Table 7. Additions to Investment in Place by Line of Business for FRS Companies, 1992-1993 (Billion Dollars) aMeasured as additions to property, plant, and equipment, plus additions to investments and advances. - Not meaningful. Note: Sum of components may not equal total due to independent rounding. Percent changes were calculated from unrounded data. Source: Energy Information Administration, Form EIA-28. The FRS companies targeted chemical operations and coal production for the sharpest cutbacks in investment in 1993. Reduced investment in chemicals was a response to deteriorating profitability and worldwide overcapacity in some chemical product lines, particularly petroleum-based commodity chemicals. The steep decline in capital expenditures for coal in 1993 was due in roughly equal parts to the exit of some FRS companies from the industry22 and to reduced outlays by FRS companies with ongoing asset commitments to coal production. "Other energy," by nearly any measure, is the smallest among the FRS lines of business. Canadian tar sands, geothermal energy, cogeneration, and solar power account for the bulk of assets in this line of business. Despite the small size, capital expenditures for other energy activities registered the largest relative increase, 67 percent, of all the FRS lines of business in 1993. Nearly all of this increase was traceable to Enron's $151 million outlay for its Teesside electric power joint venture in the United Kingdom.23 Additionally, Unocal reported increased investment in its Indonesian geothermal energy projects.24 The "other nonenergy" line of business was the focus of massive restructuring by the FRS companies in the mid-1980's (this development is reviewed in detail in Part II). Accordingly, capital expenditures for activities outside energy and chemicals fell drastically. For example, capital expenditures dropped from their peak value of $6.9 billion in 1981, to $2.4 billion in 1988. Since 1988, capital expenditures have remained in the range of $2.0 billion to $2.5 billion. At $2.2 billion in 1993, capital expenditures were unchanged from 1992. However, acquisitions of nonenergy businesses by DuPont and Union Pacific, in 1993, composed a significant share of other nonenergy capital expenditures (Table 8). Table 8. Value of Mergers, Acquisitions, and Related Transactions by FRS Companies, 1993 (Million Dollars) Sources: Company annual reports to shareholders, Oil and Gas Investor (September 1993 and April 1994), and various issues of The Wall Street Journal. 22In 1991 and 1992, five FRS companies either sold or announced plans to sell all or a significant portion of their U.S. coal operations. The companies included Burlington Resources, DuPont, Occidental Petroleum, Shell Oil, and Sun Company. For detailed discussion of this development see Energy Information Administration, Performance Profiles of Major Energy Producers 1992, DOE/EIA-0206(92) (Washington, DC, January 1994), pp. 6, 53-57. 23 Enron Corp., 1993 Annual Report to Shareholders and Customers. 24Unocal Corporation, 1993 Annual Report. The apparent emphasis on nonenergy among the FRS companies' acquisitions was more a reflection of reduced outlays for acquisitions rather than a heightened interest in diversification. Capital expenditures for mergers and acquisitions hit a 15-year low in 1993 (Figure 6).25 In recent years, many of the FRS companies have been more interested in selling U.S. oil and gas properties, pursuant to cost-cutting consolidations, than in purchasing them. Sales of U.S. oil and gas reserves by the FRS companies exceeded purchases for the fourth consecutive year in 1993. No multinational FRS company made notable acquisitions of U.S. oil and gas properties in 1992 or 1993. Environmentally-related outlays have been increasingly important in the FRS companies' capital budgets. New and stricter environmental standards, particularly as they apply to petroleum refining, gasoline marketing, and chemical manufacturing, have required increased costs for compliance. Based on public disclosures made by 16 of the 25 FRS companies, capital expenditures for environmental quality and remediation totaled $4.4 billion in 1993 and accounted for 14 percent of the total capital expenditures (excluding the effects of mergers and acquisitions) for these 16 companies. The comparable shares for environmentally-related capital expenditures were 10 percent in 1991 and 8 percent in 1989.26 1993 Income Taxes: Mixed Effects A number of fiscal and financial developments, cutting in different directions, had a variety of effects on the FRS companies' worldwide income tax obligations in 1993. On balance, FRS companies' 1993 income tax expense rose 6 percent from the prior-year level to $9.1 billion (Table 9). However, income taxes rose at a lesser pace than pretax income. Consequently, the FRS companies' worldwide effective tax rate" fell slightly to 37 percent (Table 10). The effective tax rate for the S&P 400 group of U.S. industrial companies also dropped slightly, by one percentage point (Figure 7). The most dramatic development was a $1.4-billion decline in current taxes (Table 9). Current taxes constitute that portion of income tax expense deemed payable in the reporting period. Several factors played important roles in reducing current income taxes for the FRS companies in 1993. One was the reversal of the effect of the corporate Alternative Minimum Tax. The Tax Reform Act of 1986 greatly strengthened the Alternative Minimum Tax (AMT). Basically, a corporation pays the greater of (1) taxes computed from the regular corporate income tax system or (2) taxes computed from the AMT. The AMT taxes paid in excess of the regular corporate tax can be used as credits against future years' tax obligations emanating from the regular corporate income tax system. For the first six years after passage of the Tax Reform Act, the FRS companies paid $1.6 billion in added current taxes due to the workings of the AMT (Appendix B, Table B19). In 1993, this trend was reversed. A substantial number of FRS companies found that their regular corporate income tax obligations exceeded the AMT amount. These companies were able to use AMT credits carried forward from previous years to reduce their corporate income tax liabilities. In 1992, the AMT added $450 million to current taxes, but in 1993, AMT credits reduced current taxes by $158 million, a $608 million turnaround. 25Figure 6 and Table 7 show the value of property, plant, and equipment and investments and advances added to the companies' books as a result of acquisitions rather than the value of the transactions. The reported, or purchase, value of an acquisition shown in Table 8 can include effects on working capital, long-term liabilities, and other values that would not add to the acquiring company's investment base. 26 Energy Information Administration, Performance Profiles of Major Energy Producers 1989, DOE/EIA-0206(89) (Washington, DC, January 1991), p. 10 and Performance Profiles of Major Energy Producers 1991, DOE/EIA-0206(91) (Washington, DC, December 1992), p. 14. 27 Effective tax rate is calculated by dividing income tax expense by pretax income. Table 9. Composition of Income Tax Expense for FRS Companies, 1992-1993 Includes minority interest in income; excludes extraordinary items and cumulative effect of accounting changes. --= Not meaningful. Note: Sum of components may not equal total due to independent rounding. Former Soviet Union and Eastern Europe included in OECD Europe to avoid disclosure. Source: Energy Information Administration, Form EIA-28. "Section 29" tax credits also helped reduce FRS companies' current Federal income taxes. These tax credits apply to the production of certain alternative (or nonconventional) fuels.28 Based on information in company annual reports and filings of Form EIA-28, the bulk of FRS companies' reported Section 29 tax credits appear to be related to the production of gas from coal seams, particularly in New Mexico and Alabama. To a lesser extent, FRS companies also drilled gas wells in tight sands formations. The value of these tax credits to the FRS companies increased about 50 percent from 1992 to 1993. Lower income taxes on some of the FRS companies' foreign operations (mostly oil and gas production) also lowered current taxes. The most notable area was the North Sea, where the United Kingdom's (UK) revision of the Petroleum Revenue Tax (PRT) dropped the PRT rate from 75 percent to 50 percent on producing wells, effective July 1, 1993. Additionally, new fields are only taxed at the standard UK corporate tax rate of 33 percent as of March 16, 1993.29 28/Section 29," or nonconventional, fuels generally include oil produced from shale and tar sands; gas produced from geopressurized brine, Devonian shale, coal seams, tight formations, or biomass; and liquid, gaseous, or solid synthetic fuels produced from coal. 29"U.K. Plans Big Changes in Taxes on Oil and Gas," Oil & Gas Journal, March 22, 1993, p. 31. Table 10. Income Tax Expense, Pretax Income, and Effective Tax Rates by Line of Business for FRS Companies, 1992-1993 Note: Sum of components may not equal total due to independent rounding. Effective tax rates are calculated from unrounded data. Source: Energy Information Administration, Form EIA-28. Two developments in 1993 had the effect of increasing the FRS companies' income tax expense. These wellpublicized developments were the implementation of a change in Federal tax law and a change in financial reporting requirements. Under the Omnibus Budget Reconciliation Act of 1993, the highest corporate income tax rate went from 34 percent to 35 percent, as of January 1, 1993.30 Also by 1993, all FRS companies had implemented the provisions of Statement of Financial Accounting Standard No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 uses the balance sheet approach, also referred to as the liability method, in determining taxes. Deferred taxes31 increased in 1993 because SFAS 109 requires that, in the event of a change in the corporate tax rate, the deferred tax assets and liabilities must be recomputed at the new tax rate.32 The increase in deferred tax liabilities resulting from the higher tax rate was recognized as an addition to income tax expense in the income statement for 1993. Deferred income taxes for the FRS companies increased by $2.0 billion from 1992 to 1993 (Table 9). 30Omnibus Reconciliation Act of 1993, Public Law No. 103-66, 107 Stat. 31. 31Deferred taxes are differences between income tax expense accrued under Generally Accepted Accounting Principles for financial reporting purposes and income taxes currently payable in the reporting period. They originate from a variety of sources and are important to the financial operations of energy companies, as well as to industry in general. Basically, deferred taxes originate because of timing differences in reporting revenue and expense for financial reporting and tax reporting. Financial reporting attempts to match items of income and expense in the periods in which they occur. Tax reporting may permit different timing for recognizing revenues and deducting expenses. For example, faster writeoffs of depreciable properties are permitted under tax laws while they may not be acceptable under financial accounting principles. Accelerated writeoffs result in lower taxable income and thus lower tax liability in the year taken. In future periods, however, taxable income and income taxes payable may be higher than pretax income for financial reporting purposes because the timing differences between tax and financial reporting are reversed. 32See Appendix A for a more detailed discussion of SFAS 109 and deferred taxes. |