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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 Commission file number 1-27
TEXACO INC.
(Exact name of the registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
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Texaco Inc. (1) HAS FILED all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) HAS BEEN subject to such filing requirements for the past 90 days.
As of October 31, 1996, there were outstanding 264,459,840 shares of Texaco
Inc. Common Stock - par value $6.25.
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PART I - FINANCIAL INFORMATION
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
---------------------------------------------------------------
(Millions of dollars, except per share amounts)
(Unaudited)
--------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995(a) 1996 1995(a)
---- ------- ---- -------
REVENUES
Sales and services $31,777 $26,237 $10,901 $ 8,621
Equity in income of affiliates, and income from
interest, asset sales and other 852 903 196 193
------- ------- ------- --------
32,629 27,140 11,097 8,814
------- ------- ------- --------
DEDUCTIONS
Purchases and other costs 24,526 20,062 8,399 6,556
Operating expenses 2,105 2,140 721 713
Selling, general and administrative expenses 1,205 1,159 406 411
Maintenance and repairs 266 272 88 88
Exploratory expenses 243 180 84 66
Depreciation, depletion and amortization 1,068 1,091 364 346
Interest expense 328 365 107 120
Taxes other than income taxes 361 361 129 115
Minority interest 50 43 17 13
------- ------- ------- --------
30,152 25,673 10,315 8,428
------- ------- ------- --------
Income from continuing operations before income
taxes and cumulative effect of accounting change 2,477 1,467 782 386
Provision for income taxes 968 488 348 96
------- ------- ------- --------
Net income from continuing operations before
cumulative effect of accounting change 1,509 979 434 290
Cumulative effect of accounting change - (121) - -
------- ------- ------- --------
NET INCOME $ 1,509 $ 858 $ 434 $ 290
======= ======= ======= ========
Preferred stock dividend requirements (43) (46) (14) (15)
------- ------- ------- --------
Net income available for common stock $ 1,466 $ 812 $ 420 $ 275
------- ------- ------- --------
Per common share (dollars)
Net income from continuing operations before
cumulative effect of accounting change $ 5.62 $ 3.60 $ 1.61 $ 1.06
Cumulative effect of accounting change - (.47) - -
------- ------- ------- --------
Net income $ 5.62 $ 3.13 $ 1.61 $ 1.06
======= ======= ======= ========
Cash dividends paid $ 2.45 $ 2.40 $ .85 $ .80
Average number of common shares outstanding
for computation of earnings per share
(thousands) 260,725 259,862 260,758 260,087
<FN>
(a) Previously reported results for 1995 have been reclassified and restated for the adoption of SFAS 121.
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
----------------------------------------------
(Millions of dollars)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 903 $ 501
Short-term investments - at fair value 42 35
Accounts and notes receivable, less allowance for doubtful
accounts of $36 million in 1996 and $28 million in 1995 4,019 4,177
Inventories 1,526 1,357
Net assets of discontinued operations - 164
Deferred income taxes and other current assets 204 224
------- -------
Total current assets 6,694 6,458
Investments and Advances 5,114 5,278
Properties, Plant and Equipment - at cost 32,143 31,492
Less - accumulated depreciation, depletion and amortization 19,097 18,912
------- -------
Net properties, plant and equipment 13,046 12,580
Deferred Charges 842 621
------- -------
Total $25,696 $24,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 584 $ 737
Accounts payable and accrued liabilities 3,711 3,777
Estimated income and other taxes 1,024 692
------- -------
Total current liabilities 5,319 5,206
Long-Term Debt and Capital Lease Obligations 5,044 5,503
Deferred Income Taxes 694 634
Employee Retirement Benefits 1,182 1,138
Deferred Credits and Other Noncurrent Liabilities 2,549 2,270
Minority Interest in Subsidiary Companies 672 667
------- -------
Total 15,460 15,418
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 479 495
Unearned employee compensation and benefit plan trust (403) (437)
Common stock (authorized: 350,000,000 shares, $6.25 par
value; 274,293,417 shares issued) 1,714 1,714
Paid-in capital in excess of par value 651 655
Retained earnings 8,027 7,186
Currency translation adjustment (35) 61
Unrealized net gain on investments 43 62
------- -------
10,776 10,036
Less - Treasury stock, at cost 540 517
------- -------
Total stockholders' equity 10,236 9,519
------- -------
Total $25,696 $24,937
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Millions of dollars)
(Unaudited)
-----------
For the nine months
ended September 30,
-------------------
1996 1995(a)
---- -------
OPERATING ACTIVITIES
Net income $1,509 $ 858
Reconciliation to net cash provided by (used in)
operating activities
Cumulative effect of accounting change - 121
Depreciation, depletion and amortization 1,068 1,091
Deferred income taxes 108 71
Exploratory expenses 243 180
Minority interest in net income 50 43
Dividends from affiliates, greater than (less than)
equity in income 141 (117)
Gains on asset sales (49) (289)
Changes in operating working capital 36 (451)
Other - net (55) 53
------ ------
Net cash provided by operating activities 3,051 1,560
INVESTING ACTIVITIES
Capital and exploratory expenditures (2,001) (1,666)
Proceeds from sale of discontinued operations, net of
cash and cash equivalents sold 344 -
Proceeds from sales of assets 99 1,043
Sale of leasehold interests 231 214
Purchases of investment instruments (1,390) (959)
Sales/maturities of investment instruments 1,436 964
Other - net 21 13
------ ------
Net cash used in investing activities (1,260) (391)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 125 94
Repayments (250) (287)
Net decrease in other borrowings (481) (301)
Purchases of common stock (59) -
Dividends paid to the company's stockholders
Common (638) (624)
Preferred (34) (36)
Dividends paid to minority shareholders (49) (46)
------ ------
Net cash used in financing activities (1,386) (1,200)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (3) (13)
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 402 (44)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 501 404
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 903 $ 360
====== ======
<FN>
(a) Previously reported results for 1995 have been reclassified and restated for the adoption of SFAS 121.
See accompanying notes to consolidated financial statements.
</FN>
-3-
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Change in Accounting Principle
- --------------------------------------
During 1995, Texaco adopted Statement of Financial Accounting Standards (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Under SFAS 121, assets whose carrying amounts are not
expected to be fully recovered by future use or disposition must be written down
to their fair values.
Adoption of SFAS 121 resulted in a non-cash after-tax charge of $639 million
against fourth quarter 1995 earnings. Additionally, in accordance with SFAS 121,
a $121 million after-tax write-down of non-core domestic producing properties
held for sale at January 1, 1995, previously recorded in the first quarter of
1995 in income from continuing operations, was reclassified as a cumulative
effect of an accounting change.
Adoption of SFAS 121 by Star Enterprise and the Caltex Group of Companies, each
owned 50% by Texaco, had no effect on 1995 net income.
Note 2. Discontinued Operations
- -------------------------------
On February 29, 1996, Texaco completed the disposition of its operations
classified as discontinued operations by completing the sale of its worldwide
lubricant additives business, which included manufacturing facilities, as well
as sales and marketing offices in various locations in the U.S. and abroad, to
Ethyl Corporation, a fuel and lubricant additives manufacturer. Ethyl purchased
this business for $196 million, comprised of $136 million in cash and a
three-year note of $60 million.
The results for Texaco's worldwide lubricant additives business had been
accounted for as discontinued operations and the assets and liabilities had been
classified in the Consolidated Balance Sheet at December 31, 1995 as "Net assets
of discontinued operations."
Revenues for the discontinued operations totaled $33 million for the first two
months of 1996, representing activities through the sale date, and $57 million
and $171 million for the third quarter and first nine months of 1995,
respectively.
Discontinued operations had no significant impact on the 1996 and 1995 results.
- 4 -
Note 3. Inventories
- -------------------
The inventories of Texaco Inc. and consolidated subsidiary companies were as
follows:
As of
--------------------------------------
September 30, December 31,
1996 1995
---- ----
(Unaudited)
(Millions of dollars)
Crude oil $ 354 $ 294
Petroleum products and other 972 866
Materials and supplies 200 197
------ ------
Total $1,526 $1,357
====== ======
Note 4. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 15 and 17, pages 57-58 and 60,
respectively, of Texaco Inc.'s 1995 Annual Report to Stockholders. With respect
to the Internal Revenue Service (IRS) claims discussed in Note 17, page 60, of
Texaco Inc.'s 1995 Annual Report to Stockholders, on October 17, 1996, the
United States Court of Appeals for the Fifth Circuit affirmed the 1993 U.S. Tax
Court decision in the so-called "Aramco Advantage" case and upheld Texaco's
position in this dispute with the IRS. Disposition of the amount remaining in
the Deposit Fund and interest will be determined when the IRS has exhausted its
legal options.
In the company's opinion, while it is impossible to ascertain the ultimate legal
and financial liability with respect to the company's contingent liabilities and
commitments, including lawsuits, claims, guarantees, taxes and regulations, the
aggregate amount of such liability in excess of financial reserves, together
with deposits and prepayments made against disputed tax claims, is not
anticipated to be materially important in relation to the consolidated financial
position or results of operations of Texaco Inc. and its subsidiaries.
- 5 -
Note 5. Caltex Group of Companies
- ---------------------------------
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% by Texaco and 50% by Chevron Corporation, is presented below and is
reflected on a 100% Caltex Group basis:
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions of dollars)
Gross revenues $13,365 $11,603 $4,205 $3,304
Income before income taxes $ 1,945 $ 1,034 $ 221 $ 202
Net income $ 1,082 $ 667 $ 93 $ 87
On April 2, 1996, Caltex Petroleum Corporation ("Caltex") completed the sale of
its 50% interest in Nippon Petroleum Refining Company, Limited to its partner
Nippon Oil Company for approximately $2 billion. Earnings relating to this sale
of some $630 million was recorded by Caltex in the second quarter of 1996.
Net income for the first nine months of 1995 included a first quarter net gain
for U.S. financial reporting of $171 million relating to the sale of a portion
of land and air utility rights by a Caltex affiliate in Japan required for a
public project.
* * * * * * * * * * *
In the preparation of preliminary and unaudited financial statements for the
nine-month and three-month periods ended September 30, 1996 and 1995, Texaco's
accounting policies have been applied on a basis consistent with the application
of such policies in Texaco's financial statements issued in its 1995 Annual
Report to Stockholders. In the opinion of Texaco, all adjustments and
disclosures necessary to present fairly the results of operations for such
periods have been made. These adjustments are of a normal recurring nature. The
information is subject to year-end audit by independent public accountants.
Texaco makes no forecasts or representations with respect to the level of net
income for the year 1996.
- 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Total worldwide net income for Texaco Inc. and subsidiary companies for the
third quarter of 1996 was $434 million, or $1.61 per share, as compared with
$290 million, or $1.06 per share, for the third quarter of 1995. Total net
income for the first nine months of 1996 was $1,509 million, or $5.62 per share,
as compared with $858 million, or $3.13 per share, for the first nine months of
1995. Both years included special items.
Net income before special items for the first nine months of 1996 totaled $1,285
million, or $4.76 per share. Net income before special items and the cumulative
effect of an accounting change for the first nine months of 1995 totaled $785
million, or $2.84 per share. Third quarter 1996 results had no special items.
For the third quarter of 1995, net income before special items was $288 million,
or $1.05 per share.
Net income for the first nine months of 1996 included a second quarter net
special gain of $224 million relating to the sale by Texaco's affiliate Caltex
Petroleum Corporation ("Caltex") of its interest in the Nippon Petroleum
Refining Company, Limited (NPRC). Net income for the third quarter and first
nine months of 1995 included $44 million in tax benefits realizable through the
sale of an interest in a subsidiary, a $27 million gain from the sale of
Texaco's interest in Pekin Energy Company, special charges of $56 million for
the cost of employee separations and $13 million for the restructuring of
certain Caltex operations. Net income for the first nine months of 1995 also
included first quarter net special gains of $205 million resulting from the sale
of non-core U.S. producing properties, partly offset by reserves for
environmental remediation of these properties of $13 million, and from the sale
of land by a Caltex affiliate in Japan. Nine months 1995 also included a $121
million non-cash charge from the write-down of non-core U.S. producing
properties held for sale at January 1, 1995, classified as a cumulative effect
of an accounting change in accordance with the 1995 adoption of Statement of
Financial Accounting Standards (SFAS) 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
On February 29, 1996, Texaco completed the sale of its worldwide lubricant
additives business for $196 million, comprised of $136 million in cash and a
three-year note of $60 million. This sale completed the disposition of the
operations classified as discontinued operations. Discontinued operations had no
significant impact on 1996 and 1995 results.
Results for 1996 and 1995 are summarized in the following table:
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions of Dollars)
Net income before special items and the cumulative
effect of accounting change $ 1,285 $ 785 $ 434 $ 288
Gain on sale of an interest in an affiliate 224 - - -
Gains on major asset sales - 232 - 27
Tax benefits on asset sales - 44 - 44
Employee separations costs - (56) - (56)
Other - (26) - (13)
------- ------ ----- ------
Net income before cumulative effect of
accounting change 1,509 979 434 290
Cumulative effect of accounting change - (121) - -
------- ------ ----- ------
Total net income $ 1,509 $ 858 $ 434 $ 290
======= ====== ===== ======
- 7 -
Texaco's higher worldwide crude oil and natural gas production and the
continuing strength in commodity prices led the company's strong third quarter
and year-to-date results. Texaco has been successful this year in reversing
previous production declines from maturing fields and non-core asset sales. The
company's success was bolstered by increased production from new fields in the
Gulf of Mexico, China and Angola, and improved recovery from existing fields,
most notably in the Kern River, Calif., and Partitioned Neutral Zone operations.
In the downstream sector, higher margins, increased branded gasoline sales
volumes and better operating performance at the company's refineries,
particularly on the West Coast, contributed to improved results in the United
States. However, in the international sector, results were lower this year as
the effects of intense competitive pressure in Europe and poor margins in the
Caltex operating areas more than offset solid results achieved by the company's
Latin American marketing operations.
The company has continued its strict commitment to cost containment throughout
its worldwide operations as shown by this year's decline in per barrel cash
operating expenses. In addition, strong earnings and cash flow, both important
measures of the company's plan for growth, enabled Texaco to increase its
quarterly dividend rate to $.85 per share in July and to maintain an aggressive
capital expenditure program this year. Year-to-date capital expenditures were
$2,252 million, up $208 million or 10 percent from last year, with the majority
of funds targeted to key upstream opportunities.
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the third quarter of 1996
were $262 million, as compared with $162 million for the third quarter of 1995.
For the first nine months of 1996 and 1995, earnings were $772 million and $595
million, respectively. Results for 1995 included a first quarter special gain of
$125 million principally resulting from the sale of non-core producing
properties partly offset by reserves for environmental remediation on these
properties of $13 million. Excluding the net special gain, first nine months of
1995 results totaled $483 million.
In the U.S. upstream operations, the strong growth in earnings for both the
comparative third quarter and nine months of 1996 resulted from increased crude
oil and natural gas production and higher prices. Increased crude oil, natural
gas liquids (NGL), and natural gas production, which in total are up 2.5 percent
for the year, reflects success in adding new production, most notably from the
Gulf of Mexico, and enhancing production from existing fields, primarily in the
Kern River, Calif., operations. This new production reverses previous declines
from maturing fields and non-core asset sales, and is in contrast to U.S. oil
industry statistics which indicate an overall decline in U.S. crude oil
production. Increased exploratory expenses for both the third quarter and nine
months reflect an increased level of exploration activity, and complement this
year's success in acquiring lease acreage and the discovery and development of
new prospects.
The Texaco U.S. average natural gas price for the third quarter of 1996 was $.50
per thousand cubic feet (MCF) higher than 1995, while the price for the nine
months of 1996 was $.48 per MCF higher than 1995. These price improvements were
primarily due to unusually cold weather earlier this year and the resulting
increase in industry demand to replenish depleted natural gas storage.
The 1996 average price for Texaco U.S. crude oil was $3.05 and $2.07 per barrel
higher for the third quarter and nine months, respectively. These higher prices
reflect increased demand combined with historically low inventory levels in 1996
and market uncertainty related to delays in the possible resumption of Iraqi
crude sales.
- 8 -
International
Exploration and production earnings outside the U.S. for the third quarter of
1996 were $132 million, as compared with $87 million for the third quarter of
1995. For the first nine months of 1996 and 1995, earnings were $365 million and
$253 million, respectively.
In the international upstream, results for both the third quarter and nine
months of 1996 benefited from higher crude oil prices. Additionally, crude oil
production increased primarily from activity in Angola, China and the
Partitioned Neutral Zone, located between Saudi Arabia and Kuwait. In Angola,
the production increases were the result of new offshore fields as well as the
resumption of onshore production early this year. Production increased in China
due to new fields and in the Partitioned Neutral Zone due to continuing
development programs. Lower production from maturing fields in the United
Kingdom (U.K.) and Australia partly offset overall production improvements for
the third quarter and nine months of 1996. Third quarter 1996 natural gas
production reflected the continued development of the Dolphin field in Trinidad.
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the third
quarter of 1996 were $94 million, as compared with $59 million for the third
quarter of 1995. For the first nine months of 1996 and 1995, earnings were $242
million and $70 million, respectively. Results for 1995 included third quarter
special charges of $11 million relating to employee separations. Excluding
special charges, results for the third quarter and first nine months of 1995
totaled $70 million and $81 million, respectively.
In the U.S. downstream operations, results for the third quarter and nine months
of 1996 benefited primarily from higher West Coast refinery margins as compared
to the same period of 1995. Although third quarter 1996 refining margins have
steadily deteriorated from their peak in May, they exceeded the depressed levels
of the comparable period of 1995.
The significant improvement in West Coast refining margins this year reflected
product price increases due to shortages resulting from regional refining
problems and new California gasoline formulation requirements during the first
half of the year when the seasonal increase in market demand occurred. Improved
refinery operations and continued cost containment efforts also contributed to
the improved 1996 results.
For the third quarter and nine months of 1996, marketing margins for most
refined products were lower than the comparable period of 1995. This was offset
partially by the continued strength in gasoline and diesel sales volumes, with
Texaco branded gasoline sales up more than three percent for both the
comparative third quarter and nine months. Additionally, downstream results for
the nine months of 1996 benefited from improved profits in the distribution and
transportation businesses, particularly in the second quarter.
International
Manufacturing, marketing and distribution earnings outside the U.S. for the
third quarter of 1996 were $37 million, as compared with $16 million for the
third quarter of 1995. For the first nine months of 1996 and 1995, earnings were
$433 million and $279 million, respectively. Results for the first nine months
of 1996 included a second quarter net special gain of $224 million relating to
the sale by Caltex of its interest in NPRC. Results for 1995 included a $42
million third quarter special charge relating to employee separations in
subsidiary operations and Caltex restructuring charges and first quarter net
special gains of $80 million, principally relating to the sale of land by a
Caltex affiliate in Japan. Excluding net special gains, first nine months of
1996 earnings totaled $209 million. For the third quarter and first nine months
of 1995, results excluding special items totaled $58 million and $241 million,
respectively.
In the international downstream, comparative third quarter and nine months 1996
earnings before special items reflected lower margins in both the Europe and
Caltex operating areas offset partially by improved results in Brazil from
increased volumes and higher product margins.
- 9 -
In Europe, marketing margins were significantly depressed from excess gasoline
supply and a highly competitive market, especially in the U.K., and only
partially offset by higher refining margins. In the Caltex operating markets,
significantly lower margins in Korea and Thailand, primarily due to higher crude
costs not fully recovered in the market, were somewhat offset by higher margins
in Bahrain and Singapore. Additionally, earnings in Japan were lower as a result
of the April 1996 sale of NPRC.
NONPETROLEUM
Nonpetroleum earnings for the third quarter and first nine months of 1996 were
$6 million and $11 million, respectively, as compared with $36 million and $47
million for the respective 1995 periods. Third quarter 1995 results included a
special gain of $27 million from the sale of the company's interest in Pekin
Energy Company. Excluding the special gain, results for the third quarter and
first nine months of 1995 totaled $9 million and $20 million, respectively.
Nonpetroleum results for 1996 reflected higher gasification licensing revenues,
while 1995 mainly reflected improved loss experience of insurance operations.
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the third quarter and first nine months
of 1996 were $97 million and $314 million, respectively, as compared with
charges of $70 million and $265 million for the respective periods of 1995. Nine
months 1995 included first quarter gains of $25 million, principally from sales
of equity securities held for investment by the insurance operations. The 1995
third quarter also included a special gain of $44 million related to tax
benefits realizable through the sale of an interest in a subsidiary and a
special charge of $16 million for employee separations.
On October 17, 1996 the United States Court of Appeals for the Fifth Circuit
affirmed the 1993 U.S. Tax Court decision in the so-called "Aramco Advantage"
case and upheld Texaco's position in this dispute with the Internal Revenue
Service (IRS). A favorable conclusion of this case could result in a significant
benefit to net income in 1997.
- 10 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1996, Texaco's cash, cash equivalents and short-term
investments totaled $945 million, as compared with the 1995 year-end level of
$536 million. Texaco's total cash provided by operating activities for the first
nine months of 1996 totaled $3.05 billion. Total cash provided by operating
activities for 1996 reflected strong operational earnings and a net inflow of
$430 million primarily comprised of a cash dividend from Caltex (related to the
sale of Caltex' interest in NPRC) and the collection of receivables (primarily
insurance recoveries relating to environmental matters) which were partially
offset by payments related to litigation and other matters.
During the first nine months of 1996, cash generated from operating activities,
proceeds from the sale of discontinued operations (discussed below) and proceeds
from normal asset sales were used to support Texaco's capital and exploratory
expenditures of $2,001 million, for payment of dividends to common, preferred
and minority shareholders of $721 million, and for the reduction of debt.
Total debt at September 30, 1996 amounted to $5.6 billion as compared with $6.2
billion at year-end 1995. Texaco's ratio of total debt to total borrowed and
invested capital was 34.0% at September 30, 1996, as compared with 38.0% at
year-end 1995. At September 30, 1996, Texaco's long-term debt included $688
million of debt scheduled to mature within one year, which the company has both
the intent and the ability to refinance on a long-term basis. The company
maintained a revolving credit facility with commitments of $2.0 billion, which
was unused at both September 30, 1996 and at year-end 1995. In November 1996,
the company decreased the amount of this credit facility to $1.5 billion, which
remains unused.
During the first nine months of 1996, Texaco received $231 million from the sale
of certain equipment leasehold interests in conjunction with a sale/leaseback
arrangement. In the aggregate, through September 30, 1996, Texaco has received
$479 million for these interests. Additional payments are expected to be
received over the remainder of 1996. The company expects to repurchase the total
interests, in early 1997, after the related equipment is placed in service.
During the first quarter of 1996, Texaco sold its worldwide lubricant additive
business for $196 million, comprised of $136 million in cash and a three-year
note of $60 million. Also during the first quarter of 1996, Texaco received $208
million from the prepayment of the note received as part of the consideration
for the 1994 sale of Texaco Chemical Company and related international chemical
operations to Huntsman Corporation.
During 1995, Texaco announced a stock repurchase program to buy up to $500
million of its common stock through open market or privately negotiated
transactions. Subject to market conditions and applicable regulatory
requirements, the stock repurchase program is expected to be completed in 1997.
The sale of a 15% interest in the company's Captain Field in the U.K. North Sea
to Korea Petroleum Development Corporation for approximately $210 million is
expected to be completed in early 1997.
In the third quarter of 1996, Texaco increased its quarterly dividend on its
common stock to 85 cents per share from 80 cents per share, an increase of 6.25
percent.
On October 17, 1996 the United States Court of Appeals for the Fifth
Circuit affirmed the 1993 U.S. Tax Court decision in the so-called "Aramco
Advantage" case and upheld Texaco's position in this dispute with the IRS. In
March 1988, prior to the commencement of the Tax Court action, Texaco, as a
condition of its emergence from Chapter 11 proceedings, made certain
cash deposits to the IRS in contemplation of potential tax claims. The
remaining portion of these deposits, together with interest, currently
exceed $700 million. Disposition of the deposits and interest will be
determined when the IRS has exhausted its legal options. A favorable
conclusion of this case could result in the receipt of a significant
portion of the deposits and interest in 1997.
The company considers its financial position sufficient to meet its anticipated
future financial requirements.
- 11 -
EMPLOYEE SEVERANCE PROGRAM
- --------------------------
On July 5, 1994, Texaco announced its plan for growth which included a series of
action steps to increase competitiveness and profitability. This program also
called for reductions in overhead, including reduced layers of supervision, and
improvements in operating efficiencies. Implementation of Texaco's program was
expected to result in the reduction of approximately 2,500 employees worldwide
by June 30, 1995, involving U.S. and international upstream and downstream
segments, as well as various support staff functions. During the second quarter
of 1994, Texaco recorded an after-tax charge of $88 million for the anticipated
severance costs associated with the employee reductions. As a result of the
continued successful application of its overhead reduction initiative, on
October 2, 1995, Texaco announced that it had expanded this program to include
approximately 1,500 additional employee separations worldwide by year-end 1996.
In this regard, in the third quarter of 1995, Texaco recorded an after-tax
charge of $56 million for the cost of these additional employee separations.
As of September 30, 1996, implementation of Texaco's program has included
reductions of approximately 4,400 employees worldwide with a related commitment
to severance payments of $209 million, or an after-tax cost of $143 million. Of
this pre-tax commitment, payments of $189 million have been made as of September
30, 1996.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures for continuing operations, including equity
in such expenditures of affiliates, were $2,252 million for the first nine
months of 1996, as compared with $2,044 million for the same period of 1995.
Expenditures for the third quarter of 1996 amounted to $815 million versus $772
million for the third quarter of 1995.
Increased U.S. exploration and development expenditures during 1996 reflect
solid opportunities in traditional offshore and key deepwater areas of the Gulf
of Mexico. Texaco continued its aggressive acquisition of acreage at the latest
Gulf of Mexico lease sale, adding to significant deepwater acreage acquired at
the federal lease sale earlier this year. Progress on design and construction
for the Petronius deepwater project continued during the third quarter.
Aggressive international upstream investment also continued this year as
increased expenditures focused in Colombia, Australia, Nigeria, the Partitioned
Neutral Zone and Denmark, while development work continues in the Captain and
Erskine Fields in the U.K. North Sea and in Indonesia.
Comparative downstream expenditure levels decreased due to the completion of
major refinery construction projects in Thailand and Singapore by Caltex and the
completion of refinery upgrades in the U.S. and Panama. Increased investments in
1996 relating to the Poseidon oil pipeline, which will service new deepwater and
subsalt oil production from the central Gulf of Mexico as well as selected
worldwide marketing investments particularly in Latin American growth areas and
by Caltex in Singapore, partially offset the decrease in refinery spending.
- 12 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 4 to the
Consolidated Financial Statements of this Form 10-Q, Item 1 of Texaco Inc.'s
Forms 10-Q for the quarterly periods ended March 31, 1996 and June 30, 1996 and
to Item 3 of Texaco Inc.'s 1995 Annual Report on Form 10-K, which are
incorporated herein by reference.
In addition, in March 1994 six current or former employees filed a purported
class action against the company in the United States District Court for the
Southern District of New York (District Court) alleging race discrimination
against African-American employees, principally with respect to promotions. The
District Court referred the matter to the Equal Employment Opportunity
Commission, which found some disparity in promotions in some pay grades for some
periods of time between African-American employees and other employees. In
November 1996, the plaintiffs filed in the District Court a motion for sanctions
alleging that Texaco concealed or withheld documents requested by the
plaintiffs. A hearing on that motion is scheduled for November 22, 1996.
On November 6, 1996, a purported derivative action was filed in the District
Court against Texaco Inc., as nominal defendant, its directors, and certain
current and former officers and employees. The suit alleges, among other things,
that the directors violated their fiduciary duties as a result of alleged
discriminatory employment practices, discovery abuses and violations of law by
the company. The suit seeks, among other things, the formation of an equal
opportunity committee and an oversight and litigation committee of the Board,
damages in the form of restitution of all costs and expenses to the company
resulting from the alleged violations, fees and expenses.
In addition, the company has received a subpoena from the office of the United
States Attorney for the Southern District of New York requesting the production
of documents related to the foregoing matters.
- 13 -
Item 5. Other Information
- -------------------------
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995(a) 1996 1995(a)
---- ------- ---- -------
(Millions of dollars)
FUNCTIONAL NET INCOME
- ---------------------
Operating earnings from continuing operations before cumulative
effect of accounting change Petroleum and natural gas
Exploration and production
United States $ 772 $ 595 $ 262 $ 162
International 365 253 132 87
------ ------ ----- -------
Total 1,137 848 394 249
Manufacturing, marketing and distribution
United States 242 70 94 59
International 433 279 37 16
------ ------ ----- -------
Total 675 349 131 75
------ ------ ----- -------
Total petroleum and natural gas 1,812 1,197 525 324
Nonpetroleum 11 47 6 36
------ ------ ----- -------
Total operating earnings 1,823 1,244 531 360
Corporate/Nonoperating (314) (265) (97) (70)
------ ------ ----- -------
Net income from continuing operations before
cumulative effect of accounting change 1,509 979 434 290
Cumulative effect of accounting change - (121) - -
------ ------ ----- -------
Net income $1,509 $ 858 $ 434 $ 290
====== ====== ===== =======
CAPITAL AND EXPLORATORY EXPENDITURES -
- --------------------------------------
INCLUDING EQUITY IN AFFILIATES
------------------------------
Exploration and production
United States $ 894 $ 619 $ 273 $ 232
International 762 727 312 289
------ ------ ----- -------
Total 1,656 1,346 585 521
------ ------ ----- -------
Manufacturing, marketing and distribution
United States 234 263 78 96
International 345 415 144 147
------ ------ ----- -------
Total 579 678 222 243
------ ------ ----- -------
Other 17 20 8 8
------ ------ ----- -------
Total 2,252 2,044 815 772
Discontinued operations - 2 - 1
------ ------ ----- -------
Total, including equity in affiliates $2,252 $2,046 $ 815 $ 773
====== ====== ===== =======
<FN>
(a) Previously reported results for 1995 have been reclassified and restated for the adoption of SFAS 121.
</FN>
- 14 -
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Exploration and Production
- --------------------------
United States
- -------------
Net production of crude oil and natural
gas liquids (000 BPD) 388 381 393 373
Net production of natural gas - available
for sale (000 MCFPD) 1,680 1,627 1,708 1,618
Total net production (000 BOEPD) 668 652 678 643
Natural gas sales (000 MCFPD) 3,100 3,162 3,059 3,046
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 208 214 191 207
Average U.S. crude (per bbl) $17.24 $15.17 $17.93 $14.88
Average U.S. natural gas (per mcf) $ 2.08 $ 1.60 $ 2.02 $ 1.52
Average WTI (Spot) (per bbl) $21.30 $18.52 $22.41 $17.85
Average Kern (Spot) (per bbl) $14.92 $13.90 $14.41 $13.84
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 115 117 115 118
Indonesia 143 149 146 153
Partitioned Neutral Zone 75 56 79 63
Other 62 55 65 56
------ ------ ------ ------
Total 395 377 405 390
Net production of natural gas - available
for sale (000 MCFPD)
Europe 182 210 162 172
Colombia 117 118 124 117
Other 66 52 77 46
------ ------ ------ ------
Total 365 380 363 335
Total net production (000 BOEPD) 456 440 466 446
Natural gas sales (000 MCFPD) 456 434 450 398
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 95 79 74 86
Average International crude (per bbl) $18.64 $16.32 $19.43 $15.45
Average U.K. natural gas (per mcf) $ 2.56 $ 2.63 $ 2.55 $ 2.55
Average Colombia natural gas (per mcf) $ .94 $ .87 $ .97 $ .92
- 15 -
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
Refinery input (000 BPD)
Subsidiary 405 391 417 406
Affiliate - Star Enterprise 320 300 325 297
----- ----- ----- -----
Total 725 691 742 703
Refined product sales (000 BPD)
Gasolines 499 448 515 458
Avjets 127 89 122 94
Middle Distillates 214 193 217 195
Residuals 65 53 70 66
Other 133 130 132 129
----- ----- ----- -----
Total 1,038 913 1,056 942
International
- -------------
Refinery input (000 BPD)
Europe 336 284 334 312
Affiliate - Caltex 368 441 340 451
Latin America/West Africa 64 37 68 43
----- ----- ----- -----
Total 768 762 742 806
Refined product sales (000 BPD)
Europe 453 453 431 487
Affiliate - Caltex 602 645 555 622
Latin America/West Africa 397 356 408 353
Other 61 75 39 54
----- ----- ----- -----
Total 1,513 1,529 1,433 1,516
- 16 -
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (3.2) Copy of By-Laws of Texaco Inc., as amended to and including
September 27, 1996.
-- (11) Computation of Earnings Per Share of Common Stock of Texaco Inc.
and Subsidiary Companies.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on a
Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (including portions of Texaco
Inc.'s Annual Report to Stockholders for the year 1995) and a
copy of Texaco Inc.'s Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1996 and June 30, 1996, as
previously filed by the Registrant with the Securities and
Exchange Commission, File
No. 1-27.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K:
During the third quarter of 1996, the Registrant filed a Current Report on
Form 8-K for the following event:
1. July 22, 1996 (date of earliest event reported: July 22, 1996)
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the second quarter 1996. Texaco appended as an exhibit
thereto a copy of the Press Release entitled "Texaco Reports Results
for the Second Quarter and First Half 1996," dated July 22, 1996.
- 17 -
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Texaco Inc.
-------------------------------
(Registrant)
By: R.C. Oelkers
-------------------------------
(Vice President and Comptroller)
By: R.E. Koch
-------------------------------
(Assistant Secretary)
Date: November 13, 1996
-----------------
- 18-