================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997 Commission file number 1-27
TEXACO INC.
(Exact name of the registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
Texaco Inc. (1) HAS FILED all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) HAS BEEN subject to such filing requirements for the past 90 days.
As of July 31, 1997, there were outstanding 264,107,386 shares of Texaco
Inc. Common Stock - par value $6.25.
================================================================================
PART I - FINANCIAL INFORMATION
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Millions of dollars, except per share amounts)
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Sales and services $22,796 $20,876 $10,983 $10,817
Equity in income of affiliates, interest, asset
sales and other 729 656 513 444
------- ------- ------- -------
23,525 21,532 11,496 11,261
------- ------- ------- -------
DEDUCTIONS
Purchases and other costs 17,969 16,127 8,671 8,345
Operating expenses 1,444 1,384 728 700
Selling, general and administrative expenses 792 799 395 399
Maintenance and repairs 171 178 84 90
Exploratory expenses 192 159 93 90
Depreciation, depletion and amortization 757 704 372 354
Interest expense 203 221 102 108
Taxes other than income taxes 268 232 129 127
Minority interest 37 33 16 17
------- ------- ------- -------
21,833 19,837 10,590 10,230
------- ------- ------- -------
Income before income taxes 1,692 1,695 906 1,031
Provision for income taxes 141 620 335 342
------- ------- ------- -------
NET INCOME $ 1,551 $ 1,075 $ 571 $ 689
======= ======= ======= =======
Preferred stock dividend requirements $ 28 $ 29 $ 14 $ 14
------- ------- ------- -------
Net income available for common stock $ 1,523 $ 1,046 $ 557 $ 675
======= ======= ======= =======
Per common share (dollars)
Net income $ 5.86 $ 4.01 $ 2.14 $ 2.59
Cash dividends paid $ 1.70 $ 1.60 $ .85 $ .80
Average number of common shares outstanding
for computation of earnings per share
(thousands) 260,080 260,709 260,090 260,764
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
(Millions of dollars)
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 564 $ 511
Short-term investments - at fair value 46 41
Accounts and notes receivable, less allowance for doubtful accounts
of $22 million and $34 million in 1997 and 1996, respectively 4,524 5,195
Inventories 1,632 1,460
Deferred income taxes and other current assets 289 458
------- -------
Total current assets 7,055 7,665
Investments and Advances 5,438 4,996
Properties, Plant and Equipment - at cost 34,462 33,988
Less - accumulated depreciation, depletion and amortization 20,878 20,577
------- -------
Net properties, plant and equipment 13,584 13,411
Deferred Charges 964 891
------- -------
Total $27,041 $26,963
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 472 $ 465
Accounts payable and accrued liabilities
Trade liabilities 2,524 3,472
Accrued liabilities 1,279 1,333
Estimated income and other taxes 1,156 914
------- -------
Total current liabilities 5,431 6,184
Long-Term Debt and Capital Lease Obligations 5,067 5,125
Deferred Income Taxes 809 795
Employee Retirement Benefits 1,204 1,236
Deferred Credits and Other Noncurrent Liabilities 2,459 2,593
Minority Interest in Subsidiary Companies 656 658
------- -------
Total 15,626 16,591
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 464 474
Unearned employee compensation and benefit plan trust (362) (378)
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 608 630
Retained earnings 9,376 8,292
Currency translation adjustment (80) (65)
Unrealized net gain on investments 32 33
------- -------
12,052 11,000
Less - Common stock held in treasury, at cost 637 628
------- -------
Total stockholders' equity 11,415 10,372
------- -------
Total $27,041 $26,963
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Millions of dollars)
(Unaudited)
-----------------------
For the six months
ended June 30,
-----------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net income $1,551 $1,075
Reconciliation to net cash provided by (used in)
operating activities
Receivable for refund of IRS deposits (700) -
Depreciation, depletion and amortization 757 704
Deferred income taxes 185 55
Exploratory expenses 192 159
Minority interest in net income 37 33
Dividends from affiliates, greater than (less than)
equity in income (144) 162
Gains on asset sales (287) (37)
Changes in operating working capital (89) 53
Other - net (52) (103)
------ ------
Net cash provided by operating activities 1,450 2,101
INVESTING ACTIVITIES
Capital and exploratory expenditures (1,451) (1,231)
Proceeds from sale of discontinued operations, net of
cash and cash equivalents sold - 344
Proceeds from sales of assets 742 87
Sale of leasehold interests - 147
Purchases of investment instruments (608) (970)
Sales/maturities of investment instruments 657 963
Other - net (142) 5
------ ------
Net cash used in investing activities (802) (655)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 221 113
Repayments (180) (222)
Net decrease in other borrowings (85) (576)
Purchases of common stock (36) (55)
Dividends paid to the company's stockholders
Common (441) (416)
Preferred (28) (29)
Dividends paid to minority shareholders (40) (35)
------ ------
Net cash used in financing activities (589) (1,220)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (6) (3)
------ ------
Increase during period 53 223
Beginning of year 511 501
------ ------
End of period $ 564 $ 724
====== ======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-3-
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Discontinued Operations
- -------------------------------
On February 29, 1996, Texaco completed the disposition of its operations
classified as discontinued operations by completing the sale of its worldwide
lubricant additives business to Ethyl Corporation for $136 million in cash and a
three-year note with a face amount of $60 million.
Revenues for the discontinued operations totaled $33 million for the first two
months of 1996, representing activities through the sale date.
Discontinued operations had no significant impact on 1996 results.
Note 2. Inventories
- -------------------
The inventories of Texaco Inc. and consolidated subsidiary companies were as
follows:
As of
--------------------------------------
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
(Millions of dollars)
Crude oil $ 440 $ 296
Petroleum products and petrochemicals 923 904
Other merchandise 42 58
Materials and supplies 227 202
------ ------
Total $1,632 $1,460
====== ======
Note 3. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 14 and 16, pages 63-64 and 67,
respectively, of Texaco Inc.'s 1996 Annual Report to Stockholders.
With respect to the U.S. Internal Revenue Service (IRS) claims discussed in Note
16, page 67, of Texaco Inc.'s 1996 Annual Report to Stockholders, on April 21,
1997 the U.S. Supreme Court decided not to review the decisions of the U.S.
Court of Appeals for the Fifth Circuit and the U.S. Tax Court in the so-called
"Aramco Advantage" case. As a result of this decision by the Supreme Court,
Texaco recognized an after-tax earnings benefit of $488 million in the first
quarter 1997, representing the expected refund of the balance of deposits made
to the IRS in previous years for potential tax claims and accrued interest. The
expected refund, including interest, exceeds $700 million. A significant portion
of the refund is expected to be received in 1997.
----------
In the company's opinion, while it is impossible to ascertain the ultimate legal
and financial liability with respect to contingent liabilities and commitments,
including lawsuits, claims, guarantees, taxes and regulations, the aggregate
amount of such liability in excess of financial reserves is not anticipated to
be materially important in relation to the consolidated financial position or
results of operations of Texaco Inc. and its subsidiaries.
- 4 -
Note 4. Caltex Group of Companies
- ---------------------------------
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% each by subsidiaries of Texaco and Chevron Corporation, is presented
below and is reflected on a 100% Caltex Group basis:
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of dollars)
Gross revenues $9,127 $9,160 $4,433 $4,999
Income before income taxes $ 639 $1,724 $ 319 $1,410
Net income $ 386 $ 989 $ 200 $ 794
On April 2, 1996, Caltex Petroleum Corporation ("Caltex") completed the sale of
its 50% interest in Nippon Petroleum Refining Company, Limited to its partner
Nippon Oil Company for approximately $2 billion. Caltex' net income for the
second quarter of 1996 included a gain of $621 million associated with this
sale.
Effective April 1, 1997, Caltex' 40% interest in its Bahrain refining joint
venture (Bapco) was sold to the Government of the State of Bahrain at
approximately net book value.
On June 17, 1997, Caltex received a claim from the IRS for $292 million in
excise taxes, plus penalties and interest. The IRS claim relates to crude oil
sales to Japanese customers beginning in 1980. Prior to 1980, Caltex directly
supplied crude oil to its Japanese customers. In 1980, a Caltex subsidiary,
Caltex Trading and Transport Corporation, also became a contractual supplier of
crude oil to the Japanese customers. The IRS position is that this was a
transfer of property, and thus taxable. Caltex is challenging the claim and
fully expects to prevail, since the addition of another supplying company was
not a taxable event. Additionally, Caltex believes the claim is based on an
overstated value. Finally, Caltex disagrees with the imposition and calculation
of interest and penalties. Just as Caltex believes the underlying excise tax
claim is wrong, Caltex also believes the related claim for approximately $140
million in penalties is equally wrong and the IRS claim for almost $1.6 billion
in interest charges is flawed. Caltex believes that the likelihood that it will
pay these charges is remote.
Note 5. Subsequent Events
- -------------------------
On July 25, 1997, the company's Board of Directors approved a two-for-one split
of the company's common stock effected in the form of a 100% stock dividend. The
additional shares will be distributed on September 29, 1997, to shareholders of
record on September 11, 1997.
The Board's action follows the approval by shareholders at the company's
1997 Annual Meeting to increase the number of authorized common shares to
700,000,000 and halve the par value to $3.125 per share.
- 5 -
The proforma effect of the stock split would be as follows:
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
Average number of common shares outstanding for
computation of earnings per share (thousands)
As reported 260,080 260,709 260,090 260,764
Split basis 520,161 521,418 520,180 521,528
Net income per common share
As reported $5.86 $4.01 $2.14 $2.59
Split basis $2.93 $2.01 $1.07 $1.29
The company also announced an increase in its quarterly dividend on its common
stock to 90 cents per share from 85 cents per share, on a pre-split basis. This
quarterly cash dividend will be payable on September 10, 1997 to shareholders of
record on August 5, 1997.
* * * * * * * * * * *
In the determination of preliminary and unaudited financial statements for the
six-month and three-month periods ended June 30, 1997 and 1996, Texaco's
accounting policies have been applied on a basis consistent with the application
of such policies in Texaco's financial statements issued in its 1996 Annual
Report to Stockholders. In the opinion of Texaco, all adjustments and
disclosures necessary to present fairly the results of operations for such
periods have been made. These adjustments are of a normal recurring nature. The
information is subject to year-end audit by independent public accountants.
Texaco makes no forecasts or representations with respect to the level of net
income for the year 1997.
- 6 -
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
second quarter of 1997 was $571 million, or $2.14 per share, as compared with
$689 million, or $2.59 per share, for the second quarter of 1996. Total net
income for the first six months of 1997 was $1,551 million, or $5.86 per share,
as compared with $1,075 million, or $4.01 per share, for the first six months of
1996. Both years included special items.
Net income before special items for the second quarter of 1997 was $440 million,
or $1.64 per share, as compared with $465 million, or $1.73 per share, for the
second quarter of 1996. For the first half of 1997, net income before special
items was $932 million, or $3.48 per share, as compared with $851 million, or
$3.15 per share, for the first half of 1996.
Volume growth in both the upstream and downstream and a continuing commitment to
manage per barrel operating expenses were key drivers of Texaco's strong second
quarter performance. However, abundant supplies of crude oil and products have
put downward pressure on commodity prices and downstream margins.
During the second quarter of 1997:
o Worldwide daily production rose four percent.
o Branded gasoline sales in the U.S. increased two percent.
o Year-to-date capital and exploratory expenditures grew 25 percent to
$1.8 billion.
o Expenses per barrel continued to be managed at levels below
inflation.
In Texaco's upstream business, the successful push to increase production,
especially in the United Kingdom and Partitioned Neutral Zone, is key to the
company's results. But, while production rose in this year's second quarter,
unanticipated start-up problems slowed expected production in the U.K. Captain
Field. Overall, earnings for this year's second quarter were slightly below last
year. Commodity prices this year were lower, and the company increased
exploratory spending focused on expanding its reserve base. International
downstream results were higher this year. Earnings grew in Latin America and
margins in Europe improved over depressed 1996 levels. However, in the U.S.
downstream, 1997 results were significantly lower. A surplus of refined
products, especially on the West Coast, and lackluster demand in the marketplace
drove prices downward, negating the effects of improved refining operations and
higher gasoline sales volumes.
In this year's second quarter, increased capital and exploratory spending
accompanied the company's announcements of natural gas discoveries in Oklahoma
and New Mexico, government approval of Texaco's Hamaca heavy oil project in
Venezuela, the completion of a significant geothermal well in Indonesia and
expansions of the company's natural gas liquids and refined products pipeline
systems. Also, negotiations with Shell continued to combine major elements of
Texaco's U.S. downstream operations.
Results for 1997 and 1996 are summarized in the following table. Details on
special items are included in the functional analysis which follows this table.
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of Dollars)
Net income before special items $ 932 $ 851 $440 $ 465
------ ------ ---- ------
Gains on major asset sales 174 224 174 224
Financial reserves for various issues (43) - (43) -
U.S. tax issue 488 - - -
------ ------ ---- ------
619 224 131 224
------ ------ ---- ------
Total net income $1,551 $1,075 $571 $ 689
====== ====== ==== ======
- 7 -
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the second quarter of 1997
were $189 million, as compared with $243 million for the second quarter of 1996.
For the first six months of 1997 and 1996, earnings were $500 million and $510
million, respectively. Results for 1997 included a second quarter special charge
of $43 million for the establishment of financial reserves for royalty and
severance tax issues. Excluding the special charge, results for the second
quarter and first six months of 1997 totaled $232 million and $543 million,
respectively.
In the U.S. upstream, lower commodity prices caused second quarter 1997 earnings
to be below last year's level. Excess supplies in the global market led to the
price declines. Average realized crude oil and natural gas prices for the second
quarter of 1997 were $16.95 per barrel and $2.02 per thousand cubic feet (MCF),
respectively, which were $.35 per barrel and $.05 per MCF, respectively, lower
than the same period last year.
Earnings before special items for the first half of 1997 were six percent above
1996. The effects of higher commodity prices in the first quarter significantly
exceeded the second quarter price declines. Lower gas trading results and higher
exploratory activity, mostly in the Gulf of Mexico, partly negated the impact of
higher prices.
Liquids and natural gas production in 1997 was maintained at prior-year levels.
Continued success in enhancing liquids production from existing fields,
particularly in the Gulf of Mexico and Louisiana, offset declines from maturing
fields.
International
Exploration and production earnings outside the U.S. for the second quarter of
1997 were $240 million, as compared with $103 million for the second quarter of
1996. For the first six months of 1997 and 1996, earnings were $396 million and
$233 million, respectively. Results for 1997 included second quarter special
gains of $161 million from the sales of a 15 percent interest in the Captain
Field in the U.K. North Sea, an interest in Canadian gas properties and an
interest in an Australian pipeline system. Excluding the special gains, results
for the second quarter and first six months of 1997 totaled $79 million and $235
million, respectively.
In the international upstream, higher production had a favorable impact on 1997
results. Total daily production in 1997 increased 11 percent over last year. New
production from the Captain Field in the U.K. North Sea contributed to the
increase. Also, new activities coming onstream late in 1996 in the Wafra field
in the Partitioned Neutral Zone, between Saudi Arabia and Kuwait, in the Bagre
Field offshore Angola and in the Danish North Sea led to higher liquids
production. Natural gas production in 1997 benefited from a full six months
operations at the Dolphin Field in Trinidad and from the Chuchupa "B" Field in
Colombia. Crude oil prices were lower in 1997. Average crude oil prices were
$16.91 per barrel for the second quarter, $1.50 per barrel below comparative
1996 prices.
Significantly higher activity levels associated with Texaco's aggressive
exploration program contributed to lower overall results for the second quarter
of 1997. Additionally, earnings for 1997 included lower gas trading results in
the U.K.
- 8 -
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the second
quarter of 1997 were $100 million, as compared with $144 million for the second
quarter of 1996. For the first six months of 1997 and 1996, earnings were $106
million and $148 million, respectively. Results for 1997 included a second
quarter special gain of $13 million from the sale of credit card operations.
Excluding the special gain, results for the second quarter and first six months
of 1997 totaled $87 million and $93 million, respectively.
In the U.S. downstream, weak West Coast margins caused lower earnings in the
second quarter and first half of 1997. West Coast product prices were higher in
1996 from shortages caused by regional refining problems and new California
gasoline formulation requirements. Throughout the first half of 1997 branded
gasoline sales volumes increased; however, surplus supplies led to a squeeze on
West Coast gasoline margins. Additionally, while refinery operations improved
this year, refinery upsets in late 1996 and early 1997 caused higher repair
costs and lower product yields in the first quarter of 1997. Lower crude oil
trading margins, cleanup costs associated with the Lake Barre, Louisiana
pipeline break and the absence of earnings from a PO/MTBE business sold on March
1, 1997, also lowered 1997 results. Partially offsetting these negative factors
were improved Gulf Coast sour crude cracking margins.
International
Manufacturing, marketing and distribution earnings outside the U.S. for the
second quarter of 1997 were $132 million, as compared with $304 million for the
second quarter of 1996. For the first six months of 1997 and 1996, earnings were
$236 million and $396 million, respectively. Results for 1996 included a first
quarter special gain of $224 million for Caltex' sale of its interest in a
Japanese affiliate, including the tax on the portion of the sale proceeds
distributed to the shareholders. Excluding the special gain, results for the
second quarter and first six months of 1996 totaled $80 million and $172
million, respectively.
In the international downstream, both second quarter and first half 1997
operating earnings before special items were higher. Improved refining margins
in the U.K. and Panama drove earnings upward this year. In addition, expense
control at all refineries coupled with improved marketing margins and increased
sales volumes in Latin America and the U.K. contributed to the higher earnings.
Competitive pressures in the Norwegian marketplace led to lower results in
Scandinavia.
Lower results in the Caltex area of operations partially offset the improved
earnings in Latin America and Europe. Higher operating earnings in Korea were
more than offset by currency impacts attributable to the South African Rand, and
operational difficulties at the Thailand refinery that adversely affected
product yields.
NONPETROLEUM
Nonpetroleum earnings for the second quarter of 1997 were $1 million, as
compared with $3 million for the second quarter of 1996. For the first six
months of 1997 and 1996, earnings were $13 million and $5 million, respectively.
- 9 -
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the second quarter of 1997 were $91
million, as compared with charges of $108 million for the second quarter of
1996. Corporate and nonoperating earnings for the first six months of 1997 were
$300 million, as compared with charges of $217 million for the first six months
of 1996. Results for the first six months of 1997 included a first quarter
special benefit of $488 million associated with the "Aramco Advantage" U.S. tax
case. Excluding this benefit, corporate and nonoperating charges totaled $188
million for the first six months of 1997.
Reduced interest expense due to lower debt levels and slightly lower interest
rates led to a comparative improvement in second quarter and first half 1997
results. Additionally, these results included higher gains on sales of
marketable securities held for investment by insurance operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Texaco's cash, cash equivalents and short-term investments totaled $610 million
at June 30, 1997, as compared with $552 million at year-end 1996. Cash provided
by operating activities of $1.5 billion for the first six months of 1997,
supplemented by proceeds of $742 million from the sale of nonstrategic assets,
exceeded outlays of $1.5 billion relative to the company's capital and
exploratory program, $509 million for payment of dividends to common, preferred
and minority interest shareholders and $80 million for the reduction of debt and
purchases of common stock.
At June 30, 1997, Texaco's ratio of total debt to total borrowed and invested
capital was 31.5%, as compared with 33.6% at year-end 1996. This improvement
reflected strong operating results, the favorable resolution of the "Aramco
Advantage" case and a reduction in debt to $5.5 billion from $5.6 billion at
year-end 1996. At June 30, 1997, Texaco's long-term debt included $968 million
of debt scheduled to mature within one year, which the company has both the
intent and the ability to refinance on a long-term basis. The company maintained
a revolving credit facility with commitments of $1.5 billion, which was unused
at both June 30, 1997 and at year-end 1996.
During the first quarter of 1997, the company issued $150 million of 7.09%
Noncallable Notes Due 2007. Proceeds from this offering were used for working
capital, retirement of existing debt and other general corporate purposes.
As of June 30, 1997, $199 million has been expended under the $500 million
common stock repurchase program announced in 1995, of which $36 million was
expended during the first six months of 1997. The company will continue
repurchasing shares from time to time based on market conditions.
During the first six months of 1997, the company completed various sales, as
follows:
o In March, Texaco exercised an option to terminate a lease arrangement
and obtained ownership of the assets used in its propylene oxide/methyl
tertiary butyl ether (PO/MTBE) business. Concurrent with this
transaction, Texaco sold the PO/MTBE business to a Huntsman Corporation
affiliate for cash and preferred stock. The cash proceeds of $512
million were used to substantially offset the cost of exercising the
option. The preferred stock, with a stated value of $65 million, is
mandatorily redeemable in eleven years.
o During April, the company finalized the sale of a 15% interest in its
U.K. North Sea Captain Field to an affiliate of Korea Petroleum
Development Corporation for approximately $210 million. Of this total
amount, $20 million was received during the first quarter of 1996.
o In April, the company sold its interests in certain producing
operations in Canada for approximately $80 million.
o In May, the company completed the previously announced sale of its
credit card services unit, including its portfolio of proprietary
credit card accounts receivable, to Associates First Capital
Corporation, an indirect majority-owned subsidiary of the Ford Motor
Company. As a result of this sale, Texaco received cash proceeds of
approximately $300 million for its proprietary credit card accounts
receivable and associated processing assets.
- 10 -
On April 21, 1997, the United States Supreme Court decided not to review the
decisions of the U.S. Court of Appeals for the Fifth Circuit and the U.S. Tax
Court in the so-called "Aramco Advantage" case. In previous years, Texaco made
payments, with associated interest, to the IRS for potential tax claims. As a
result of the Supreme Court action, Texaco expects a refund in excess of $700
million, which represents the remaining balance of these deposits and accrued
interest. A significant portion of the refund is expected to be received in
1997.
On July 25, 1997, Texaco's Board of Directors approved a two-for-one split of
the company's common stock effected in the form of a 100% stock dividend. The
additional shares will be distributed on September 29, 1997, to shareholders of
record on September 11, 1997. The company also announced an increase in its
quarterly dividend on its common stock to 90 cents per share from 85 cents per
share, on a pre-split basis, representing an increase of 5.9 percent. This
quarterly cash dividend will be payable on September 10, 1997 to shareholders of
record on August 5, 1997.
On August 5, 1997, the company issued $200 million of 3.50% Cash-Settled
Convertible Notes Due 2004. Concurrently with the issuance of these Notes, the
company entered into an arrangement that effectively converts its interest cost
relative to these Notes into a LIBOR-based floating rate and fixes Texaco's cost
of future conversions at the face amount of the Notes. Proceeds from this
offering will be used for working capital, retirement of existing debt and other
general purposes. On August 12, 1997 Texaco repurchased certain equipment
leasehold interests in conjunction with a sale/leaseback arrangement for
somewhat less than the proceeds received. Through June 30, 1997, Texaco had
received $509 million and an additional $20 million in July, 1997 for those
leasehold interests.
The company considers it financial position sufficient to meet its anticipated
future financial requirements.
EMPLOYEE SEVERANCE PROGRAM
- --------------------------
On October 30, 1996, Texaco announced a companywide realignment designed to
enhance the company's ability to grow existing and new businesses. This
realignment, coupled with other organizational enhancements such as the
consolidation of operations, is designed to stimulate growth and improve
efficiencies in both support and operating functions. However, it is expected
that some overlapping activities will be eliminated resulting in the reduction
of some 750 employees worldwide by the end of 1997. An after-tax provision of
$56 million was recorded in the fourth quarter of 1996 to cover the costs of
employee separations, including employees of affiliates. Through June 30, 1997,
approximately 750 employees have been terminated with a related commitment to
severance payments of $30 million after-tax. Of this commitment, payments of $18
million have been made and charged against the reserve as of June 30, 1997. The
remaining reserve balance will be used for ongoing employee separation benefits
relating principally to affiliates, for which Texaco is responsible.
NEW ACCOUNTING STANDARD
- -----------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 128, Earnings per Share. Under SFAS 128,
companies currently required to report primary and fully diluted earnings per
share (EPS), will instead report basic and diluted EPS, respectively. Currently,
primary EPS considers the average number of common shares outstanding and the
potential dilution that would result if conversion rights associated with
certain outstanding securities were exercised. Fully diluted EPS considers all
potentially dilutive securities. Basic EPS, which will replace primary EPS, does
not consider any potential dilution. Diluted EPS is essentially similar to fully
diluted EPS.
Texaco must adopt SFAS 128 for its fiscal year 1997 financial statements and, at
that time, restate the per share amounts of prior periods. Amounts to be
reported as basic and diluted EPS in accordance with the new Statement will not
differ significantly from previously reported primary and fully diluted EPS.
- 11 -
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures, including equity in such expenditures of
affiliates, were $1,798 million for the first half of 1997, as compared with
$1,437 million for the same period of 1996. Expenditures for the second quarter
of 1997 amounted to $999 million versus $796 million for the second quarter of
1996.
Texaco's continued focus on high impact projects in the U.S. upstream, both
onshore and offshore, generated increased exploration and development
expenditures in the first half of 1997. In the deepwater Gulf of Mexico,
platform construction and development drilling continued in the Arnold and
Petronius fields while delineation drilling is underway in the Fuji and Gemini
prospects. Aggressive drilling and development programs in the traditional
offshore shelf area and onshore, as well as enhanced oil recovery efforts in
California, also increased investments. Construction continued during the second
quarter on a jointly owned natural gas pipeline and processing complex in the
Gulf Coast area. There was, however, reduced spending this year on lease
acquisitions compared to significant expenditures in 1996.
Internationally, upstream investments for the first half of 1997 exceeded the
aggressive activity level of 1996. Higher expenditures reflected development
work in the U.K. North Sea, principally for continuing activities in the Mariner
and Galley fields. Exploration and development activities continued in China and
Indonesia.
Downstream expenditures in the U.S. declined slightly in 1997. While spending
for refinery upgrades and marketing investment decreased, construction continued
on a major crude oil pipeline that will service new deepwater and subsalt
production in the Gulf of Mexico.
Internationally, downstream spending increased due to marketing investments and
initiatives in the Asia-Pacific area by Texaco's affiliate, Caltex Petroleum
Corporation, principally in Hong Kong. Texaco also continued to invest in
selected Latin American growth markets.
- 12 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 3 to the
Consolidated Financial Statements of this Form 10-Q, Item 1 of Texaco Inc.'s
Form 10-Q for the quarterly period ended March 31, 1997 and to Item 3 of Texaco
Inc.'s 1996 Annual Report on Form 10-K, which are incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Annual Meeting of the Stockholders of Texaco Inc. was held on May 13, 1997,
for the purpose of (1) electing four directors, (2) approving the appointment of
auditors for the year 1997, (3) amending the Certificate of Incorporation to
increase the number of authorized shares and reduce the par value, (4) approving
the Incentive Compensation Program of 1997 and (5) acting on three stockholder
proposals concerning the establishment of a shareholders' advisory committee,
classification of the Board of Directors and diversity on the Board of
Directors. The following summarizes the stockholder voting results:
Stockholders elected Dr. Franklyn G. Jenifer and Messrs. Willard C. Butcher,
Edmund M. Carpenter and Thomas A. Vanderslice, each for a three-year term
expiring at the 2000 Annual Meeting. The vote tabulation for each individual
director was as follows:
Director Shares Voted for % of Vote Shares Withheld
-------- ---------------- --------- ---------------
Willard C. Butcher 231,977,862 97.9 5,005,642
Edmund M. Carpenter 232,455,636 98.1 4,527,868
Franklyn G. Jenifer 232,168,142 98.0 4,815,362
Thomas A. Vanderslice 232,359,728 98.0 4,623,776
Directors continuing in office were Dr. John Brademas, Mrs. Robin B. Smith, and
Messrs. Peter I. Bijur, Michael C. Hawley, Allen J. Krowe, Thomas S. Murphy,
Charles H. Price II, William C. Steere and William Wrigley. Mr. Krowe, upon
reaching the company's mandatory retirement age, retired from the company
effective July 1, 1997 and resigned from the Board of Directors also effective
July 1, 1997.
The appointment of Arthur Andersen LLP to audit the accounts of the company and
its subsidiaries for the fiscal year 1997 was approved. Of those shares voted,
234,279,670 shares, or 99.3% voted in favor, 1,796,133 shares, or .7% voted
against, and 934,700 shares abstained.
The proposal to amend the Certificate of Incorporation as set forth in Item 3 of
the 1997 Proxy Statement, was approved. Of those shares voted, 217,469,056
shares, or 92.5% voted in favor, 17,656,932 shares, or 7.5% voted against, and
1,857,511 shares abstained.
The proposal to approve the Incentive Compensation Program of 1997 was approved.
Of those shares voted, 173,228,950 shares, or 83.4% voted in favor, 34,517,604
shares, or 16.6% voted against and 2,763,394 shares abstained.
Stockholders rejected the three stockholder proposals. The proposal relating to
the establishment of a shareholders' advisory committee, as set forth in Item 5
of the 1997 Proxy Statement, was rejected by a vote of 195,647,188 shares, or
95.4%, against. Shares voting for the proposal totaled 9,439,366 shares, or
4.6%, and 5,423,800 shares abstained.
The proposal relating to the classification of the Board of Directors, as set
forth in Item 6 of the 1997 Proxy Statement, was rejected by a vote of
111,287,711 shares, or 53.7%, against. Shares voting for the proposal totaled
96,017,962 shares, or 46.3%, and 3,264,677 shares abstained.
The proposal relating to diversity on the Board of Directors, as set forth in
Item 7 of the 1997 Proxy Statement, was rejected by a vote of 182,925,982
shares, or 89.3%, against. Shares voting for the proposal totaled 21,940,019
shares, or 10.7%, and 5,643,949 shares abstained.
- 13 -
Item 5. Other Information
- -------------------------
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of dollars)
FUNCTIONAL NET INCOME
- ---------------------
Operating earnings
Petroleum and natural gas
Exploration and production
United States $ 500 $ 510 $ 189 $ 243
International 396 233 240 103
------ ------ ------ ------
Total 896 743 429 346
------ ------ ------ ------
Manufacturing, marketing and distribution
United States 106 148 100 144
International 236 396 132 304
------ ------ ------ ------
Total 342 544 232 448
------ ------ ------ ------
Total petroleum and natural gas 1,238 1,287 661 794
Nonpetroleum 13 5 1 3
------ ------ ------ ------
Total operating earnings 1,251 1,292 662 797
Corporate/Nonoperating 300 (217) (91) (108)
------ ------ ------ ------
Total net income $1,551 $1,075 $ 571 $ 689
====== ====== ====== ======
CAPITAL AND EXPLORATORY EXPENDITURES -
- --------------------------------------
INCLUDING EQUITY IN AFFILIATES
------------------------------
Exploration and production
United States $ 781 $ 621 $ 429 $ 355
International 546 450 264 243
------ ------ ------ ------
Total 1,327 1,071 693 598
------ ------ ------ ------
Manufacturing, marketing and distribution
United States 152 156 92 79
International 308 201 207 114
------ ------ ------ ------
Total 460 357 299 193
------ ------ ------ ------
Other 11 9 7 5
------ ------ ------ ------
Total, including equity in affiliates $1,798 $1,437 $ 999 $ 796
====== ====== ====== ======
Texaco Inc. and subsidiary companies
Exploratory expenses included above:
United States $ 76 $ 67 $ 34 $ 44
International 116 92 59 46
------ ------ ------ ------
Total $ 192 $ 159 $ 93 $ 90
====== ====== ====== ======
- 14 -
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Exploration and Production
- --------------------------
United States
- -------------
Net production of crude oil and natural
gas liquids (000 BPD) 385 387 385 391
Net production of natural gas - available
for sale (000 MCFPD) 1,666 1,666 1,677 1,685
------ ------ ------ ------
Total net production (000 BOEPD) 663 665 665 672
Natural gas sales (000 MCFPD) 3,700 3,120 3,561 3,007
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 188 216 172 188
Average U.S. crude (per bbl) $18.29 $16.90 $16.95 $17.30
Average U.S. natural gas (per mcf) $ 2.36 $ 2.11 $ 2.02 $ 2.07
Average WTI (Spot) (per bbl) $21.38 $20.74 $19.97 $21.73
Average Kern (Spot) (per bbl) $15.07 $15.18 $14.11 $15.46
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 116 115 118 110
Indonesia 147 140 153 144
Partitioned Neutral Zone 92 74 94 75
Other 67 60 68 60
------ ------ ------ ------
Total 422 389 433 389
Net production of natural gas - available
for sale (000 MCFPD)
Europe 207 192 172 180
Colombia 156 113 173 111
Other 93 60 83 66
------ ------ ------ ------
Total 456 365 428 357
Total net production (000 BOEPD) 498 450 504 449
Natural gas sales (000 MCFPD) 574 459 528 442
Natural gas liquids sales - (including
purchased LPGs) (000 BPD) 93 106 104 95
Average International crude (per bbl) $18.22 $18.25 $16.91 $18.41
Average U.K. natural gas (per mcf) $ 2.73 $ 2.56 $ 2.59 $ 2.48
Average Colombia natural gas (per mcf) $ 1.09 $ .93 $ 1.12 $ .92
- 15 -
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING DATA - INCLUDING INTERESTS
- ------------------------------------
IN AFFILIATES
-------------
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
Refinery input (000 BPD)
Subsidiary 413 399 418 403
Affiliate - Star Enterprise 332 317 328 318
----- ----- ----- -----
Total 745 716 746 721
Refined product sales (000 BPD)
Gasolines 505 491 512 507
Avjets 92 129 94 127
Middle Distillates 215 212 216 205
Residuals 72 62 59 62
Other 119 133 117 133
----- ----- ----- -----
Total 1,003 1,027 998 1,034
International
- -------------
Refinery input (000 BPD)
Europe 341 337 335 340
Affiliate - Caltex 411 383 414 266
Latin America/West Africa 59 62 55 66
----- ----- ----- -----
Total 811 782 804 672
Refined product sales (000 BPD)
Europe 495 473 494 467
Affiliate - Caltex 574 626 561 539
Latin America/West Africa 391 391 406 396
Other 55 74 74 73
----- ----- ----- -----
Total 1,515 1,564 1,535 1,475
- 16 -
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (3) Copy of By-Laws of Texaco Inc., as amended to and including
July 25, 1997.
-- (4.1) Form of First Supplemental Indenture, dated as of January 31,
1990, among Texaco Capital Inc., Texaco Inc. and The Chase
Manhattan Bank (National Association), as Trustee. (This
document was previously filed with the Securities and Exchange
Commission, File No. 1-27, as Exhibit 4.1 to Texaco Capital
Inc.'s Registration Statement on Form S-3 (Registration Nos.
33-33303 and 33-33303-01) on February 1, 1990, and is being
filed herein only for EDGAR purposes.)
-- (4.1(a)) Form of First Supplement to the First Supplemental
Indenture, dated as of October 11, 1990. (This document was
previously filed with the Securities and Exchange Commission,
File No. 1-27, as Exhibit 4.1(a) to Texaco Inc.'s Current
Report on Form 8-K, dated October 12, 1990 and filed on October
15, 1990, and is being filed herein only for EDGAR purposes.)
-- (4.1(b)) Form of Second Supplement to the First Supplemental
Indenture, dated as of August 5, 1997, including Forms of the
Note representing Texaco Capital Inc.'s $200 million 3.50%
Guaranteed Cash-Settled Convertible Notes Due 2004.
-- (11) Computation of Earnings Per Share of Common Stock of Texaco
Inc. and Subsidiary Companies.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on
a Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 1996)
and a copy of Texaco Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997, as previously filed
by the Registrant with the Securities and Exchange Commission,
File No. 1-27.
-- (22) Information relative to the various matters submitted to a
vote of security holders are described on pages 9 through 27 of
the 1997 Proxy Statement of Texaco Inc., relating to the Annual
Meeting of Stockholders held on May 13, 1997, as previously
filed by the Registrant with the Securities and Exchange
Commission, File No. 1-27.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K:
During the second quarter of 1997, the Registrant filed a Current Report on
Form 8-K for the following events:
1. April 22, 1997 (date of earliest event reported: April 21, 1997)
Item 5. Other Events -- reported that Texaco (1) announced that it had
been notified that the U.S. Supreme Court has decided not to review
the decisions of the U.S. Court of Appeals for the Fifth Circuit and
the U.S. Tax Court in the so-called "Aramco Advantage" case and (2)
issued an Earnings Press Release for the first quarter 1997. Texaco
appended as exhibits thereto a copy of the Press Release entitled
"Texaco Advised Supreme Court Will Let Stand Favorable Decision in
`Aramco Advantage' Case," dated April 21, 1997 and "Texaco Reports
Significant Increase in Net Income: First Quarter 1997 Earnings Reach
$980 Million," dated April 22, 1997, respectively.
2. June 19, 1997 (date of earliest event reported: June 17, 1997)
Item 5. Other Events -- reported that the Registrant's 50-percent
owned affiliate, Caltex Petroleum Corporation, received a claim from
the U.S. Internal Revenue Service for $292 million in excise taxes,
plus interest and penalties.
- 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
---------------------
(Comptroller)
By: R.E. Koch
---------------------
(Assistant Secretary)
Date: August 13, 1997
---------------
- 18-