================================================================================
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 March 31, 1999 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 April 30, 1999, there were outstanding 536,492,771 shares of Texaco
Inc. Common Stock - par value $3.125.
================================================================================
PART I - FINANCIAL INFORMATION
TEXACO INC.
STATEMENT OF CONSOLIDATED INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------
(Millions of dollars, except as noted)
(Unaudited)
----------------------
For the three months
ended March 31,
----------------------
1999 1998
---- ----
REVENUES
Sales and services $ 6,914 $ 7,922
Equity in income of affiliates,
interest, asset sales and other 276 225
-------- --------
7,190 8,147
-------- --------
DEDUCTIONS
Purchases and other costs 5,450 6,114
Operating expenses 559 580
Selling, general and administrative expenses 290 276
Exploratory expenses 130 141
Depreciation, depletion and amortization 361 388
Interest expense 121 118
Taxes other than income taxes 76 116
Minority interest 19 15
-------- --------
7,006 7,748
-------- --------
Income before income taxes and cumulative effect
of accounting change 184 399
Provision for (benefit from) income taxes (15) 140
-------- --------
Income before cumulative effect of accounting change 199 259
Cumulative effect of accounting change -- (25)
-------- --------
NET INCOME $ 199 $ 234
======== ========
Preferred stock dividend requirements $ 13 $ 14
-------- --------
Net income available for common stock $ 186 $ 220
======== ========
Per common share (dollars)
Basic net income $ .35 $ .41
Diluted net income $ .35 $ .42
Cash dividends paid $ .45 $ .45
Average shares outstanding for computation of
earnings per share (thousands)
Basic 526,230 531,914
Diluted 526,892 551,421
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC.
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
------------------------------------------
(Millions of dollars)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 263 $ 249
Short-term investments - at fair value 85 22
Accounts and notes receivable, less allowance for doubtful
accounts of $27 million in 1999 and $28 million in 1998 3,483 3,955
Inventories 1,296 1,154
Deferred income taxes and other current assets 337 256
------- -------
Total current assets 5,464 5,636
Investments and Advances 6,787 7,184
Properties, Plant and Equipment - at cost 35,861 35,494
Less - accumulated depreciation, depletion and amortization 21,048 20,733
------- -------
Net properties, plant and equipment 14,813 14,761
Deferred Charges 1,015 989
------- -------
Total $28,079 $28,570
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 700 $ 939
Accounts payable and accrued liabilities
Trade liabilities 1,980 2,302
Accrued liabilities 1,131 1,368
Estimated income and other taxes 682 655
------- -------
Total current liabilities 4,493 5,264
Long-Term Debt and Capital Lease Obligations 6,784 6,352
Deferred Income Taxes 1,541 1,644
Employee Retirement Benefits 1,263 1,248
Deferred Credits and Other Noncurrent Liabilities 1,532 1,550
Minority Interest in Subsidiary Companies 690 679
------- -------
Total 16,303 16,737
Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 378 428
Unearned employee compensation and benefit plan trust (331) (334)
Common stock (authorized: 700,000,000 shares, $3.125 par value;
567,576,504 shares issued in 1999; 567,606,290 shares issued in 1998) 1,774 1,774
Paid-in capital in excess of par value 1,627 1,640
Retained earnings 9,519 9,561
Other accumulated nonowner changes in equity
Currency translation adjustment (107) (107)
Minimum pension liability adjustment (24) (24)
Unrealized net gain on investments 10 30
------- -------
Total other accumulated nonowner changes in equity (121) (101)
------- -------
13,146 13,268
Less - Common stock held in treasury, at cost 1,370 1,435
------- -------
Total stockholders' equity 11,776 11,833
------- -------
Total $28,079 $28,570
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------
(Millions of dollars)
(Unaudited)
-----------------------
For the three months
ended March 31,
-----------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 199 $ 234
Reconciliation to net cash provided by (used in)
operating activities
Cumulative effect of accounting change -- 25
Depreciation, depletion and amortization 361 388
Deferred income taxes (83) 56
Exploratory expenses 130 141
Minority interest in net income 19 15
Dividends from affiliates, less than equity
in income (71) (130)
Gains on asset sales (22) (5)
Changes in operating working capital (377) (242)
Other - net 6 175
----- -----
Net cash provided by operating activities 162 657
INVESTING ACTIVITIES
Capital and exploratory expenditures (529) (784)
Proceeds from asset sales 46 42
Purchases of investment instruments (178) (256)
Sales/maturities of investment instruments 504 247
Collection of note from affiliate 101 -
----- -----
Net cash used in investing activities (56) (751)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 837 396
Repayments (243) (277)
Net increase (decrease) in other borrowings (419) 363
Purchases of common stock -- (105)
Dividends paid to the company's stockholders
Common (237) (239)
Preferred (3) (5)
Dividends paid to minority shareholders (8) (9)
----- -----
Net cash provided by (used in) financing activities (73) 124
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (19) (6)
----- -----
Increase during period 14 24
Beginning of year 249 311
----- -----
End of period $ 263 $ 335
===== =====
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-3-
TEXACO INC.
CONDENSED STATEMENT OF CONSOLIDATED NONOWNER CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------------
(Millions of dollars)
(Unaudited)
--------------------
For the three months
ended March 31,
--------------------
1999 1998
---- ----
NET INCOME $199 $234
Other nonowner changes in equity (net of tax)
Currency translation adjustment -- (2)
Minimum pension liability adjustment -- 2
Unrealized net gain (loss) on investments (20) 5
---- ----
(20) 5
---- ----
TOTAL NONOWNER CHANGES IN EQUITY $179 $239
==== ====
TEXACO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Segment Information
- ---------------------------
Sales and Services
------------------ After Assets
Inter- Tax at
Quarter Ended March 31, 1999 Outside Segment Total Profit (Loss) Quarter-End
- ---------------------------- ------- ------- ----- ------------- -----------
(Millions of dollars)
(Unaudited)
Exploration and production
United States $ 349 $296 $ 645 $ 38 $ 8,698
International 445 239 684 (20) 4,421
Refining, marketing and distribution
United States 605 3 608 63 3,999
International 4,552 39 4,591 220 8,421
Global gas marketing 948 24 972 12 752
------ ---- ------ ---- -------
Segment totals $6,899 $601 7,500 313 26,291
Other business units ====== ==== 23 (6) 553
Corporate/Non-operating 1 (108) 1,407
Intersegment eliminations (610) -- (172)
------ ---- -------
Consolidated $6,914 $199 $28,079
====== ==== =======
- 4 -
Sales and Services
------------------ After Assets
Inter- Tax at
Quarter Ended March 31, 1998 Outside Segment Total Profit (Loss) December 31, 1998
- ---------------------------- ------- ------- ----- ------------- -----------------
(Millions of dollars) (Millions of dollars)
(Unaudited)
Exploration and production
United States $ 488 $ 454 $ 942 $ 108 $ 8,699
International 529 296 825 48 4,352
Refining, marketing and distribution
United States 716 55 771 47 4,095
International 4,954 11 4,965 182 8,306
Global gas marketing 1,217 19 1,236 (9) 879
------- ------- ------- ------- -------
Segment totals $ 7,904 $ 835 8,739 376 26,331
Other business units ======= ======= 26 2 506
Corporate/Non-operating 2 (119) 1,945
Intersegment eliminations (845) -- (212)
Consolidated, before cumulative ------- ------- -------
effect of accounting change $ 7,922 $ 259 $28,570
======= ======= =======
Note 2. Inventories
- -------------------
The inventory accounts of Texaco are presented below (in millions of dollars):
As of
-------------------------------------
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
Crude oil $ 194 $ 116
Petroleum products and petrochemicals 868 799
Other merchandise 31 40
Materials and supplies 203 199
------ ------
Total $1,296 $1,154
====== ======
Note 3. Redemption of Series F ESOP Convertible Preferred Stock
- ---------------------------------------------------------------
On February 16, 1999, each share of Series F ESOP Convertible Preferred Stock
was converted into 20 shares, or 1.1 million shares in total, of Common Stock of
Texaco Inc., after we called the Series F for redemption.
Note 4. Other Financial Information, Commitments and Contingencies
- ------------------------------------------------------------------
Information relative to commitments and contingent liabilities of Texaco is
presented in Note 16, pages 67-68, of our 1998 Annual Report.
On April 7, 1999, the federal court in Texas approved a settlement agreement
with most of the plaintiffs in the seventeen purported class actions pending in
Texas and six other states. The plaintiffs alleged that Texaco and approximately
fifty other oil companies underpaid royalties and severance taxes to them.
Similar claims by the federal and various state governments remain unresolved.
- 5 -
In June 1997, Caltex Corporation received a claim from the United States
Internal Revenue Service (IRS) for $292 million in excise taxes, $140 million in
penalties and $1.6 billion in interest. The IRS claim relates to sales of crude
oil by Caltex to Japanese customers beginning in 1980. Caltex believes the
underlying claim for excise taxes and penalties is wrong and that the claim for
interest is flawed. We believe that this claim is without merit and is not
anticipated to be materially important in relation to our consolidated financial
position or results of operations. In May 1998, Caltex filed a complaint in the
United States Court of Federal Claims asking the Court to hold that Caltex owes
nothing on the IRS claim. A decision by the Court remains pending. In February
1999, Caltex renewed a letter of credit for $2.5 billion to the IRS that was
required to pursue the claim. In May 1999, the IRS agreed to reduce the letter
of credit to $200 million. Texaco and its 50% partner, Chevron Corporation, have
severally guaranteed Caltex' letter of credit obligation to a syndicate of
banks.
----------
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.
Note 5. Investments in Significant Equity Affiliates
- ----------------------------------------------------
U.S. Downstream Alliances
Summarized unaudited financial information for Equilon, formed January 1, 1998
and jointly owned 44% by Texaco and 56% by Shell Oil Company, is presented below
on a 100% Equilon basis (in millions of dollars):
For the three months
ended March 31,
--------------------
1999 1998
---- ----
Gross revenues $5,779 $6,360
Income before income taxes $ 171 $ 112
Summarized unaudited financial information for Motiva, formed July 1, 1998 and
jointly owned 32.5% each by Texaco and Saudi Refining, Inc. (a corporate
affiliate of Saudi Aramco) and 35% by Shell Oil Company, is presented below on a
100% Motiva basis (in millions of dollars):
For the three months
ended March 31, 1999
--------------------
Gross revenues $2,242
Income before income taxes $ 41
We account for our interests in Equilon and Motiva using the equity method of
accounting. Under this method, we record our share of Equilon's and Motiva's
results of operations on a one-line basis to Equity in Income of Affiliates in
the Statement of Consolidated Income. Additionally, since Equilon and Motiva are
limited liability companies, we record the provision and related liability for
income taxes applicable to our share of Equilon's and Motiva's pre-tax income in
our consolidated financial statements.
Caltex Group of Companies
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% by Texaco and 50% by Chevron Corporation, is presented below on a 100%
Caltex Group basis (in millions of dollars):
- 6 -
For the three months
ended March 31,
--------------------
1999 1998
---- ----
Gross revenues $3,960 $4,306
Income before income taxes $ 289 $ 320
Income before cumulative effect
of accounting change $ 203 $ 205
Net income $ 203 $ 155
Effective January 1, 1998, Caltex adopted a new accounting standard, Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities," issued by the
American Institute of Certified Public Accountants. This resulted in a change in
accounting for start-up costs at Caltex' Thailand refinery. Caltex' first
quarter 1998 results included a $50 million charge (no tax benefit) associated
with this accounting change.
* * * * * * * * * * *
In the determination of unaudited financial statements for the three-month
periods ended March 31, 1999 and 1998, our accounting policies have been applied
on a basis consistent with the application of such policies in our financial
statements issued in our 1998 Annual Report. In our opinion, we have made all
adjustments and disclosures necessary to present fairly our results of
operations for such periods. These adjustments include normal recurring
adjustments. The information is subject to year-end audit by independent public
accountants. We make no forecasts or representations with respect to the level
of net income for the year 1999.
* * * * * * * * * * *
SUPPLEMENTAL MARKET RISK DISCLOSURES
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 derivative financial instruments, such as futures, forwards, options and
swaps, in managing these risks. There were no material changes during the first
quarter of 1999 in our exposures to loss from possible future changes in the
price of crude oil, natural gas and petroleum products, or from possible future
changes in the value of foreign currencies in relation to the U. S. dollar.
The Liquidity section of the MD&A appearing on page 11 of this Form 10-Q
describes financing and related hedging transactions we entered into during the
first quarter of 1999 and shortly thereafter. As a result of those transactions,
our variable rate debt, before the effects of interest rate swaps, now totals
$2.2 billion, as compared with $2.7 billion at year-end 1998. The notional
amount of interest rate swaps increased $850 million and now totals $1.6
billion. Based on our present interest rate exposure on variable rate debt and
interest rate swaps, a hypothetical increase or decrease in interest rates of
200 basis points would not materially affect our consolidated financial
position, net income or cash flows.
-7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Texaco's net income for the first quarter of 1999 was $199 million ($.35 per
share). This compares with net income for the first quarter of 1998 of $234
million ($.42 per share). Both periods included special items. Excluding special
items, income was $105 million ($.18 per share) for the first quarter of 1999
and $259 million ($.46 per share) for the first quarter of 1998.
Continuing low crude oil and natural gas prices through early March and a high
level of exploratory expenses depressed our first quarter earnings. Fortunately,
prices have recently strengthened significantly, which is a very positive signal
for the rest of the year. We are also encouraged by the results of our cost
containment programs, which have reduced our expenses per barrel by six percent,
and by the acceleration by our U.S. downstream alliances of targeted synergy
benefits during 1999.
Our worldwide production levels declined as a result of operational problems in
the U.K. North Sea, which impacted expected production by approximately 30,000
barrels per day, and in the U.S., due to reduced capital spending by Texaco and
other operators in reaction to the significantly lower prices for oil and gas.
In April, production in the U.K. North Sea returned to normal levels and overall
worldwide production is expected to be higher in the second quarter and for the
remainder of the year.
Despite the challenges our industry faced this past year, we continued to
aggressively search for new sources of production and in the first quarter of
1999, we announced two significant exploratory successes offshore Nigeria.
In the U.S. downstream, after a slow start, margins improved late in the first
quarter. While first quarter earnings were weaker in the international
downstream compared to last year, the stabilization of markets in the Caltex
region and in Brazil in March are encouraging signs which should lead to
improved margins in the months ahead.
Results for the first quarter of 1999 and 1998 are summarized in the following
table. Details on special items are included in the segment analysis which
follows this table.
(Unaudited)
------------------------
For the three months
ended March 31,
------------------------
1999 1998
---- ----
(Millions of Dollars)
Income before special items $105 $259
Inventory valuation adjustments 83 -
Production tax refund 11 -
---- ----
Special items 94 -
---- ----
Adoption of new accounting standard
Cumulative effect of accounting change - (25)
---- ----
Net income $199 $234
==== ====
Effective January 1, 1998, our affiliate, Caltex, adopted a new accounting
standard, Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," issued by the American Institute of Certified Public Accountants.
This resulted in a change in accounting for start-up costs at its Thailand
refinery. Our first quarter 1998 results included a $25 million charge
associated with this accounting change.
- 8 -
OPERATING RESULTS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the first quarter of 1999
were $38 million, as compared with $108 million for the first quarter of 1998.
Results for 1999 included a special benefit of $11 million for a production tax
refund. Excluding the special benefit, results for the first quarter of 1999
totaled $27 million.
U.S. exploration and production earnings for the first quarter of 1999 were
below last year mostly due to lower crude oil and natural gas prices. Continued
weakness in worldwide demand growth and high inventory levels contributed to the
decline in prices. For the first quarter of 1999, average realized crude oil
prices were $9.11 per barrel, 23 percent below last year and average natural gas
prices were $1.79 per MCF, 16 percent below last year. However, prices began to
rise in March as OPEC and several non-OPEC countries announced production
cutbacks and worldwide inventory levels began to decline.
Daily production for the first quarter of 1999 was 12 percent lower than last
year due to natural field declines. Capital expenditures were reduced by Texaco
and other operators given the low prevailing commodity prices.
Expenses were lower as a result of cost savings from the restructuring of our
worldwide upstream organization. Exploratory expenses for the quarter were $54
million before tax, $42 million below last year.
International
Exploration and production results outside the U.S. for the first quarter of
1999 were a loss of $20 million, as compared with earnings of $48 million for
the first quarter of 1998.
International exploration and production operating results for the first quarter
of 1999 were below last year mostly due to lower crude oil and natural gas
prices and higher exploratory expenses. Industry fundamentals of low demand
growth and high inventories kept downward pressure on commodity prices. For the
first quarter of 1999, average realized crude oil prices were $9.88 per barrel,
17 percent lower than last year and average natural gas prices were $1.51 per
MCF, seven percent below last year. In March, crude oil prices began to rise due
to worldwide production cutbacks and inventory declines.
Daily production for the first quarter of 1999 was unchanged from last year.
Decreased production of 30,000 barrels per day, mostly as a result of separator
problems at the Captain field, in the U.K. North Sea reduced earnings by $10
million. Production increased in the Partitioned Neutral Zone and the U.K.
Galley field.
Exploratory expenses for the first quarter were $76 million before taxes, $31
million higher than last year mostly due to an unsuccessful exploratory well in
a new offshore area of Trinidad.
Looking Forward in the Worldwide Upstream
We intend to cost-effectively explore for, develop and produce crude oil and
natural gas reserves, despite the current low price environment. Our areas of
focus include the U.S. Gulf of Mexico, the U.K. North Sea, Kazakhstan, Latin
America and West Africa, where we recently announced two major oil discoveries
offshore Nigeria.
We expect $200 million in annual pre-tax cash expense savings from our worldwide
upstream restructuring program announced in November, 1998. The program is
designed to place greater emphasis on our long-term production and reserve
growth, and to address the need for streamlining costs and improving
competitiveness. These savings include lower people-related expenses and
operating expenses.
- 9 -
REFINING, MARKETING AND DISTRIBUTION
United States
Refining, marketing and distribution earnings in the U.S. for the first quarter
of 1999 were $63 million as compared with $47 million for the first quarter of
1998. We value inventories at the lower of cost or market, after initial
recording at cost. Results for the first quarter of 1999 included a special
benefit of $8 million due to higher inventory values on March 31, 1999. This
follows a fourth-quarter 1998 charge of $34 million to reflect lower prices on
December 31, 1998 for inventories of crude oil and refined products. Inventory
valuation adjustments are reversed when the associated physical units of
inventory are sold. Excluding this special benefit, results for the first
quarter of 1999 totaled $55 million.
We conduct our U.S. downstream activities primarily through Equilon Enterprises
LLC, our western alliance with Shell Oil Company, and Motiva Enterprises LLC,
our eastern alliance with Shell Oil Company and Saudi Refining, Inc.
During the quarter, Equilon's earnings benefited from improved refining margins.
Although West Coast refining margins were weak for the first two months due to
high inventory levels, they improved during March as a result of industry supply
disruptions. The first quarter of 1999 also benefited from the realization of
synergies including reduced additive costs and higher utilization of proprietary
pipelines.
Motiva captured synergy benefits which contributed to higher first quarter 1999
results. The most significant of these relate to marketing staff and function
consolidation and hydrotreater realignment at the Convent refinery. These
benefits, together with higher gasoline sales, were somewhat offset by weaker
refinery margins in 1999 due to warmer than normal weather and high inventory
levels.
International
Refining, marketing and distribution earnings outside the U.S. for the first
quarter of 1999 were $220 million, as compared with $182 million for the first
quarter of 1998. We value inventories at the lower of cost or market, after
initial recording at cost. Results for the first quarter of 1999 included a
special benefit of $75 million due to higher inventory values at March 31, 1999.
This follows a fourth-quarter 1998 charge of $108 million to reflect lower
prices on December 31, 1998 for inventories of crude oil and refined products.
Inventory valuation adjustments are reversed when the associated physical units
of inventory are sold. Excluding this special benefit, results for the first
quarter of 1999 totaled $145 million.
International refining, marketing and distribution earnings before special items
for the first quarter of 1999 declined from 1998. The decline was due to lower
operating earnings in our Caltex and Latin American areas of operations. In our
Caltex affiliate, margins in Korea in the first quarter of 1998 benefited from
the partial recovery of currency losses experienced in the fourth quarter of
1997. After adjusting for currency effects, Caltex operating income improved in
1999 due to stronger marketing margins, higher sales volumes and reduced
operating expenses.
Results in Latin America declined due to the margin impacts and currency effects
related to the weakening of the Brazilian economy in the first quarter of 1999.
However, margins increased in West Africa, Central America and the Caribbean
this year, which partly offset the events in Brazil. Results in Europe were in
line with last year.
Looking Forward in the Worldwide Downstream
We anticipate that our U.S. joint ventures with Shell and Saudi Refining, Inc.
will continue to lower costs and capture synergies. We expect that our share of
these annual pre-tax cost reductions will be over $300 million. These savings
include lower people-related expenses and reductions in cash operating expenses
due to efficiencies. We will continue to expand our operations in Latin America.
In addition, we expect that our share of the annual pre-tax cost savings from
the Caltex reorganization will be $25 million, representing lower people-related
expenses.
- 10 -
GLOBAL GAS MARKETING
Global gas marketing earnings for the first quarter of 1999 were $12 million, as
compared with a loss of $9 million for the first quarter of 1998.
First quarter 1999 results benefited from improved margins in our U.S.
operations. Additionally, our U.S. gas marketing results included a gain on the
sale of a gas gathering pipeline. We also recognized a gain on the sale of our
50 percent interest in our retail gas marketing operation in the United Kingdom.
This sale successfully completed our exit from the U.K. domestic gas market
where we disposed of our wholesale business in late 1998.
We anticipate $20 million in annual pre-tax cost savings from the global gas
marketing restructuring announced in November 1998. These savings include lower
people-related expenses and benefits from our exiting the United Kingdom gas
marketing business.
OTHER BUSINESS UNITS
Results for the first quarter of 1999 were a loss of $6 million, as compared
with earnings of $2 million for the first quarter of 1998. Our other business
units include insurance activity and power generation and gasification
operations.
CORPORATE/NON-OPERATING
Corporate/Non-operating charges for the first quarter of 1999 were $108 million,
as compared with charges of $119 million for the first quarter of 1998.
Corporate/Non-operating results for the first quarter of 1999 benefited from
gains on the sale of marketable securities. Net interest expense for the first
quarter of 1999 was unchanged from last year.
We expect annual pre-tax cost savings of $60 million as a result of the fourth
quarter 1998 corporate center reorganization and other cost-cutting initiatives,
mainly lower people-related expenses and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $348 million at March
31, 1999, as compared with $271 million at year-end 1998.
During 1999, our operations provided cash of $162 million. We raised an
additional $175 million from net borrowings and $326 million from net sales of
long-term investments. Early collection of a note receivable from our affiliate
Equilon generated another $101 million. We spent $529 million on our capital and
exploratory program and paid $248 million in common, preferred and minority
interest dividends.
At March 31, 1999, our ratio of total debt to total borrowed and invested
capital was 37.5%, as compared with 36.8% at year-end 1998. At March 31, 1999,
our long-term debt included $2.05 billion of debt scheduled to mature within one
year, which we have both the intent and ability to refinance on a long-term
basis. During the first quarter of 1999, our debt activity included a $400
million borrowing due 2009, $242 million issued under our medium-term note
program and a $100 million borrowing associated with one of our producing
interests located in the U.K. North Sea. In addition, we reduced our commercial
paper by $643 million, to $974 million at March 31, 1999, while increasing other
debt obligations by $76 million. During the first quarter of 1999, we entered
into $500 million of floating rate pay interest rate swaps. We maintain $2.05
billion in revolving credit facilities, which were unused at March 31, 1999, to
provide additional support for liquidity and our commercial paper program.
- 11 -
Subsequent to March 31, 1999, we established a new "shelf" registration for $1.5
billion, and we issued $1 billion from this "shelf" registration under our
medium-term note program, to refinance existing short-term debt. In connection
with this issuance, we entered into $350 million of floating rate pay interest
rate swaps. All floating rate swaps entered into to date in 1999 are indexed to
LIBOR.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
REORGANIZATIONS, RESTRUCTURINGS AND EMPLOYEE SEVERANCE PROGRAMS
- ---------------------------------------------------------------
In the fourth quarter of 1998, we announced reorganizations for several of our
operations and began implementing other cost-cutting initiatives to reduce costs
and improve focus in growth areas. The principal units affected were our
worldwide upstream operations; our global gas marketing operations; our
international downstream operations, principally our marketing operations in the
United Kingdom and Brazil and our refining operations in Panama; and, our
corporate center. The reorganizations were completed by the end of the first
quarter of 1999.
We accrued $115 million ($80 million, net of tax) for employee separations,
curtailment costs and special termination benefits associated with these
announced restructurings in the fourth quarter of 1998. The accrual included $56
million applicable to our worldwide upstream, $5 million recorded by our global
gas marketing business, $25 million applicable to our international downstream
areas, and $29 million for our corporate center. The costs related to the
severance programs are reflected in the Statement of Consolidated Income,
primarily as an increase in operating expenses. At the time we announced these
programs, we estimated that over 1,400 employee reductions would result.
Employee reductions of approximately 800, 100, 300 and 200, respectively, are
expected in our worldwide upstream, global gas marketing, international
downstream areas and corporate center. At the end of the first quarter of 1999,
we have not made changes to these estimates. Through March 31, 1999, employee
reductions totaled 424, 51, 160 and 219 in our worldwide upstream, global gas
marketing, international downstream areas and corporate center, respectively.
Almost all of the remaining employees will be leaving during the second quarter
of this year. Of the $115 million commitment recorded during the fourth quarter
of 1998, payments of $8 million, $1 million, $12 million and $13 million,
respectively, have been recorded against the expense accrual related to each of
our four restructuring initiatives. We will pay the remaining benefit liability
of $81 million (worldwide upstream - $48 million; global gas marketing - $4
million; international downstream - $13 million; and, corporate center - $16
million) in future periods in accordance with plan provisions.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures were $669 million for the first quarter of
1999, compared with $967 million for the same period in 1998.
While U.S. upstream spending slowed considerably, we continued to focus on
platform construction in the Gulf of Mexico and developmental drilling in
California. Internationally, increased exploratory activity, primarily in
Trinidad and Colombia, and developmental work in the U.K. North Sea Captain
field were more than offset by lower spending in Eurasia where we made a
significant investment in the Karachaganak project in the first quarter of 1998.
Downstream activities also decreased following refinery project completions in
the U.S. and the slowing of re-imaging and brand initiatives in the U.S. and
Caltex areas of operation. We also spent less on a gas pipeline project which
incurred peak expenditures in 1998. Other operations reflected an increase in
spending for an Indonesian cogeneration facility.
- 12 -
EURO CONVERSION
- ---------------
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing legacy currencies and
one common currency--the euro. The euro began trading on world currency
exchanges 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. While remaining systems adaptations and
legal due diligence reviews are ongoing, all our operating subsidiaries had the
capability to comply with necessary business requirements and customer/supplier
preferences with the introduction of the euro on January 1, 1999. We, therefore,
experienced no major impact to our current business operations.
We are currently reviewing 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
- ---------
On pages 39 and 40 of our 1998 Annual Report, we discussed our state of
readiness and our costs, risks and contingency plans for dealing with potential
year 2000 (Y2K) date change problems. We reported that approximately 95% of the
computers and computer software involved in corporate financial applications,
and about 5% of our industrial automation systems used in refineries, lubricant
and gas plants and oil well operations needed modification or upgrade. We have
not identified any material additional Y2K risks that we did not discuss in our
1998 Annual Report. We continue to believe that the worst case scenario we
described in our 1998 Annual Report is not likely to occur. However, if it
occurs, Y2K failures, if not corrected on a timely basis or otherwise mitigated
by our contingency plans, could have a material adverse effect on our results of
operations, liquidity and overall financial condition.
As of the end of the first quarter of 1999, we completed modifications or
upgrading to 98% of the corporate financial applications and 99% of the
industrial automation systems that required such work. We are not able to
complete a small percentage of upgrades until our vendors provide the required
equipment. We expect to complete the last of these upgrades by July, 1999. If
these upgrades are delayed beyond that date, we will use contingency plans to
work around any non-compliant systems or seek alternative vendors, as
appropriate. We are approximately 80% through the effort required to review our
critical suppliers and customers and develop contingency plans, as required. If
we cannot satisfy ourselves that these critical suppliers and customers will be
able to operate in 2000, we will seek alternatives and/or use contingency plans.
We are also evaluating the business resumption plans of all of our business
units for any Year 2000 issues. This effort is approximately 80% complete. We
expect to complete the testing of these plans by July, 1999.
During the first of quarter 1999, we spent $7 million in readying our systems
for Y2K, bringing our total spent to date to $44 million. We continue to
estimate that our costs to ready our systems for Y2K will be no more than $75
million.
* * * * * *
- 13 -
FORWARD-LOOKING STATEMENTS
- --------------------------
Portions of the foregoing discussion of RESULTS OF OPERATIONS; REORGANIZATIONS,
RESTRUCTURINGS AND EMPLOYEE SEVERANCE PROGRAMS; EURO CONVERSION; and, YEAR 2000
contain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements are based on our current expectations, estimates and
projections. Therefore, they could ultimately prove to be inaccurate. Factors
which could affect our expectations for worldwide crude oil production and
downstream margins in 1999 are changes in business conditions, such as energy
prices, world economic conditions, demand growth and inventory levels. The
extent and timing of our anticipated cost savings and reorganization programs
will depend upon worldwide and industry economic conditions. Factors that could
alter the financial impact of our euro conversion include: changes in current
governmental regulations and interpretations of such regulations; unanticipated
implementation costs; and the effect of the euro conversion on product prices
and margins. Factors that could affect our ability to be Year 2000 compliant by
the end of 1999 include: the failure of our customers, suppliers, governmental
entities and others to achieve compliance and the inaccuracy of certifications
received from them; our inability to identify and remediate every possible
problem; and a shortage of necessary programmers, hardware and software. For a
further discussion of additional factors that could cause actual results to
materially differ from those in the forward-looking statements, please refer to
the section entitled "Forward-Looking Statements and Factors That May Affect Our
Business" in our 1998 Annual Report on Form 10-K.
- 14 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
We have provided information about legal proceedings pending against Texaco
in Note 4 to the Consolidated Financial Statements of this Form 10-Q and in Item
3 of our 1998 Annual Report on Form 10-K. Note 4 of this Form 10-Q and Item 3 of
our 1998 Form 10-K are 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 two proceedings that were
instituted during the first quarter of 1999.
o By letter dated March 3, 1999, the San Joaquin Valley Unified Air Pollution
Control District demanded penalties of $1.4 million for alleged violations
of that agency's air quality regulations at our producing fields in
Bakersfield, California. We are contesting the allegations.
o In January, 1999, the U.S. Department of Justice filed suit in U.S.
District Court in Nevada against Nevada Cogeneration Associates #1 and
Nevada Cogeneration Associates #2. Each defendant is a partnership in which
we hold a 50% interest. The suit seeks up to $230 million in penalties
under the Clean Air Act for alleged emissions from cogeneration facilities
in Clark County, Nevada. The partnerships are contesting the allegations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
We held our Annual Meeting of Stockholders on April 27, 1999, for the purpose of
(1) electing five directors, (2) approving the appointment of auditors for 1999,
(3) approving an amendment to our Certificate of Incorporation, (4) acting on a
stockholder proposal relating to an independent chairperson, and (5) acting on a
stockholder proposal relating to classification of our Board of Directors. The
following summarizes the voting results:
Item (1). Stockholders elected Michael C. Hawley, Charles R. Shoemate, Robin B.
Smith and William C. Steere, Jr., each for a three-year term expiring at the
2002 Annual Meeting and A. Charles Baillie for a one-year term expiring at the
2000 Annual Meeting. The vote for each director was as follows:
Director Votes For % of Vote Votes Withheld
-------- --------- --------- --------------
A. Charles Baillie 462,020,776 98.3% 8,033,299
Michael C. Hawley 461,982,045 98.3% 8,072,030
Charles R. Shoemate 462,303,914 98.4% 7,750,161
Robin B. Smith 461,296,502 98.1% 8,757,573
William C. Steere, Jr. 462,023,036 98.3% 8,031,039
Directors continuing in office were Peter I. Bijur, Mary K. Bush, Edmund M.
Carpenter, Franklyn G. Jenifer, Sam Nunn, Charles H. Price, II and Thomas A.
Vanderslice.
Item (2). The appointment of Arthur Andersen LLP to audit the accounts of the
company and its subsidiaries for the fiscal year 1999 was approved.
Votes For (% of voted) Votes Against (% of voted) Abstained
---------------------- -------------------------- ---------
464,538,299 (99.3%) 3,321,596 (0.7%) 2,194,180
- 15 -
Item (3). The proposal to approve an amendment to our Certificate of
Incorporation to increase the number of authorized shares of Common Stock of
Texaco Inc. from 700 million to 850 million was approved. Results are as
follows:
Common and Series B For 444,452,793 (80.5%)
(% of issued and outstanding Common and Series B)
Common and Series B Against 22,850,471 (4.1%)
(% of issued and outstanding Common and Series B)
Common and Series B Abstained 2,750,811
Common For 430,239,176 (80.3%)
(% of issued and outstanding Common)
Common Against 20,838,684 (3.9%)
(% of issued and outstanding Common)
Item (4). The stockholder proposal relating to an independent chairperson was
rejected.
Votes For (% of voted) Votes Against (% of voted) Abstained
---------------------- -------------------------- ---------
87,213,428 (22.1%) 306,855,079 (77.9%) 7,716,299
Item (5). The stockholder proposal relating to the classification of the Board
of Directors was rejected.
Votes For (% of voted) Votes Against (% of voted) Abstained
---------------------- -------------------------- ---------
192,364,198 (48.7%) 202,789,184 (51.3%) 6,636,225
Item 5. Other Information
- -------------------------
(Unaudited)
-----------------------
For the three months
ended March 31,
-----------------------
1999 1998
---- ----
(Millions of dollars)
CAPITAL AND EXPLORATORY EXPENDITURES
Exploration and production
United States $256 $ 442
International 222 290
---- -----
Total 478 732
---- -----
Refining, marketing and distribution
United States 73 88
International 77 99
---- -----
Total 150 187
---- -----
Global gas marketing 11 34
---- -----
Total operating segments 639 953
Other business units 30 14
---- -----
Total $669 $ 967
==== =====
- 16 -
(Unaudited)
--------------------
For the three months
ended March 31,
--------------------
1999 1998
---- ----
OPERATING DATA
Exploration and Production
United States
Net production of crude oil and natural
gas liquids (000 BPD) 406 452
Net production of natural gas - available
for sale (000 MCFPD) 1,487 1,738
------ ------
Total net production (000 BOEPD) 654 742
Natural gas sales (000 MCFPD) 3,579 3,882
Average U.S. crude (per bbl) $ 9.11 $11.78
Average U.S. natural gas (per mcf) $ 1.79 $ 2.14
Average WTI (Spot) (per bbl) $13.15 $15.92
Average Kern (Spot) (per bbl) $ 7.65 $ 8.89
International
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 130 158
Indonesia 180 155
Partitioned Neutral Zone 116 108
Other 67 70
------ ------
Total 493 491
Net production of natural gas - available
for sale (000 MCFPD)
Europe 286 258
Colombia 153 208
Other 111 123
------ ------
Total 550 589
------ ------
Total net production (000 BOEPD) 585 589
Natural gas sales (000 MCFPD) 565 777
Average International crude (per bbl) $ 9.88 $11.95
Average International natural gas (per mcf) $ 1.51 $ 1.62
Average U.K. natural gas (per mcf) $ 2.64 $ 2.65
Average Colombia natural gas (per mcf) $ .65 $ .91
Worldwide
Total worldwide net production (MBOEPD) 1,239 1,331
- 17 -
(Unaudited)
--------------------
For the three months
ended March 31,
--------------------
1999 1998
---- ----
OPERATING DATA
Refining, Marketing and Distribution
United States
Refinery input (000 BPD)
Equilon area 365 374
Motiva area 302 313
----- -----
Total 667 687
Refined product sales (000 BPD)
Equilon area 596 532
Motiva area 355 333
Other operations 307 234
----- -----
Total 1,258 1,099
International
Refinery input (000 BPD)
Europe 368 374
Caltex area 438 437
Latin America/West Africa 71 57
----- -----
Total 877 868
Refined product sales (000 BPD)
Europe 638 564
Caltex area 672 593
Latin America/West Africa 479 428
Other 103 49
----- -----
Total 1,892 1,634
- 18 -
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (3.1) Copy of Restated Certificat of Incorporation of Texaco
Inc., as amended to and including April 27, 1999, including
Certificate of Designations, Preferences and Rights of Series B
ESOP Convertible Preferred Stock, Series D Junior Participating
Preferred Stock and Series G, H, I and J Market Auction
Preferred Shares.
-- (3.2) Copy of By-Law of Texaco Inc., as amended to and including
April 27, 1999.
-- (11) Computation of Earnings Per Share of Common Stock.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on
a Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 1998),
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 10 through 18
of the 1999 Proxy Statement of Texaco Inc., relating to the
Annual Meeting of Stockholders held on April 27, 1999, as
previously filed by the Registrant with the Securities and
Exchange Commission, File No. 1-27.
-- (27) Financial Data Schedule for the three months ended March 31,
1999.
b) Reports on Form 8-K:
During the first quarter of 1999, we filed Current Reports on Form 8-K for
the following events:
1. January 8, 1999
Item 5. Other Events -- reported that Texaco issued a Press Release to
announce a reduction in its 1999 capital and exploratory spending plan
and acceleration of its cost reduction program. Texaco also issued
another Press Release to announce fourth quarter, 1998 charges.
2. January 26, 1999
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the fourth quarter and year 1998.
- 19 -
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: G.J. Batavick
---------------------
(Comptroller)
By: R.E. Koch
---------------------
(Assistant Secretary)
Date: May 14, 1999
------------
-20 -