depletion and
amortization expense by $87 million, resulted mainly from impairments in our
global gas and power segment and our corporate center. Asset write-downs in
1998, which increased depreciation, depletion and amortization expense by $150
million, resulted from impairments primarily in our upstream operations. These
and other asset impairments we have recognized since initially applying the
provisions of SFAS 121 have been driven by specific events. These include the
sale of properties or downward revisions in underground reserve quantities.
Impairments have not resulted from changes in prices used to calculate future
revenues. In performing our impairment reviews of assets not held for sale, we
use our best judgment in estimating future cash flows. This includes our outlook
of commodity prices based on our view of supply and demand forecasts and other
economic indicators.
Special charges in 1997 were principally for asset write-downs and royalty
litigation issues.
Interest expense for 1999 and 1998 increased due mostly to higher average
debt levels after a slight decrease in 1997.
During 1999 we kept tight control over expenses. Our success is illustrated
by the chart below.
ITEM 3
CASH EXPENSES PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 3.]
- --------------------------------------------------------------------------------
In 1999, we realized $743 million in pre-tax cost savings and synergy
capture, exceeding our year-end 2000 target of $650 million, a full year ahead
of schedule. We have identified other opportunities that should capture an
additional $400 million in savings by 2001.
Income Taxes
Income tax expense was $602 million in 1999, $98 million in 1998 and $663
million in 1997. The increase in 1999 is mostly due to higher income from
international producing operations. These areas are generally high tax
jurisdictions. The year 1997 included a $488 million benefit from an IRS
settlement.
Income Summary Schedules
The following schedules show after-tax results before and after special items
and before the cumulative effect of accounting change. A full discussion of
special items is included in our Analysis of Income by Operating Segments.
<TABLE>
<CAPTION>
Income (loss)
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before special items
and cumulative effect of
accounting change $ 1,214 $ 894 $ 1,894
- --------------------------------------------------------------------------------
Special items:
Inventory valuation adjustments 152 (142) --
Write-downs of assets (157) (93) (41)
Reorganizations, restructurings
and employee separation costs (74) (144) --
Gains (losses) on major asset sales (62) 20 367
Tax benefits on asset sales 40 43 --
Tax issues 106 25 480
Royalty issues (30) -- (36)
Environmental issues (12) -- --
-------------------------------------
Total special items (37) (291) 770
- --------------------------------------------------------------------------------
Income before cumulative effect
of accounting change $ 1,177 $ 603 $ 2,664
================================================================================
</TABLE>
<PAGE>
18 TEXACO 1999 ANNUAL REPORT
The following schedule further details our results:
Income (loss)
<TABLE>
<CAPTION>
Before Special Items After Special Items
------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exploration and production (upstream)
United States $ 666 $ 381 $ 1,038 $ 652 $ 301 $ 990
International 386 181 479 360 129 812
------------------------------------------------------------------
Total 1,052 562 1,517 1,012 430 1,802
- --------------------------------------------------------------------------------------------------------------------------
Refining, marketing and distribution (downstream)
United States 287 276 312 208 221 325
International 338 503 524 370 332 508
------------------------------------------------------------------
Total 625 779 836 578 553 833
- --------------------------------------------------------------------------------------------------------------------------
Global gas and power 21 (33) (46) (14) (16) (46)
- --------------------------------------------------------------------------------------------------------------------------
Total 1,698 1,308 2,307 1,576 967 2,589
- --------------------------------------------------------------------------------------------------------------------------
Other business units (3) (2) 2 (3) (2) 2
Corporate/Non-operating (481) (412) (415) (396) (362) 73
------------------------------------------------------------------
Income before cumulative effect of accounting change $ 1,214 $ 894 $ 1,894 $ 1,177 $ 603 $ 2,664
==========================================================================================================================
</TABLE>
ANALYSIS OF INCOME BY OPERATING SEGMENTS
Upstream
In our upstream business, we explore for, find, produce and sell crude oil,
natural gas liquids and natural gas.
Our upstream operations benefited from improved crude oil prices during
1999. The following discussion will focus on how the improved price environment
and other business factors affected our earnings. The U.S. results for 1998 and
1997 include some minor Canadian operations which were sold at the end of 1998.
- --------------------------------------------------------------------------------
United States Upstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 666 $ 381 $ 1,038
- -----------------------------------------------------------------------------------------------------------
Special items:
Write-downs of assets -- (51) (31)
Employee separation costs (11) (29) --
Gains on major asset sales 18 -- 26
Royalty issues (30) -- (36)
Tax issues 9 -- (7)
---------------------------------------
Total special items (14) (80) (48)
- -----------------------------------------------------------------------------------------------------------
Operating income $ 652 $ 301 $ 990
- -----------------------------------------------------------------------------------------------------------
Selected Operating Data:
Net production
Crude oil and NGL (thousands of barrels a day) 395 433 396
Natural gas available for sale (millions of cubic feet a day) 1,462 1,679 1,706
Average realized crude price (dollars per barrel) $ 14.70 $ 10.60 $ 17.34
Average realized natural gas price (dollars per MCF) $ 2.18 $ 2.00 $ 2.37
Exploratory expenses (millions of dollars) $ 234 $ 257 $ 189
Production costs (dollars per barrel) $ 4.01 $ 4.07 $ 3.94
Return on average capital employed before special items 10.5% 6.0% 20.9%
Return on average capital employed 10.3% 4.7% 20.0%
===========================================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 19
WHAT HAPPENED IN THE UNITED STATES?
Business Factors
PRICES We benefited from higher prices in 1999, which improved earnings by $342
million. Our average realized crude oil price increased by 39% to $14.70 per
barrel. This follows a 39% decrease in 1998 when crude prices plummeted to over
20 year lows in the fourth quarter. Crude oil prices recovered in 1999 as OPEC
and several non-OPEC producers implemented cutbacks in production. These
production cutbacks, coupled with increasing demand in improving global
economies, led to a decline in worldwide inventory levels. Our average realized
natural gas price in 1999 increased 9% to $2.18 per thousand cubic feet (MCF).
This follows a 16% decrease in 1998.
PRODUCTION Our production declined by 10% in 1999. This decrease was due to
natural field declines, asset sales and reduced investment in mature properties
consistent with our focus on capital efficiency. In 1998 our production
increased by 5%. This was due to our acquisition of heavy oil producer Monterey
Resources in November 1997, new production in the Gulf of Mexico and higher
production from our Kern River field in California.
Our capital expenditures in 1999 reflect our shift in upstream strategy to
pursue high-margin, high-impact projects rather than multiple projects with
incremental potential.
ITEM 4
U.S. FINDING AND DEVELOPMENT COST PER BARREL OF OIL EQUIVALENT
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 4.]
- --------------------------------------------------------------------------------
EXPLORATORY EXPENSES We expensed $234 million on exploratory activity in 1999.
This included a $100 million write-off of investments in the Fuji and McKinley
prospects in the Gulf of Mexico. These prospects, initially drilled between 1995
and 1998, were determined to be non-commercial in the fourth quarter of 1999
after appraisal drilling. Our exploratory expenses in 1998 were $257 million,
36% higher than 1997.
Other Factors
Our cash operating expenses decreased in 1999 by 10%. This was a result of cost
savings from the restructuring of our worldwide upstream organization. Our
production costs per barrel increased in 1998 and then decreased slightly in
1999. Our 1999 production cost per barrel benefited from cost savings but were
negatively impacted by production declines of 10%.
ITEM 5
U.S. PRODUCTION COSTS PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 5.]
- --------------------------------------------------------------------------------
Special Items
Our results for 1999 included a $30 million charge for the settlement of crude
oil royalty valuation issues on federal lands and an $11 million charge for
employee separation costs. The employee separation costs result from the
expansion of our 1998 program. Results for 1998 included a charge for employee
separation costs of $29 million. See the section entitled, Reorganizations,
Restructurings and Employee Separation Programs on page 26 for additional
information. During 1999, we also recorded an $18 million gain on asset sales in
California and a $9 million production tax refund.
Results for 1998 also included asset write-downs of $51 million for
impaired properties in Louisiana and Canada. The impaired Louisiana property
represents an unsuccessful enhanced recovery project. We determined in the
fourth quarter of 1998 that the carrying value of this property exceeded future
undiscounted cash flows. Fair value was determined by discounting expected
future cash flows. The Canadian properties were impaired following our decision
in October 1998 to exit the upstream business in Canada. These properties were
written down to their sales price with the sale closing in December 1998.
Results for 1997 included a charge of $31 million for asset write-downs and
a gain of $26 million from the sale of gas properties in Canada. We also
recorded charges of $36 million for royalty issues and $7 million for tax
issues.
<PAGE>
20 TEXACO 1999 ANNUAL REPORT
International Upstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 386 $ 181 $ 479
- -----------------------------------------------------------------------------------------------------------------
Special items:
Write-downs of assets -- (42) (10)
Employee separation costs (2) (10) --
Gains on major asset sales -- -- 328
Tax issues (24) -- 15
-------------------------------
Total special items (26) (52) 333
- -----------------------------------------------------------------------------------------------------------------
Operating income $ 360 $ 129 $ 812
- -----------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Net production
Crude oil and NGL (thousands of barrels a day) 490 497 437
Natural gas available for sale (millions of cubic feet a day) 537 548 471
Average realized crude price (dollars per barrel) $15.23 $11.20 $17.64
Average realized natural gas price (dollars per MCF) $ 1.34 $ 1.63 $ 1.66
Exploratory expenses (millions of dollars) $ 267 $ 204 $ 282
Production costs (dollars per barrel) $ 4.37 $ 3.74 $ 4.30
Return on average capital employed before special items 10.3% 5.8% 17.5%
Return on average capital employed 9.6% 4.1% 29.7%
=================================================================================================================
</TABLE>
WHAT HAPPENED IN THE INTERNATIONAL AREAS?
Business Factors
PRICES Our earnings increased by $327 million in 1999 due to the rebound in
crude oil prices. Our average crude oil price increased by 36% to $15.23 per
barrel. The 1999 recovery in crude oil prices was due to worldwide production
cutbacks and improved demand. This improvement follows a decline of 37% in 1998.
The trend of lower crude oil prices began in late 1997 and continued throughout
1998 with prices dropping to over 20 year lows in the fourth quarter. Our
average realized natural gas price in 1999 declined to $1.34 per MCF, a decrease
of 18%. This follows a decrease of 2% in 1998.
PRODUCTION Our production in 1999 declined slightly. We experienced some
declines in the U.K. North Sea due to operating problems. In Indonesia we had
lower production volumes as higher prices reduced our lifting entitlements for
cost recovery under a production sharing agreement. We also experienced lower
gas production in Latin America. These declines were partially offset by
increased production in the Partitioned Neutral Zone as a result of increased
drilling activity and further development of the Karachaganak field in the
Republic of Kazakhstan. Our production increased 14% in 1998 due to a full
year's production in the U.K. North Sea from the Captain and Erskine fields and
new production from the Galley field. Production also grew in the Partitioned
Neutral Zone.
ITEM 6
INTERNATIONAL NET PROVED RESERVES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 6.]
- --------------------------------------------------------------------------------
EXPLORATORY EXPENSES We expensed $267 million on exploratory activity in 1999,
an increase of 31%. This included about $50 million for an unsuccessful
exploratory well in a new offshore area of Trinidad. Also included is $30
million of prior year drilling expenditures in Thailand, which we wrote off in
1999 after we determined the prospect to be non-commercial. In 1999, our main
focus areas were in Nigeria and Brazil. Our exploratory expenses were $204
million in 1998, a decrease of 28%.
Other Factors
Our 1999 cash operating expenses decreased by 3% as a result of continuing cost
savings initiatives and the restructuring of our worldwide upstream
organization. Our production costs were $4.37 per barrel, an increase of 17%.
This increase reflects lower production in Indonesia due to lower entitlement
liftings for cost recovery as a result of higher prices.
<PAGE>
TEXACO 1999 ANNUAL REPORT 21
ITEM 7
INTERNATIONAL UPSTREAM CAPITAL AND EXPLORATORY EXPENDITURES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 7.]
- --------------------------------------------------------------------------------
Special Items
Our results for 1999 included a $24 million charge for prior years' tax issues
in the U.K. and a $2 million charge for employee separation costs. The employee
separation costs result from the expansion of our 1998 program. Results for 1998
included a charge for employee separation costs of $10 million. See the section
entitled, Reorganizations, Restructurings and Employee Separation Programs on
page 26 for additional information.
Results for 1998 also included a write-down of $42 million for the
impairment of our investment in the Strathspey field in the U.K. North Sea. The
Strathspey impairment was caused by a downward revision in the fourth quarter of
1998 of the estimated volume of the field's proved reserves. Fair value was
determined by discounting expected future cash flows.
Results for 1997 included a $10 million charge for asset write-downs and
gains on asset sales of $328 million. These sales included a 15% interest in the
Captain field in the U.K. and investments in an Australian pipeline system and
the company's Myanmar operations. Also, 1997 included a $15 million prior period
tax benefit.
LOOKING FORWARD IN THE WORLDWIDE UPSTREAM
We intend to continue to cost-effectively explore for, develop and produce crude
oil and natural gas reserves by focusing on high-margin, high-impact projects.
In an effort to boost long-term upstream profitability, we are selling producing
properties that no longer fit our business strategy. The cash proceeds from
these sales will be reinvested into major upstream projects that offer higher
returns. In 2000 we plan to sell producing properties totaling about 100,000
barrels per day of production in the U.S., offshore Trinidad and in the U.K.
North Sea. As a result, beginning in 2001 we expect worldwide production to
increase by two to three percent annually over the next three to five years. In
addition to California, our growth areas of focus include:
o Philippines -- where in 1999 we acquired a 45% interest in the Malampaya
Deep Water Natural Gas Project. This added 140 million BOE to our proved
reserve base and increased our international gas reserves by 30%. Our
share of production is anticipated to reach 240 MMCF per day by 2003
o West Africa -- where in 1999 we announced the major Agbami oil discovery
offshore Nigeria
o U.S. Gulf of Mexico -- where we hold both exploration and production
acreage and saw the June 1999 start-up of our Gemini Project
o Venezuela -- where in 1999 we increased our interest from 20% to 30% in the
Hamaca Oil Project
o Kazakhstan -- where we hold interests in the Karachaganak and North Buzachi
Projects
o Brazil -- where in 1999 we signed an agreement with Petrobras, Brazil's
national oil company, to become an equity partner in the Campos and Santos
exploration and the Frade development areas offshore Brazil and
successfully bid on three high potential offshore exploration blocks in
Brazil's First License Round
As we implement these growth plans, we will continue to lower our per barrel
operating costs through additional cost-savings initiatives.
Downstream
In our downstream business, we refine, transport and sell crude oil and
products, such as gasoline, fuel oil and lubricants.
Our U.S. downstream includes our share of operations in Equilon and Motiva.
The Equilon area includes western and midwestern refining and marketing
operations, and nationwide trading, transportation and lubricants activities.
Our 1999 and 1998 results in this area are our share of the earnings of our
joint venture with Shell, Equilon, which began operations on January 1, 1998. We
have a 44% interest in Equilon. Results for 1997 are for our subsidiary
operations in this same area. The Motiva area includes eastern and Gulf Coast
refining and marketing operations. Our results for 1999 and the last half of
1998 are our share of the earnings of our joint venture with Shell and Saudi
Refining, Inc., Motiva, which began operations on July 1, 1998. We have a 32.5%
interest in Motiva. Results for the first half of 1998 and the year 1997 are for
our 50% share of our joint venture with Saudi Refining, Inc., Star.
Internationally, our wholly-owned downstream operations are reported
separately as Latin America and West Africa and Europe. We also have a 50%
interest in a joint venture with Chevron, Caltex, which operates in Africa,
Asia, Australia, the Middle East and New Zealand.
In the U.S. and international operations, we also have other businesses,
which include aviation and marine product sales, lubricants marketing and other
refined product trading activity.
<PAGE>
22 TEXACO 1999 ANNUAL REPORT
United States Downstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 287 $ 276 $ 312
- -------------------------------------------------------------------------------------------------
Special items:
Write-downs of assets (76) -- --
Inventory valuation adjustments 8 (34) --
Reorganizations, restructurings and employee separation costs (11) (21) --
Gains on major asset sales -- -- 13
--------------------------------
Total special items (79) (55) 13
- -------------------------------------------------------------------------------------------------
Operating income $ 208 $ 221 $ 325
- -------------------------------------------------------------------------------------------------
Selected Operating Data:
Refinery input (thousands of barrels a day) 671 698 747
Refined product sales (thousands of barrels a day) 1,377 1,203 1,022
Return on average capital employed before special items 11.3% 9.6% 9.8%
Return on average capital employed 8.2% 7.7% 10.2%
=================================================================================================
</TABLE>
WHAT HAPPENED IN THE UNITED STATES?
Equilon - These operations contributed $288 million to our 1999 operating
earnings before special items. We achieved higher earnings in 1999 from improved
West Coast refining margins as a result of industry refinery outages earlier in
the year. We also benefited from improved utilization of the Martinez refinery,
strong transportation results from higher throughput and realization of cost
savings and synergies. These include improved efficiency of work processes,
reduction of supply costs, sharing best practices, capitalizing on logistical
and trading opportunities and greater utilization of proprietary pipelines.
These improved results in 1999 were partly offset by operating problems at the
Puget Sound refinery earlier in the year and weak marketing margins as pump
prices lagged behind increases in gasoline spot prices. Our sales volumes
improved in 1999 due to increased trading activity.
The 1998 earnings were flat when compared with 1997. Strong transportation
and lubricants earnings as well as cost and expense reductions were offset by
the effects of significant downtime at certain refineries, lower margins and
interest expense. Refined product sales volumes increased. This included 4%
growth in Texaco-branded gasoline sales.
Our share of the U.S. affiliates' pre-tax cost savings and synergy capture
was $326 million in 1999.
Motiva - These operations contributed only $12 million to our 1999 operating
income before special items. Our 1999 results were lower than 1998. They were
negatively impacted by weak refining and marketing margins on the East and Gulf
Coasts due to the inability to pass along rising crude costs and high
industry-wide refined product inventory levels. These weaknesses were partly
offset by improved refinery reliability and cost savings and synergies that were
achieved by Motiva. These include reduction of fuel additive supply costs,
improved efficiency of work processes, improved asset utilization and sharing
best practices.
The 1998 earnings were lower due to refinery downtime coupled with lower
refining margins. Refined product sales were higher as a result of our joint
venture and an increase in Texaco-branded gasoline sales. The year 1997
benefited from improved Gulf Coast refining margins.
Special Items
Results for 1999 and 1998 included net special charges of $79 million and $55
million, representing our share of special items recorded by our U.S. alliances.
Results for 1997 included a gain of $13 million from the sale of our credit card
business.
The 1999 charge included $76 million for the write-downs of assets to their
estimated sales values by Equilon for the intended sales of its El Dorado and
Wood River refineries. Equilon completed the sale of the El Dorado refinery to
Frontier Oil Corporation in November 1999, and is continuing to seek a purchaser
for the Wood River refinery.
Our 1999 results also included an inventory valuation benefit of $8 million
due to higher 1999 inventory values. This follows a 1998 charge of $34 million
to reflect lower market prices on December 31, 1998 for inventories of crude oil
and refined products. We value inventories at the lower of cost or market, after
initially recording at
<PAGE>
TEXACO 1999 ANNUAL REPORT 23
cost. Inventory valuation adjustments are reversed when prices recover and the
associated physical units of inventory are sold.
Our 1999 and 1998 results included net charges of $11 million and $21
million for reorganizations, restructurings and employee separation costs. The
1999 charge represents dismantling expenses at a closed refinery, an adjustment
to the Anacortes refinery sale and employee separation costs from the expansion
of Equilon's and Motiva's 1998 separation programs. The 1998 net charge was for
U.S. alliance formation issues. This net charge included $52 million for
employee separation costs and $45 million for write-downs of closed facilities
and surplus equipment to their net realizable value. These facilities included a
refinery in Texas, lubricant plants in various states, a sales terminal in
Louisiana and research facilities and equipment in Texas and New York. Also
included in net charges were gains of $76 million from the Federal Trade
Commission-mandated sale of the Anacortes refinery and Plantation pipeline.
- --------------------------------------------------------------------------------
International Downstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 338 $ 503 $ 524
- ---------------------------------------------------------------------------------------------------------------------------
Special items:
Inventory valuation adjustments 144 (108) --
Write-downs of assets (23) -- --
Reorganizations, restructurings and employee separation costs (41) (63) --
Losses on major asset sales (80) -- --
Tax issues 32 -- (16)
---------------------------------------
Total special items 32 (171) (16)
- ---------------------------------------------------------------------------------------------------------------------------
Operating income $ 370 $ 332 $ 508
- ---------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Refinery input (thousands of barrels a day) 820 832 804
Refined product sales (thousands of barrels a day) 1,844 1,685 1,563
Return on average capital employed before special items 5.6% 8.2% 9.2%
Return on average capital employed 6.1% 5.4% 8.9%
===========================================================================================================================
</TABLE>
WHAT HAPPENED IN THE INTERNATIONAL AREAS?
Latin America and West Africa - Our operations in Latin America and West Africa
contributed 66% of our 1999 operating income before special items. Results in
1999 were lower than 1998 as they reflected a squeeze on refining margins as
escalating crude costs outpaced product price increases. Our results were also
adversely affected by depressed marketing margins and lower volumes in Brazil
due to poor economic conditions and related currency devaluation. Partially
offsetting these conditions was an overall 7% increase in refined product sales
volume led by our Caribbean and Central American operations. In 1998, earnings
increased due to higher refined product sales volumes from service station
acquisitions and the expansion of our industrial customer base.
Europe - Our European operations contributed 26% of our 1999 operating income
before special items. Results for 1999 were lower due to poor refining margins.
Product price increases failed to keep pace with escalating crude costs. A 6%
increase in refined product sales volumes helped to offset the squeeze on
margins. In 1998, earnings increased significantly from improved refining and
marketing margins. Additionally, during 1998 we grew our refined product sales
volumes by increasing retail outlets and obtaining new commercial business.
Caltex - Our results for Caltex in 1999 before special items were $28 million.
These results were lower than 1998. Results were adversely affected by depressed
refining and marketing margins. This was caused by the inability to recover
rapidly escalating crude oil costs in the marketplace and product oversupply.
These declines were partially offset by an inventory drawdown benefit and gains
from the sale of marketable securities. There were also lower currency losses
from reduced volatility and generally improved economic conditions. In 1998, our
results for Caltex were $156 million lower than 1997. This was mainly due to
negative currency impacts of $204 million. Excluding currency effects, our
results for Caltex improved in 1998 due to higher margins and volumes.
In the Caltex area, most of our operations have a net liability exposure,
which creates currency losses when foreign currencies strengthen against the
U.S. dollar and currency gains when these currencies weaken against the U.S.
dollar. Effective October 1, 1997, Caltex changed the functional currency used
to account for operations in Korea and Japan to the U.S. dollar.
<PAGE>
24 TEXACO 1999 ANNUAL REPORT
ITEM 8
INTERNATIONAL REFINED PRODUCT SALES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 8.]
- --------------------------------------------------------------------------------
Special Items
Results for 1999 included net special benefits of $32 million. Results for 1998
and 1997 included net special charges of $171 million and $16 million. Special
items relating to Caltex represent our 50 percent share.
Results for 1999 included inventory valuation benefits of $144 million due
to higher 1999 inventory values. This follows a 1998 charge of $108 million to
reflect lower market prices on December 31, 1998 for inventories of crude oil
and refined products, as well as additional charges recorded in prior years. We
value inventories at the lower of cost or market, after initially recording at
cost. Inventory valuation adjustments are reversed when prices recover and the
associated physical units of inventory are sold.
Results for 1999 included a charge of $23 million for the write-downs of
assets. These write-downs on properties to be disposed of include $10 million
for marketing assets in our subsidiary in Poland and $13 million for assets in
our Caltex operations.
Our 1999 results included a $9 million charge for employee separation costs
for our subsidiaries operating in Europe and Latin America. These costs resulted
from the expansion of our 1998 program. Results for 1998 included a charge for
employee separation costs of $20 million. See the section entitled,
Reorganizations, Restructurings and Employee Separation Programs on page 26 for
additional information.
Results for 1999 also included charges of $80 million related to our share
of the Caltex loss on the sale of its equity interest in Koa Oil Company,
Limited, including deferred currency translation net losses. Additionally, our
results for 1999 included a Caltex Korean tax benefit of $54 million due to
asset revaluation and $22 million for prior year tax charges in the U.K. Results
for 1997 included a charge of $16 million primarily for a European deferred tax
adjustment.
Results for 1999 and 1998 included other charges of $32 million and $43
million, representing our share of a Caltex reorganization program. The 1999
charge represented continued expenses related to the 1998 program. The 1998
charge resulted from their decision to structure their organization along
functional lines and to reduce costs by establishing a shared service center in
the Philippines. In implementing this change, Caltex also relocated its
headquarters from Dallas to Singapore. About $35 million of the 1998 charge
relates to severance and other retirement benefits for about 200 employees not
relocating, write-downs of surplus furniture and equipment and other costs. The
balance of the charge is for severance costs in other affected areas and amounts
spent in relocating employees to the new shared service center.
LOOKING FORWARD IN THE WORLDWIDE DOWNSTREAM
We intend to do the following in our worldwide downstream:
o Reduce our exposure to refining
o Continue to achieve lower costs and capture synergies
o Focus on business opportunities in areas of trading, transportation and
lubricants
o Pursue marketing growth opportunities in selected areas
Global Gas and Power
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income (loss)
before special items $ 21 $ (33) $ (46)
- --------------------------------------------------------------------------------
Special items:
Write-downs of assets (32) -- --
Employee separation costs (3) (3) --
Gain on major asset sale -- 20 --
----------------------------------
Total special items (35) 17 --
- --------------------------------------------------------------------------------
Operating loss $ (14) $ (16) $ (46)
- --------------------------------------------------------------------------------
Natural gas sales (millions
of cubic feet a day) 3,134 3,764 3,452
Net power sales (gigawatt hours) 4,353 4,395 4,185
================================================================================
</TABLE>
Global Gas and Power includes marketing of natural gas and natural gas liquids,
gas processing plants, pipelines, power generation plants, gasification
licensing and equity plants, and our hydrocarbons-to-liquids and fuel cell
technology units. Gasification is a proprietary technology that converts low
value hydrocarbons into useful synthesis gas for the chemical, refining and
power industries. During 1999, responsibility for these activities was combined
under a single senior executive, forming the Global Gas and Power segment. Prior
period information has been restated to reflect this change.
Our gas marketing operating results in 1999 benefited from improved natural
gas liquids margins. Our 1999 results also included gains on normal asset sales
and lower operating expenses. The asset sales included our interest in a U.K.
retail gas marketing operation and the sale of a U.S. gas gathering pipeline.
Results for 1998 were adversely affected by losses associated with our
start-up wholesale and retail marketing activities in the U.K. We exited the
U.K. wholesale gas marketing business in October 1998. Weak natural gas and
natural gas liquids margins in the U.S. also contributed to the poor results.
Milder than normal temperatures reduced demand and squeezed margins.
<PAGE>
TEXACO 1999 ANNUAL REPORT 25
Our operating results for the power and gasification business in 1999
benefited from higher gasification licensing revenues and cogeneration income.
This was partially offset by lower margins from Indonesian geothermal activities
and the non-recurring recoupment of development costs in 1998. The lower
Indonesian geothermal margins are due to higher costs and lower revenues caused
by regional economic weakness.
Special Items
Results for both 1999 and 1998 included charges of $3 million for employee
separation costs. The 1999 charge resulted from the expansion of our 1998
program. See the section entitled, Reorganizations, Restructurings and Employee
Separation Programs on page 26 for additional information.
Our 1999 results also included charges of $32 million for asset write-downs
from the impairment of certain gas plants in Louisiana. We determined in the
fourth quarter of 1999 that as a result of declining gas volumes available for
processing, the carrying value of these plants exceeded future undiscounted cash
flows. Fair value was determined by discounting expected future cash flows. Our
1998 results also included a gain of $20 million on the sale of an interest in
our Discovery pipeline affiliate.
LOOKING FORWARD IN GLOBAL GAS AND POWER
We believe there is great promise with emerging gas and power technologies.
Accordingly, we are pursuing opportunities utilizing gasification,
hydrocarbons-to-liquids and fuel cell technologies. We continue to develop power
projects in conjunction with our exploration, production and refining needs. Our
future plans include:
o Developing power projects where significant reserves of natural gas require
commercialization
o Expanding our gasification technology to commercialize this environmentally
friendly technology
o Using our technology to develop opportunities in the fuel cell and
hydrocarbons-to-liquids businesses
Effective March 1, 2000, we will form a joint venture with a subsidiary of Enron
Corp. to combine the companies' intrastate pipeline and storage businesses in
southeast Louisiana.
Other Business Units
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income (loss) $ (3) $ (2) $ 2
================================================================================
</TABLE>
Our other business units mainly include our insurance operations. There were no
significant items in our three-year results.
Corporate/Non-operating
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
================================================================================
<S> <C> <C> <C>
Results before special items $(481) $(412) $(415)
- --------------------------------------------------------------------------------
Special items:
Write-downs of assets (26) -- --
Employee separation costs (6) (18) --
Tax benefits on asset sales 40 43 --
Tax issues 89 25 488
Environmental issues (12) -- --
---------------------------------------
Total special items 85 50 488
- --------------------------------------------------------------------------------
Total Corporate/Non-operating $(396) $(362) $ 73
================================================================================
</TABLE>
Corporate/Non-operating
Corporate/Non-operating includes our corporate center and financing activities.
The year 1999 reflects higher interest expense resulting from increases in debt
levels. Results for 1998 included lower overhead and tax expense. Higher
interest income was mostly offset by interest expense from higher average debt
levels.
Special Items
Results for 1999 included tax benefits of $89 million. These are associated with
favorable determinations in the fourth quarter on prior years' tax issues.
Results for 1999 and 1998 included tax benefits of $40 million and $43 million
from the sales of interests in a subsidiary. Additionally, results for 1998
included a benefit of $25 million to adjust for prior years' federal tax
liabilities. The year 1997 included a tax benefit of $488 million from an IRS
settlement.
Our 1999 results also included a $6 million charge for employee separation
costs. These costs resulted from the expansion of our 1998 program. Results for
1998 included a charge for employee separations of $18 million. See the section
entitled, Reorganizations, Restructurings and Employee Separation Programs on
page 26 for additional information.
We also recorded in 1999 charges of $12 million for environmental issues
and $26 million for the impairment of assets and related disposal costs. The
assets write-downs resulted from our joint plan with state and local agencies to
convert for third-party industrial use idle facilities, formerly used in
research activities. The facilities and equipment were written down to their
appraised values.
OTHER ITEMS
Liquidity and Capital Resources
INTRODUCTION The Statement of Consolidated Cash Flows on page 37 reports the
changes in cash balances for the last three years, and summarizes the inflows
and outflows of cash between operating, investing and financing activities. Our
cash requirements are met by cash from operations, supplemented by outside
borrowings and the proceeds from the sale of non-strategic assets.
<PAGE>
26 TEXACO 1999 ANNUAL REPORT
The main components of cash flows are:
INFLOWS Cash from operating activities represents net income adjusted for
non-cash charges or credits, such as depreciation, depletion and amortization,
and changes in working capital and other balances. Cash from operating
activities excludes exploratory expenses, which we show as a cash outflow from
investing activities. Operating cash flows for 1999 of $3,169 million benefited
from higher commodity prices and our expense reduction programs. For more
detailed insight into our financial and operational results, see Analysis of
Income by Operating Segments on the preceding pages.
New borrowings in 1999 reflect a net increase of $290 million compared to a
net increase of $1,052 million in 1998. During the year, we borrowed $1,668
million from our existing "shelf" registration, including $1,268 million under
our medium-term note program. We decreased our commercial paper by $518 million
during the year, to $1,099 million at year-end. See Note 9 to the financial
statements for total outstanding debt, including 1999 borrowings.
After December 31, 1999, we issued an additional $530 million under our
medium-term note program to refinance existing short-term debt. As a result, our
total remaining capacity under our "shelf" registration is $1,445 million,
covering possible issuances of both debt and equity securities.
We maintain strong credit ratings and access to global financial markets
providing us flexibility to borrow funds at low capital costs.
Our senior debt is rated A+ by Standard & Poor's Corporation and A1 by Moody's
Investors Service. Our U.S. commercial paper is rated A-1 by Standard & Poor's
and Prime-1 by Moody's. These ratings denote high quality investment grade
securities. Our debt has an average maturity of 10 years and a weighted average
interest rate of 7.0%. We also maintain $2.05 billion in revolving credit
facilities, which remain unused, to provide liquidity and to support our
commercial paper program.
Other net cash inflows in 1999 represent proceeds from the sale of
non-strategic assets of $321 million, net sales/maturities of investment
instruments of $346 million and the collection of notes receivable from an
affiliate of $101 million.
OUTFLOWS Capital and exploratory expenditures (Capex) were $2,957 million in
1999 -- The section on page 27 describes in more detail the uses of our Capex
dollars.
Payments of dividends were $1,047 million in 1999 -- $964 million to
common, $28 million to preferred and $55 million to shareholders who hold a
minority interest in Texaco subsidiary companies.
The following year-end table reflects our key financial indicators:
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ratio 1.05 1.07 1.07
Total debt $ 7,647 $ 7,291 $ 6,392
Average years debt maturity 10 10 11
Average interest rates 7.0% 7.0% 7.2%
Minority interest in
subsidiary companies $ 710 $ 679 $ 645
Stockholders' equity $12,042 $11,833 $12,766
Total debt to total borrowed
and invested capital 37.5% 36.8% 32.3%
================================================================================
</TABLE>
OUTLOOK We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements. Our financial policies and procedures
afford us flexibility to meet the changing landscape of our financial
environment. Cash required to service debt maturities in 2000 is projected to be
$1,450 million. However, we intend to refinance these maturities.
In 2000, we feel our cash from operating activities and cash proceeds from
asset sales, coupled with our borrowing capacity, will allow us to meet our
Capex program. Additionally, we will continue to provide a sustained return to
our shareholders in the form of dividends.
MANAGING MARKET RISK We are exposed to the following types of market risks:
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 use contracts such as futures, swaps and options in managing our exposure to
these risks. We have written policies that govern our use of these instruments
and limit our exposure to market and counterparty risks. These arrangements do
not expose us to material adverse effects. See Notes 9, 14 and 15 to the
financial statements and Supplemental Market Risk Disclosures on page 63 for
additional information.
Reorganizations, Restructurings and Employee Separation Programs
In the fourth quarter of 1998, we announced that we were reorganizing several of
our operations and implementing other cost-cutting initiatives. The principal
units affected were our worldwide upstream; our international downstream,
principally our marketing operations in the United Kingdom and Brazil and our
refining operations in Panama; global gas marketing, now included as part of our
global gas and power operating segment; and our corporate center. We accrued
$115 million ($80 million, net of tax) for employee separations, curtailment
<PAGE>
TEXACO 1999 ANNUAL REPORT 27
costs and special termination benefits associated with these announced
restructurings in the fourth quarter of 1998. During the second quarter of 1999,
we expanded the employee separation programs and recorded an additional
provision of $48 million ($31 million, net of tax). For the most part,
separation accruals are shown as operating expenses in the Statement of
Consolidated Income.
The following table identifies each of our four restructuring initiatives.
It provides the provision recorded in the fourth quarter of 1998 and the
additional provision recorded in the second quarter of 1999. It also shows the
deductions made through December 31, 1999 and the remaining obligations as of
December 31, 1999. These deductions include cash payments of $124 million and
transfers to long-term obligations of $12 million. We will pay the remaining
obligations in future periods in accordance with plan provisions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Provision Recorded in Deductions Remaining
--------------------- made through Obligations as of
(Millions of dollars) 1998 1999 December 31, 1999 December 31, 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Worldwide upstream $ 56 $ 20 $ (71) $ 5
International downstream 25 13 (26) 12
Global gas and power 5 4 (7) 2
Corporate center 29 11 (32) 8
------------------------------------------------------------------
Total $115 $ 48 $ (136) $ 27
===================================================================================================
</TABLE>
At the time we initially announced these programs, we estimated that over 1,400
employee reductions would result. Employee reductions of 800 in worldwide
upstream, 300 in international downstream, 100 in global gas and power and 200
in our corporate center were expected. During the second quarter of 1999, we
expanded the program by almost 1,100 employees, comprised of 600 employees in
worldwide upstream, 250 employees in international downstream, 100 employees in
global gas and power and 150 employees in our corporate center. Through December
31, 1999, employee reductions totaled 1,375 in worldwide upstream, 518 in
international downstream, 165 in global gas and power, and 404 in our corporate
center.
As a result of our reorganizations and restructurings, we captured
significant annual pre-tax cost and expense savings and synergies. We captured
$236 million in worldwide upstream, $44 million in international downstream, $32
million in global gas and power and $59 million in our corporate center. These
savings include lower people-related and operating expenses.
Additionally, our major affiliates have also captured significant annual
pre-tax cost and expense savings and synergies, as a result of their own
reorganizations. Our share of these savings from our U.S. downstream joint
ventures, Equilon and Motiva, was $326 million, representing lower
people-related expenses and reductions in cash operating expenses due to
efficiencies. We realized $19 million in annual pre-tax cost savings,
representing our share of the Caltex reorganization. These savings represent
lower people-related expenses. We also captured $27 million in annual pre-tax
cost reductions from our worldwide Fuel and Marine Marketing joint venture with
Chevron, representing our share of reductions in operating costs and expenses
due to efficiencies.
Capital and Exploratory Expenditures
1999 ACTIVITY Worldwide capital and exploratory expenditures, including our
share of affiliates, were $3.9 billion for 1999, $4.0 billion for 1998 and $5.9
billion for 1997. The year 1997 included the $1.4 billion acquisition of
Monterey Resources Inc., a producing company with operations primarily in
California. Texaco's 1999 expenditures include acquisitions of and increased
ownership interests in upstream projects. Expenditures were geographically and
functionally split as follows:
ITEM 9
CAPITAL AND EXPLORATORY EXPENDITURES - GEOGRAPHICAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 9.]
- --------------------------------------------------------------------------------
ITEM 10
CAPITAL AND EXPLORATORY EXPENDITURES - FUNCTIONAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 10.]
- --------------------------------------------------------------------------------
<PAGE>
28 TEXACO 1999 ANNUAL REPORT
EXPLORATION AND PRODUCTION Significant areas of investment included:
o Exploration and development work in West Africa where we announced the
major Agbami oil discovery offshore Nigeria in 1999
o Acquisition of a 45% interest in the Malampaya Deep Water Natural Gas
Project in the Philippines
o Increased ownership interest in the Venezuelan Hamaca Oil Project from 20%
to 30%
o Development work in Kazakhstan on the Karachaganak and North Buzachi
fields
o Acquisition of exploration leases in the Brazilian Campos and Santos Basins
REFINING, MARKETING AND DISTRIBUTION AND OTHER Investment activities included:
o Reduced spending by Equilon and Motiva on refining
o Increased service station construction and renovation in the Caribbean
o Increased global gasification and power projects
- --------------------------------------------------------------------------------
The following table details our capital and exploratory expenditures:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- -------------------------- -------------------------------
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 $ 234 $ 267 $ 501 $ 257 $ 204 $ 461 $ 189 $ 282 $ 471
Capital expenditures 666 1,556 2,222 1,179 1,015 2,194 2,854* 1,095 3,949*
- ------------------------------------------------------------------------------------------------------------------------------------
Total exploration and
production 900 1,823 2,723 1,436 1,219 2,655 3,043 1,377 4,420
Refining, marketing
and distribution 379 487 866 431 717 1,148 427 848 1,275
Global gas and power 103 176 279 124 61 185 149 34 183
Other 18 7 25 29 2 31 50 2 52
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,400 $2,493 $3,893 $2,020 $1,999 $4,019 $3,669 $2,261 $5,930
- ------------------------------------------------------------------------------------------------------------------------------------
Total, excluding affiliates $1,012 $2,051 $3,063 $1,528 $1,496 $3,024 $3,421 $1,718 $5,139
====================================================================================================================================
</TABLE>
* Capital expenditures for 1997 include $1,448 million for the acquisition of
Monterey Resources Inc.
2000 AND BEYOND
Spending for the year 2000 is expected to rise to $4.7 billion, an increase of
$800 million over 1999 levels. In the upstream, spending is being allocated to
our large impact producing projects in West Africa, Venezuela, Kazakhstan, the
Philippines and the U.K. North Sea. Major exploration programs are underway in
our key focus areas of Nigeria, Brazil and the deepwater Gulf of Mexico.
International marketing will increase spending in the rapidly growing Caribbean
area. Modest increases in spending are also anticipated for our international
refinery system, particularly the Pembroke refinery in Wales. However, refining
expenditures are generally being held at maintenance levels. Our global gas and
power business is growing and has identified additional power generation and
gasification projects as well as natural gas business opportunities.
Environmental Matters
The cost of compliance with federal, state and local environmental laws in the
U.S. and international countries continues to be substantial. Using definitions
and guidelines established by the American Petroleum Institute, our 1999
environmental spending was $633 million. This includes our equity share in the
environmental expenditures of our major affiliates, Equilon, Motiva and the
Caltex Group of Companies. The following table provides our environmental
expenditures for the past three years:
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital expenditures $118 $175 $162
Non-capital:
Ongoing operations 391 495 538
Remediation 98 93 79
Restoration and abandonment 26 44 46
-------------------------------------------
Total environmental expenditures $633 $807 $825
================================================================================
</TABLE>
CAPITAL EXPENDITURES
Our spending for capital projects in 1999 was $118 million. These expenditures
were made to comply with clean air and water regulations as well as waste
management requirements. Worldwide capital expenditures projected for 2000 and
2001 are $91 million and $121 million.
<PAGE>
TEXACO 1999 ANNUAL REPORT 29
ONGOING OPERATIONS
In 1999, environmental expenses charged to current operations were $391 million.
These expenses related largely to the production of cleaner-burning gasoline and
the management of our environmental programs.
REMEDIATION
Remediation Costs and Liabilities - Our worldwide remediation expenditures in
1999 were $98 million. This included $12 million spent on the remediation of
Superfund waste sites. At the end of 1999, we had liabilities of $391 million
for the estimated cost of our known environmental liabilities. This includes $46
million for the cleanup of Superfund waste sites. We have accrued for these
remediation liabilities based on currently available facts, existing technology
and presently enacted laws and regulations. It is not possible to project
overall costs beyond amounts disclosed due to the uncertainty surrounding future
developments in regulations or until new information becomes available.
Superfund Sites - Under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) and
other regulatory agencies have identified us as a potentially responsible party
(PRP) for cleanup of Superfund waste sites. We have determined that we may have
potential exposure, though limited in most cases, at 178 Superfund waste sites.
Of these sites, 104 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 the sharing of Superfund costs with other identified PRPs. The sharing
of these costs is on the basis of weight, volume and toxicity of the materials
contributed by the PRP.
RESTORATION AND ABANDONMENT COSTS AND LIABILITIES
Expenditures in 1999 for restoration and abandonment of our oil and gas
producing properties amounted to $26 million. At year-end 1999, accruals to
cover the cost of restoration and abandonment were $911 million.
- --------------------------------------------------------------------------------
We make every reasonable effort to fully comply with applicable governmental
regulations. Changes in these regulations as well as our continuous
re-evaluation of our environmental programs may result in additional future
costs. We believe that any mandated future costs would be recoverable in the
marketplace, since all companies within our industry would be facing similar
requirements. However, we do not believe that such future costs would be
material to our financial position or to our operating results over any
reasonable period of time.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new accounting rules and disclosure requirements for most derivative
instruments and hedge transactions. In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS 133. We will adopt SFAS 133 effective
January 1, 2001 and are currently assessing the effects of adoption.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and one
common currency -- the euro. The euro began trading on world currency exchanges
at that time and may be used in business transactions. On January 1, 2002, new
euro-denominated bills and coins will be issued, and legacy currencies will be
completely withdrawn from circulation by June 30 of that year.
Prior to introduction of the euro, our operating subsidiaries affected by
the euro conversion completed computer systems upgrades and fiscal and legal due
diligence to ensure our euro readiness. Computer systems have been adapted to
ensure that all our operating subsidiaries have the capability to comply with
necessary business requirements and customer/supplier preferences. Legal due
diligence was conducted to ensure post-euro continuity of contracts, and fiscal
reviews were completed to ensure compatibility with our banking relationships.
We, therefore, experienced no major impact on our current business operations as
a result of the introduction of the euro.
We continue to review our marketing and operational policies and procedures
to ensure our ability to continue to successfully conduct all aspects of our
business in this new, price-transparent market. We believe that the euro
conversion will not have a material adverse impact on our financial condition or
results of operations.
Year 2000 (Y2K)
We encountered no major operating or other problems due to the Y2K issue. The
Y2K issue concerned the inability of some information and technology-based
operating systems to properly recognize and process date-sensitive information
beyond December 31, 1999. Since we began addressing this issue in 1995, we
assessed over 45,000 systems for potential problems. By November 1, 1999, we
completed modifying or upgrading all of our critical and essential systems and
gained assurances that our major affiliates were prepared for the Y2K rollover.
We also completed our review of critical suppliers and customers, developed
contingency plans, and established an Early Alert System to monitor the Y2K
status of our key facilities around the world during the rollover.
During the year 1999 and the first few weeks of 2000, we spent about $22
million on Y2K issues, bringing our total spent since 1995 to $59 million. We do
not anticipate expending additional funds on Y2K related activities.
<PAGE>
30 TEXACO 1999 ANNUAL REPORT
Description of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements consist of the accounts of Texaco Inc. and
subsidiary companies in which we hold direct or indirect voting interest of more
than 50%. Intercompany accounts and transactions are eliminated.
The U.S. dollar is the functional currency of all our operations and
substantially all of the operations of 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
In preparing Texaco's consolidated financial statements in accordance with
generally accepted accounting principles, management is required to use
estimates and judgment. While we have considered all available information,
actual amounts could differ from those reported as assets and liabilities and
related revenues, costs and expenses and the disclosed amounts of contingencies.
REVENUES
We recognize revenues for crude oil, natural gas and refined product sales at
the point of passage of title specified in the contract. We record revenues on
forward sales where cash has been received to deferred income until title
passes.
CASH EQUIVALENTS
We generally classify highly liquid investments with a maturity of three months
or less when purchased as cash equivalents.
INVENTORIES
We value inventories at the lower of cost or market, after initially recording
at cost. For virtually all inventories of crude oil, petroleum products and
petrochemicals, cost is determined on the last-in, first-out (LIFO) method. For
other merchandise inventories, cost is generally on the first-in, first-out
(FIFO) method. For materials and supplies, cost is at average cost.
INVESTMENTS AND ADVANCES
We use the equity method of accounting for investments in certain affiliates
owned 50% or less, including corporate joint ventures, limited liability
companies and partnerships. Under this method, we record equity in the pre-tax
income or losses of limited liability companies and partnerships, and equity in
the net income or losses of corporate joint-venture companies currently in
Texaco's revenues, rather than when realized through dividends or distributions.
We record the net income of affiliates accounted for at cost in net income
when realized through dividends.
We account for investments in debt securities and in equity securities with
readily determinable fair values at fair value if classified as available-for-
sale.
PROPERTIES, PLANT AND EQUIPMENT AND DEPRECIATION, DEPLETION AND AMORTIZATION
We follow the "successful efforts" method of accounting for our oil and gas
exploration and producing operations.
We capitalize as incurred the lease acquisition costs of properties held
for oil, gas and mineral production. We expense as incurred exploratory costs
other than wells. We initially capitalize exploratory wells, including
stratigraphic test wells, pending further evaluation of whether economically
recoverable proved reserves have been found. If such reserves are not found, we
charge the well costs to exploratory expenses. For locations not requiring major
capital expenditures, we record the charge within one year of well completion.
We capitalize intangible drilling costs of productive wells and of development
dry holes, and tangible equipment costs. Also capitalized are costs of injected
carbon dioxide related to development of oil and gas reserves.
We base our evaluation of impairment for properties, plant and equipment
intended to be held on comparison of carrying value against undiscounted future
net pre-tax cash flows, generally based on proved developed reserves. If an
impairment is identified, we adjust the asset's carrying amount to fair value.
We generally account for assets to be disposed of at the lower of net book value
or fair value less cost to sell.
We amortize unproved oil and gas properties, when individually significant,
by property using a valuation assessment. We generally amortize other unproved
oil and gas properties on an aggregate basis over the average holding period,
for the portion expected to be non-productive. We amortize productive properties
and other tangible and intangible costs of producing activities 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. We include estimated future restoration and abandonment costs in
determining amortization and depreciation rates of productive properties.
We apply depreciation of facilities other than producing properties
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.
We depreciate facilities not on the group plan individually by estimated useful
life using the straight-line method. We exclude estimated salvage value from
amounts subject to depreciation. We amortize capitalized non-mineral leases over
the estimated useful life of the asset or the lease term, as appropriate, using
the straight-line method.
<PAGE>
TEXACO 1999 ANNUAL REPORT 31
We record periodic maintenance and repairs at manufacturing facilities on
the accrual basis. We charge to expense normal maintenance and repairs of all
other properties, plant and equipment as incurred. We capitalize renewals,
betterments and major repairs that materially extend the useful life of
properties and record a retirement of the assets replaced, if any.
When capital assets representing complete units of property are disposed
of, we credit or charge to income the difference between the disposal proceeds
and net book value.
ENVIRONMENTAL EXPENDITURES
When remediation of a property is probable and the related costs can be
reasonably estimated, we accrue the expenses of environmental remediation costs
and record them as liabilities. Recoveries or reimbursements are recorded as an
asset when receipt is assured. We expense or capitalize other environmental
expenditures, principally maintenance or preventive in nature, as appropriate.
DEFERRED INCOME TAXES
We determine deferred income taxes 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, non-productive
leases, merchandise inventories and certain liabilities. This approach gives
immediate effect to changes in income tax laws upon enactment.
We reduce deferred income tax assets by a valuation allowance when it is
more likely than not (more than 50%) that a portion will not be realized.
Deferred income tax assets are assessed individually by type for this purpose.
This process requires the use of estimates and judgment, as many deferred income
tax assets have a long potential realization period.
We do not make provision 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.
STATEMENT OF CONSOLIDATED CASH FLOWS
We present cash flows from operating activities using the indirect method. We
exclude exploratory expenses from cash flows of operating activities and apply
them to cash flows of investing activities. On this basis, we reflect all
capital and exploratory expenditures as investing activities.
<PAGE>
32 TEXACO 1999 ANNUAL REPORT
Statement of Consolidated Income
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Sales and services (includes transactions with significant
affiliates of $4,839 million in 1999, $4,169 million
in 1998 and $3,633 million in 1997) $ 34,975 $ 30,910 $ 45,187
Equity in income of affiliates, interest, asset sales and other 716 797 1,480
------------------------------------------
Total revenues 35,691 31,707 46,667
- -------------------------------------------------------------------------------------------------------------
Deductions
Purchases and other costs (includes transactions with
significant affiliates of $1,691 million in 1999,
$1,669 million in 1998 and $2,178 million in 1997) 27,442 24,179 35,230
Operating expenses 2,319 2,508 3,251
Selling, general and administrative expenses 1,186 1,224 1,755
Exploratory expenses 501 461 471
Depreciation, depletion and amortization 1,543 1,675 1,633
Interest expense 504 480 412
Taxes other than income taxes 334 423 520
Minority interest 83 56 68
------------------------------------------
33,912 31,006 43,340
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 1,779 701 3,327
Provision for income taxes 602 98 663
------------------------------------------
Income before cumulative effect of accounting change 1,177 603 2,664
Cumulative effect of accounting change -- (25) --
------------------------------------------
Net income $ 1,177 $ 578 $ 2,664
=============================================================================================================
Net Income per Common Share (dollars)
Basic:
Income before cumulative effect of accounting change $ 2.14 $ 1.04 $ 4.99
Cumulative effect of accounting change -- (.05) --
------------------------------------------
Net income $ 2.14 $ .99 $ 4.99
=============================================================================================================
Diluted:
Income before cumulative effect of accounting change $ 2.14 $ 1.04 $ 4.87
Cumulative effect of accounting change -- (.05) --
------------------------------------------
Net income $ 2.14 $ .99 $ 4.87
=============================================================================================================
Average Number of Common Shares Outstanding (for computation
of earnings per share) (thousands)
Basic 535,369 528,416 522,234
Diluted 537,860 528,965 542,570
=============================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 33
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 419 $ 249
Short-term investments - at fair value 29 22
Accounts and notes receivable (includes receivables from significant
affiliates of $585 million in 1999 and $694 million in 1998),
less allowance for doubtful accounts of $27 million in 1999
and $28 million in 1998 4,060 3,955
Inventories 1,182 1,154
Deferred income taxes and other current assets 273 256
--------------------------
Total current assets 5,963 5,636
Investments and Advances 6,426 7,184
Net Properties, Plant and Equipment 15,560 14,761
Deferred Charges 1,023 989
--------------------------
Total $ 28,972 $ 28,570
=========================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable, commercial paper and current portion of long-term debt $ 1,041 $ 939
Accounts payable and accrued liabilities (includes payables to
significant affiliates of $61 million in 1999 and $395 million in 1998)
Trade liabilities 2,585 2,302
Accrued liabilities 1,203 1,368
Estimated income and other taxes 839 655
--------------------------
Total current liabilities 5,668 5,264
Long-Term Debt and Capital Lease Obligations 6,606 6,352
Deferred Income Taxes 1,468 1,644
Employee Retirement Benefits 1,184 1,248
Deferred Credits and Other Non-current Liabilities 1,294 1,550
Minority Interest in Subsidiary Companies 710 679
--------------------------
Total 16,930 16,737
Stockholders' Equity
Market auction preferred shares 300 300
ESOP convertible preferred stock -- 428
Unearned employee compensation and benefit plan trust (306) (334)
Common stock - shares issued: 567,576,504 in 1999; 567,606,290 in 1998 1,774 1,774
Paid-in capital in excess of par value 1,287 1,640
Retained earnings 9,748 9,561
Other accumulated non-owner changes in equity (119) (101)
--------------------------
12,684 13,268
Less - Common stock held in treasury, at cost 642 1,435
--------------------------
Total stockholders' equity 12,042 11,833
- ---------------------------------------------------------------------------------------------------------
Total $ 28,972 $ 28,570
=========================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
34 TEXACO 1999 ANNUAL REPORT
Statement of Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------
(Shares in thousands; amounts in millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<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
Beginning of year 649 389 693 416 720 432
Redemptions (587) (352) -- -- -- --
Retirements (62) (37) (44) (27) (27) (16)
----------------------------------------------------------------------------
End of year -- -- 649 389 693 416
- ------------------------------------------------------------------------------------------------------------------------------------
Series F ESOP Convertible Preferred Stock
Beginning of year 53 39 56 41 57 42
Redemptions (53) (39) -- -- -- --
Retirements -- -- (3) (2) (1) (1)
----------------------------------------------------------------------------
End of year -- -- 53 39 56 41
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned Employee Compensation
(related to ESOP and restricted stock awards)
Beginning of year (94) (149) (175)
Awards (18) (36) (16)
Amortization and other 46 91 42
----------------------------------------------------------------------------
End of year (66) (94) (149)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit Plan Trust
(common stock)
Beginning of year 9,200 (240) 9,200 (240) 8,000 (203)
Additions -- -- -- -- 1,200 (37)
----------------------------------------------------------------------------
End of year 9,200 (240) 9,200 (240) 9,200 (240)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
par value $3.125; shares authorized - 850,000,000
Beginning of year 567,606 1,774 567,606 1,774 548,587 1,714
Monterey acquisition (29) -- -- -- 19,019 60
----------------------------------------------------------------------------
End of year 567,577 1,774 567,606 1,774 567,606 1,774
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Held in Treasury, at Cost
Beginning of year 32,976 (1,435) 25,467 (956) 21,191 (628)
Redemption of Series B and
Series F ESOP Convertible
Preferred Stock (16,180) 699 -- -- -- --
Purchases of common stock -- -- 9,572 (551) 7,423 (410)
Transfer to benefit plan trust -- -- -- -- (1,200) 37
Other - mainly employee benefit plans (2,327) 94 (2,063) 72 (1,947) 45
----------------------------------------------------------------------------
End of year 14,469 $ (642) 32,976 $ (1,435) 25,467 $ (956)
====================================================================================================================================
(Continued on next page.)
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 35
Statement of Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paid-in Capital in Excess of Par Value
Beginning of year $ 1,640 $ 1,688 $ 630
Redemption of Series B and Series F ESOP
Convertible Preferred Stock (308) -- --
Monterey acquisition (2) -- 1,091
Treasury stock transactions relating to investor services plan
and employee compensation plans (43) (48) (33)
--------------------------------------
End of year 1,287 1,640 1,688
- -------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 9,561 9,987 8,292
Add:
Net income 1,177 578 2,664
Tax benefit associated with dividends on unallocated
ESOP Convertible Preferred Stock and Common Stock 2 3 4
Deduct: Dividends declared on
Common stock
($1.80 per share in 1999 and 1998
and $1.75 per share in 1997) 964 952 918
Preferred stock
Series B ESOP Convertible Preferred Stock 17 38 40
Series F ESOP Convertible Preferred Stock 2 4 4
Market Auction Preferred Shares (Series G, H, I and J) 9 13 11
--------------------------------------
Balance at end of year 9,748 9,561 9,987
- -------------------------------------------------------------------------------------------------------------------------
Other Accumulated Non-owner Changes in Equity
Currency translation adjustment
Beginning of year (107) (105) (65)
Change during year 8 (2) (40)
--------------------------------------
End of year (99) (107) (105)
--------------------------------------
Minimum pension liability adjustment
Beginning of year (24) (16) --
Change during year 1 (8) (16)
--------------------------------------
End of year (23) (24) (16)
--------------------------------------
Unrealized net gain on investments
Beginning of year 30 26 33
Change during year (27) 4 (7)
--------------------------------------
End of year 3 30 26
--------------------------------------
Total other accumulated non-owner changes in equity (119) (101) (95)
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
End of year (including preceding page) $ 12,042 $ 11,833 $ 12,766
=========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
36 TEXACO 1999 ANNUAL REPORT
Statement of Consolidated Non-owner Changes in Equity
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 1,177 $ 578 $ 2,664
- ---------------------------------------------------------------------------------------------------------
Other Non-owner Changes in Equity:
Currency translation adjustment
Reclassification to net income of realized loss on sale of affiliate 17 -- --
Other unrealized net change during period (9) (2) (40)
-----------------------------
Total 8 (2) (40)
-----------------------------
Minimum pension liability adjustment
Before income taxes 1 (16) (21)
Income taxes -- 8 5
-----------------------------
Total 1 (8) (16)
-----------------------------
Unrealized net gain on investments
Net gain (loss) arising during period
Before income taxes 12 35 22
Income taxes (2) (11) (9)
Reclassification to net income of net realized (gain) or loss
Before income taxes (48) (31) (29)
Income taxes 11 11 9
-----------------------------
Total (27) 4 (7)
- ---------------------------------------------------------------------------------------------------------
Total other non-owner changes in equity (18) (6) (63)
- ---------------------------------------------------------------------------------------------------------
Total non-owner changes in equity $ 1,159 $ 572 $ 2,601
=========================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 37
Statement of Consolidated Cash Flows
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,177 $ 578 $ 2,664
Reconciliation to net cash provided by (used in) operating activities
Cumulative effect of accounting change -- 25 --
Depreciation, depletion and amortization 1,543 1,675 1,633
Deferred income taxes (140) (152) 451
Exploratory expenses 501 461 471
Minority interest in net income 83 56 68
Dividends from affiliates, greater than (less than) equity in income 233 224 (370)
Gains on asset sales (87) (109) (558)
Changes in operating working capital
Accounts and notes receivable (637) 125 718
Inventories (28) (51) (56)
Accounts payable and accrued liabilities 382 16 (856)
Other - mainly estimated income and other taxes 130 (205) (64)
Other - net 12 (99) (186)
-------------------------------
Net cash provided by operating activities 3,169 2,544 3,915
-------------------------------
Investing Activities
Capital and exploratory expenditures (2,957) (3,101) (3,628)
Proceeds from asset sales 321 282 1,036
Sales (purchases) of leasehold interests (23) 25 (503)
Purchases of investment instruments (432) (947) (1,102)
Sales/maturities of investment instruments 778 1,118 1,096
Collection of note/formation payments from U.S. affiliate 101 612 --
Other - net -- -- (57)
-------------------------------
Net cash used in investing activities (2,212) (2,011) (3,158)
-------------------------------
Financing Activities
Borrowings having original terms in excess of three months
Proceeds 2,353 1,300 507
Repayments (1,080) (741) (637)
Net increase (decrease) in other borrowings (983) 493 628
Purchases of common stock -- (579) (382)
Dividends paid to the company's stockholders
Common (964) (952) (918)
Preferred (28) (53) (55)
Dividends paid to minority stockholders (55) (52) (81)
-------------------------------
Net cash used in financing activities (757) (584) (938)
-------------------------------
Cash and Cash Equivalents
Effect of exchange rate changes (30) (11) (19)
-------------------------------
Increase (decrease) during year 170 (62) (200)
Beginning of year 249 311 511
-------------------------------
End of year $ 419 $ 249 $ 311
=======================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
38 TEXACO 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SEGMENT INFORMATION
We are presenting below information about our operating segments for the years
1999, 1998 and 1997, according to Statement of Financial Accounting Standards
131, "Disclosures about Segments of an Enterprise and Related Information,"
which we adopted in 1998. Due to the formation in 1999 of our Global Gas and
Power segment, prior period information has been restated.
We determined our operating segments based on differences in the nature of
their operations, geographic location and internal management reporting. The
composition of segments and measure of segment profit are consistent with that
used by our Executive Council in making strategic decisions. The Executive
Council is headed by the Chairman and Chief Executive Officer and includes,
among others, the Senior Vice Presidents having oversight responsibility for our
business units.
- --------------------------------------------------------------------------------
Operating Segments 1999
<TABLE>
<CAPTION>
Sales and Services After- Income
------------------------------ tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 2,166 $ 1,547 $ 3,713 $ 652 $ 299 $ 758 $ 167 $ 670 $ 8,696
International 2,684 924 3,608 360 545 451 30 1,273 5,333
Refining, marketing
and distribution
United States 3,579 18 3,597 208 73 3 78 3 3,714
International 22,114 75 22,189 370 101 220 132 375 8,542
Global gas and power 4,422 117 4,539 (14) (8) 65 10 161 1,297
-------------------------------------------------------------------------------------------------
Segment totals $ 34,965 $ 2,681 37,646 1,576 1,010 1,497 417 2,482 27,582
===================
Other business units 32 (3) (2) 1 -- -- 365
Corporate/Non-operating 6 (396) (406) 45 (1) 21 1,430
Intersegment eliminations (2,709) -- -- -- -- -- (405)
---------------------------------------------------------------------------
Consolidated $ 34,975 $ 1,177 $ 602 $ 1,543 $ 416 $ 2,503 $ 28,972
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Operating Segments 1998
Sales and Services After- Income
------------------------------ tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 1,712 $ 1,659 $ 3,371 $ 301 $ 34 $ 892 $ 1 $ 1,200 $ 8,699
International 2,020 695 2,715 129 132 513 18 901 4,345
Refining, marketing
and distribution
United States 2,612 29 2,641 221 88 29 230 1 4,066
International 19,805 106 19,911 332 130 204 135 396 8,214
Global gas and power 4,748 76 4,824 (16) 4 15 45 122 1,119
-------------------------------------------------------------------------------------------------
Segment totals $ 30,897 $ 2,565 33,462 967 388 1,653 429 2,620 26,443
===================
Other business units 50 (2) -- 1 3 -- 381
Corporate/Non-operating 5 (362) (290) 21 (67) 30 1,945
Intersegment eliminations (2,607) -- -- -- -- -- (199)
---------------------------------------------------------------------------
Consolidated, before cumulative
effect of accounting change $ 30,910 $ 603 $ 98 $ 1,675 $ 365 $ 2,650 $ 28,570
===========================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 39
Operating Segments 1997
<TABLE>
<CAPTION>
Sales and Services After- Income
------------------------------ tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 365 $ 4,149 $ 4,514 $ 990 $ 487 $ 783 $ 281 $ 1,349 $ 8,769
International 2,565 693 3,258 812 566 442 104 901 4,107
Refining, marketing
and distribution
United States 16,984 250 17,234 325 172 178 169 262 5,668
International 20,009 362 20,371 508 117 173 (166) 482 7,908
Global gas and power 5,260 247 5,507 (46) (6) 15 63 113 1,178
----------------------------------------------------------------------------------------------------
Segment totals $ 45,183 $ 5,701 50,884 2,589 1,336 1,591 451 3,107 27,630
===================
Other business units 64 2 2 1 3 -- 431
Corporate/Non-operating 4 73 (675) 41 242 52 2,030
Intersegment eliminations (5,765) -- -- -- -- -- (491)
------------------------------------------------------------------------------
Consolidated $ 45,187 $ 2,664 $ 663 $ 1,633 $ 696 $ 3,159 $ 29,600
==============================================================================
</TABLE>
Our exploration and production segments explore for, find, develop and produce
crude oil and natural gas. The United States segment in 1998 and 1997 included
minor operations in Canada. Our refining, marketing and distribution segments
process crude oil and other feedstocks into refined products and purchase, sell
and transport crude oil and refined petroleum products. The global gas and power
segment includes the U.S. natural gas operations, which purchases natural gas
and natural gas products from our exploration and production operations and
third parties for resale. It also operates natural gas processing plants and
pipelines in the United States. Also included in this segment are our power
generation, gasification, hydrocarbons-to-liquids and fuel cell technology
operations. This segment sold its U.K. wholesale gas business in 1998 and its
U.K. retail gas marketing business in 1999. Other business units include our
insurance operations and investments in undeveloped mineral properties. None of
these units is individually significant in terms of revenue, income or assets.
You are encouraged to read Note 5 -- Investments and Advances, beginning on
page 41, which includes information about our affiliates and the formation of
the Equilon and Motiva alliances in 1998.
Corporate and non-operating includes the assets, income and expenses
relating to cash management and financing activities, our corporate center and
other items not directly attributable to the operating segments.
We apply the same accounting policies to each of the segments as we do in
preparing the consolidated financial statements. Intersegment sales and services
are generally representative of market prices or arms-length negotiated
transactions. Intersegment receivables are representative of normal trade
balances. Other non-cash items principally include deferred income taxes, the
difference between cash distributions and equity in income of affiliates, and
non-cash charges and credits associated with asset sales. Capital expenditures
are presented on a cash basis, excluding exploratory expenses.
The countries in which we have significant sales and services and
long-lived assets are listed below. Sales and services are based on the origin
of the sale. Long-lived assets include properties, plant and equipment and
investments in foreign producing operations where the host governments own the
physical assets under terms of the operating agreements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales and Services Long-lived assets at December 31
--------------------------------- ---------------------------------
(Millions of dollars) 1999 1998 1997 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
United States $ 9,733 $ 8,184 $21,657 $ 8,630 $ 8,757 $11,437
====================================================================================================================================
International - Total $25,242 $22,726 $23,530 $ 7,109 $ 6,250 $ 5,876
Significant countries included above:
Brazil 2,404 3,175 3,175 326 301 266
Netherlands 1,955 1,636 1,901 246 257 250
United Kingdom 9,211 7,529 6,862 2,275 2,257 2,384
====================================================================================================================================
</TABLE>
<PAGE>
40 TEXACO 1999 ANNUAL REPORT
NOTE 2 ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS 128 -- During 1997, we adopted SFAS 128, "Earnings per Share." Our basic
and diluted net income per common share under SFAS 128 were approximately the
same as under the comparable prior basis of reporting.
SFAS 130, 131 and 132 -- In 1998, Texaco adopted SFAS 130, 131 and 132.
SFAS 130, "Reporting Comprehensive Income," requires that we report all items
classified as comprehensive income under its provisions as separate components
within a financial statement. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the reporting of certain income,
revenue, expense and asset data about operating segments of public enterprises.
Operating segments are based upon a company's internal management structure.
SFAS 131 also requires data for revenues and long-lived assets by major
countries of operation. SFAS 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits," requires disclosure of new information on
changes in plan benefit obligations and fair values of plan assets.
SOP 98-5 -- Effective January 1, 1998, Caltex, our affiliate, adopted
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
issued by the American Institute of Certified Public Accountants. This Statement
requires that the costs of start-up activities and organization costs, as
defined, be expensed as incurred. The cumulative effect of adoption on Texaco's
net income for 1998 was a net loss of $25 million. This Statement was adopted by
Texaco and our other affiliates effective January 1, 1999. The effect was not
significant.
NOTE 3 INCOME PER COMMON SHARE
Basic net income per common share is 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
(Millions, except per share amounts) ---------------------------- --------------------------- -------------------------
For the years ended December 31 Income Shares Per Share Income Shares Per Share Income Shares Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income:
Income before cumulative
effect of accounting change $ 1,177 $ 603 $ 2,664
Less: Preferred stock dividends (29) (54) (56)
--------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change,
for basic income per share $ 1,148 535.4 $ 2.14 $ 549 528.4 $ 1.04 $ 2,608 522.2 $ 4.99
Effect of dilutive securities:
ESOP Convertible preferred stock -- -- -- -- 34 19.3
Stock options and restricted stock 3 2.5 -- .4 -- .8
Convertible debentures -- -- 1 .2 -- .3
--------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change, for
diluted income per share $ 1,151 537.9 $ 2.14 $ 550 529.0 $ 1.04 $ 2,642 542.6 $ 4.87
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 41
NOTE 4 INVENTORIES
<TABLE>
<CAPTION>
(Millions of dollars)
As of December 31 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Crude oil $ 141 $ 116
Petroleum products and other 857 839
Materials and supplies 184 199
------------------------
Total $1,182 $1,154
================================================================================
</TABLE>
At December 31, 1999, the excess of estimated market value over the carrying
value of inventories was $136 million. The carrying value of inventories at
December 31, 1998 is net of a valuation allowance of $99 million to adjust from
cost to market value. This valuation allowance was reversed in 1999 as market
prices increased and the associated physical units of inventory were sold.
NOTE 5 INVESTMENTS AND ADVANCES
We account for our investments in affiliates, including corporate joint ventures
and partnerships owned 50% or less, on the equity method. Our total investments
and advances are summarized as follows:
<TABLE>
<CAPTION>
(Millions of dollars)
As of December 31 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Affiliates accounted for on the
equity method
Exploration and production
United States $ 243 $ 230
International
CPI 454 452
Other 14 24
----------------------
711 706
Refining, marketing
and distribution
United States
Equilon 1,953 2,266
Motiva 686 896
International
Caltex 1,685 1,747
Other 234 210
----------------------
4,558 5,119
Global gas and power 281 188
Other affiliates 13 3
----------------------
Total 5,563 6,016
----------------------
Miscellaneous investments, long-term
receivables, etc., accounted for at:
Fair value 138 470
Cost, less reserve 725 698
----------------------
Total $6,426 $7,184
================================================================================
</TABLE>
Our equity in the net income of affiliates is adjusted to reflect income taxes
for limited liability companies and partnerships whose income is directly
taxable to us:
<TABLE>
<CAPTION>
(Millions of dollars)
For the years ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in net income (loss)
Exploration and production
United States $ 53 $ 37 $ 40
International
CPI 139 107 171
Other -- (12) --
-----------------------------------
192 132 211
Refining, marketing
and distribution
United States
Equilon 142 199 --
Motiva (3) 22 --
Star -- (3) 95
Other -- -- 48
International
Caltex 11 (36) 252
Other 27 15 20
-----------------------------------
177 197 415
Global gas and power 6 (11) (11)
Other affiliates -- -- 1
-----------------------------------
Total $ 375 $ 318 $ 616
- -------------------------------------------------------------------------------
Dividends received $ 716 $ 709 $ 332
===============================================================================
</TABLE>
The undistributed earnings of these affiliates included in our retained earnings
were $2,613 million, $2,846 million and $3,096 million as of December 31, 1999,
1998 and 1997.
Caltex Group
We have 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 (CPI), American Overseas Petroleum Limited and subsidiary and Caltex
Corporation and subsidiaries (Caltex). This group of companies is engaged in the
exploration for and production, transportation, refining and marketing of crude
oil and products in Africa, Asia, Australia, the Middle East and New Zealand.
Results for the Caltex Group in 1998 include an after-tax charge of $50
million (Texaco's share $25 million) for the cumulative effect of accounting
change. See Note 2 for additional information.
Equilon Enterprises LLC
Effective January 1, 1998, Texaco and Shell Oil Company formed Equilon
Enterprises LLC (Equilon), a Delaware limited liability company. Equilon is a
joint venture that combined major elements of the companies' western and
midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. We own 44% and Shell Oil Company owns
56% of Equilon.
<PAGE>
42 TEXACO 1999 ANNUAL REPORT
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. These amounts were reclassified to investment in affiliates
accounted for by the equity method.
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. In
February 1999, we received $101 million from Equilon for the payment of notes
receivable.
Motiva Enterprises LLC
Effective July 1, 1998, Texaco, Shell and Saudi Aramco formed Motiva Enterprises
LLC (Motiva), a Delaware limited liability company. Motiva is a joint venture
that combined Texaco's and Saudi Aramco's interests and major elements of
Shell's eastern and Gulf Coast U.S. refining and marketing businesses. Texaco's
and Saudi Aramco's interest in these businesses were previously conducted by
Star Enterprise (Star), a joint-venture partnership owned 50% by Texaco and 50%
by Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Texaco and Saudi
Refining, Inc., each owns 32.5% and Shell owns 35% of Motiva.
The investment in Motiva at date of formation approximated the previous
investment in Star. The Motiva investment and previous Star investment are
recorded as investment in affiliates accounted for on the equity method.
- -------------------------------------------------------------------------------
The following table provides summarized financial information on a 100% basis
for the Caltex Group, Equilon, Motiva, Star and all other affiliates that we
account for on the equity method, as well as Texaco's total share of the
information. The net income of all limited liability companies and partnerships
is net of estimated income taxes. The actual income tax liability is reflected
in the accounts of the respective members or partners and is not shown in the
following table.
Motiva's and 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 of Star. Our
investment and equity in the income of Motiva and Star, as reported in our
consolidated financial statements, reflect the remaining unamortized historical
carrying cost of the assets transferred to Star at formation of Star.
Additionally, our investments in Motiva and Star include adjustments for
contractual arrangements on the formation of Star, principally involving
contributed inventories.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Caltex Other Texaco's
(Millions of dollars) Equilon Motiva Group Affiliates Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Gross revenues $ 29,398 $ 12,196 $ 14,915 $ 2,895 $ 25,650
Income (loss) before income taxes $ 347 $ (69) $ 780 $ 348 $ 679
Net income (loss) $ 226 $ (45) $ 390 $ 232 $ 375
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 4,209 $ 1,271 $ 2,705 $ 801 $ 3,796
Non-current assets 7,208 5,307 7,604 2,230 9,321
Current liabilities (5,636) (1,278) (3,395) (736) (4,916)
Non-current liabilities (735) (2,095) (2,639) (792) (2,638)
--------------------------------------------------------------------------------
Net equity $ 5,046 $ 3,205 $ 4,275 $ 1,503 $ 5,563
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Caltex Other Texaco's
(Millions of dollars) Equilon Motiva Star Group Affiliates Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Gross revenues $ 22,246 $ 5,371 $ 3,190 $ 11,505 $ 2,541 $ 20,021
Income (loss) before income taxes and cumulative
effect of accounting change $ 502 $ 78 $ (128) $ 519 $ 170 $ 662
Net income (loss) $ 326 $ 51 $ (83) $ 143 $ 84 $ 318
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 2,640 $ 1,481 $ 1,974 $ 687 $ 2,769
Non-current assets 7,752 5,257 7,684 2,021 9,313
Current liabilities (4,044) (1,243) (2,839) (727) (3,924)
Non-current liabilities (382) (1,667) (2,421) (672) (2,142)
-------------------------------------------------------------------------------
Net equity $ 5,966 $ 3,828 $ 4,398 $ 1,309 $ 6,016
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 43
<TABLE>
<CAPTION>
Total
Caltex Other Texaco's
(Millions of dollars) Star Group Affiliates Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Gross revenues $ 7,758 $ 15,699 $ 4,028 $ 13,312
Income before income taxes $ 301 $ 1,210 $ 605 $ 940
Net income $ 196 $ 846 $ 400 $ 616
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 1,042 $ 2,521 $ 947 $ 1,965
Non-current assets 3,260 7,193 3,607 6,324
Current liabilities (769) (2,991) (1,032) (2,270)
Non-current liabilities (1,072) (2,131) (2,022) (2,198
--------------------------------------------------------
Net equity $ 2,461 $ 4,592 $ 1,500 $ 3,821
====================================================================================================================================
</TABLE>
NOTE 6 PROPERTIES, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Gross Net
-------------------------- --------------------------
(Millions of dollars) As of December 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration and production
United States $21,565 $21,991 $ 7,822 $ 7,945
International 8,835 7,554 3,804 2,950
----------------------------------------------------------------
Total 30,400 29,545 11,626 10,895
- ------------------------------------------------------------------------------------------------------------------------------------
Refining, marketing and distribution
United States 33 75 22 27
International 4,575 4,487 3,107 3,055
----------------------------------------------------------------
Total 4,608 4,562 3,129 3,082
- ------------------------------------------------------------------------------------------------------------------------------------
Global gas and power 748 660 317 267
Other 771 727 488 517
- ------------------------------------------------------------------------------------------------------------------------------------
Total $36,527 $35,494 $15,560 $14,761
- ------------------------------------------------------------------------------------------------------------------------------------
Capital lease amounts included above $ 152 $ 264 $ 3 $ 79
====================================================================================================================================
</TABLE>
Accumulated depreciation, depletion and amortization totaled $20,967 million and
$20,733 million at December 31, 1999 and 1998. Interest capitalized as part of
properties, plant and equipment was $28 million in 1999, $21 million in 1998 and
$20 million in 1997.
In 1999, 1998 and 1997, we recorded pre-tax charges of $87 million, $150 million
and $63 million for the write-downs of impaired assets. These charges were
recorded to depreciation, depletion and amortization expense.
1999
In our global gas and power operating segment, pre-tax asset write-downs from
the impairment of certain gas plants in Louisiana were $49 million. We
determined in the fourth quarter that, as a result of declining gas volumes
available for processing, the carrying value of these plants exceeded future
undiscounted cash flows. Fair value was determined by discounting expected
future cash flows.
Pre-tax asset write-downs of $28 million included in corporate resulted
from our joint plan with state and local agencies to convert for third-party
industrial use idle facilities, formerly used in research activities. The
facilities and equipment were written down to their appraised values. An
additional $10 million was recorded to bring certain marketing assets of our
subsidiary in Poland to be disposed of to their appraised value.
1998
In the U.S. exploration and production operating segment, pre-tax asset
write-downs for impaired properties in Louisiana and Canada were $64 million.
The Louisiana property represents an unsuccessful enhanced recovery project. We
determined in the fourth quarter of 1998 that the carrying value of this
property exceeded future undiscounted cash flows. Fair value was determined by
discounting expected future cash flows. Canadian properties were impaired
following our decision in October 1998 to exit the upstream business in Canada.
These properties were written down to their sales price with the sale closing in
December 1998.
<PAGE>
44 TEXACO 1999 ANNUAL REPORT
In the international exploration and production operating segment, the pre-tax
asset write-down for the impairment of our investment in the Strathspey field in
the U.K. North Sea was $58 million. The Strathspey impairment was caused by a
downward revision in the fourth quarter of the estimated volume of the field's
proved reserves. Fair value was determined by discounting expected future cash
flows.
In the U.S. downstream operating segment, the pre-tax asset write-downs for
the impairment of surplus facilities and equipment held for sale and not
transferred to the Equilon joint venture was $28 million. Fair value was
determined by an independent appraisal.
1997
In our U.S. exploration and producing operating segment, pre-tax asset
write-downs for impaired properties in Louisiana and Canada were $48 million.
The Louisiana impairment resulted from the write-downs of gas plants due to
insufficient contract volumes and the Canadian impairment resulted from
unsuccessful enhanced recovery projects and downward revisions to underground
reserves.
In our international exploration and producing operating segment, pre-tax
asset write-downs of $15 million for impaired properties in the U.K. North Sea
were caused by downward revisions to underground reserves.
Fair values were based on expected future discounted cash flows.
NOTE 7 FOREIGN CURRENCY
Currency translations resulted in pre-tax losses of $47 million in 1999, $80
million in 1998 and $59 million in 1997. After applicable taxes, 1999 included a
gain of $25 million compared to a loss of $94 million in 1998 and a gain of $154
million in 1997.
The after-tax currency gain in 1999 related principally to balance sheet
translation. After-tax currency impacts for years 1998 and 1997 were largely due
to currency volatility in Asia. In 1998, our Caltex affiliate incurred
significant currency-related losses due to the strengthening of the Korean won
and Japanese yen against the U.S. dollar. In contrast, those currencies weakened
against the U.S. dollar in 1997, which resulted in significant currency-related
gains.
Results for 1997 through 1999 were also impacted by the effect of currency
rate changes on deferred income taxes denominated in British pounds. This
results in gains from strengthening of the U.S. dollar and losses from weakening
of the U.S. dollar. These effects were gains of $8 million in 1999, losses of $5
million in 1998 and gains of $28 million in 1997.
Effective October 1, 1997, Caltex changed the functional currency for its
operations in its Korean and Japanese affiliates to the U.S. dollar.
Currency translation adjustments shown in the separate stockholders' equity
account result from translation items pertaining to certain affiliates of
Caltex. For 1999, we recorded unrealized losses of $9 million from these
adjustments. In addition, we reversed an existing $17 million deferred loss due
to the sale by Caltex of its investment in Koa Oil Company, Limited. As a
result, a $17 million loss was recorded in Texaco's net income as part of the
loss on this sale. For years 1998 and 1997, currency translation losses recorded
to stockholders' equity were $2 million and $40 million.
NOTE 8 TAXES
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal and other income taxes
Current
U.S. Federal $ 100 $ (45) $ (538)
Foreign 678 283 689
State and local (36) 12 61
--------------------------------------
Total 742 250 212
Deferred
U.S. (120) (104) 457
Foreign (20) (48) (6)
--------------------------------------
Total (140) (152) 451
--------------------------------------
Total income taxes 602 98 663
Taxes other than income taxes
Oil and gas production 64 70 127
Property 69 108 139
Payroll 91 119 125
Other 110 126 129
--------------------------------------
Total 334 423 520
Import duties and other levies
U.S. 34 36 53
Foreign 6,937 6,843 5,414
--------------------------------------
Total 6,971 6,879 5,467
--------------------------------------
Total direct taxes 7,907 7,400 6,650
Taxes collected from consumers 2,097 2,148 3,370
--------------------------------------
Total all taxes $ 10,004 $ 9,548 $ 10,020
================================================================================
</TABLE>
The deferred income tax assets and liabilities included in the Consolidated
Balance Sheet as of December 31, 1999 and 1998 amounted to $198 million and $205
million, as net current assets and $1,468 million and $1,644 million, as net
non-current liabilities. The table that follows shows deferred income tax assets
and liabilities by category:
<TABLE>
<CAPTION>
(Liability) Asset
- --------------------------------------------------------------------------------
(Millions of dollars) As of December 31 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (991) $(1,079)
Depletion (383) (429)
Intangible drilling costs (881) (726)
Other deferred tax liabilities (691) (686)
------------------------
Total (2,946) (2,920)
Employee benefit plans 548 532
Tax loss carryforwards 599 641
Tax credit carryforwards 495 368
Environmental liabilities 123 116
Other deferred tax assets 711 639
------------------------
Total 2,476 2,296
------------------------
Total before valuation allowance (470) (624)
Valuation allowance (800) (815)
------------------------
Total $(1,270) $(1,439)
================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 45
The preceding table excludes certain potential deferred income tax asset amounts
for which possibility of realization is extremely remote.
The valuation allowance relates principally to upstream operations in
Denmark. The related deferred income tax assets result from tax loss
carryforwards and book versus tax asset basis differences for a hydrocarbon tax.
Loss carryforwards from this tax are generally determined by individual field
and, in that case, are not usable against other fields' taxable income.
The following schedule reconciles the differences between the U.S. Federal
income tax rate and the effective income tax rate excluding the cumulative
effect of accounting change in 1998:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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 (3.8) (7.0) (4.7)
Aggregate earnings and
losses from international
operations 14.4 10.4 6.2
U.S. tax adjustments (5.0) (8.7) (.3)
Sales of stock of subsidiaries (2.2) (6.1) --
Energy credits (3.8) (11.7) (1.4)
Other (.8) 2.1 (.2)
---------------------------------
Effective income tax rate 33.8% 14.0% 19.9%
================================================================================
</TABLE>
The year 1997 included a $488 million benefit resulting from an IRS settlement.
For companies operating in the United States, pre-tax earnings before the
cumulative effect of an accounting change aggregated $484 million in 1999, $194
million in 1998 and $1,527 million in 1997. For companies with operations
located outside the United States, pre-tax earnings on that basis aggregated
$1,295 million in 1999, $507 million in 1998 and $1,800 million in 1997.
Income taxes paid, net of refunds, amounted to $600 million, $430 million
and $285 million in 1999, 1998 and 1997.
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, 1999, amounted
to $1,708 million and $2,187 million. The corresponding amounts at December 31,
1998 were $1,328 million and $2,226 million. Determination of the unrecognized
U.S. deferred income taxes on these amounts is not practicable.
For the years 1999, 1998 and 1997, no loss carryforward benefits were
recorded for U.S. Federal income taxes. For the years 1999, 1998 and 1997, the
tax benefits recorded for loss carryforwards were $54 million, $30 million and
$31 million in foreign income taxes.
At December 31, 1999, we had worldwide tax basis loss carryforwards of
approximately $1,647 million, including $941 million which do not have an
expiration date. The remainder expire at various dates through 2019.
Foreign tax credit carryforwards available for U.S. Federal income tax
purposes amounted to approximately $245 million at December 31, 1999, expiring
at various dates through 2004. Alternative minimum tax and other tax credit
carryforwards available for U.S. Federal income tax purposes were $461 million
at December 31, 1999, of which $357 million have no expiration date. The
remaining credits expire at various dates through 2014. The credits that are not
utilized by the expiration dates may be taken as deductions for U.S. Federal
income tax purposes. For the year 1999, we recorded tax credit carryforwards of
$68 million for U.S. Federal income tax purposes.
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 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to banks and others with
originating terms of one year or less $1,251 $ 368
Commercial paper 1,099 1,617
Current portion of long-term debt
and capital lease obligations
Indebtedness 734 991
Capital lease obligations 7 13
---------------------
3,091 2,989
Less short-term obligations
intended to be refinanced 2,050 2,050
---------------------
Total $1,041 $ 939
================================================================================
</TABLE>
The weighted average interest rate of commercial paper and notes payable to
banks at December 31, 1999 and 1998 was 5.9%.
<PAGE>
46 TEXACO 1999 ANNUAL REPORT
Long-term Debt and Capital Lease Obligations
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Long-Term Debt
3-1/2% convertible notes due 2004 $ 203 $ 204
5.5% note due 2009 397 --
5.7% notes due 2008 201 201
6% notes due 2005 299 299
6-7/8% notes due 1999 -- 200
6-7/8% debentures due 2023 196 196
7.09% notes due 2007 150 150
7-1/2% debentures due 2043 198 198
7-3/4% debentures due 2033 199 199
8% debentures due 2032 148 147
8-1/4% debentures due 2006 150 150
8-3/8% debentures due 2022 198 198
8-1/2% notes due 2003 200 199
8-5/8% debentures due 2010 150 150
8-5/8% debentures due 2031 199 199
8-5/8% debentures due 2032 199 199
8-7/8% debentures due 2021 150 150
9% notes due 1999 -- 200
9-3/4% debentures due 2020 250 250
Medium-term notes, maturing
from 2000 to 2043 (7.0%) 757 543
Revolving Credit Facility,
due 1999-2002 -
variable rate (5.9%) -- 309
Pollution Control Revenue Bonds,
due 2012 - variable rate (3.5%) 166 166
Other long-term debt:
Texaco Inc. - Guarantee of ESOP
Series F loan - variable rate (6.6%) -- 2
U.S. dollars (6.6%) 369 335
Other currencies (9.4%) 472 394
--------------------
Total 5,251 5,238
Capital Lease Obligations (see Note 10) 46 68
--------------------
5,297 5,306
Less current portion of long-term
debt and capital lease obligations 741 1,004
--------------------
4,556 4,302
Short-term obligations intended
to be refinanced 2,050 2,050
--------------------
Total long-term debt and
capital lease obligations $6,606 $6,352
================================================================================
</TABLE>
The percentages shown for variable-rate debt are the interest rates at December
31, 1999. The percentages shown for the categories "Medium-term notes" and
"Other long-term debt" are the weighted average interest rates at year-end 1999.
Where applicable, principal amounts shown in the preceding schedule include
unamortized premium or discount. Interest paid, net of amounts capitalized,
amounted to $480 million in 1999, $474 million in 1998 and $395 million in 1997.
At December 31, 1999, we had revolving credit facilities with commitments
of $2.05 billion with syndicates of major U.S. and international banks. These
facilities are available as support for our issuance of commercial paper as well
as for working capital and other general corporate purposes. We had no amounts
outstanding under these facilities at year-end 1999. We pay commitment fees on
these facilities. The banks reserve the right to terminate the credit facilities
upon the occurrence of certain specific events, including a change in control.
At December 31, 1999, our long-term debt included $2.05 billion of
short-term obligations scheduled to mature during 2000, which we have both the
intent and the ability to refinance on a long-term basis through the use of our
$2.05 billion revolving credit facilities.
Contractual annual maturities of long-term debt, including sinking fund
payments and potential repayments resulting from options that debtholders might
exercise, for the five years subsequent to December 31, 1999 are as follows (in
millions):
<TABLE>
<S> <C> <C> <C> <C>
2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
$734 $135 $191 $273 $ 31
</TABLE>
Debt-related Derivatives
We seek to maintain a balanced capital structure that provides financial
flexibility and supports our strategic objectives while achieving a low cost of
capital. This is achieved by balancing our liquidity and interest rate
exposures. We manage these exposures primarily through long-term and short-term
debt on the balance sheet. In managing our exposure to interest rates, we seek
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. To
achieve this objective, we also use off-balance sheet derivative instruments,
primarily interest rate swaps, to manage identifiable exposures on a
non-leveraged, non-speculative basis.
Summarized below are the carrying amounts and fair values of our debt and
debt-related derivatives at December 31, 1999 and 1998. Our use of derivatives
during the periods presented was limited to interest rate swaps, where we either
paid or received the net effect of a fixed rate versus a floating rate
(commercial paper or LIBOR) index
<PAGE>
TEXACO 1999 ANNUAL REPORT 47
at specified intervals, calculated by reference to an agreed notional principal
amount.
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Notes Payable and Commercial Paper:
Carrying amount $ 2,350 $ 1,985
Fair value 2,348 1,985
Related Derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value (13) 17
Notional principal amount $ 300 $ 300
Weighted average maturity (years) 7.3 8.3
Weighted average fixed pay rate 6.42% 6.42%
Weighted average floating
receive rate 6.42% 5.32%
Long-Term Debt, including current maturities:
Carrying amount $ 5,251 $ 5,238
Fair value 5,225 5,842
Related Derivatives -
Payable (Receivable):
Carrying amount $ (19) $ (4)
Fair value 55 (9)
Notional principal amount $ 1,294 $ 449
Weighted average maturity (years) 5.8 8.4
Weighted average fixed receive rate 5.69% 6.24%
Weighted average floating pay rate 6.10% 5.03%
Unamortized net gain on
terminated swaps
Carrying amount $ 4 $ 5
==============================================================================
</TABLE>
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. We pay a floating rate and receive a 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 was not significant at
year-end 1999 and 1998.
During 1999, floating rate pay swaps having an aggregate notional principal
amount of $30 million were amortized or matured. We initiated $875 million of
new floating rate pay swaps in connection with certain of the 1999 debt
issuances. There was no activity in fixed rate pay swaps during 1999.
Fair values of debt are based upon quoted market prices, as well as rates
currently available to us for borrowings with similar terms and maturities. We
estimate the fair value of swaps as the 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. The notional
amounts of derivative contracts do not represent cash flow and are not subject
to credit risk.
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.
NOTE 10 LEASE COMMITMENTS AND RENTAL EXPENSE
We have leasing arrangements involving service stations, tanker charters, crude
oil production and processing equipment and other facilities. We reflect amounts
due under capital leases in our balance sheet as obligations, while we reflect
our interest in the related assets as properties, plant and equipment. The
remaining lease commitments are operating leases, and we record payments on such
leases as rental expense.
As of December 31, 1999, we had estimated minimum commitments for payment
of rentals (net of non-cancelable sublease rentals) under leases which, at
inception, had a non-cancelable term of more than one year, as follows:
<TABLE>
<CAPTION>
Operating Capital
(Millions of dollars) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 134 $ 9
2001 93 9
2002 416 8
2003 50 7
2004 54 7
After 2004 315 14
--------------------------
Total lease commitments $ 1,062 $ 54
=======
Less interest 8
------
Present value of total capital
lease obligations $ 46
===============================================================================
</TABLE>
Operating lease commitments for 2002 include a $304 million residual value
guarantee of leased production facilities if we do not renew the lease.
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.
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
Rental expense
<S> <C> <C> <C>
Minimum lease rentals $218 $208 $270
Contingent rentals 6 -- 3
--------------------------------
Total 224 208 273
Less rental income on
properties subleased
to others 54 50 78
--------------------------------
Net rental expense $170 $158 $195
================================================================================
</TABLE>
<PAGE>
48 TEXACO 1999 ANNUAL REPORT
NOTE 11 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, accruals 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)
We recorded ESOP expense of $3 million in 1999, $1 million in 1998 and $2
million in 1997. Our contributions to the Employees Thrift Plan of Texaco Inc.
and the Employees Savings Plan of Texaco Inc. amounted to $3 million in 1999, $1
million in 1998 and $2 million in 1997. These plans are designed to provide
participants with a benefit of approximately 6% of base pay, as well as any
benefits earned under the current employee Performance Compensation Program. In
December 1999, we made a $27 million advanced company ESOP allocation for the
period December 1999 through November 2000 to participants of the Employees
Thrift Plan.
During the year, we called the Series B and Series F Convertible Preferred
Stock and converted them into Texaco common stock, with future ESOP allocations
being made in common stock. Following this conversion, we paid $12 million in
dividends. Dividends on the preferred and common ESOP shares used to service
debt of the plans are tax deductible to the company.
In 1999, 1998 and 1997, we paid $19 million, $42 million and $44 million in
dividends on Series B and Series F stock. The trustee applied the dividends to
fund interest payments which amounted to $2 million, $5 million and $7 million
for 1999, 1998 and 1997, as well as to reduce principal on the ESOP loans. The
Savings Plan ESOP loan was satisfied in January 1999. In November 1998 and
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.
We include in our long-term debt the plans' original ESOP loans guaranteed
by Texaco Inc. As the ESOP repays the original and refinanced ESOP loans, we
reduce the remaining ESOP-related unearned employee compensation included as a
component of stockholders' equity.
Benefit Plan Trust
We have established a benefit plan trust for funding company obligations under
some of our benefit plans. At year-end 1999, the trust contained 9.2 million
shares of treasury stock. We intend to continue to pay our obligations under our
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 that we
do not pay such benefits. The trustee will vote the shares held in the trust 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
In the fourth quarter of 1998, we announced we were restructuring several of our
operations. The principal units affected were our worldwide upstream; our
international downstream, principally our marketing operations in the United
Kingdom and Brazil and our refining operations in Panama; our global gas
marketing operations, now included as part of our global gas and power segment;
and our corporate center. In 1998, we recorded an after-tax charge of $80
million for employee separations, curtailment costs and special termination
benefits associated with our restructuring. The charge was comprised of $88
million of operating expenses, $27 million of selling, general and
administrative expenses and $35 million in related income tax benefits. We
initially estimated that over 1,400 employee reductions worldwide would occur.
In the second quarter of 1999, we expanded the employee separation programs and
recorded an after-tax charge of $31 million to cover an additional 1,100
employee reductions. The charge was comprised of $36 million of operating
expenses, $12 million of selling, general and administrative expenses and $17
million in related income tax benefits. The restructuring programs were
completed during 1999. Through December 31, 1999, under these programs we have
separated 2,462 employees and paid $124 million of benefits and transferred $12
million to long-term obligations. The remaining benefits of $27 million will be
paid in future periods in accordance with plan provisions.
We recorded an after-tax charge of $56 million in the fourth quarter of
1996 to cover the costs of employee separations, including employees of
affiliates, as a result of a company-wide realignment and consolidation of our
operations. We recorded an adjustment of $6 million in the fourth quarter of
1997 to increase the accrual from the previous amount. The program was completed
by the end of 1997 with the reduction of approximately 920 employees. During
1999 we paid $4 million of benefits under this program. The remaining benefits
of $8 million will be paid in future periods in accordance with plan provisions.
Pension Plans
We sponsor pension plans that cover the majority of our employees. Generally,
these plans provide defined pension benefits based on years of service and final
average pay. Pension plan assets are principally invested in equity and fixed
income securities and deposits with insurance companies.
Effective October 1, 1999, the Retirement Plan was changed to provide
improved early retirement benefits and/or lump sum options availability, for
vested employees who terminate before age 55. Pensions are now based on a new
point system (age plus service) which pays graduated pensions to terminating
members.
Total worldwide expense for all employee pension plans of Texaco, including
pension supplementations and smaller non-U.S.
<PAGE>
TEXACO 1999 ANNUAL REPORT 49
plans, was $41 million in 1999 and $92 million in 1998 and 1997. The following
data are provided for principal U.S. and non-U.S. plans:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits
- ------------------------------------------------------------------------------------------------------
1999 1998 Other U.S. Benefits
------------------------------------------------- ---------------------
(Millions of dollars) As of December 31 U.S. Int'l U.S. Int'l 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Changes in Benefit (Obligations)
Benefit (obligations) at January 1 $(1,884) $ (979) $(1,769) $ (835) $ (773) $ (756)
Service cost (46) (25) (60) (21) (6) (9)
Interest cost (113) (82) (117) (86) (49) (50)
Amendments (29) (23) -- (3) 12 --
Actuarial gain/(loss) (16) (26) (191) (117) 59 8
Employee contributions (3) (1) (4) (3) (14) (12)
Benefits paid 63 62 64 70 66 56
Curtailments/settlements 364 (2) 193 -- 12 (7)
Special termination benefits -- -- (12) -- -- (3)
Currency adjustments -- 96 -- 16 -- --
Acquisitions/joint ventures -- -- 12 -- 60 --
-----------------------------------------------------------------------------
Benefit (obligations) at December 31 $(1,664) $ (980) $(1,884) $ (979) $ (633) $ (773)
Changes in Plan Assets
Fair value of plan assets at January 1 $ 1,826 $ 1,028 $ 1,702 $ 900 $ -- $ --
Actual return on plan assets 236 151 293 142 -- --
Company contributions 15 26 90 32 52 44
Employee contributions 3 1 4 3 14 12
Expenses (7) -- (6) (2) -- --
Benefits paid (63) (62) (64) (70) (66) (56)
Currency adjustments -- (74) -- 23 -- --
Curtailments/settlements (364) -- (176) -- -- --
Acquisitions/joint ventures -- -- (17) -- -- --
-----------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 1,646 $ 1,070 $ 1,826 $ 1,028 $ -- $ --
==================================================================================================================================
Funded Status of the Plans
Obligation (greater than) less than assets $ (18) $ 90 $ (58) $ 49 $ (633) $ (773)
Unrecognized net transition asset (7) (1) (14) (14) -- --
Unrecognized prior service cost 85 63 68 52 (7) 4
Unrecognized actuarial (gain)/loss (161) (17) (93) 4 (143) (92)
-----------------------------------------------------------------------------
Net (liability)/asset recorded in
Texaco's Consolidated Balance Sheet $ (101) $ 135 $ (97) $ 91 $ (783) $ (861)
Net (liability)/asset recorded in Texaco's
Consolidated Balance Sheet consists of:
Prepaid benefit asset $ 84 $ 373 $ 72 $ 346 $ -- $ --
Accrued benefit liability (231) (246) (215) (268) (783) (861)
Intangible asset 23 8 23 12 -- --
Other accumulated non-owner equity 23 -- 23 1 -- --
-----------------------------------------------------------------------------
Net (liability)/asset recorded in
Texaco's Consolidated Balance Sheet $ (101) $ 135 $ (97) $ 91 $ (783) $ (861)
==================================================================================================================================
Assumptions as of December 31
Discount rate 8.0% 8.1% 6.75% 9.5% 8.0% 6.75%
Expected return on plan assets 10.0% 8.8% 10.0% 8.4% -- --
Rate of compensation increase 4.0% 5.2% 4.0% 6.1% 4.0% 4.0%
Health care cost trend rate -- -- -- -- 4.0% 4.0%
==================================================================================================================================
</TABLE>
<PAGE>
50 TEXACO 1999 ANNUAL REPORT
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------------------------
1999 1998 1997 Other U.S. Benefits
------------------------------------------------------- --------------------------
(Millions of dollars) As of December 31 U.S. Int'l U.S. Int'l U.S. Int'l 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Components of Net Periodic
Benefit Expenses
Service cost $ 46 $ 25 $ 60 $ 21 $ 54 $ 17 $ 6 $ 9 $ 6
Interest cost 113 82 117 86 117 85 49 50 49
Expected return on plan assets (140) (81) (136) (79) (132) (66) -- -- --
Amortization of transition asset (6) (12) (4) (10) (5) (8) -- -- --
Amortization of prior
service cost 11 13 11 7 10 6 -- -- --
Amortization of (gain)/loss 4 (2) 6 (2) 3 -- (1) (4) (5)
Curtailments/settlements (15) 2 6 -- -- -- (12) 1 --
Special termination charges -- -- 8 -- -- -- -- 2 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expenses $ 13 $ 27 $ 68 $ 23 $ 47 $ 34 $ 42 $ 58 $ 50
====================================================================================================================================
</TABLE>
For pension plans with accumulated obligations in excess of plan assets, the
projected benefit obligation and the accumulated benefit obligation were $410
million and $379 million as of December 31, 1999, and $414 million and $383
million as of December 31, 1998. The fair value of plan assets for both years
was $0.
In connection with the formation of Equilon, effective January 1, 1998, we
transferred to Equilon pension benefit obligations of $12 million and related
plan assets of $17 million.
Other U.S. Benefits
We sponsor postretirement plans in the U.S. that provide health care and life
insurance for retirees and eligible dependents. Effective October 1, 1999, we
introduced an age and service point schedule for eligible participants. Our U.S.
health insurance obligation is our fixed dollar contribution. The plans are
unfunded, and the costs are shared by us and our employees and retirees. Certain
of the company's non-U.S. subsidiaries have postretirement benefit plans, the
cost of which is not significant to the company.
As a result of the transfer of employees to the downstream alliances
effective April 1, 1999, $58 million of postretirement benefit obligations were
also transferred.
For measurement purposes, the fixed dollar contribution is expected to
increase by 4% per annum for all future years. A change in our fixed dollar
contribution has a significant effect on the amounts we report. A 1% change in
our contributions would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
(Millions of dollars) Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on annual total of service
and interest cost components $ 4 $ (4)
Effect on postretirement
benefit obligation $ 38 $(34)
================================================================================
</TABLE>
NOTE 12 STOCK INCENTIVE PLAN
Under our Stock Incentive Plan, stock options, restricted stock and other
incentive award forms may be granted to executives, directors and 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. The following table summarizes the number of
shares at December 31, 1999, 1998 and 1997 available for awards during the
subsequent year:
<TABLE>
<CAPTION>
(Shares) As of December 31 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
To all participants 15,646,336 12,677,325 9,607,506
To those participants not
officers or directors 2,020,621 1,967,715 2,362,273
------------------------------------------
Total 17,666,957 14,645,040 11,969,779
================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 51
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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares 278,402 334,798 281,174
Weighted average fair value $62.78 $61.59 $55.09
================================================================================
</TABLE>
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 us 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 $19 million in 1999, $17 million in 1998 and $18 million in 1997. 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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
Net income (Millions of dollars)
<S> <C> <C> <C>
As reported $ 1,177 $ 578 $ 2,664
Pro forma $ 1,107 $ 524 $ 2,621
Earnings per share (dollars)
Basic--as reported $ 2.14 $ .99 $ 4.99
--pro forma $ 2.01 $ .89 $ 4.91
Diluted--as reported $ 2.14 $ .99 $ 4.87
--pro forma $ 2.01 $ .89 $ 4.79
================================================================================
</TABLE>
We used the Black-Scholes model with the following assumptions to estimate the
fair market value of options at date of grant:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life 2 yrs. 2 yrs. 2 yrs.
Interest rate 5.4% 5.4% 6.0%
Volatility 29.1% 22.5% 18.6%
Dividend yield 3.0% 3.0% 3.0%
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Option award activity during 1999, 1998 and 1997 is summarized in the following
table:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ----------------------
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 11,616,049 $59.48 10,071,307 $53.31 9,436,406 $42.73
Granted 2,015,741 62.78 2,388,593 61.56 2,084,902 55.06
Exercised (8,163,386) 59.24 (7,732,978) 53.18 (9,533,861) 44.86
Restored 7,448,018 64.55 6,889,941 60.77 8,103,502 55.32
Canceled (819,284) 64.48 (814) 78.08 (19,642) 51.43
---------- ---------- ----------
Outstanding December 31 12,097,138 62.98 11,616,049 59.48 10,071,307 53.31
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable December 31 6,358,652 $62.57 5,945,445 $58.93 3,197,262 $51.21
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $11.21 $ 8.48 $ 6.92
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information on stock options outstanding at
December 31, 1999:
<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>
$ 25.36 - 31.84 20,323 2.4 yrs. $ 29.32 20,323 $ 29.32
$ 32.47 - 78.08 12,076,815 6.3 yrs. $ 63.04 6,338,329 $ 62.67
---------- ---------
$ 25.36 - 78.08 12,097,138 6.3 yrs. $ 62.98 6,358,652 $ 62.57
====================================================================================================================================
</TABLE>
<PAGE>
52 TEXACO 1999 ANNUAL REPORT
NOTE 13 PREFERRED STOCK AND RIGHTS
Series B ESOP Convertible Preferred Stock
At December 31, 1998, the outstanding shares of Series B ESOP Convertible
Preferred Stock (Series B) were held by an ESOP. Dividends on each share of
Series B were cumulative and payable semiannually at the rate of $57 per annum.
On June 30, 1999, after we called the Series B for redemption, each share
of Series B was converted into 25.736 shares, or 15.1 million shares in total,
of common stock.
Series D Junior Participating Preferred Stock and Rights
In 1989, we declared a dividend distribution of one Right for each outstanding
share of common stock. This was adjusted to one-half Right when we declared a
two-for-one stock split in 1997. In 1998, our shareholders approved the
extension of the Rights until May 1, 2004. Unless we redeem the Rights, 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 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.
We can redeem the Rights 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. We have reserved and designated 3
million shares as Series D for issuance upon exercise of the Rights. At December
31, 1999, the Rights are not exercisable.
Series F ESOP Convertible Preferred Stock
At December 31, 1998, the outstanding shares of Series F ESOP Convertible
Preferred Stock (Series F) were held by an ESOP. Dividends on each share of
Series F were cumulative and payable semiannually at the rate of $64.53 per
annum.
On February 16, 1999, after we called the Series F for redemption, each
share of Series F was converted into 20 shares, or 1.1 million shares in total,
of common stock.
Market Auction Preferred Shares
There are 1,200 shares of cumulative variable rate preferred stock, called
Market Auction Preferred Shares (MAPS) outstanding. 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 or longer intervals.
During 1999, the annual dividend rate for the MAPS ranged between 3.59% and
4.36% and dividends totaled $9 million ($7,713, $7,772, $7,989 and $7,935 per
share for Series G, H, I and J).
For 1998, the annual dividend rate for the MAPS ranged between 3.96% and
4.50% and dividends totaled $13 million ($11,280, $11,296, $11,227 and $11,218
per share for Series G, H, I and J). For 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).
We 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 limited circumstances.
NOTE 14 FINANCIAL INSTRUMENTS
We utilize various types of financial instruments in conducting our business.
Financial instruments encompass assets and liabilities included in the balance
sheet, as well as derivatives which are principally off-balance sheet.
Derivatives are contracts whose value is derived from changes in an
underlying commodity price, interest rate or other item. We use derivatives to
reduce our exposure to changes in foreign exchange rates, interest rates and
crude oil, petroleum products and natural gas prices. Our written policies
restrict our use of derivatives to protecting existing positions and committed
or anticipated transactions. On a limited basis, we may use commodity-based
derivatives to establish a position in anticipation of future movements in
prices or margins. Derivative transactions expose us to counterparty credit
risk. We place contracts only with parties whose credit-worthiness has been
pre-determined under credit policies and limit the dollar exposure to any
counterparty. Therefore, risk of counterparty non-performance and exposure to
concentrations of credit risk are limited.
CASH AND CASH EQUIVALENTS Fair value approximates cost as reflected in the
Consolidated Balance Sheet at December 31, 1999 and 1998 because of the
short-term maturities of these instruments. Cash equivalents are classified as
held-to-maturity. The amortized cost of cash equivalents at December 31, 1999
includes $67 million of time deposits and $165 million of commercial paper.
Comparable amounts at year-end 1998 were $72 million and $109 million.
SHORT-TERM AND LONG-TERM INVESTMENTS Fair value is primarily based on quoted
market prices and valuation statements obtained from major financial
institutions. At December 31, 1999, our available-for-sale securities had an
estimated fair value of $167 million, including gross unrealized gains of $11
million and losses of $6 million. At December 31, 1998, our available-for-sale
securities had an estimated fair value of $492 million, including gross
unrealized gains
<PAGE>
TEXACO 1999 ANNUAL REPORT 53
of $40 million and losses of $8 million. The available-for-sale securities
consist primarily of debt securities issued by U.S. and foreign governments and
corporations. The majority of these investments mature within five years.
Proceeds from sales of available-for-sale securities were $750 million in
1999, $1,011 million in 1998 and $1,040 million in 1997. These sales resulted in
gross realized gains of $45 million in 1999, $53 million in 1998 and $48 million
in 1997, and gross realized losses of $13 million, $22 million and $19 million.
The estimated fair value of other long-term investments qualifying as
financial instruments but not included above, for which it is practicable to
estimate fair value, approximated the December 31, 1999 and 1998 carrying values
of $465 million and $331 million.
SHORT-TERM DEBT, LONG-TERM DEBT AND RELATED DERIVATIVES Refer to Note 9 for
additional information about debt and related derivatives outstanding at
December 31, 1999 and 1998.
FORWARD EXCHANGE AND OPTION CONTRACTS As an international company, we are
exposed to currency exchange risk. To hedge against adverse changes in foreign
currency exchange rates, we 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>
(Millions of dollars) Buy Sell
- --------------------------------------------------------------------------------
<S> <C> <C>
Australian dollars $ 251 $ 37
British pounds 1,161 145
Danish kroner 245 39
Euro 264 40
New Zealand dollars 145 --
Other European currencies 56 11
------------------------
Total at December 31, 1999 $2,122 $ 272
Total at December 31, 1998 $2,953 $ 883
================================================================================
</TABLE>
Market risk exposure on these contracts is essentially limited to currency rate
movements. At year-end 1999, there were $10 million of unrealized gains and $30
million of unrealized losses related to these contracts. At year-end 1998, there
were $8 million of unrealized gains and $19 million of unrealized losses.
We use forward exchange contracts to buy foreign currencies primarily to
hedge the net monetary liability position of our European, 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 1999 and 1998, hedges of foreign currency
commitments principally involved capital projects requiring expenditure of
British pounds and Danish kroner. The percentages of planned capital
expenditures hedged at year-end were: British pounds - 90% in 1999 and 54% in
1998; Danish kroner - 94% in 1999 and 40% in 1998. 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 1999 and 1998, net hedging gains of $17
million and $50 million, respectively, had yet to be amortized.
We sell foreign currencies under a separately managed program to hedge the
value of our investment portfolio denominated in foreign currencies. Our
strategy is to hedge the full value of this portion of our investment portfolio
and to close out forward contracts upon the sale or maturity of the
corresponding investments. We value these contracts at market based on the
foreign exchange rates in effect on the balance sheet dates. We record changes
in the value of these contracts as part of the carrying amount of the related
investments. We record related gains and losses, net of applicable income taxes,
to stockholders' equity until the underlying investments are sold or mature.
PREFERRED SHARES OF SUBSIDIARIES Refer to Note 15 regarding derivatives related
to subsidiary preferred shares.
PETROLEUM AND NATURAL GAS HEDGING We hedge a portion of the market risks
associated with our crude oil, natural gas and petroleum product purchases,
sales and exchange activities to reduce price exposure. 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 our delegations of authorities.
We use established petroleum futures exchanges, as well as
"over-the-counter" hedge instruments, including futures, options, swaps and
other derivative products. In carrying out our hedging programs, we analyze our
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, we determine 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. Derivative transactions not designated as hedging a
specific position or transaction are adjusted to market at each balance sheet
date. Gains and losses are included in operating income.
<PAGE>
54 TEXACO 1999 ANNUAL REPORT
At December 31, 1999 and 1998, there were open derivative commodity
contracts required to be settled in cash, consisting mostly of basis swaps
related to location differences in prices. Notional contract amounts, excluding
unrealized gains and losses, were $6,604 million and $4,397 million at year-end
1999 and 1998. 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 our business
activities, generally for the next twelve months. Unrealized gains and losses on
contracts outstanding at year-end 1999 were $195 million and $132 million,
respectively. At year-end 1998, unrealized gains and losses were $161 million
and $140 million, respectively.
NOTE 15 OTHER FINANCIAL INFORMATION, COMMITMENTS AND CONTINGENCIES
Environmental Liabilities
Texaco Inc. and subsidiary companies have financial liabilities relating to
environmental remediation programs which we believe are sufficient for known
requirements. At December 31, 1999, the balance sheet includes liabilities of
$246 million for future environmental remediation costs. Also, we have accrued
$803 million for the future cost of restoring and abandoning existing oil and
gas properties.
We have accrued for our probable environmental remediation liabilities to
the extent reasonably measurable. We based our accruals for these obligations on
technical evaluations of the currently available facts, interpretation of the
regulations and our experience with similar sites. Additional accrual
requirements for existing and new remediation sites may be necessary in the
future when more facts are known. The potential also exists for further
legislation which may 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. This is due to uncertainty surrounding future
developments, both in relation to remediation exposure and to regulatory
initiatives. We believe that such future costs will not be material to our
financial position or to our operating results over any reasonable period of
time.
Preferred Shares of Subsidiaries
Minority holders own $602 million of preferred shares of our 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
1999, 1998 and 1997.
Texaco Capital LLC, another subsidiary, has three classes of preferred
shares, all held by minority holders. The first class is 14 million shares
totaling $350 million of Cumulative Guaranteed Monthly Income Preferred Shares,
Series A (Series A). The second class is 4.5 million shares totaling $112
million of Cumulative Adjustable Rate Monthly Income Preferred Shares, Series B
(Series B). The third class, issued in Canadian dollars, is 3.6 million shares
totaling $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.
The fixed dividend rate for Series A is 6-7/8% per annum. The annual
dividend rate for Series B averaged 5.0% for 1999, 5.1% for 1998 and 5.9% for
1997. The dividend rate on Series B is reset quarterly per contractual formula.
Dividends on Series A and Series B are paid monthly. Dividends on Series A for
1999, 1998 and 1997 totaled $24 million for each year. Annual dividends on
Series B totaled $6 million for both 1999 and 1998 and $7 million for 1997.
Series A and Series B are redeemable under certain circumstances at the
option of Texaco Capital LLC (with Texaco Inc.'s consent) in whole or in part at
$25 per share plus 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.
We have entered into an interest rate and currency swap related to Series C
preferred shares. The swap matures in the year 2005. Over the life of the
interest rate swap component of the contract, we will make LIBOR-based floating
rate interest payments based on a notional principal amount of $65 million.
Canadian dollar interest will accrue to us 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 us to exchange at
contract maturity date $65 million for Cdn. $170 million, representing Cdn. $87
million plus accrued interest. The carrying amount of this contract represents
the Canadian dollar accrued interest receivable by us. At year-end 1999 and
1998, the carrying amounts of this swap, which approximated fair value, were $20
million and $16 million, respectively.
Series A, Series B and Series C preferred shares are non-voting, except
under limited circumstances.
The above preferred stock issues currently require annual dividend payments
of approximately $34 million. We are 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. We have the ability to
extend the required redemption dates for the $112 million and $350 million of
preferred stock beyond 2024 and 2043.
Pending Award
In July 1999, the Governing Council of the United Nations Compensation
Commission (UNCC) approved an award to Saudi Arabian Texaco Inc. (SAT), a
wholly-owned subsidiary of Texaco Inc., of about $505 million, plus unspecified
interest, for damages
<PAGE>
TEXACO 1999 ANNUAL REPORT 55
sustained as a result of Iraq's invasion of Kuwait in 1990. Payments to SAT are
subject to income tax in Saudi Arabia at an applicable tax rate of 85%. SAT is
party to a concession agreement with the Kingdom of Saudi Arabia covering the
Partitioned Neutral Zone in Southern Kuwait and Northern Saudi Arabia.
The UNCC funds compensation awards by retaining 30% of Iraqi oil sales
revenue under an agreement with Iraq. We do not know when we will receive this
award since the timing of payments by the UNCC depends on several factors,
including the total amount of all compensation awards, the ability of Iraq to
produce and sell oil, the price of Iraqi oil and the duration of U.N. trade
sanctions on Iraq. This award will be recognized in income when collection is
assured.
Financial Guarantees
We have guaranteed the payment of certain debt, lease commitments and other
obligations of third parties and affiliate companies. These guarantees totaled
$716 million and $797 million at December 31, 1999 and 1998. The year-end 1999
and 1998 amounts include $336 million and $387 million of operating lease
commitments of Equilon, our affiliate.
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.
On December 22, 1999, our 50% owned affiliate, Caltex Corporation (Caltex),
settled an excise tax claim with the United States Internal Revenue Service
(IRS) for $65 million. The IRS claim related to sales of crude oil by Caltex to
Japanese customers beginning in 1980. The original claim was for $292 million in
excise taxes, $140 million in penalties and $1.6 billion in interest. In order
to litigate this claim, Caltex had arranged for a letter of credit for $2.5
billion. Pursuant to an agreement with the IRS in May 1999, the letter of credit
was reduced to $200 million. The letter of credit, which Texaco and its 50%
partner, Chevron Corporation, had severally guaranteed, was terminated upon
settlement. Resolution of this matter had no significant impact on reported
results.
Throughput Agreements
Texaco Inc. and certain of its subsidiary companies previously entered into
certain long-term agreements wherein we 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.
In 1998, we assigned the shipping obligations to Equilon, our affiliate, but
Texaco remains responsible for deficiency payments on virtually all of these
agreements. Additionally, Texaco has entered into long-term purchase commitments
with third parties for take or pay gas transportation. At December 31, 1999 and
1998, our maximum exposure to loss was estimated to be $445 million and $500
million.
However, based on our right of counterclaim against Equilon and
unaffiliated third parties in the event of non-performance, our net exposure was
estimated to be $173 million and $195 million at December 31, 1999 and 1998.
No significant losses are anticipated as a result of these obligations.
Litigation
Texaco and approximately 50 other oil companies are defendants 17 purported
class actions. The actions are pending in Texas, New Mexico, Oklahoma,
Louisiana, Utah, Mississippi and Alabama. The plaintiffs allege that the
defendants undervalued oil produced from properties leased from the plaintiffs
by establishing artificially low selling prices. They allege that these low
selling prices resulted in the defendants underpaying royalties or severance
taxes to them. Plaintiffs seek to recover royalty underpayments and interest. In
some cases plaintiffs also seek to recover severance taxes and treble and
punitive damages. Texaco and 24 other defendants have executed a settlement
agreement with most of the plaintiffs that will resolve many of these disputes.
The federal court in Texas gave final approval to the settlement in April 1999
and the matter is now pending before the U.S. Fifth Circuit Court of Appeal.
Texaco has reached an agreement with the federal government to resolve
similar claims. The claims of various state governments remain unresolved.
- --------------------------------------------------------------------------------
It is impossible for us to ascertain the ultimate legal and financial liability
with respect to contingencies and commitments. However, we do not anticipate
that the aggregate amount of such liability in excess of accrued liabilities
will be materially important in relation to our consolidated financial position
or results of operations.
<PAGE>
56 TEXACO 1999 ANNUAL REPORT
REPORT OF MANAGEMENT
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 these
financial records are being accurately and objectively maintained and the
company's assets are being protected. The internal control system comprises:
o Corporate Conduct Guidelines requiring 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 LLP 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/ George J. Batavick
George J. Batavick
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, 1999 and 1998,
and the related statements of consolidated income, cash flows, stockholders'
equity and non-owner changes in equity for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
February 24, 2000
New York, N.Y.
<PAGE>
TEXACO 1999 ANNUAL REPORT 57
SUPPLEMENTAL OIL AND GAS INFORMATION
The following pages provide information required by Statement of Financial
Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities.
Table I - Net Proved Reserves
The reserve quantities include only those quantities that are recoverable based
upon reasonable estimates from sound geological and engineering principles. As
additional information becomes available, these estimates may be revised. Also,
we have a large inventory of potential hydrocarbon resources that we expect will
increase our reserve base as future investments are made in exploration and
development programs.
o Proved developed reserves are reserves that we expect to be recovered through
existing wells with existing equipment and operating methods.
o Proved undeveloped reserves are reserves that we expect to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for completion of development.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table I
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>
Developed reserves 1,100 50 165 418 1,733 354 2,087
Undeveloped reserves 222 6 232 48 508 109 617
------------------------------------------------------------------------------------
As of December 31, 1996 1,322 56 397 466 2,241 463 2,704
Discoveries & extensions 107 13 34 61 215 4 219
Improved recovery 15 -- 65 -- 80 18 98
Revisions 55 3 11 100 169 22 191
Net purchases (sales) 413 (2) (31) (8) 372 -- 372
Production (145) (5) (45) (66) (261) (56) (317)
------------------------------------------------------------------------------------
Total changes 445 9 34 87 575 (12) 563
Developed reserves 1,374 54 210 463 2,101 354 2,455
Undeveloped reserves 393 11 221 90 715 97 812
------------------------------------------------------------------------------------
As of December 31, 1997* 1,767 65 431 553 2,816 451 3,267
Discoveries & extensions 70 2 8 32 112 1 113
Improved recovery 136 -- 16 3 155 156 311
Revisions 46 (15) 22 55 108 137 245
Net purchases (sales) (38) -- -- 26 (12) -- (12)
Production (157) (4) (58) (71) (290) (61) (351)
------------------------------------------------------------------------------------
Total changes 57 (17) (12) 45 73 233 306
Developed reserves 1,415 39 246 490 2,190 456 2,646
Undeveloped reserves 409 9 173 108 699 228 927
------------------------------------------------------------------------------------
As of December 31, 1998* 1,824 48 419 598 2,889 684 3,573
Discoveries & extensions 66 11 23 23 123 2 125
Improved recovery 34 -- 2 29 65 52 117
Revisions 11 -- 36 72 119 (132) (13)
Net purchases (sales) (9) -- -- 23 14 -- 14
Production (144) (4) (53) (75) (276) (60) (336)
------------------------------------------------------------------------------------
Total changes (42) 7 8 72 45 (138) (93)
Developed reserves 1,361 39 261 545 2,206 316 2,522
Undeveloped reserves 421 16 166 125 728 230 958
------------------------------------------------------------------------------------
As of December 31, 1999* 1,782 55 427 670 2,934 546 3,480
- ---------------------------------------------------------------------------------------------------------------------------------
*Includes net proved
NGL reserves
As of December 31, 1997 246 -- 71 -- 317 4 321
As of December 31, 1998 250 -- 68 22 340 6 346
As of December 31, 1999 250 -- 74 134 458 1 459
=================================================================================================================================
</TABLE>
<TABLE>
<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>
Developed reserves 3,360 893 452 96 4,801 136 4,937
Undeveloped reserves 368 138 509 4 1,019 17 1,036
------------------------------------------------------------------------------------
As of December 31, 1996 3,728 1,031 961 100 5,820 153 5,973
Discoveries & extensions 692 26 92 346 1,156 2 1,158
Improved recovery 7 -- 22 -- 29 5 34
Revisions 228 75 41 (22) 322 19 341
Net purchases (sales) 10 (118) (7) (310) (425) -- (425)
Production (643) (96) (81) (2) (822) (17) (839)
------------------------------------------------------------------------------------
Total changes 294 (113) 67 12 260 9 269
Developed reserves 3,379 792 576 110 4,857 145 5,002
Undeveloped reserves 643 126 452 2 1,223 17 1,240
------------------------------------------------------------------------------------
As of December 31, 1997* 4,022 918 1,028 112 6,080 162 6,242
Discoveries & extensions 599 6 47 98 750 1 751
Improved recovery 4 -- 7 -- 11 3 14
Revisions 152 (12) (6) 34 168 10 178
Net purchases (sales) (39) -- -- 250 211 -- 211
Production (633) (92) (112) (17) (854) (25) (879)
------------------------------------------------------------------------------------
Total changes 83 (98) (64) 365 286 (11) 275
Developed reserves 3,345 688 615 374 5,022 135 5,157
Undeveloped reserves 760 132 349 103 1,344 16 1,360
------------------------------------------------------------------------------------
As of December 31, 1998* 4,105 820 964 477 6,366 151 6,517
Discoveries & extensions 442 7 93 42 584 5 589
Improved recovery 4 -- 2 235 241 1 242
Revisions 285 193 7 427 912 3 (915)
Net purchases (sales) (81) -- -- 712 631 -- 631
Production (550) (79) (104) (27) (760) (26) (786)
------------------------------------------------------------------------------------
Total changes 100 121 (2) 1,389 1,608 (17) (1,591)
Developed reserves 3,388 865 557 787 5,597 131 5,728
Undeveloped reserves 817 76 405 1,079 2,377 3 2,380
------------------------------------------------------------------------------------
As of December 31, 1999* 4,205 941(a) 962 1,866 7,974(a) 134 8,108(a)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additionally, there is approximately 489 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>
58 TEXACO 1999 ANNUAL REPORT
The following chart summarizes our experience in finding new quantities of
oil and gas to replace our production. Our reserve replacement performance is
calculated by dividing our reserve additions by our production. Our additions
relate to new discoveries, existing reserve extensions, improved recoveries and
revisions to previous reserve estimates. The chart excludes oil and gas
quantities from purchases and sales.
<TABLE>
<CAPTION>
Worldwide United States International
- ----------------------------------------------------------------
<S> <C> <C> <C>
Year 1999 111% 99% 124%
Year 1998 166% 144% 191%
Year 1997 167% 132% 212%
3-year average 148% 126% 174%
5-year average 138% 115% 166%
</TABLE>
Table II - Standardized Measure
The standardized measure provides a common benchmark among those companies that
have exploration and producing activities. This measure may not necessarily
match our view of the future cash flows from our proved reserves.
The standardized measure is calculated at a 10% discount. Future revenues
are based on year-end prices for oil and gas. Future production and development
costs are based on current year costs. Extensive judgment is used to estimate
the timing of production and future costs over the remaining life of the
reserves. Future income taxes are calculated using each country's statutory tax
rate.
Our inventory of potential hydrocarbon resources, which may become proved
in the future, are excluded. This could significantly impact our standardized
measure in the future.
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, 1999
Future cash inflows from sale of oil & gas,
and service fee revenue $ 45,281 $ 2,668 $ 11,875 $ 16,890 $ 76,714 $ 7,646 $ 84,360
Future production costs (10,956) (913) (2,264) (2,946) (17,079) (2,254) (19,333)
Future development costs (3,853) (239) (1,749) (1,956) (7,797) (767) (8,564)
Future income tax expense (8,304) (758) (2,428) (7,665) (19,155) (2,340) (21,495)
---------------------------------------------------------------------------------
Net future cash flows before discount 22,168 758 5,434 4,323 32,683 2,285 34,968
10% discount for timing of future cash flows (10,816) (327) (1,985) (2,243) (15,371) (887) (16,258)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 11,352 $ 431 $ 3,449 $ 2,080 $ 17,312 $ 1,398 $ 18,710
====================================================================================================================================
As of December 31, 1998
Future cash inflows from sale of oil & gas,
and service fee revenue $ 23,147 $ 1,657 $ 6,581 $ 4,816 $ 36,201 $ 4,708 $ 40,909
Future production costs (10,465) (605) (2,574) (2,551) (16,195) (1,992) (18,187)
Future development costs (4,055) (142) (1,695) (761) (6,653) (803) (7,456)
Future income tax expense (2,583) (419) (715) (1,023) (4,740) (967) (5,707)
---------------------------------------------------------------------------------
Net future cash flows before discount 6,044 491 1,597 481 8,613 946 9,559
10% discount for timing of future cash flows (2,626) (244) (644) (167) (3,681) (391) (4,072)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 3,418 $ 247 $ 953 $ 314 $ 4,932 $ 555 $ 5,487
====================================================================================================================================
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
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 59
Table III - Changes in the Standardized Measure
The annual change in the standardized measure is explained in this table by the
major sources of change, discounted at 10%.
o Sales & transfers, net of production costs capture the current year's revenues
less the associated producing expenses. The net amount reflected here correlates
to Table VII for revenues less production costs.
o Net changes in prices, production & development costs are computed before the
effects of changes in quantities. The beginning-of-the-year production forecast
is multiplied by the net annual change in the unit sales price and production
cost.
o Discoveries & extensions indicate the value of the new reserves at year-end
prices, less related costs.
o Development costs incurred during the period capture the current year's
development costs that are shown in Table V. These costs will reduce the
previously estimated future development costs.
o Accretion of discount represents 10% of the beginning discounted future net
cash flows before income tax effects.
o Net change in income taxes is computed as the change in present value of
future income taxes.
Table III - Changes in the Standardized Measure
<TABLE>
<CAPTION>
Worldwide Including
Equity in Affiliate - Other East
-----------------------------------------
(Millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Standardized measure - beginning of year $ 5,487 $ 12,057 $ 17,966
Sales of minerals-in-place (352) (160) (79)
-----------------------------------------
5,135 11,897 17,887
Changes in ongoing oil and gas operations:
Sales and transfers of produced oil and gas,
net of production costs during the period (4,230) (3,129) (4,921)
Net changes in prices, production and development costs 21,990 (11,205) (14,632)
Discoveries and extensions and improved recovery, less related costs 1,821 728 2,681
Development costs incurred during the period 1,598 1,770 1,976
Timing of production and other changes (517) (1,170) (969)
Revisions of previous quantity estimates 301 852 1,476
Purchases of minerals-in-place 895 48 449
Accretion of discount 881 1,916 3,027
Net change in discounted future income taxes (9,164) 3,780 5,083
-----------------------------------------
Standardized measure - end of year $ 18,710 $ 5,487 $ 12,057
====================================================================================================================================
</TABLE>
Table IV - Capitalized Costs
Costs of the following assets are capitalized under the "successful efforts"
method of accounting. These costs include the activities of Texaco's upstream
operations but exclude the crude oil marketing activities, geothermal and other
non-producing activities. As a result, this table will not correlate to
information in Note 6 to the financial statements.
o Proved properties include mineral properties with proved reserves, development
wells and uncompleted development well costs.
o Unproved properties include leaseholds under exploration (even where
hydrocarbons were found but not in sufficient quantities to be considered proved
reserves) and uncompleted exploratory well costs.
o Support equipment and facilities include costs for seismic and drilling
equipment, construction and grading equipment, repair shops, warehouses and
other supporting assets involved in oil and gas producing activities.
o The accumulated depreciation, depletion and amortization represents the
portion of the assets that have been charged to expense in prior periods. It
also includes provisions for future restoration and abandonment activity.
<PAGE>
60 TEXACO ANNUAL REPORT
Table IV - Capitalized Costs
<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, 1999
Proved properties $ 20,364 $ 304 $ 5,327 $ 2,273 $ 28,268 $ 1,085 $ 29,353
Unproved properties 983 139 50 619 1,791 335 2,126
Support equipment and facilities 441 267 37 529 1,274 975 2,249
---------------------------------------------------------------------------------
Gross capitalized costs 21,788 710 5,414 3,421 31,333 2,395 33,728
Accumulated depreciation,
depletion and amortization (13,855) (298) (3,955) (1,365) (19,473) (1,217) (20,690)
---------------------------------------------------------------------------------
Net capitalized costs $ 7,933 $ 412 $ 1,459 $ 2,056 $ 11,860 $ 1,178 $ 13,038
====================================================================================================================================
As of December 31, 1998
Proved properties $ 20,601 $ 515 $ 4,709 $ 1,799 $ 27,624 $ 1,015 $ 28,639
Unproved properties 1,188 53 71 390 1,702 408 2,110
Support equipment and facilities 437 27 37 342 843 768 1,611
---------------------------------------------------------------------------------
Gross capitalized costs 22,226 595 4,817 2,531 30,169 2,191 32,360
Accumulated depreciation,
depletion and amortization (14,140) (277) (3,381) (1,253) (19,051) (1,119) (20,170)
---------------------------------------------------------------------------------
Net capitalized costs $ 8,086 $ 318 $ 1,436 $ 1,278 $ 11,118 $ 1,072 $ 12,190
====================================================================================================================================
</TABLE>
Table V - Costs Incurred
This table summarizes how much we spent to explore and develop our existing
reserve base, and how much we spent to acquire mineral rights from others
(classified as proved or unproved).
o Exploration costs include geological and geophysical costs, the cost of
carrying and retaining undeveloped properties and exploratory drilling costs.
o Development costs include the cost of drilling and equipping development wells
and constructing related production facilities for extracting, treating,
gathering and storing oil and gas from proved reserves.
o Exploration and development costs may be capitalized or expensed, as
applicable. Such costs also include administrative expenses and depreciation
applicable to support equipment associated with these activities. As a result,
the costs incurred will not correlate to Capital and Exploratory Expenditures.
On a worldwide basis, in 1999 we spent $4.37 for each BOE we added. Finding and
development costs averaged $3.80 for the three-year period 1997-1999 and $3.88
per BOE for the five-year period 1995-1999.
<PAGE>
TEXACO 1999 ANNUAL REPORT 61
Table V - Costs Incurred
<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, 1999
Proved property acquisition $ 4 $ -- $ -- $ 481 $ 485 $ -- $ 485
Unproved property acquisition 39 25 -- 27 91 -- 91
Exploration 204 92 23 224 543 19 562
Development 698 97 319 301 1,415 183 1,598
--------------------------------------------------------------------------------
Total $ 945 $ 214 $ 342 $1,033 $2,534 $ 202 $2,736
==============================================================================================================================
For the year ended December 31, 1998
Proved property acquisition $ 27 $ -- $ -- $ 199 $ 226 $ -- $ 226
Unproved property acquisition 85 1 -- 32 118 -- 118
Exploration 417 92 65 277 851 19 870
Development 1,073 25 308 204 1,610 160 1,770
--------------------------------------------------------------------------------
Total $1,602 $ 118 $ 373 $ 712 $2,805 $ 179 $2,984
==============================================================================================================================
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
==============================================================================================================================
<FN>
*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.
</FN>
</TABLE>
Table VI - Unit Prices
Average sales prices are calculated using the gross revenues in Table VII.
Average production costs equal producing (lifting) costs, other taxes and the
depreciation, depletion and amortization of support equipment and facilities.
<TABLE>
<CAPTION>
Average sales prices
-----------------------------------------------------------------------
Natural Natural Natural
Crude oil gas per Crude oil gas per Crude oil gas per
and NGL thousand and NGL thousand and NGL thousand Average production costs
per barrel cubic feet per barrel cubic feet per barrel cubic feet (per composite barrel)
------------------------ ---------------------- ---------------------- ---------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $16.56 $ 2.13 $10.14 $ 1.93 $16.32 $ 2.32 $ 4.01 $ 4.07 $ 3.94
Other West 14.12 .77 9.65 .92 14.40 1.03 2.87 1.86 2.80
Europe 17.42 1.99 11.73 2.42 18.41 2.42 6.15 5.24 5.58
Other East 15.33 .18 9.61 .38 16.87 1.89 3.45 3.65 4.11
Affiliate - Other East 13.24 -- 9.81 -- 14.89 -- 3.95 2.68 3.76
=================================================================================================================================
</TABLE>
Table VII - Results of Operations
Results of operations for exploration and production activities consist of all
the activities within our upstream operations, except for crude oil marketing
activities, geothermal and other non-producing activities. As a result, this
table will not correlate to the Analysis of Income by Operating Segments.
o Revenues are based upon our production that is available for sale and excludes
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.
<PAGE>
62 TEXACO 1999 ANNUAL REPORT
o Production costs consist of costs incurred to operate and maintain wells and
related equipment and facilities. These costs also include taxes other than
income taxes and administrative expenses.
o Exploration costs include dry hole, leasehold impairment, geological and
geophysical expenses, the cost of retaining undeveloped leaseholds and
administrative expenses. Also included are taxes other than income taxes.
o Depreciation, depletion and amortization includes the amount for support
equipment and facilities.
o Estimated income taxes are computed by adjusting each country's income before
income taxes for permanent differences related to the oil and gas producing
activities, then multiplying the result by the country's statutory tax rate and
adjusting for applicable tax credits.
Table VII - Results of Operations
<TABLE>
<CAPTION>
Consolidated Subsidiaries Equity
--------------------------------------------------- ---------
United Other Other Affiliate -
(Millions of dollars) States West Europe East Total Other East Worldwide
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1999
Gross revenues from:
Sales and transfers, including affiliate sales $ 2,890 $ -- $ 617 $ 935 $ 4,442 $ 592 $ 5,034
Sales to unaffiliated entities 230 116 498 202 1,046 24 1,070
Production costs (943) (39) (435) (252) (1,669) (205) (1,874)
Exploration costs (243) (97) (21) (154) (515) (17) (532)
Depreciation, depletion and amortization (794) (22) (336) (134) (1,286) (109) (1,395)
Other expenses (92) (15) (1) (53) (161) (3) (164)
--------------------------------------------------------------------------
Results before estimated income taxes 1,048 (57) 322 544 1,857 282 2,139
Estimated income taxes (312) (8) (114) (457) (891) (143) (1,034)
--------------------------------------------------------------------------
Net results $ 736 $ (65) $ 208 $ 87 $ 966 $ 139 $ 1,105
====================================================================================================================================
For the year ended December 31, 1998
Gross revenues from:
Sales and transfers, including affiliate sales $ 2,570 $ -- $ 438 $ 571 $ 3,579 $ 454 $ 4,033
Sales to unaffiliated entities 218 120 509 122 969 28 997
Production costs (1,066) (35) (400) (250) (1,751) (150) (1,901)
Exploration costs (286) (31) (53) (137) (507) (16) (523)
Depreciation, depletion and amortization (832) (22) (422) (113) (1,389) (106) (1,495)
Other expenses (198) -- (4) (10) (212) (1) (213)
---------------------------------------------------------------------------
Results before estimated income taxes 406 32 68 183 689 209 898
Estimated income taxes (49) (14) (27) (166) (256) (102) (358)
---------------------------------------------------------------------------
Net results $ 357 $ 18 $ 41 $ 17 $ 433 $ 107 $ 540
====================================================================================================================================
For the year ended December 31, 1997
Gross revenues from:
Sales and transfers, including affiliate sales $ 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
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 63
Supplemental Market Risk Disclosures
We use derivative financial instruments to hedge interest rate, foreign currency
exchange and commodity market risks. Derivatives 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
instruments. We hedge only a portion of our risk exposures for assets,
liabilities, commitments and future production, purchases and sales. We remain
exposed on the unhedged portion of such risks.
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.
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, the range
of variability in prices and rates is representative only of past fluctuations
for each risk category. Past fluctuations in rates and prices may not
necessarily be an indicator of probable future fluctuations.
Notes 9, 14 and 15 to the financial statements include details of our
hedging activities, fair values of financial instruments, related derivatives
exposures and accounting policies.
DEBT AND DEBT-RELATED DERIVATIVES
We had variable rate debt of approximately $2.8 billion and $2.7 billion at
year-end 1999 and 1998, before effects of related interest rate swaps. Interest
rate swap notional amounts at year-end 1999 increased by $845 million from
year-end 1998.
Based on our overall interest rate exposure on variable rate debt and
interest rate swaps at December 31, 1999 (including the interest rate and equity
swap), a hypothetical two percentage points increase or decrease in interest
rates would decrease or increase net income approximately $52 million.
CURRENCY FORWARD EXCHANGE AND OPTION CONTRACTS
During 1999, the net notional amount of open forward contracts decreased $220
million. This related mostly to a decrease in balance sheet monetary exposures.
The effect on fair value of our forward exchange contracts at year-end 1999
from a hypothetical 10% change in currency exchange rates would be an increase
or decrease of approximately $185 million. This would be offset by an opposite
effect on the related hedged exposures.
PETROLEUM AND NATURAL GAS HEDGING
In 1999, the notional amount of open derivative contracts increased by $2,207
million, mostly related to natural gas hedging.
For commodity derivatives outstanding at year-end 1999 that are permitted
to be settled in cash or another financial instrument, the aggregate effect of a
hypothetical 17% change in natural gas prices, a 13% change in crude oil prices
and a 14% change in petroleum product prices would not be material to our
consolidated financial position, net income or cash flows.
INVESTMENTS IN DEBT AND PUBLICLY TRADED EQUITY SECURITIES
We are subject to price risk on this unhedged portfolio of available-for-sale
securities. During 1999, market risk exposure decreased by $325 million. At
year-end 1999, a 10% appreciation or depreciation in debt and equity prices
would change portfolio fair value by about $17 million. This assumes no
fluctuations in currency exchange rates.
PREFERRED SHARES OF SUBSIDIARIES
We are exposed to interest rate risk on dividend requirements of Series B
preferred shares of Texaco Capital LLC.
We are exposed to currency exchange risk on the Canadian dollar denominated
Series C preferred shares of Texaco Capital LLC. We are exposed to offsetting
currency exchange risk as well as interest rate risk on a swap contract used to
hedge the Series C.
Based on the above exposures, a hypothetical two percentage points increase
or decrease in the applicable variable interest rates and a hypothetical 10%
appreciation or depreciation in the Canadian dollar exchange rate would not
materially affect our consolidated financial position, net income or cash flows.
MARKET AUCTION PREFERRED SHARES (MAPS)
We are exposed to interest rate risk on dividend requirements of MAPS. A
hypothetical two percentage points increase or decrease in interest rates would
not materially affect our consolidated financial position or cash flows. There
are no derivatives related to MAPS.
<PAGE>
64 TEXACO 1999 ANNUAL REPORT
Selected Financial Data
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) 1999 1998
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Sales and services $ 6,914 $ 8,116 $ 9,472 $10,473 $ 7,922 $ 7,729 $ 7,481 $ 7,778
Equity in income of affiliates, interest,
asset sales and other 276 153 205 82 225 315 226 31
-------------------------------------------------------------------------------
7,190 8,269 9,677 10,555 8,147 8,044 7,707 7,809
-------------------------------------------------------------------------------
Deductions
Purchases and other costs 5,450 6,356 7,448 8,188 6,114 5,972 5,836 6,257
Operating expenses 559 550 544 666 580 645 593 690
Selling, general and
administrative expenses 290 311 270 315 276 296 290 362
Exploratory expenses 130 80 72 219 141 90 93 137
Depreciation, depletion and amortization 361 365 356 461 388 375 409 503
Interest expense, taxes other than
income taxes and minority interest 216 212 214 279 249 240 237 233
-------------------------------------------------------------------------------
7,006 7,874 8,904 10,128 7,748 7,618 7,458 8,182
-------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change 184 395 773 427 399 426 249 (373)
Provision for (benefit from) income taxes (15) 122 386 109 140 84 34 (160)
-------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change 199 273 387 318 259 342 215 (213)
Cumulative effect of accounting change -- -- -- -- (25) -- -- --
-------------------------------------------------------------------------------
Net income (loss) $ 199 $ 273 $ 387 $ 318 $ 234 $ 342 $ 215 $ (213)
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-owner changes in equity $ 179 $ 271 $ 393 $ 316 $ 239 $ 344 $ 210 $ (221)
===================================================================================================================================
Net income (loss) per common share (dollars)
Basic
Income (loss) before cumulative
effect of accounting change $ .35 $ .50 $ .71 $ .58 $ .46 $ .62 $ .38 $ (.43)
Cumulative effect of
accounting change -- -- -- -- (.05) -- -- --
-------------------------------------------------------------------------------
Net income (loss) $ .35 $ .50 $ .71 $ .58 $ .41 $ .62 $ .38 $ (.43)
===================================================================================================================================
Diluted
Income (loss) before cumulative
effect of accounting change $ .35 $ .50 $ .71 $ .58 $ .46 $ .61 $ .38 $ (.43)
Cumulative effect of
accounting change -- -- -- -- (.04) -- -- --
-------------------------------------------------------------------------------
Net income (loss) $ .35 $ .50 $ .71 $ .58 $ .42 $ .61 $ .38 $ (.43)
===================================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TEXACO 1999 ANNUAL REPORT 65
Five-Year Comparison of Selected Financial Data
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997 1996 1995
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
For the year:
Revenues $ 35,691 $ 31,707 $ 46,667 $ 45,500 $ 36,787
Net income before cumulative effect of accounting changes $ 1,177 $ 603 $ 2,664 $ 2,018 $ 728
Cumulative effect of accounting changes -- (25) -- -- (121)
-------------------------------------------------------------
Net income $ 1,177 $ 578 $ 2,664 $ 2,018 $ 607
-------------------------------------------------------------
Total non-owner changes in equity $ 1,159 $ 572 $ 2,601 $ 1,863 $ 592
-------------------------------------------------------------
Net income per common share* (dollars)
Basic
Income before cumulative effect of accounting changes $ 2.14 $ 1.04 $ 4.99 $ 3.77 $ 1.29
Cumulative effect of accounting changes -- (.05) -- -- (.24)
-------------------------------------------------------------
Net income $ 2.14 $ .99 $ 4.99 $ 3.77 $ 1.05
-------------------------------------------------------------
Diluted
Income before cumulative effect of accounting changes $ 2.14 $ 1.04 $ 4.87 $ 3.68 $ 1.28
Cumulative effect of accounting changes -- (.05) -- -- (.23)
-------------------------------------------------------------
Net income $ 2.14 $ .99 $ 4.87 $ 3.68 $ 1.05
-------------------------------------------------------------
Cash dividends per common share* (dollars) $ 1.80 $ 1.80 $ 1.75 $ 1.65 $ 1.60
Total cash dividends paid on common stock $ 964 $ 952 $ 918 $ 859 $ 832
At end of year:
Total assets $ 28,972 $ 28,570 $ 29,600 $ 26,963 $ 24,937
Debt and capital lease obligations
Short-term $ 1,041 $ 939 $ 885 $ 465 $ 737
Long-term 6,606 6,352 5,507 5,125 5,503
-------------------------------------------------------------
Total debt and capital lease obligations $ 7,647 $ 7,291 $ 6,392 $ 5,590 $ 6,240
===================================================================================================================================
<FN>
*Reflects two-for-one stock split effective September 29, 1997.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
68 TEXACO 1999 ANNUAL REPORT
Investor Information
COMMON STOCK -- MARKET
AND DIVIDEND INFORMATION:
Texaco Inc. common stock (symbol TX) is traded principally on the New York Stock
Exchange. As of February 24, 2000, there were 198,698 shareholders of record. In
1999, Texaco's common stock price reached a high of $70 1/16, and closed
December 31, 1999, at $54 5/16.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Price Range
-------------------------------------------------
High Low High Low Dividends
------------------------------------------------- ----------------
1999 1998 1999 1998
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 59 3/16 $ 44 9/16 $ 65 $ 49 1/16 $ .45 $ .45
Second Quarter 70 1/16 55 1/8 63 3/4 55 3/4 .45 .45
Third Quarter 68 1/2 60 5/16 64 7/8 55 1/4 .45 .45
Fourth Quarter 67 3/16 52 3/8 63 7/8 50 1/4 .45 .45
=================================================================================================================================
</TABLE>
STOCK TRANSFER AGENT AND
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]
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
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]
ANNUAL MEETING
Texaco Inc.'s Annual Stockholders Meeting will be held at Purchase College, The
State University of New York, in Purchase, NY, on Wednesday, April 26, 2000. A
formal notice of the meeting, together with a proxy statement and proxy form, is
being mailed to stockholders 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. Open an account or
access your registered shareholder account on the Internet through our new
TexLink connection at www.texaco.com. 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.
EXHIBIT 21
--------------------------
Subsidiaries of Registrant
1999
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>
Bridgeline Gas Distribution LLC Louisiana
FAMM LLC Delaware
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 Australia Pty Limited Delaware
Texaco Brazil S.A. - Produtos de Petroleo Brazil
Texaco California Inc. Delaware
Texaco Captain Holdings Inc. Delaware
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 (Ireland) Limited Ireland
Texaco Limited England
Texaco Natural Gas Inc. Delaware
Texaco Nederland B.V. Netherlands
Texaco North Sea U.K. Company Delaware
Texaco Oil ( Britain) Ltd. England
Texaco Overseas Holdings Inc. Delaware
Texaco Panama Inc. Panama
Texaco Philippines 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
<FN>
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.
</FN>
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 24, 2000 included or incorporated by reference in Texaco
Inc.'s Form 10-K for the year ended December 31, 1999, into the following
previously filed Registration Statements:
<TABLE>
<S> <C> <C>
1. Form S-3 File Number 33-31148
2. Form S-8 File Number 2-67125
3. Form S-8 File Number 2-76755
4. Form S-8 File Number 2-90255
5. Form S-8 File Number 33-34043
6. Form S-3 File Number 33-50553 and 33-50553-01
7. Form S-8 File Number 333-11019
8. Form S-3 File Number 333-82893 and 333-82893-01
9. Form S-8 File Number 333-73329
</TABLE>
Arthur Andersen LLP
New York, N.Y.
March 24, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Texaco Inc.:
We hereby consent to the incorporation by reference of our report dated February
7, 2000 relating to the combined balance sheets of the Caltex Group of Companies
as of December 31, 1999 and 1998, and the related combined statements of income,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999, which report appears in the
December 31, 1999 Annual Report on Form 10-K of Texaco Inc., into the following
previously filed Registration Statements:
<TABLE>
<S> <C> <C>
1. Form S-3 File Number 33-31148
2. Form S-8 File Number 2-67125
3. Form S-8 File Number 2-76755
4. Form S-8 File Number 2-90255
5. Form S-8 File Number 33-34043
6. Form S-3 File Number 33-50553 and 33-50553-01
7. Form S-8 File Number 333-11019
8. Form S-3 File Number 333-82893 and 333-82893-01
9. Form S-8 File Number 333-73329
</TABLE>
KPMG
Singapore
March 24, 2000
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated March 3,
2000, on our audits of the consolidated balance sheets of Equilon Enterprises
LLC as of December 31, 1999 and 1998, and the related statements of consolidated
income, owners' equity and cash flows for the years then ended, included in the
Annual Report on Form 10-K of Texaco Inc. for the year ended December 31, 1999,
into the following previously filed Registration Statements:
<TABLE>
<S> <C> <C>
1. Form S-3 File Number 33-31148
2. Form S-8 File Number 2-67125
3. Form S-8 File Number 2-76755
4. Form S-8 File Number 2-90255
5. Form S-8 File Number 33-34043
6. Form S-3 File Number 33-50553 and 33-50553-01
7. Form S-8 File Number 333-11019
8. Form S-3 File Number 333-82893 and 333-82893-01
9. Form S-8 File Number 333-73329
</TABLE>
PricewaterhouseCoopers LLP Arthur Andersen LLP
Houston, Texas Houston, Texas
March 24, 2000 March 24, 2000
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated March
10, 2000, on our audits of the balance sheets of Motiva Enterprises LLC as of
December 31, 1999 and 1998, and the related statements of income, owners' equity
and cash flows for the year ended December 31, 1999 and the six months ended
December 31, 1998, included in the Annual Report on Form 10-K of Texaco Inc. for
the year ended December 31, 1999, into the following previously filed
Registration Statements:
<TABLE>
<S> <C> <C>
1. Form S-3 File Number 33-31148
2. Form S-8 File Number 2-67125
3. Form S-8 File Number 2-76755
4. Form S-8 File Number 2-90255
5. Form S-8 File Number 33-34043
6. Form S-3 File Number 33-50553 and 33-50553-01
7. Form S-8 File Number 333-11019
8. Form S-3 File Number 333-82893 and 333-82893-01
9. Form S-8 File Number 333-73329
</TABLE>
Arthur Andersen LLP
Deloitte & Touche LLP
PricewaterhouseCoopers LLP
Houston, Texas
March 24, 2000
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Chairman of the
Board and Chief Executive Officer of TEXACO INC., a Delaware corporation (the
"Company"), hereby appoints MICHAEL H. RUDY and DEVAL L. PATRICK, and either of
them (with full power to act without the other) as the undersigned's
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 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,
preferred stock and debt securities, 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 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, or either of them, 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 all other documents
in connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
1st day of January, 2000.
/S/ Peter I. Bijur
------------------
Peter I. Bijur
Chairman of the Board
and Chief Executive Officer
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Senior Vice
President and Chief Financial Officer of TEXACO INC., a Delaware corporation
(the "Company"), hereby appoints MICHAEL H. RUDY and DEVAL L. PATRICK, and
either of them (with full power to act without the other) as the undersigned's
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 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,
preferred stock and debt securities, 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 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, or either of them, 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 all other documents
in connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
1st day of January, 2000.
/S/ Patrick J. Lynch
--------------------
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, Comptroller and Chief
Accounting Officer of TEXACO INC., a Delaware corporation (the "Company"),
hereby appoints MICHAEL H. RUDY and DEVAL L. PATRICK, and either of them (with
full power to act without the other) as the undersigned's 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 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, preferred stock and debt
securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ George J. Batavick
----------------------
George J. Batavick
Comptroller and Chief Accounting Officer
(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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ A. Charles Baillie
----------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ 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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Edmund M. Carpenter
-----------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Michael C. Hawley
---------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Franklyn G. Jenifer
-----------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Sam Nunn
------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Charles H. Price, II
------------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Charles R. Shoemate
-----------------------
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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ 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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ 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 appoints MICHAEL H. RUDY
and DEVAL L. PATRICK, and either of them (with full power to act without the
other) as the undersigned's 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 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, preferred stock and debt securities, 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 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, or either of them, 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 all other documents in
connection with the foregoing, and take such other and further action as such
attorneys-in-fact and agents, or either of them, deem necessary or appropriate.
The powers and authorities granted herein to such attorneys-in-fact and agents,
and either of them, also include the full right, power and authority to effect
necessary or appropriate substitutions or revocations. The undersigned hereby
ratifies, confirms, and adopts, as the undersigned's 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, 2001.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the 1st
day of January, 2000.
/S/ Thomas A. Vanderslice
-------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TEXACO INC.'S 1999 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-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 419
<SECURITIES> 29
<RECEIVABLES> 4,087
<ALLOWANCES> 27
<INVENTORY> 1,182
<CURRENT-ASSETS> 5,963
<PP&E> 36,527
<DEPRECIATION> 20,967
<TOTAL-ASSETS> 28,972
<CURRENT-LIABILITIES> 5,668
<BONDS> 6,606
0
277
<COMMON> 2,136
<OTHER-SE> 9,629
<TOTAL-LIABILITY-AND-EQUITY> 28,972
<SALES> 34,975
<TOTAL-REVENUES> 35,691
<CGS> 27,442
<TOTAL-COSTS> 29,761
<OTHER-EXPENSES> 3,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504
<INCOME-PRETAX> 1,779
<INCOME-TAX> 602
<INCOME-CONTINUING> 1,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,177
<EPS-BASIC> 2.14<F1>
<EPS-DILUTED> 2.14
<FN>
<F1>EPS-PRIMARY REPRESENTS BASIC EARNINGS PER SHARE IN ACCORDANCE WITH STATEMENT
OF FINANCIAL ACCOUNTING STANDARD 128.
</FN>
</TABLE>
