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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 September 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
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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 October 31, 2000, there were 550,145,641 shares outstanding of Texaco
Inc. Common Stock - par value $3.125.
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TEXACO INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the nine
and three months ended September 30, 2000 and 1999 1
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Comprehensive
Income for the nine and three months ended
September 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 9-16
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
Exhibits
Exhibit 3.2. By-Laws of Texaco Inc.
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges
- i -
PART I - FINANCIAL INFORMATION
TEXACO INC.
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Millions of dollars, except per share data)
(Unaudited)
-------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
Sales and services $35,889 $24,502 $13,027 $ 9,472
Equity in income of affiliates, interest,
asset sales and other 810 634 332 205
------- ------- ------- -------
36,699 25,136 13,359 9,677
------- ------- ------- -------
DEDUCTIONS
Purchases and other costs 28,306 19,254 10,251 7,448
Operating expenses 1,935 1,653 667 544
Selling, general and administrative expenses 904 871 323 270
Exploratory expenses 219 282 106 72
Depreciation, depletion and amortization 1,231 1,082 356 356
Interest expense 345 369 114 124
Taxes other than income taxes 284 211 90 63
Minority interest 89 62 32 27
------- ------- ------- -------
33,313 23,784 11,939 8,904
------- ------- ------- -------
Income before income taxes 3,386 1,352 1,420 773
Provision for income taxes 1,389 493 622 386
------- ------- ------- -------
NET INCOME $ 1,997 $ 859 $ 798 $ 387
======= ======== ======== ========
PER COMMON SHARE
Basic net income $ 3.66 $ 1.56 $ 1.47 $ 0.71
Diluted net income $ 3.65 $ 1.56 $ 1.46 $ 0.71
Cash dividends paid $ 1.35 $ 1.35 $ 0.45 $ 0.45
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Millions of dollars)
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 212 $ 419
Short-term investments - at fair value 66 29
Accounts and notes receivable, less allowance for doubtful
accounts of $23 million in 2000 and $27 million in 1999 5,148 4,060
Inventories 1,381 1,182
Deferred income taxes and other current assets 402 273
------- -------
Total current assets 7,209 5,963
Investments and Advances 6,733 6,426
Properties, Plant and Equipment - at cost 33,916 36,527
Less - Accumulated Depreciation, Depletion and Amortization 18,268 20,967
------- -------
Net properties, plant and equipment 15,648 15,560
Deferred Charges 1,078 1,023
------- -------
Total $30,668 $28,972
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 831 $ 1,041
Accounts payable and accrued liabilities
Trade liabilities 3,068 2,585
Accrued liabilities 1,195 1,203
Income and other taxes 1,300 839
------- -------
Total current liabilities 6,394 5,668
Long-Term Debt and Capital Lease Obligations 6,527 6,606
Deferred Income Taxes 1,540 1,468
Employee Retirement Benefits 1,183 1,184
Deferred Credits and Other Non-current Liabilities 1,162 1,294
Minority Interest in Subsidiary Companies 717 710
------- -------
Total 17,523 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 11,000 9,748
Unearned employee compensation and benefit plan trust (307) (306)
Accumulated other comprehensive income (loss)
Currency translation adjustment (99) (99)
Minimum pension liability adjustment (27) (23)
Unrealized net gain on investments 7 3
------- -------
Total (119) (119)
------- -------
13,933 12,684
Less - Common stock held in treasury, at cost 788 642
------- -------
Total stockholders' equity 13,145 12,042
------- -------
Total $30,668 $28,972
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Millions of dollars)
(Unaudited)
------------------------
For the nine months
ended September 30,
-----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,997 $ 859
Reconciliation to net cash provided by (used in)
operating activities
Depreciation, depletion and amortization 1,231 1,082
Deferred income taxes 94 3
Exploratory expenses 219 282
Minority interest in net income 89 62
Dividends from affiliates, greater than
equity in income 28 25
Gains on asset sales (128) (70)
Changes in operating working capital (622) (290)
Other - net (29) (66)
------- -------
Net cash provided by operating activities 2,879 1,887
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and exploratory expenditures (2,340) (1,729)
Proceeds from asset sales 571 306
Purchases of investment instruments (261) (406)
Sales/maturities of investment instruments 242 685
Collection of note from U.S. affiliate -- 101
Other - net -- (23)
------- -------
Net cash used in investing activities (1,788) (1,066)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 764 2,086
Repayments (2,071) (763)
Net increase (decrease) in other borrowings 1,015 (1,395)
Purchases of common stock (167) --
Dividends paid to the company's stockholders
Common (733) (719)
Preferred (13) (26)
Dividends paid to minority stockholders (85) (31)
------- -------
Net cash used in financing activities (1,290) (848)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash and cash equivalents (8) (29)
------- -------
Decrease during period (207) (56)
Beginning of year 419 249
------- -------
End of period $ 212 $ 193
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 3 -
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-------------------------------------------------------
(Millions of dollars)
(Unaudited)
--------------------------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
NET INCOME $1,997 $ 859 $ 798 $ 387
Other comprehensive income (loss), net of tax
Currency translation adjustment -- 10 -- 10
Minimum pension liability adjustment (4) -- -- --
Unrealized net gain (loss) on investments 4 (27) 3 (5)
------ ------- ------ -------
-- (17) 3 5
------ ------- ------ -------
COMPREHENSIVE INCOME $1,997 $ 842 $ 801 $ 392
====== ======= ====== =======
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 nine-month and three-month periods ended September 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 -
Note 2. Net Income Per Common Share
- -----------------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Basic Net Income Per Common Share:
Net income $ 1,997 $ 859 $ 798 $ 387
Less: Preferred stock dividends 11 26 4 3
------- ------- ------- -------
Net income available for common stock $ 1,986 $ 833 $ 794 $ 384
======= ======= ======= =======
Weighted average shares outstanding (thousands) 542,760 532,534 541,611 543,671
------- ------- ------- -------
Basic net income per common share (dollars) $ 3.66 $ 1.56 $ 1.47 $ 0.71
======= ======= ======= =======
Diluted Net Income Per Common Share:
Net income available for common stock $ 1,986 $ 833 $ 794 $ 384
Adjustment for the dilutive effect of
stock-based compensation 3 3 1 1
------- ------- ------- -------
Income for diluted earnings per share $ 1,989 $ 836 $ 795 $ 385
======= ======= ======= =======
Weighted average shares outstanding (thousands) 542,760 532,534 541,611 543,671
Dilutive effect of stock-based compensation (thousands) 1,612 2,674 1,614 2,672
------- ------- ------- -------
Weighted average shares outstanding for diluted
computation (thousands) 544,372 535,208 543,225 546,343
======= ======= ======= =======
Diluted net income per common share (dollars) $ 3.65 $ 1.56 $ 1.46 $ 0.71
======= ======= ======= =======
Note 3. Segment Information
- ---------------------------
For the nine months ended September 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)
Exploration and production
United States $ 2,662 $1,453 $ 4,115 $1,126 $ 1,434 $1,100 $ 2,534 $ 444
International 2,723 1,104 3,827 849 1,770 600 2,370 189
Refining, marketing and distribution
United States 4,268 145 4,413 140 2,461 12 2,473 204
International 21,442 272 21,714 202 15,761 57 15,818 377
Global gas and power 4,786 155 4,941 33 3,068 82 3,150 13
------- ------ ------- ------ ------- ------ ------- ------
Segment totals $35,881 $3,129 39,010 2,350 $24,494 $1,851 26,345 1,227
======= ====== ======= ======
Other business units 21 (6) 27 (3)
Corporate/Non-operating 4 (347) 5 (365)
Intersegment eliminations (3,146) -- (1,875) --
------- ------ ------- -------
Consolidated $35,889 $1,997 $24,502 $ 859
======= ====== ======= =======
- 5 -
For the nine months ended September 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)
Exploration and production
United States $ 980 $ 529 $ 1,509 $479 $ 608 $434 $1,042 $258
International 1,054 420 1,474 295 748 306 1,054 129
Refining, marketing and distribution
United States 1,501 39 1,540 77 1,021 5 1,026 118
International 7,591 81 7,672 61 5,905 34 5,939 6
Global gas and power 1,899 74 1,973 13 1,189 35 1,224 6
------- ------ ------- ---- ------ ---- ------- ----
Segment totals $13,025 $1,143 14,168 925 $9,471 $814 10,285 517
======= ====== ====== ====
Other business units 6 (4) 7 (1)
Corporate/Non-operating 1 (123) 1 (129)
Intersegment eliminations (1,148) -- (821) --
------- ---- ------ ----
Consolidated $13,027 $798 $9,472 $387
======= ==== ====== ====
Assets as of
---------------------------------------------
September 30, December 31,
2000 1999
--------------- -----------
(Unaudited)
Exploration and production
United States $ 8,409 $ 8,696
International 6,296 5,333
Refining, marketing and distribution
United States 3,523 3,714
International 9,133 8,542
Global gas and power 1,946 1,297
------- -------
Segment totals 29,307 27,582
Other business units 355 365
Corporate/Non-operating 1,383 1,430
Intersegment eliminations (377) (405)
------- -------
Consolidated $30,668 $28,972
======= =======
- 6 -
Note 4. Inventories
- -------------------
The inventory accounts of Texaco are presented below:
As of
--------------------------------------
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
Crude oil $ 175 $ 141
Petroleum products and other 1,028 857
Materials and supplies 178 184
------ ------
Total $1,381 $1,182
====== ======
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:
For the nine months For the three months
ended September 30, ended September 30,
------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
Gross revenues $33,615 $19,756 $12,429 $ 8,404
Income before income taxes $ 207 $ 378 $ 189 $ 330
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.
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
2000 1999 2000 1999
------- ------ ------ ------
Gross revenues $14,299 $8,339 $5,162 $3,374
Income before income taxes $ 369 $ 67 $ 152 $ 47
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 -
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:
For the nine months For the three months
ended September 30, ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
------ ------- ------ ------
Gross revenues $14,034 $10,185 $5,129 $4,048
Income before income taxes $ 782 $ 666 $ 299 $ 148
Net income $ 378 $ 378 $ 148 $ 35
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.
Note 7. Subsequent Event
- ------------------------
On October 15, 2000, Texaco and Chevron Corporation entered into a merger
agreement providing for Texaco's merger with a Chevron subsidiary. In the
merger, Texaco shareholders will receive .77 shares of Chevron common stock for
each share of Texaco common stock they own, and Chevron shareholders will retain
their existing shares.
The merger is conditioned, among other things, on the approval by the
shareholders of both companies, pooling accounting treatment for the merger and
regulatory approvals of government agencies, such as the U.S. Federal Trade
Commission (FTC). Texaco and Chevron anticipate that the FTC will require
certain divestitures in the U.S. downstream in order to address market
concentration issues, and the companies intend to cooperate with the FTC in this
process. In that regard, Texaco is in discussions with our partners in the U.S.
downstream.
For additional information regarding the merger, refer to the Current Report on
Form 8-K we filed with the U.S. Securities and Exchange Commission on October
16, 2000.
- 8 -
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 third quarter and first nine months of 2000 and 1999. All
dollar amounts are in millions, unless otherwise noted.
For the nine months For the three months
ended September 30, ended September 30,
-------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Income before special items $2,058 $ 844 $ 815 $453
Per share (dollars) $ 3.76 $1.53 $1.49 $.83
Net income $1,997 $ 859 $ 798 $387
Per share (dollars) $ 3.65 $1.56 $1.46 $.71
We posted record earnings in the third quarter, due largely to sharply higher
worldwide crude oil and U.S. natural gas prices, which greatly benefited our
upstream operations. These higher prices were a result of several market
factors, including increased global demand. Also contributing to upstream
results was production from the Petronius field in the Gulf of Mexico which
started-up in July. In the downstream, marketing margins, especially in the
Caltex area, remained under pressure as higher crude oil costs could not be
fully recovered in the marketplace.
Our capital and exploratory spending rose $600 million this year as we continued
to invest in major upstream development projects and in alternate energy and
power projects. In Nigeria, the successful Ekoli-1 exploration well recently
confirmed the extension of our Agbami oil discovery on block 216 into the
adjacent block 217.
On October 15, 2000, we entered into a merger agreement with Chevron
Corporation. For additional information regarding the merger, refer to Note 7,
Subsequent Event, of this Quarterly Report on Form 10-Q and to our Current
Report on Form 8-K filed with the U.S. Securities and Exchange Commission on
October 16, 2000.
Results for the third quarter and first nine 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 -
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Income before special items $2,058 $ 844 $815 $453
------ ----- ---- ----
Net losses on major asset sales (77) (135) (12) (80)
Tax issues 46 65 -- --
Inventory valuation adjustments -- 152 -- 14
Employee benefits revision 18 -- -- --
Reorganization, restructuring and employee separation costs (12) (67) -- --
Environmental issues (5) -- (5) --
Litigation issue (17) -- -- --
Net loss on Erskine pipeline (14) -- -- --
------ ----- ---- ----
Special items (61) 15 (17) (66)
------ ----- ---- ----
Net income $1,997 $ 859 $798 $387
====== ===== ==== ====
OPERATING RESULTS
EXPLORATION AND PRODUCTION
For the nine months For the three months
United States ended September 30, ended September 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating income before special items $1,241 $423 $487 $258
Special items (115) 21 (8) --
------ ---- ---- ----
Operating income $1,126 $444 $479 $258
====== ==== ==== ====
U.S. exploration and production earnings for the third quarter and first nine
months of 2000 were significantly higher than last year due to higher crude oil
and natural gas prices. World crude oil prices were exceptionally strong during
the third quarter. Despite production increases by OPEC members, concerns over
low global inventories of both crude oil and refined products helped push crude
oil prices to their highest levels since the Gulf War in 1991. The spot price of
WTI crude oil averaged $31.66 per barrel during the third quarter, nearly $10.00
per barrel higher than in 1999.
Our realized crude oil prices for the third quarter and first nine months of
2000 were $28.11 and $25.79 per barrel, 69 percent and 101 percent higher than
last year. U.S. natural gas prices also rose to record levels during the
quarter, as low storage levels and continued strong demand exceeded the modest
recovery in domestic production. For the third quarter and first nine months of
2000, our average realized natural gas prices were $4.01 and $3.23 per MCF, 64
percent and 55 percent above last year.
Daily production decreased for both the third quarter and first nine months of
the year. This expected reduction was due to the sale of non-core producing
properties and natural field declines. First production from our Petronius
project in the Gulf of Mexico began in July and is expected to average about
12,000 BOE per day in the fourth quarter. During the third quarter, we received
$61 million from the sale of non-core producing properties, bringing our total
cash proceeds for nine months of 2000 to $391 million.
Operating expenses increased this year as higher crude oil and natural gas
prices led to significantly higher utilities expenses and production taxes.
Exploratory expenses for the third quarter were $29 million before tax, $17
million higher than last year due to increased activity in the Gulf of Mexico.
Exploratory expenses for the first nine months of 2000 were $70 million before
tax, $34 million lower than last year, reflecting reduced activities.
- 10 -
Results for each of the first three quarters of 2000 included special charges of
$67 million, $40 million and $8 million for net losses on the sales of non-core
producing properties and related disposal costs. Results for 1999 included a
special gain of $21 million for the sale of our interest in several California
fields and a special charge of $11 million for employee separation costs, both
of which were recorded in the second quarter. 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.
For the nine months For the three months
International ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating income before special items $787 $191 $299 $129
Special items 62 (2) (4) --
---- ---- ---- ----
Operating income $849 $189 $295 $129
==== ==== ==== ====
International exploration and production operating results for the third quarter
and first nine months of 2000 were considerably higher than last year due mostly
to higher crude oil prices. Market conditions have continued to keep crude oil
prices strong throughout the first nine months of 2000 despite OPEC actions to
increase production. Our realized crude oil prices for the third quarter and
first nine months of 2000 were $26.69 and $24.60 per barrel, 57 percent and 84
percent higher than last year. Average natural gas prices were $1.58 per MCF for
the third quarter and $1.50 per MCF for the first nine months of 2000, 17
percent and 10 percent above last year.
Daily production decreased six percent for the third quarter and the first nine
months of 2000 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 planned sale of non-core producing
properties. Production in the Partitioned Neutral Zone and the Karachaganak
field in the Republic of Kazakhstan continues to be above last year's levels. We
have received cash proceeds of $137 million from the sale of non-core producing
properties this year, all in the second quarter.
Operating expenses for the third quarter were flat with last year, while
expenses for the first nine months decreased slightly. Exploratory expenses for
the third quarter were $77 million before tax, slightly higher than last year.
Exploratory expenses for the first nine months of 2000 were $149 million before
tax, $29 million lower than last year which included an unsuccessful exploratory
well in a new offshore area of Trinidad.
Results for the third quarter of 2000 included a special charge of $4 million
for net losses on the sale of non-core producing properties. Results for 2000
also 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, both of
which were recorded in the second quarter. Results for 1999 included a second
quarter 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
For the nine months For the three months
United States ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating income before special items $175 $ 283 $ 82 $118
Special items (35) (79) (5) --
---- ------ ----- ----
Operating income $140 $ 204 $ 77 $118
==== ====== ===== ====
- 11 -
U.S. refining, marketing and distribution earnings were lower than last year for
both the third quarter and first nine months.
Equilon's earnings declined from last year due to depressed marketing margins as
pump prices lagged increases in supply costs in a very competitive market. Weak
lubricant margins as a result of higher base oil costs also negatively impacted
earnings. Maintenance activity at the Puget Sound, Martinez and Wood River
refineries adversely impacted results for both years.
Compared to last year, Motiva's results benefited from improved East and Gulf
Coast refining margins as a result of lower gasoline and distillate inventories
due to industry refinery downtime. Maintenance activities in the first half of
the year at the Delaware City refinery and in the second quarter at the Port
Arthur refinery adversely impacted 2000 results. While refining results
improved, marketing margins were negatively impacted by higher supply costs,
which were not fully recovered in the market, and by lower branded gasoline
sales volumes.
Results for the third quarter of 2000 included a $5 million special charge for
environmental issues. Additionally, results for 2000 included a second quarter
special charge of $31 million for the loss on the sale of the Wood River
refinery, special charges of $4 million in the second quarter and $13 million in
the first quarter for a patent litigation issue and a first quarter special gain
of $18 million for an employee benefits revision. Results for 1999 included
second quarter special charges for losses on refinery asset sales of $76 million
and employee separation costs of $11 million, as well as a first quarter special
benefit of $8 million for inventory valuation adjustments.
For the nine months For the three months
International ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating income before special items $214 $ 293 $ 61 $ 72
Special items (12) 84 -- (66)
---- ----- ------ -----
Operating income $202 $ 377 $ 61 $ 6
==== ===== ====== =====
International refining and marketing earnings before special items for the third
quarter of 2000 decreased from last year. Marketing results declined from lower
margins in the Caltex area, Europe and Latin America. Refining results improved
dramatically in Europe from higher margins in the U.K. and the Netherlands, but
decreased in Latin America due to increased crude costs.
Results for the first nine months of 2000 declined due to weak marketing margins
from increased costs and highly competitive market conditions in the Caltex
region, Latin America, West Africa and Europe. Lower volumes impacted Latin
America and West Africa. Refining results were mixed as European and Asian
margins improved, while the inability to fully recover increased crude costs
negatively impacted refining margins in Panama and Guatemala. Rising utility
costs negatively impacted refining results in all areas.
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. Results for each of the first three quarters of 1999
included special benefits of $75 million, $55 million and $14 million,
respectively, for favorable inventory valuation adjustments. Results for the
third quarter of 1999 also included special charges of $32 million for our share
of Caltex' loss on the sale of its equity interest in Koa Oil Co., Ltd. and $48
million for related deferred currency translation amounts. Additionally, results
for the second quarter of 1999 included $54 million for a Korean tax benefit, as
well as restructuring charges in Caltex of $25 million and employee separation
costs in Europe and Latin America of $9 million.
- 12 -
GLOBAL GAS AND POWER
For the nine months For the three months
ended September 30, ended September 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating income before special items $ 33 $ 16 $ 13 $ 6
Special items -- (3) -- --
----- ------ ----- ------
Operating income $ 33 $ 13 $ 13 $ 6
===== ====== ===== ======
Operating results for 2000 benefited from the recovery of natural gas liquids
prices. Results for the first nine months of 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 1999 included a second quarter 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
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating loss $(6) $(3) $(4) $(1)
=== === === ===
Our other business units mainly include our insurance operations. There were no
significant items in these results.
CORPORATE/NON-OPERATING
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Results before special items $(386) $(359) $(123) $(129)
Special items 39 (6) -- --
----- ----- ----- -----
Total Corporate/Non-operating $(347) $(365) $(123) $(129)
===== ===== ===== =====
Corporate and non-operating expenses before special items for the third quarter
and first nine months of 2000 included lower interest and higher corporate
expenses, including spending for our Olympic sponsorship program. Results for
the first nine months of 1999 benefited from a $21 million gain on the sale of
marketable securities earlier in the year.
Results for the first nine 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.
- 13 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $278 million at
September 30, 2000, compared with $448 million at year-end 1999.
During the first nine months of 2000, strong earnings from our operations
provided cash of $2.9 billion. We also had cash inflows of $571 million from
asset sales, primarily from the sale of several non-core producing properties.
We spent $2.3 billion on our capital and exploratory program, paid $831 million
in common, preferred and minority interest dividends and used $459 million to
reduce debt and repurchase common stock.
As of September 30, 2000, our ratio of total debt to total borrowed and invested
capital was 34.7%, compared with 37.5% at year-end 1999. At September 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 nine months of 2000, our overall debt level decreased by
$292 million. This was comprised of debt repayments of $1,295 million, increased
commercial paper of $473 million and the issuance of $530 million of medium-term
notes from our existing "shelf" registration.
As of September 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 September 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 of 1998. We purchased about $165
million of common stock under this program during the first nine months of 2000
and an additional $3 million during the period October 2 through 4, 2000. This
brings our total purchases under this program, including $474 million purchased
during 1998, to almost $645 million. No shares were purchased under this program
in 1999. We suspended the repurchase program following the October 16, 2000
announcement of the proposed merger with Chevron Corporation.
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 September 30, 2000,
cash payments totaled $151 million and transfers to long-term obligations
totaled $12 million. By the end of the third quarter of 2000, we had satisfied
all remaining obligations in accordance with the 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
September 30, 2000, employee reductions totaled 114. The remaining reductions
will occur by the end of the first quarter of 2001. During the first nine months
of 2000, we made cash payments of $4 million and transfers to long-term
obligations of $8 million. We will pay the remaining obligations of $5 million
in future periods in accordance with plan provisions.
- 14 -
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 amended SFAS 133. These standards require
that all derivative financial instruments be recorded in the Consolidated
Balance Sheets at their fair value. Fair value adjustments are made either
through earnings or equity, depending upon the exposure being hedged and the
effectiveness of the hedge. The adoption of these standards could increase
volatility in earnings and other comprehensive income or result in certain
changes in our business practices.
We will adopt these standards effective January 1, 2001. Our current assessment
is that the cumulative effects of adoption on net income and on other
comprehensive income at that date will not be material. This is based upon our
presently anticipated derivative notional amounts, derivative types and expected
degree of hedge accounting to be applied at that date. Notional amounts and
derivative types are subject to change from time to time based upon management's
decisions as to the appropriate strategies and our overall risk exposure levels.
In December 1999, the staff of the U.S. Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition. In SAB 101, the
staff clarified how it applies generally accepted accounting principles to
various revenue-related accounting issues. The staff issued SAB 101B in June
2000, deferring the effective date of SAB 101. Texaco and other calendar-year
companies must apply SAB 101 no later than the fourth quarter of 2000. Our
review of SAB 101 indicates there will be no material impact.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures were $2,803 million for the first nine
months of 2000, compared with $2,176 million for 1999.
Total upstream expenditures increased by 36 percent as we continued to focus on
high-impact projects. The international segment of the upstream increased by 57
percent as investment continued in the Malampaya natural gas project in the
Philippines and the Karachaganak field in Kazakhstan. In addition to these
projects, spending continued on the Captain B project in the U.K. North Sea and
for development work in Nigeria deepwater. In the United States spending
increased six percent. Expenditures in 2000 occurred in the Central and Permian
basin regions while 1999 spending focused on the Gemini project in the deepwater
Gulf of Mexico.
Expenditures for global gas and power increased more than 95 percent in 2000.
Contributing to this increase was the purchase of a 20 percent investment in
Energy Conversion Devices, Inc. and the development of a power project in
Thailand. This project, in which we hold a 37.5 percent interest, became
operational July 1, 2000 and is a "state of the art" power plant. These
initiatives are representative of our continuing efforts to become a leader in
the development of energy technology.
In the United States downstream, refinery expenditures declined with the sales
of the El Dorado refinery in November of 1999 and the Wood River refinery in
June of 2000. In the international segment, expenditures decreased due to the
completion of a project at the Pembroke refinery last year and lower spending in
the U.K. marketing segment in 2000.
- 15 -
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, in
addition to statements concerning our proposed merger with Chevron, such as
statements as to the consummation and expected benefits of the merger, 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 and political conditions;
inaccurate forecasts of crude oil, natural gas and petroleum product prices;
increasing price and product competition; price fluctuations; higher costs,
expenses and interest rates; the possibility that the merger will not be
consummated or that the anticipated benefits from the proposed merger with
Chevron cannot be fully realized; and the possibility that costs or difficulties
related to the integration of our businesses with Chevron will be greater than
we expected. 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.
* * * * *
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
nine 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 -
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.
The Securities and Exchange Commission ("SEC") requires us to report proceedings
that were instituted or contemplated by governmental authorities against us
under laws or regulations relating to the protection of the environment. None of
these proceedings is material to our business or financial condition. Following
is a brief description of notices of violation that we received and settled in
the third quarter of 2000.
o Commencing in December of 1999, the San Joaquin Valley Unified Air
Pollution Control District issued a series of 59 Notices of Violation to
Texaco California Inc. and Texaco Exploration and Production Inc. alleging
various permit violations in the Midway-Sunset Fields and Kern River Fields
in Kern County, California, but primarily in connection with a project to
refurbish, replace and expand the number of steam generators used in the
Midway-Sunset Field in Kern County, California. Effective September 1,
2000, Texaco California Inc. and Texaco Exploration and Production Inc.
settled these Notices of Violation by paying a civil penalty of $100,000.
Item 5. Other Information
- -------------------------
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(Millions of dollars)
(Unaudited)
CAPITAL AND EXPLORATORY EXPENDITURES
Exploration and production
United States $ 661 $ 623 $ 277 $ 162
International 1,361 865 482 304
------ ------ ------ -------
Total 2,022 1,488 759 466
------ ------ ------ -------
Refining, marketing and distribution
United States 248 243 112 85
International 235 294 94 118
------ ------ ------ -------
Total 483 537 206 203
------ ------ ------ -------
Global gas and power 252 129 68 43
------ ------ ------ -------
Total operating segments 2,757 2,154 1,033 712
Other business units 46 22 1 6
------ ------ ------ -------
Total $2,803 $2,176 $1,034 $ 718
====== ====== ====== =======
Exploratory expenses included above
United States $ 70 $ 104 $ 29 $ 12
International 149 178 77 60
------ ------ ------ -------
Total $ 219 $ 282 $ 106 $ 72
====== ====== ====== =======
- 17 -
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
OPERATING DATA
Exploration and Production
United States
- -------------
Net production of crude oil and natural
gas liquids (MBPD) 360 400 338 395
Net production of natural gas - available
for sale (MMCFPD) 1,328 1,460 1,273 1,416
----- ----- ----- -----
Total net production (MBOEPD) 581 643 550 631
Natural gas sales (MMCFPD) 3,758 3,284 3,824 3,263
Average U.S. crude (per bbl) $25.79 $12.81 $28.11 $16.65
Average U.S. natural gas (per mcf) $ 3.23 $ 2.09 $ 4.01 $ 2.44
Average WTI (Spot) (per bbl) $29.84 $17.58 $31.66 $21.71
Average Kern (Spot) (per bbl) $24.17 $11.49 $26.54 $15.38
International
- -------------
Net production of crude oil and natural
gas liquids MBPD)
Europe 123 142 124 152
Indonesia 123 156 122 141
Partitioned Neutral Zone 137 122 141 127
Other 64 65 60 60
----- ----- ----- -----
Total 447 485 447 480
Net production of natural gas - available
for sale (MMCFPD)
Europe 221 261 168 252
Colombia 193 158 183 161
Other 143 105 135 91
----- ----- ----- -----
Total 557 524 486 504
----- ----- ----- -----
Total net production (MBOEPD) 540 573 528 564
Natural gas sales (MMCFPD) 586 551 509 539
Average International crude (per bbl) $24.60 $13.36 $26.69 $16.96
Average International natural gas (per mcf) $ 1.50 $ 1.36 $ 1.58 $ 1.35
Average U.K. natural gas (per mcf) $ 2.39 $ 2.37 $ 2.57 $ 2.34
Average Colombia natural gas (per mcf) $ 1.13 $ 0.64 $ 1.34 $ 0.67
Worldwide
- ---------
Total worldwide net production (MBOEPD) 1,121 1,216 1,078 1,195
-18 -
For the nine months For the three months
ended September 30, ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
OPERATING DATA
- --------------
Refining, Marketing and Distribution
- ------------------------------------
United States
- -------------
Refinery input (MBPD)
Equilon area 260 376 209 390
Motiva area 275 307 281 307
----- ----- ----- -----
Total 535 683 490 697
Refined product sales (MBPD)
Equilon area 707 667 671 717
Motiva area 359 376 373 371
Other 306 296 285 290
----- ----- ----- -----
Total 1,372 1,339 1,329 1,378
International
- -------------
Refinery input (MBPD)
Europe 368 356 355 331
Caltex area 352 411 348 381
Latin America/West Africa 62 71 70 68
----- ----- ----- -----
Total 782 838 773 780
Refined product sales (MBPD)
Europe 627 609 638 585
Caltex area 540 608 509 599
Latin America/West Africa 471 485 499 479
Other 89 90 88 86
----- ----- ----- -----
Total 1,727 1,792 1,734 1,749
- 19-
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (3.2) Copy of the By-Laws of Texaco Inc., as amended to and including
October 15, 2000.
-- (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
Reports on Form 10-Q for the quarterly periods ended March 31,
2000, dated May 8, 2000, and June 30, 2000, dated August 10,
2000, all 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 third quarter of 2000, we filed a Current Report on Form 8-K for
the following event:
1. July 27, 2000
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the second quarter of 2000.
- 20 -
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: November 9, 2000
----------------
- 21 -