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 Off-Balance-Sheet
Financing Techniques of
The objective of this case is to extend the
analysis of the off-balance-sheet financing activities of Texaco begun in
Exhibit 11-7 of the text. Specifically the case focuses on Texaco’s affiliates
and their OBS activities and the adjustments to reported financial statements
required to reflect these activities.
Caltex is a joint venture between Texaco and Chevron [CHV] (another oil
multinational); each partner owns 50%. Exhibit 11C-1 contains the 1999 condensed
balance sheet, income statement, and selected footnotes of Caltex as well as
general information, all extracted from Texaco’s 1999 10-K report.
The textbook has used information Texaco’s 1999
Annual Report in coming up with the analysis provided in Exhibits 11-6 and
11-7 in the text.
Required:
1. Exhibit 11-7 in the text shows Texaco’s reported and adjusted debt-to-equity
ratios for December 31, 1999. Extend the analysis by computing the figures for
1998 also. You may have to use Texaco’s
1999 Annual Report. Do not use any data outside the Annual Report.
Compute the following ratios on a reported and adjusted basis:
• Debt to equity (December 31, 1998 and December 31, 1999)
• Return on assets (1999)
• Times interest earned (1999)
2. The Texaco 1999 10-K Report of
has much more information. It is long (600 pages) and please do not try to
print it. It is long because it includes the whole annual reports of the major
unconsolidated subsidiaries of Texaco, like Caltex. Those subsidiary
statements are presented first followed by Texaco statements.
(a) Using the Caltex reported balance sheet and income statement (without any
adjustments) included in the Texaco 1999
10-K Report, prepare a capitalization table for Caltex for the year ended
December 31, 1999 and December 31, 1998. Do not use
the footnotes of Caltex for this question.
(b) Compute the following Caltex ratios for 1999:
• Debt-to-equity • Return on assets • Times interest earned.
3. (a) Using the footnote data from the Caltex financial statement included in
Texaco 1999 10-K Report , compute the
appropriate adjustments to Caltex debt for its off-balance-sheet obligations.
There are many footnotes of Caltex that are relevant for this question.
Pay attention to: Note 1 - Summary of significant accounting policies,
Note 4 - Equity in affiliates, Note 7 - Operating leases and Note 9 -
Commitments and contingencies
(b) Using the results from 3(a), recompute the ratios in question 2(b).
(c) Discuss the significance of your results.
4. (a) Use the results of Questions 2 to further adjust Texaco’s debt and
equity, and ratios calculated in Question 1.
(b) Use the results of Questions 3 to further adjust Texaco’s debt and equity,
and ratios calculated in Question 1.
5. Describe the information not contained in the Texaco and Caltex financial
data that would help you evaluate the impact of their off-balance-sheet
obligations on future cash flows. (Your discussion should include both financial
and operational factors.)
Check with me
before attempting this question.
6. In addition to Caltex, Texaco’s major affiliates are Equilon Enterprises LLC
(44% owned) and Motiva Enterprises LLC (32.5% owned). [Equilon and Motiva are
limited liability companies (LLC) and do not pay income taxes directly. Taxes
are the responsibility of the limited partners. As such, their financial
statements do not record a provision for taxes]. A description of these
affiliates follows.
• Equilon was formed and began operations in January 1998 as a joint venture
between Texaco and Shell. Equilon, which is headquartered in Houston, Texas,
combines major elements of Texaco’s and Shell’s western and Midwestern U.S.
refining and marketing businesses and their nationwide transportation and
lubricants businesses. Texaco owns 44% and Shell owns 56% of the company.
Equilon refines and markets gasoline and other petroleum products under both the
Texaco and Shell brand names in all or parts of 32 states. Equilon is the
seventh largest refining company in the U.S.
• Motiva was formed and began operations in July 1998 as a joint venture among
Shell, Texaco, and Saudi Refining, Inc., a corporate affiliate of Saudi Aramco.
Motiva combines Texaco’s and Saudi Aramco’s interests and major elements of
Shell’s eastern and Gulf Coast U.S. refining and marketing businesses. Texaco
and Saudi Refining, Inc., each owns 32.5% and Shell owns 35% of Motiva. Motiva
refines and markets gasoline and other petroleum products under the Shell and
Texaco brand names in all or part of 26 states and the District of Columbia,
providing product to almost 14,000 Shell- and Texaco-branded retail outlets.
Using the data from
Texaco 1999 10-K Report about Equilon and
Motiva, compute the appropriate adjustments to Texaco’s financial statements and
recompute the ratios calculated in Question 1.
Other Notes:
Texaco Annual Report: Balance Sheet page 21, Note 5 page 29, $5,563 in IS,
$718 in IS.
Texaco 10K: Caltex balance Sheet - 201, S on 309
CALTEX GROUP OF COMPANIES
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