natural gas in recent years have led the FRS companies to increase their efforts to develop additional sources of gas supply, particularly in North America. Accordingly, natural gas accounts for a larger share of the FRS companies' upstream sales and production. Nevertheless, gas revenues did not increase enough to offset the effects of lower oil prices on upstream earnings. Part I of this report reviews the FRS companies' 1993 financial performance in the context of energy market developments and the companies' responses to these developments. Chapter 2 presents an overview of sources of income, cash flow, taxation, and deployment of funds including investment patterns across lines of business. Chapter 3 reviews the FRS companies' performance in petroleum and natural gas operations from geographical and functional perspectives. Chapter 4 examines developments in energy sources other than petroleum and natural gas. Appendix A describes the structure of the FRS data collection system, and Appendix B presents detailed statistical tables. A glossary provides key definitions. The FRS Companies in the U.S. Economy and Energy Markets a Major energy-producing companies annually report to the Energy Information Administration (EIA) on Form EIA-28. These reports include data and information on financial and operating developments. For the reporting year 1993, 25 companies filed this information. The FRS companies occupy a major position in the U.S.b economy. In 1993, their sales equaled 19 percent of the $2.4 trillion in sales of the Fortune 500 largest U.S. industrial corporations, and their assets were equal to 17 percent of those of the Fortune 500 companies. Of the top 25 companies (based on sales) on the Fortune 500 list in 1993, 9 were FRS companies. The reporting companies engage in a wide range of business activities, but their most important activities are in the energy sector. About 83 percent, or $381 billion, of allocated operating revenues were derived from energy sales. Nearly all of these sales involved petroleum (Figure 1). (For purposes of this report, petroleum is defined to include natural gas.) Figure 1. Operating Revenues by Line of Business for FRS Companies, 1981-1993 Source: See Appendix B, Table B1. Nonpetroleum energy production is a relatively small part of the FRS companies' operations. The combined operating revenues of coal, nuclear, and nonconventional energy operations of the FRS companies totaled $4 billion in 1993, or only 1 percent of allocated revenues. Nonetheless, the FRS companies are significant participants in the coal market, producing 21 percent of U.S. coal in 1993. However, they no longer produce uranium oxide domestically. Aggregate time series data from Form EIA-28 for 1977 through 1993 can be obtained from the ELA (see contacts, p. ii) on paper or diskette. In addition to the data provided by the detailed statistical tables in Appendix B and in the appendices of previous versions of this report, aggregate time series data from Form EIA-28 are available in a special post-embargo report covering the period 1974 through 1980. See Energy Information Administration, Energy Company Development Patterns in the Post-embargo Era, Vol. 1 and Vol. 2, DOE/EIA0349 (Washington, DC, September 1982). See also a special analysis of energy developments in the 1980's published in Energy Information Administration, Performance Profiles of Major Energy Producers 1990, DOE/ELA-0206(90) (Washington, DC, December 1991), Part II. bFor purposes of this report, the term "United States" typically includes the 50 States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Fortune 500 is a list of the 500 largest U.S. industrial companies, ranked by total sales, published annually by Fortune magazine. To be listed, companies must obtain a majority of their sales revenues from manufacturing/mining, which includes oil production and refining. Financial and operating statistics for the Fortune 500 are therefore suitable for comparison with related FRS measures. Since all but one FRS company have sales revenues sufficient to qualify, the few exclusions of FRS companies from the Fortune 500 are due principally to foreign ownership or sales in non-manufacturing sectors. All Fortune 500 statistics used in this boxed discussion have been adjusted by the addition of those FRS companies excluded from the original Fortune lists. These companies are Anadarko, BP America, Enron, and Union Pacific. BP America became a 100-percent owned subsidiary of British Petroleum in 1987. Based on 1993 disclosures, BP America would rank 25th on the Fortune 500 list. 2. 1993 Financial Highlights Refining, Restructuring, and a Rebound in Income The 1993 financial results of the 25 major energy companies in the Financial Reporting System (FRS) not only reflected energy market developments but also showed the effects of recent restructuring efforts directed toward reducing costs. Net income of the FRS companies registered an enormous gain, from $1.8 billion in 1992 to $15.5 billion in 1993 (Table 1). However, most of this gain in bottom-line financial results was attributable to unusual items in the prior year. In particular, Financial Accounting Standard No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), required the recognition of obligations to both current and future. pensioners of U.S. corporations. Implementation required most U.S. corporations to recognize the cumulative impact of this standard for current and future obligations in a single year, 1992, reducing net income by nearly $11 billion. even more. Excluding the effects of SFAS 106, as well as other unusual items, the FRS companies' net income was up $2.5 billion between 1992 and 1993 to $17.6 billion, a 17percent increase. Although revenues declined, largely due to lower oil prices and lower refined product prices, operating expenses declined Reduction in operating costs is a theme that appears throughout the review of 1993 results. The $1.0-billion reduction in interest expense was also a notable improvement in the FRS companies' overall corporate results. This reduction reflected the lower interest rates in recent years and the FRS companies' paring of debt levels. Corporate profitability of the FRS companies continued to nearly match the profitability of large U.S. industrial Table 1. Consolidated Income Statement for FRS Companies, 1992 and 1993 (Billion Dollars) 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. 'Unusual items are composed of gains and charges recognized in a company's income statement that are of a non-recurring nature and generally unrelated to current operations. These items include effects of accounting changes, litigation settlements, gains and losses from large divestitures of assets, provisions for the cost of restructuring, and provisions for reserves for future liabilities. Financial Accounting Standards Board, Statement of Financial Accounting Standards, No. 106 (Norwalk, CT, December 1990). corporations generally in 1993. Return on equity (net income as a percent of stockholders' equity) for the FRS companies in 1993 was 10 percent, only a percentage point above the return on equity for the Standard and Poor's (S&P) 400 U.S. industrial corporations (Figure 3). The corporate profitability of both groups was still relatively low in 1993 compared with other years. 12 13 The rebound in net income of the FRS companies (excluding unusual items) came almost entirely from refining and marketing operations. Net income from U.S. refining/marketing was up $2.4 billion and up $1.5 billion in foreign refining/marketing (Table 2).10 Although worldwide consumption of petroleum was up less than 1 percent, demand for gasoline and distillates was up 3 percent.11 In the United States, gasoline and distillate (including jet fuel) demand was also up 3 percent.12 These products tend to yield higher refiner margins (i.e., refined product prices less crude oil input costs) than the rest of the refined product slate. As a result, even though refined product prices were lower in 1993 than in 1992, refiner margins improved.' Reduction in downstream operating expenses was even more important than improved margins for the FRS companies. The FRS companies' efforts to increase the efficiency of their downstream operations, in part through recent restructuring, have led to lower operating costs, particularly in the marketing and distribution stages. As discussed in Chapter 3, most of the improvement in the FRS companies' U.S. refining/marketing income in 1993 stemmed from reductions in marketing expenses. To provide an accurate perspective, it should be noted that the improvement in performance in 1993, though substantial, followed the worst year for FRS refining/marketing profitability since at least 1977. Domestic refining/marketing profitability in 1993, at 3.4 percent (Table 3), was at the fifth lowest level in the 1977-1993 period. Higher natural gas prices in 1993 could not fully offset the effects of lower oil prices in the FRS companies' upstream (oil and gas exploration, development, and production) operations. Also, evidence of upstream cost cutting was widespread, with a majority of the FRS companies reporting reductions in exploration expenses and the costs of oil and gas extraction. Worldwide net income (excluding unusual items) from oil and gas production declined $1.7 billion between 1992 and 1993 (Table 2), with the reduction about evenly split between U.S. and foreign operations. Nevertheless, oil and gas production remained the FRS companies' primary source of earnings. "The S&P 400 is a well recognized database that includes 400 of the largest U.S. industrial companies. In 1993, 17 of the FRS companies were included in the S&P 400. Financial statistics for the S&P 400 were obtained by accessing Compustat, a service of Standard & Poor's, Inc. 10Line-of-business profit measures should be distinguished from measures that reflect company-wide results because the former reflect only allocated income, expense, and asset items. Two measures of income are presented: operating income and contribution to net income. Operating income by line of business is similar in concept to the operating income measure for total company operations. It is the net of operating revenues and operating expenses (including depreciation, depletion, and amortization) for a line of business. Contribution to net income equals operating income plus income from unconsolidated affiliates and gains on disposal of property, plant, and equipment less income taxes imputed to the line of business and excludes certain non-allocable items, primarily interest expense. Interest expense is the principal source of difference between a companywide net income figure and line-of-business contributions to net income (see Appendix A for further discussion). Line-of-business rates of return are based on historical costs and measure ex-post average profitability, not marginal or prospective rates of return. "The British Petroleum Company p.l.c., BP Statistical Review of World Energy, June 1994, p. 10. 12Unless otherwise noted, energy industry price and quantity data are from Energy Information Administration, Monthly Energy Review, September 1994, DOE/EIA-0035(94/09) (Washington, DC, September 1994). 13Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), p. 181. |