Texaco Case

This case demonstrates that in dealing with Off Balance Sheet activities, useful information can be obtained by going beyond footnote data. Information about Texaco's affiliate Caltex can be estimated from Texaco's footnotes. However, by examining Caltex's own financial statements, a more accurate measure of Caltex's debt can be obtained. More importantly, by examining the affiliate's financial statements, a "'grandfather" situation can be analyzed. That is, the Off Balance Sheet debt of Caltex's affiliates can be added to Caltex's debt and consequently added to Texaco's share of the Off Balance Sheet debt of its affiliates.

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1

Texaco Capitalization Table and Selected Ratios

1999 1,041 6,606 7,647 16,930 12,042 19,689 28,972 28,771 1,779 504 2,283 1.406 0.635 7.94% 4.530 1998 939 6,352 7,291 16,737 11,833 19,124 28,570 28,570 701 480 1,181 1.414 0.616 4.13% 2.460 1997 Average 7,469

Capitalization, December 31, Current portion of debt Long-term debt & Capital leases Total Debt Total Liabilities Stockholder's equity Total Capitalization Total Assets Average Assets Pretax income as reported Interest expense EBIT Total liability/equity Total Debt/equity ROA (EBIT/Average Assets) Times interest earned

28,570

Based on information provided in exhibit 11-7, adjustments to Texaco's liabilities (and assets) must be made in the following areas (i) share of affiliate debt (iii) guarantees (ii) operating leases (iv) throughput agreements (iii) redeemable preferred shares As the discussion will indicate, a number of assumptions are needed to make appropriate calculations. N1 Share of affiliate debt: Note 5 in the annual report provides information on an aggregate basis as to the composition of the balance sheets of Texaco's affiliates. However, the portion of current and noncurrent liabilities which is debt is not provided. We will assume that the noncurrent liabilities are (primarily) debt.

N2

See the last two pages of this report for lease...