================================================================================
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 June 30, 2000 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 July 31, 2000, there were 551,250,186 shares outstanding of Texaco
Inc. Common Stock - par value $3.125.
================================================================================
<PAGE>
TEXACO INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the six
and three months ended June 30, 2000 and 1999 1
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Comprehensive
Income for the six and three months ended
June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17-19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges
</TABLE>
- i -
<PAGE>
PART I - FINANCIAL INFORMATION
TEXACO INC.
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Millions of dollars, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Sales and services $22,862 $15,030 $11,776 $ 8,116
Equity in income of affiliates, interest,
asset sales and other 478 429 293 153
------- ------- ------- --------
23,340 15,459 12,069 8,269
------- ------- ------- --------
DEDUCTIONS
Purchases and other costs 18,055 11,806 9,425 6,356
Operating expenses 1,268 1,109 678 550
Selling, general and administrative expenses 581 601 256 311
Exploratory expenses 113 210 60 80
Depreciation, depletion and amortization 875 726 391 365
Interest expense 231 245 109 124
Taxes other than income taxes 194 148 91 72
Minority interest 57 35 30 16
------- ------- ------- --------
21,374 14,880 11,040 7,874
------- ------- ------- --------
Income before income taxes 1,966 579 1,029 395
Provision for income taxes 767 107 404 122
------- ------- ------- --------
NET INCOME $ 1,199 $ 472 $ 625 $ 273
======= ======= ======= ========
Per common share
Basic net income $ 2.19 $ 0.85 $ 1.14 $ 0.50
Diluted net income $ 2.19 $ 0.85 $ 1.14 $ 0.50
Cash dividends paid $ 0.90 $ 0.90 $ 0.45 $ 0.45
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 1 -
<PAGE>
TEXACO INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
-----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 261 $ 419
Short-term investments - at fair value 35 29
Accounts and notes receivable, less allowance for doubtful
accounts of $25 million in 2000 and $27 million in 1999 4,789 4,060
Inventories 1,422 1,182
Deferred income taxes and other current assets 325 273
------- -------
Total current assets 6,832 5,963
Investments and Advances 6,485 6,426
Properties, Plant and Equipment - at cost 33,816 36,527
Less - Accumulated Depreciation, Depletion and Amortization 18,412 20,967
------- -------
Net properties, plant and equipment 15,404 15,560
Deferred Charges 1,033 1,023
------- -------
Total $29,754 $28,972
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 559 $ 1,041
Accounts payable and accrued liabilities
Trade liabilities 3,124 2,585
Accrued liabilities 1,121 1,203
Income and other taxes 1,155 839
Total current liabilities 5,959 5,668
Long-Term Debt and Capital Lease Obligations 6,519 6,606
Deferred Income Taxes 1,483 1,468
Employee Retirement Benefits 1,176 1,184
Deferred Credits and Other Non-current Liabilities 1,218 1,294
Minority Interest in Subsidiary Companies 716 710
------- -------
Total 17,071 16,930
Stockholders' Equity
Market auction preferred shares 300 300
Common stock (authorized: 850,000,000 shares, $3.125 par value;
567,576,504 shares issued) 1,774 1,774
Paid-in capital in excess of par value 1,285 1,287
Retained earnings 10,449 9,748
Unearned employee compensation and benefit plan trust (285) (306)
Accumulated other comprehensive income (loss)
Currency translation adjustment (99) (99)
Minimum pension liability adjustment (27) (23)
Unrealized net gain on investments 4 3
------- -------
Total (122) (119)
------- -------
13,401 12,684
Less - Common stock held in treasury, at cost 718 642
------- -------
Total stockholders' equity 12,683 12,042
------- -------
Total $29,754 $28,972
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
(Unaudited)
-----------------------
For the six months
ended June 30,
-----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,199 $ 472
Reconciliation to net cash provided by (used in)
operating activities
Depreciation, depletion and amortization 875 726
Deferred income taxes 15 (96)
Exploratory expenses 113 210
Minority interest in net income 57 35
Dividends from affiliates, greater than
equity in income 108 58
Gains on asset sales (95) (62)
Changes in operating working capital (337) (267)
Other - net 58 (23)
------ ------
Net cash provided by operating activities 1,993 1,053
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and exploratory expenditures (1,469) (1,109)
Proceeds from asset sales 490 219
Purchases of investment instruments (206) (283)
Sales/maturities of investment instruments 202 606
Collection of note from affiliate -- 101
------ ------
Net cash used in investing activities (983) (466)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 762 1,843
Repayments (1,836) (298)
Net increase (decrease) in other borrowings 532 (1,522)
Purchases of common stock (71) --
Dividends paid to the company's stockholders
Common (489) (474)
Preferred (8) (23)
Dividends paid to minority stockholders (53) (15)
------ ------
Net cash used in financing activities (1,163) (489)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash and cash equivalents (5) (24)
------ ------
Increase (decrease) during period (158) 74
Beginning of year 419 249
------ ------
End of period $ 261 $ 323
======= ======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
---------------------------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
(Unaudited)
--------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $1,199 $ 472 $ 625 $ 273
Other comprehensive income (loss), net of tax
Minimum pension liability adjustment (4) - - -
Unrealized net gain (loss) on investments 1 (22) (5) (2)
------ ------- ------ -------
(3) (22) (5) (2)
------ ------- ------ -------
COMPREHENSIVE INCOME $1,196 $ 450 $ 620 $ 271
====== ======= ====== =======
</TABLE>
TEXACO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1. Basis of Preparing Interim Financial Statements
-------------------------------------------------------
The accompanying unaudited consolidated interim financial statements of Texaco
Inc. have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. We have condensed or omitted from these
financial statements certain footnotes and other information included in our
1999 Annual Report on Form 10-K. You should read these unaudited condensed
financial statements in conjunction with our 1999 Annual Report. Certain prior
period amounts have been reclassified to conform to current year presentation.
All dollar amounts are in millions, unless otherwise noted.
We have consistently applied the accounting policies described in our 1999
Annual Report on Form 10-K in preparing the unaudited financial statements for
the six-month and three-month periods ended June 30, 2000 and 1999. We have made
all adjustments and disclosures necessary, in our opinion, to present fairly our
results of operations, financial position and cash flows for such periods. These
adjustments were of a normal recurring nature. The information is subject to
year-end audit by independent public accountants.
The results for the interim periods are not necessarily indicative of trends or
future financial results.
- 4 -
<PAGE>
Note 2. Net Income Per Common Share
-----------------------------------
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Basic Net Income Per Common Share:
Net income $ 1,199 $ 472 $ 625 $ 273
Less: Preferred stock dividends 7 23 4 10
------- ------- ------- -------
Net income available for common stock $ 1,192 $ 449 $ 621 $ 263
======= ======= ======= =======
Weighted average shares outstanding (thousands) 543,334 526,965 542,770 527,700
======= ======= ======= =======
Basic net income per common share (dollars) $ 2.19 $ 0.85 $ 1.14 $ 0.50
======= ======= ======= =======
Diluted Net Income Per Common Share:
Net income available for common stock $ 1,192 $ 449 $ 621 $ 263
Adjustment for the dilutive effect of
stock-based compensation 2 2 1 1
------- ------- ------- -------
Income for diluted earnings per share $ 1,194 $ 451 $ 622 $ 264
======= ======= ======= =======
Weighted average shares outstanding (thousands) 543,334 526,965 542,770 527,700
Dilutive effect of stock-based compensation (thousands) 1,611 2,675 1,642 2,536
------- ------- ------- -------
Weighted average shares outstanding for diluted
computation (thousands) 544,945 529,640 544,412 530,236
======= ======= ======= =======
Diluted net income per common share (dollars) $ 2.19 $ 0.85 $ 1.14 $ 0.50
======= ======= ======= =======
</TABLE>
Note 3. Segment Information
---------------------------
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- -------------------------------------
Sales and Services Sales and Services
------------------------ After ------------------------ After
Inter- Tax Inter- Tax
Outside Segment Total Profit (Loss) Outside Segment Total Profit (Loss)
------- ------- ----- ------------- ------- ------- ----- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $1,682 $ 924 $2,606 $ 647 $ 826 $ 666 $ 1,492 $ 186
International 1,669 684 2,353 554 1,022 294 1,316 60
Refining, marketing and distribution
United States 2,767 106 2,873 63 1,440 7 1,447 86
International 13,851 191 14,042 141 9,856 23 9,879 371
Global gas and power 2,887 81 2,968 20 1,879 47 1,926 7
------- ------ ------- ------ ------- ------ ------- -----
Segment totals $22,856 $1,986 24,842 1,425 $15,023 $1,037 16,060 710
======= ====== ======= ======
Other business units 15 (2) 20 (2)
Corporate/Non-operating 3 (224) 4 (236)
Intersegment eliminations (1,998) -- (1,054) --
------- ------ ------ -----
Consolidated $22,862 $1,199 $15,030 $ 472
======= ====== ======= =====
</TABLE>
- 5 -
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- -------------------------------------
Sales and Services Sales and Services
------------------------ After ------------------------ After
Inter- Tax Inter- Tax
Outside Segment Total Profit (Loss) Outside Segment Total Profit (Loss)
------- ------- ----- ------------- ------- ------- ----- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 859 $494 $ 1,353 $353 $ 477 $370 $ 847 $148
International 796 273 1,069 261 577 184 761 78
Refining, marketing and distribution
United States 1,387 82 1,469 45 829 4 833 24
International 7,130 96 7,226 90 5,310 20 5,330 151
Global gas and power 1,602 46 1,648 -- 919 24 943 1
------- ---- ------- --- ------ ---- ------ ----
Segment totals $11,774 $991 12,765 749 $8,112 $602 8,714 402
======= ==== ====== ====
Other business units 5 (2) 9 (1)
Corporate/Non-operating 2 (122) 3 (128)
Intersegment eliminations (996) -- (610) --
------- ---- ------ ----
Consolidated $11,776 $625 $8,116 $273
======= ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Assets as of
---------------------------------------------
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Exploration and production
United States $8,325 $8,696
International 5,792 5,333
Refining, marketing and distribution
United States 3,326 3,714
International 9,219 8,542
Global gas and power 1,800 1,297
------- -------
Segment totals 28,462 27,582
Other business units 362 365
Corporate/Non-operating 1,307 1,430
Intersegment eliminations (377) (405)
------- -------
Consolidated $29,754 $28,972
======= =======
</TABLE>
- 6 -
<PAGE>
Note 4. Inventories
-------------------
The inventory accounts of Texaco are presented below:
<TABLE>
<CAPTION>
As of
--------------------------------------
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Crude oil $ 218 $ 141
Petroleum products and other 1,023 857
Materials and supplies 181 184
------ ------
Total $1,422 $1,182
====== ======
</TABLE>
Note 5. Investments in Significant Equity Affiliates
----------------------------------------------------
U.S. Downstream Alliances
Summarized unaudited financial information for Equilon, owned 44% by Texaco and
56% by Shell Oil Company, is presented below on a 100% Equilon basis:
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenues $21,186 $11,352 $11,229 $ 5,751
Income (loss) before income taxes $ 18 $ 48 $ 49 $ (123)
</TABLE>
The following table presents summarized unaudited financial information for
Motiva on a 100% Motiva basis. Motiva is owned by Texaco, Saudi Refining, Inc.
(a corporate affiliate of Saudi Aramco) and Shell Oil Company. Under the terms
of the Limited Liability Agreement for Motiva, the ownership in Motiva is
subject to annual adjustment through year-end 2005, based on the performance of
the assets contributed to Motiva. Accordingly, the initial ownership in Motiva
was adjusted effective as of January 1, 2000, so that currently, Texaco and
Saudi Refining, Inc. each own just under 31% and Shell owns just under 39% of
Motiva. These ownership percentages will be effective through year-end 2000. The
Agreement provides that a final ownership percentage will be calculated at the
end of 2005.
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenues $9,137 $4,965 $4,746 $2,815
Income (loss) before income taxes $ 217 $ 20 $ 154 $ (21)
</TABLE>
We record income tax effects applicable to our share of Equilon's and Motiva's
pre-tax results in our consolidated financial statements, since Equilon and
Motiva are limited liability companies.
- 7 -
<PAGE>
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:
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenues $8,905 $6,137 $4,795 $3,247
Income before income taxes $ 483 $ 518 $ 264 $ 229
Net income $ 230 $ 343 $ 128 $ 140
</TABLE>
Note 6. Commitments and Contingencies
-------------------------------------
Information relative to commitments and contingent liabilities of Texaco is
presented in Note 15, Other Financial Information, Commitments and
Contingencies, pages 54-55, of our 1999 Annual Report.
It is impossible for us to determine 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.
- 8 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following table provides a summary of Texaco's net income and income before
special items for the second quarter and first six months of 2000 and 1999. All
dollar amounts are in millions, unless otherwise noted.
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income before special items $1,243 $391 $ 641 $286
Per share (dollars) $ 2.27 $.70 $1.17 $.52
Net income $1,199 $472 $ 625 $273
Per share (dollars) $ 2.19 $.85 $1.14 $.50
</TABLE>
Our strong earnings performance during the quarter was driven by high crude oil
prices and increased U.S. natural gas prices, reflecting strong worldwide demand
and low industry inventories.
Our upstream operations contributed the greatest share of our earnings
improvement during this period. During the quarter, the divestiture of several
non-core producing assets added over $200 million to our cash flow. We continue
to be encouraged by the results of our exploration program as well as the
progress on our major development activities. In addition, the Petronius field
offshore in the Gulf of Mexico began producing on July 9 and our production
there should grow to 20,000 barrels per day in October.
In the downstream, our overall results improved versus this year's first quarter
but were below last year. While our refining results have improved in Europe and
on the Gulf and East Coasts of the United States, the combination of high crude
oil costs and the extremely competitive environment contributed to weak
marketing margins in most areas. Margins in the Caltex region have been
especially weak and, accordingly, our performance there has been disappointing.
During the quarter, the sale of Equilon's Wood River refinery was completed,
furthering our long term strategy of reducing our refining exposure.
Notwithstanding our strong earnings and cash flow, we continue to maintain a
disciplined approach to our capital spending throughout the company.
Results for the second quarter and first six months of 2000 and 1999 are
summarized in the following table. Details on special items are included in the
segment analysis which follows this table. The following discussion of operating
earnings is presented on an after-tax basis.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income before special items $1,243 $391 $641 $286
Gains (losses) on major asset sales (65) (55) 2 (55)
Tax issues 46 65 -- 54
Inventory valuation adjustments -- 138 -- 55
Employee benefits revision 18 -- -- --
Reorganization, restructuring and employee separation costs (12) (67) -- (67)
Litigation issue (17) -- (4) --
Net loss on Erskine pipeline (14) -- (14) --
------ ---- ---- ----
Special items (44) 81 (16) (13)
------ ---- ---- ----
Net income $1,199 $472 $625 $273
====== ==== ==== ====
</TABLE>
OPERATING RESULTS
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
For the six months For the three months
United States ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income before special items $754 $165 $393 $138
Special items (107) 21 (40) 10
---- ---- --- ----
Operating income $647 $186 $353 $148
==== ==== ==== ====
</TABLE>
U.S. exploration and production earnings for the second quarter and first six
months of 2000 were considerably better than last year due to higher crude oil
and natural gas prices. Tight oil supplies caused second quarter WTI crude oil
prices to average nearly $29.00 per barrel. Our realized crude oil prices for
the second quarter and first six months of 2000 were $24.90 and $24.67 per
barrel, 95 percent and 125 percent higher than last year. Increased demand and
low storage levels caused U.S. natural gas prices to rise. For the second
quarter and first six months of 2000, average natural gas prices were $3.28 and
$2.86 per MCF, 60 percent and 49 percent above last year.
Daily production decreased nine percent for the second quarter and eight percent
for the first six months of the year. This expected reduction was due to natural
field declines and sales of non-core producing properties. During the second
quarter, we received $67 million from these sales, bringing our total cash
proceeds for the year to $330 million.
Our operating expenses increased eight percent for the second quarter and six
months as higher crude oil and natural gas prices led to higher utilities
expenses and production taxes. Exploratory expenses for the second quarter and
first six months of 2000 were $22 million and $41 million before tax, $16
million and $51 million below last year, reflecting reduced activities in the
U.S.
Results for the first six months of 2000 included special charges of $107
million, including $40 million in the second quarter, for net losses on sales of
non-core producing assets. This charge was comprised of write-downs of assets
sold to their sales prices and related disposal costs, partially offset by gains
on the sale of certain other assets. Results for the second quarter of 1999
included a special gain of $21 million for the sale of our interest in several
California fields. Also included in that quarter was a special charge of $11
million for employee separation costs. See the section entitled,
Reorganizations, Restructurings and Employee Separation Programs on page 14 of
this Form 10-Q for additional information. Results for 1999 also included a
first quarter special benefit of $11 million for a production tax refund.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
For the six months For the three months
International ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income before special items $488 $62 $195 $80
Special items 66 (2) 66 (2)
---- --- ---- ---
Operating income $554 $60 $261 $78
==== === ==== ===
</TABLE>
International exploration and production earnings for the second quarter and
first six months of 2000 were significantly higher than last year due to higher
crude oil prices and lower expenses. Market conditions have kept crude oil
prices strong throughout the first six months. Our realized crude oil prices for
the second quarter and first six months of 2000 were $23.64 and $23.47 per
barrel, 72 percent and 102 percent higher than last year. Average natural gas
prices were $1.44 per MCF for the second quarter and $1.46 per MCF for the first
six months of 2000, 17 percent and seven percent above last year.
Daily production decreased 10 percent for the second quarter and five percent
for the first six months due to scheduled maintenance and repairs in our U.K.
North Sea operations, lower lifting entitlements for cost recovery in Indonesia
as a result of higher crude oil prices and the sale of non-core producing
properties. Production continues to increase in the Partitioned Neutral Zone and
the Karachaganak field in the Republic of Kazakhstan. During the second quarter,
we received proceeds of $137 million from the sales of non-core producing
properties.
In line with lower production, our operating expenses decreased eight percent
for the second quarter and seven percent for the first six months of 2000.
Exploratory expenses for the second quarter were $38 million before tax,
slightly lower than last year. Exploratory expenses for the first six months
were $72 million before tax, $46 million lower than last year which included an
unsuccessful exploratory well in a new offshore area of Trinidad.
Results for the second quarter of 2000 included a special benefit of $80 million
for net gains on the sale of non-core producing properties and a special charge
of $14 million for net losses resulting from the Erskine pipeline interruption
in the U.K. North Sea. Results for the second quarter of 1999 included a special
charge of $2 million for employee separation costs. See the section entitled,
Reorganizations, Restructurings and Employee Separation Programs on page 14 of
this Form 10-Q for additional information.
REFINING, MARKETING AND DISTRIBUTION
<TABLE>
<CAPTION>
For the six months For the three months
United States ended June 30, ended June 30,
------------- ------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income before special items $93 $165 $80 $111
Special items (30) (79) (35) (87)
--- ---- --- ----
Operating income $63 $ 86 $45 $ 24
=== ==== === ====
</TABLE>
U.S. refining, marketing and distribution earnings before special items were
lower than last year for both the second quarter and first six months. U.S.
downstream activities are primarily conducted 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 second quarter and first six months of 2000, Equilon's earnings
declined due to weak marketing and lubricant margins. Maintenance activity at
the Puget Sound, Martinez and Wood River refineries adversely impacted results
for both years. Marketing margins were depressed because pump prices lagged
increases in supply costs in a very competitive market.
- 11 -
<PAGE>
Motiva's results for the second quarter and first six months of 2000 benefited
from improved East and Gulf Coast refining margins. Maintenance activities this
year in both quarters at the Delaware City refinery and in the second quarter at
the Port Arthur refinery adversely impacted results. Lower gasoline and
distillate inventory levels and tight supplies due to industry refinery downtime
helped refining margins. While refining results improved, marketing margins were
negatively impacted by higher supply costs which were not fully recovered in the
competitive market.
Results for the first six months of 2000 included net special charges of $30
million, comprised of a second quarter charge of $31 million for the loss on the
sale of the Wood River refinery, a charge for a patent litigation issue of $17
million, $4 million in the second quarter, and a first quarter gain of $18
million for an employee benefits revision. Results for the first six months of
1999 included net special charges of $79 million. This was comprised of second
quarter charges of $76 million for asset write-downs to their estimated sales
value due to the pending sales by Equilon of its El Dorado and Wood River
refineries and $11 million for alliance reorganization, restructuring and
employee separation costs. Results for 1999 included a first quarter 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.
<TABLE>
<CAPTION>
For the six months For the three months
International ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income before special items $153 $ 221 $90 $ 76
Special items (12) 150 -- 75
---- ----- --- ----
Operating income $141 $ 371 $90 $151
==== ===== === ====
</TABLE>
International refining and marketing earnings before special items for the
second quarter of 2000 increased from last year. Refining results improved
dramatically in Europe as margins improved in the U.K. and the Netherlands.
However, marketing results declined due to increased costs and highly
competitive market conditions in our European and Latin American areas of
operation. Refining results in Latin America were nearly level with the second
quarter of 1999. Operating results for our Caltex affiliate decreased due to
lower marketing margins in the Asia-Pacific area.
Results for the first six months of 2000 declined due to weak marketing margins
in the Caltex region, Latin America and Europe. Refining results were mixed as
European and Asian margins improved, while increased crude costs negatively
impacted refining margins in Panama.
Results for 2000 included first quarter special charges of $12 million for
employee separation costs. See the section entitled, Reorganizations,
Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for
additional information. The second quarter of 1999 included a special gain of
$54 million for a Korean tax benefit, Caltex restructuring charges of $25
million and employee separation costs in Europe and Latin America of $9 million.
Results for 1999 also included first and second quarter special benefits of $75
million and $55 million due to higher 1999 inventory values. This follows a
fourth-quarter 1998 charge of $108 million to reflect lower market prices on
December 31, 1998 for inventories of crude oil and refined products, as well as
additional charges recorded in prior years.
- 12 -
<PAGE>
GLOBAL GAS AND POWER
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income before special items $20 $10 $ -- $ 4
Special items -- (3) -- (3)
--- --- -- ---
Operating income $20 $ 7 $ -- $ 1
=== === == ===
</TABLE>
Operating results for our global gas and power operations for the first six
months of 2000 benefited from the first quarter recovery of natural gas liquids
prices which was not sustained in the second quarter. Results for 1999 included
gains from several asset sales, including a gas gathering pipeline in the U.S.
and our 50 percent interest in a U.K. retail gas marketing venture.
Results for the second quarter of 1999 included a special charge of $3 million
for employee separation costs. See the section entitled, Reorganizations,
Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for
additional information.
OTHER BUSINESS UNITS
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating loss $ (2) $(2) $ (2) $(1)
==== === ==== ===
</TABLE>
Our other business units mainly include our insurance operations. There were no
significant items in these results.
CORPORATE/NON-OPERATING
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Results before special items $(263) $(230) $(115) $(122)
Special items 39 (6) (7) (6)
----- ----- ----- -----
Total Corporate/Non-operating $(224) $(236) $(122) $(128)
===== ===== ===== =====
</TABLE>
Corporate and non-operating expenses before special items for the second quarter
benefited from a favorable prior period tax revision and lower interest expense.
The first six months of 2000 included expenses for our Olympic sponsorship
program and higher other corporate expenses. Results for the first six months of
1999 benefited from a $21 million gain on the sale of marketable securities.
Results for the first six months of 2000 included a first quarter special
benefit of $46 million for favorable income tax settlements in the first quarter
and a second quarter special charge of $7 million for early extinguishment of
debt associated with the anticipated sale of an offshore producing facility in
the U.K. North Sea. Results for 1999 included a second quarter special charge of
$6 million for employee separation costs. See the section entitled,
Reorganizations, Restructurings and Employee Separation Programs on page 14 of
this Form 10-Q for additional information.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Our cash, cash equivalents and short-term investments were $296 million at June
30, 2000, compared with $448 million at year-end 1999.
- 13 -
<PAGE>
During the first six months of 2000, strong earnings from our operations
provided cash of $2.0 billion. We also had cash inflows of $490 million from
assets sales, primarily from the sale of several non-core producing properties.
We spent $1.5 billion on our capital and exploratory program, paid $550 million
in common, preferred and minority interest dividends and used $613 million to
reduce debt and repurchase common stock.
As of June 30, 2000, our ratio of total debt to total borrowed and invested
capital was 34.6%, compared with 37.5% at year-end 1999. At June 30, 2000, 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 six months of 2000, our overall debt level decreased by
$542 million. This was comprised of debt repayments of $1,359 million, increased
commercial paper of $287 million and the issuance of $530 million of medium-term
notes from our existing "shelf" registration.
As of June 30, 2000, we maintained, but had not used, $2.05 billion in revolving
credit facilities that provide liquidity and support our commercial paper
program. As of June 30, 2000, the total dollar amount of debt and equity
securities remaining available for issuance and sale under our "shelf"
registration statement is $1,445 million.
In March 2000, we resumed purchasing common stock under the $1 billion common
stock repurchase program we initiated in March 1998. We purchased about $70
million of common stock under this program during the first six months of 2000
and an additional $58 million from July 1 through August 4, 2000. This brings
our total purchases under this program, including $474 million purchased during
1998, to about $600 million. No shares were purchased under this program in
1999. We will continue to repurchase shares of common stock, subject to market
conditions, through open market purchases or privately negotiated transactions.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
REORGANIZATIONS, RESTRUCTURINGS AND EMPLOYEE SEPARATION PROGRAMS
----------------------------------------------------------------
On pages 26 and 27 of our 1999 Annual Report, we discussed our fourth quarter
1998 reorganizations, restructurings and employee separation programs. In 1998,
we accrued $115 million ($80 million, net of tax) for employee separations,
curtailment costs and special termination benefits. During the second quarter of
1999, we expanded the employee separation programs and recorded an additional
provision of $48 million ($31 million, net of tax). Through June 30, 2000, cash
payments totaled $149 million and transfers to long-term obligations totaled $12
million. We will pay the remaining obligations of $2 million in future periods
in accordance with plan provisions. Refer to our 1999 Annual Report for a
further discussion of these programs.
During the first quarter of 2000, we announced an additional employee separation
program for our international downstream, primarily our marketing operations in
Brazil and Ireland. We accrued $17 million ($12 million, net of tax) for
employee separations, curtailment costs and special termination benefits for
about 200 employees. These separation accruals are shown as selling, general and
administrative expenses in the Consolidated Statements of Income. Through June
30, 2000, employee reductions totaled 91. The remaining reductions will occur
during the last half of this year. During the first six months of 2000, we made
cash payments of $2 million and transfers to long-term obligations of $8
million. We will pay the remaining obligations of $7 million in future periods
in accordance with plan provisions.
- 14 -
<PAGE>
NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS 133. This was followed in June 2000 by
the issuance of SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," which amends SFAS 133. SFAS 133 and 138 establishes
accounting and reporting standards for derivative financial instruments. The
standards require that all derivative financial instruments be recorded on the
Consolidated Balance Sheets at their fair value. Changes in fair value of
derivatives will be recorded each period in earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. We will adopt these
standards effective January 1, 2001 and are currently assessing the effects of
adoption.
CAPITAL AND EXPLORATORY EXPENDITURES
------------------------------------
Worldwide capital and exploratory expenditures, including our share of
affiliates, were $1,769 million for the first six months of 2000, compared with
$1,458 million for 1999.
Led by a 57 percent increase in our international segment, total upstream
expenditures increased 24 percent as we continued to focus on high-margin,
high-impact projects. Investment continued in the Malampaya natural gas project
in the Philippines and the Karachaganak field in Kazakhstan. In addition to
spending on these projects, expenditures for platform development work continued
on the Captain B project in the U.K. North Sea. In the United States, upstream
spending decreased by 17 percent primarily due to the completion, last year, of
the Gemini project in the Deepwater Gulf of Mexico.
In the United States downstream, refinery expenditures declined as we continued
to reduce our exposure to the refining business with Equilon's sale of the El
Dorado refinery in November of 1999 and the Wood River refinery in June of 2000.
Internationally, expenditures decreased due to the completion of a project at
the Pembroke refinery last year and lower marketing investments in Latin
America.
Expenditures for global gas and power more than doubled from last year primarily
from the purchase of a 20 percent interest in Energy Conversion Devices, Inc.,
which develops and commercializes enabling technologies for use in the fields of
alternative energy and information technologies. This investment further
advances our goal to be a leader in the development and commercialization of
advanced, environmentally-smart alternative energy technologies.
FORWARD-LOOKING STATEMENTS
--------------------------
Portions of the foregoing discussion contain a number of "forward-looking
statements" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In particular, statements made
concerning our expected performance and financial results in future periods are
based on our current expectations and beliefs and are subject to a number of
known and unknown risks and uncertainties. This could cause actual results to
differ materially from those described in the "forward-looking statements." The
following factors known to us, among other factors, could cause our actual
results to differ materially from those described in the "forward-looking
statements": incorrect estimation of reserves; inaccurate seismic data;
mechanical failures; decreased demand for crude oil, natural gas, motor fuels
and other products; worldwide and industry economic conditions; inaccurate
forecasts of crude oil, natural gas and petroleum product prices; increasing
price and product competition; price fluctuations; and higher costs, expenses
and interest rates. In addition, you are encouraged to review our latest reports
filed with the Securities and Exchange Commission, including our 1999 Annual
Report on Form 10-K filed with the SEC on March 24, 2000, which describes a
number of additional risks and uncertainties that could cause actual results to
vary materially from those listed in the "forward-looking statements" made in
this Quarterly Report on Form 10-Q.
- 15 -
<PAGE>
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
six months of 2000 in our exposures to loss from possible future changes in the
price of crude oil, natural gas and petroleum products, the value of foreign
currencies in relation to the U. S. dollar or interest rates.
- 16 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
We have provided information about legal proceedings pending against Texaco in
Note 6 to the Consolidated Financial Statements of this Form 10-Q, in Item 1 of
our first quarter 2000 Form 10-Q and in Item 3 of our 1999 Annual Report on Form
10-K. Note 6 of this Form 10-Q, Item 1 of our first quarter 2000 Form 10-Q and
Item 3 of our 1999 Form 10-K are incorporated here by reference.
Item 5. Other Information
-------------------------
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Millions of dollars)
(Unaudited)
<S> <C> <C> <C> <C>
CAPITAL AND EXPLORATORY EXPENDITURES
------------------------------------
Exploration and production
United States $ 384 $ 461 $ 209 $ 205
International 879 561 526 340
------ ------ ------ -----
Total 1,263 1,022 735 545
------ ------ ------ -----
Refining, marketing and distribution
United States 136 158 71 85
International 141 176 41 99
------ ------ ------ -----
Total 277 334 112 184
------ ------ ------ -----
Global gas and power 184 86 156 51
------ ------ ------ -----
Total operating segments 1,724 1,442 1,003 780
Other business units 45 16 42 9
------ ------ ------ -----
Total $1,769 $1,458 $1,045 $ 789
====== ====== ====== =====
Exploratory expenses included above
United States $ 41 $ 92 $ 22 $ 38
International 72 118 38 42
------ ------ ------ -----
Total $ 113 $ 210 $ 60 $ 80
====== ====== ====== =====
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING DATA
Exploration and Production
United States
Net production of crude oil and natural
gas liquids (MBPD) 371 404 364 399
Net production of natural gas - available
for sale (MMCFPD) 1,355 1,483 1,349 1,479
----- ----- ----- -----
Total net production (MBOEPD) 597 651 589 646
Natural gas sales (MMCFPD) 3,724 3,295 4,054 3,015
Average U.S. crude (per bbl) $24.67 $10.95 $24.90 $12.80
Average U.S. natural gas (per mcf) $ 2.86 $ 1.92 $ 3.28 $ 2.05
Average WTI (Spot) (per bbl) $28.94 $15.44 $28.97 $17.66
Average Kern (Spot) (per bbl) $23.00 $ 9.49 $23.17 $11.26
International
Net production of crude oil and natural
gas liquids (MBPD)
Europe 120 136 98 143
Indonesia 124 165 124 150
Partitioned Neutral Zone 135 119 136 121
Other 68 67 64 69
----- ----- ----- -----
Total 447 487 422 483
Net production of natural gas - available
for sale (MMCFPD)
Europe 248 265 205 244
Colombia 197 157 188 160
Other 148 111 145 112
----- ----- ----- -----
Total 593 533 538 516
----- ----- ----- -----
Total net production (MBOEPD) 546 576 512 569
Natural gas sales (MMCFPD) 626 557 567 549
Average International crude (per bbl) $23.47 $11.60 $23.64 $13.73
Average International natural gas (per mcf) $ 1.46 $ 1.37 $ 1.44 $ 1.23
Average U.K. natural gas (per mcf) $ 2.32 $ 2.39 $ 2.27 $ 2.17
Average Colombia natural gas (per mcf) $ 1.03 $ 0.62 $ 1.12 $ 0.59
Worldwide
Total worldwide net production (MBOEPD) 1,143 1,227 1,101 1,215
</TABLE>
-18 -
<PAGE>
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING DATA
--------------
Refining, Marketing and Distribution
------------------------------------
United States
-------------
Refinery input (MBPD)
Equilon area 286 369 295 373
Motiva area 270 307 279 313
----- ----- ----- -----
Total 556 676 574 686
Refined product sales (MBPD)
Equilon area 725 641 760 710
Motiva area 353 378 365 376
Other 318 299 344 291
----- ----- ----- -----
Total 1,396 1,318 1,469 1,377
International
-------------
Refinery input (MBPD)
Europe 375 367 385 368
Caltex area 354 427 361 416
Latin America/West Africa 58 73 64 72
----- ----- ----- -----
Total 787 867 810 856
Refined product sales (MBPD)
Europe 626 619 616 601
Caltex area 588 667 563 663
Latin America/West Africa 457 489 466 501
Other 92 93 91 82
----- ----- ----- -----
Total 1,763 1,868 1,736 1,847
</TABLE>
- 19-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
-- (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, 1999 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 1999),
dated March 24, 2000, and a copy of Texaco Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
2000, dated May 8, 2000, both incorporated herein by reference,
SEC File No. 1-27.
-- (27) Financial Data Schedule (included only in the electronic filing
of this document).
b) Reports on Form 8-K:
During the second quarter of 2000, we filed a Current Report on Form 8-K
for the following event:
1. April 25, 2000
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the first quarter of 2000.
- 20 -
<PAGE>
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: George J. Batavick
------------------
(Comptroller)
By: Michael H. Rudy
------------------
(Secretary)
Date: August 10, 2000
---------------
- 21 -
