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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 June 30, 2001 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 July 31, 2001, there were 551,087,141 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 JUNE 30, 2001
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the six
and three months ended June 30, 2001 and 2000 1
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 and 2000 3
Condensed Consolidated Statements of Comprehensive
Income for the six and three months ended
June 30, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 5. Other Information 18-20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit
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 six months For the three months
ended June 30, ended June 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Sales and services $26,310 $22,862 $12,438 $11,776
Equity in income of affiliates, interest,
asset sales and other 732 478 470 293
------- ------- ------- -------
27,042 23,340 12,908 12,069
------- ------- ------- -------
DEDUCTIONS
Purchases and other costs 20,924 18,055 9,831 9,425
Operating expenses 1,312 1,268 656 678
Selling, general and administrative expenses 682 581 338 256
Exploratory expenses 112 113 63 60
Depreciation, depletion and amortization 639 875 320 391
Interest expense 218 231 103 109
Taxes other than income taxes 231 194 115 91
Minority interest 76 57 35 30
------- ------- ------- -------
24,194 21,374 11,461 11,040
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,848 1,966 1,447 1,029
PROVISION FOR INCOME TAXES 1,231 767 663 404
------- ------- ------- -------
NET INCOME $ 1,617 $ 1,199 $ 784 $ 625
======= ======= ======= =======
PER COMMON SHARE
Basic net income $ 2.98 $ 2.19 $ 1.44 $ 1.14
Diluted net income $ 2.97 $ 2.19 $ 1.44 $ 1.14
Cash dividends paid $ 0.90 $ 0.90 $ 0.45 $ 0.45
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Millions of dollars)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 166 $ 207
Short-term investments - at fair value 46 46
Accounts and notes receivable, less allowance for doubtful
accounts of $26 million in 2001 and $27 million in 2000 6,258 5,583
Inventories 1,440 1,023
Deferred income taxes and other current assets 466 194
------- -------
Total current assets 8,376 7,053
Investments and Advances 7,726 6,889
Properties, Plant and Equipment - at cost 33,813 32,821
Less - Accumulated Depreciation, Depletion and Amortization 17,641 17,140
------- -------
Net properties, plant and equipment 16,172 15,681
Deferred Charges 1,336 1,244
------- -------
Total $33,610 $30,867
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 598 $ 376
Accounts payable and accrued liabilities
Trade liabilities 4,635 3,314
Accrued liabilities 1,220 1,347
Income and other taxes 1,008 947
------- -------
Total current liabilities 7,461 5,984
Long-Term Debt and Capital Lease Obligations 6,748 6,815
Deferred Income Taxes 1,754 1,547
Employee Retirement Benefits 1,109 1,118
Deferred Credits and Other Non-current Liabilities 1,495 1,246
Minority Interest in Subsidiary Companies 713 713
------- -------
Total 19,280 17,423
Stockholders' Equity
Market auction preferred shares -- 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 1,305 1,301
Retained earnings 12,421 11,297
Unearned employee compensation and benefit plan trust (293) (310)
Accumulated other comprehensive income (loss)
Net currency translation adjustment (105) (106)
Minimum pension liability adjustment (18) (27)
Unrealized net gain on investments 4 3
Deferred net hedging loss (11) --
------- -------
Total (130) (130)
------- -------
15,077 14,232
Less - Common stock held in treasury, at cost 747 788
------- -------
Total stockholders' equity 14,330 13,444
------- -------
Total $33,610 $30,867
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------
(Millions of dollars)
(Unaudited)
-------------------------
For the six months
ended June 30,
-------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,617 $1,199
Reconciliation to net cash provided by (used in)
operating activities
Depreciation, depletion and amortization 639 875
Deferred income taxes 160 15
Minority interest in net income 76 57
Dividends from affiliates, greater (less) than
equity in income (224) 108
Gains on asset sales (23) (95)
Changes in operating working capital (120) (337)
Other - net (7) 58
------ -------
Net cash provided by operating activities 2,118 1,880
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,477) (1,356)
Proceeds from asset sales 120 490
Purchases of investment instruments (283) (206)
Sales/maturities of investment instruments 139 202
------ -------
Net cash used in investing activities (1,501) (870)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 50 762
Repayments (812) (1,836)
Net increase in other borrowings 986 532
Purchases of common stock -- (71)
Redemption of market auction preferred shares (300) --
Dividends paid to the company's stockholders
Common (487) (489)
Preferred (7) (8)
Dividends paid to minority stockholders (75) (53)
------ -------
Net cash used in financing activities (645) (1,163)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash and cash equivalents (13) (5)
------ -------
Decrease during period (41) (158)
Beginning of year 207 419
------ -------
End of period $ 166 $ 261
====== =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-3-
TEXACO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
---------------------------------------------------------
(Millions of dollars)
(Unaudited)
--------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
--------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
NET INCOME $1,617 $1,199 $ 784 $ 625
Other comprehensive income (loss), net of tax
Net currency translation adjustment 1 -- (1) --
Minimum pension liability adjustment 9 (4) -- --
Unrealized net gain (loss) on investments 1 1 -- (5)
Deferred net hedging gain (loss) (11) -- 2 --
------ ------ ------ --------
-- (3) 1 (5)
------ ------ ------ --------
COMPREHENSIVE INCOME $1,617 $1,196 $ 785 $ 620
====== ====== ====== ========
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
2000 Annual Report on Form 10-K. You should read these unaudited condensed
financial statements in conjunction with our 2000 Annual Report. All dollar
amounts are in millions, unless otherwise noted.
We have consistently applied the accounting policies described in our 2000
Annual Report on Form 10-K in preparing the unaudited financial statements for
the six-month and three-month periods ended June 30, 2001 and 2000, except for
the adoption of SFAS No. 133, as discussed in Note 2. 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.
Note 2. Adoption of SFAS No. 133 and SFAS No. 138
- ---------------------------------------------------
On January 1, 2001, Texaco adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities, " and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." These standards
establish new accounting and disclosure requirements for most derivative
instruments and hedge transactions involving derivatives. The standards also
require formal documentation procedures for hedging relationships and
effectiveness testing when hedge accounting is to be applied. The cumulative
effects of adoption of these standards on net income and other comprehensive
income were not material to net income for the six months ended June 30, 2001
and stockholders' equity at January 1, 2001.
- 4 -
Our derivative usage is principally commodity futures, forwards and swaps;
foreign currency forwards; and interest rate swaps.
For economic hedges of commodities, we purchase and sell commodity derivatives
covering percentages of our total estimated exposures. The percentages vary by
type of exposure and are adjusted from time to time based on forecasted trends
and overall business objectives. We may or may not apply hedge accounting as
fair value hedges or cash flow hedges. For our limited trading for profit
activity not accounted for as hedges, we purchase or sell commodity derivatives
based upon management's assessment of forecasted trends and other factors
affecting the prices of crude oil, natural gas and petroleum products.
We use foreign currency forwards to create an economic hedge of our balance
sheet exposure in certain currencies for monetary assets and liabilities (cash,
cash equivalents, receivables, payables and debt). Gains and losses on forward
contracts used for this purpose are marked to market through earnings in
accordance with SFAS No. 52, "Foreign Currency Translation." We also use
short-term foreign currency forwards under a rollover strategy as cash flow
hedges for percentages of forecasted foreign currency capital expenditures
scheduled to occur within specified future time periods. After project start-up,
the deferred hedge gains and losses are amortized to depreciation expense under
the depreciation basis and life applied to the hedged asset's capitalized cost.
We utilize receive fixed-rate, pay floating-rate interest rate swaps as fair
value hedges of a portion of our fixed-rate debt. The percentage of our debt
hedged in this manner changes from time to time based upon the amount of swaps
required to achieve the desired ratio of floating rate to fixed rate exposure in
our total debt portfolio.
We record hedge ineffectiveness on fair value hedges and cash flow hedges to
revenues. There were no material ineffectiveness amounts reflected in earnings
for the six months ended June 30, 2001.
Amounts recorded in comprehensive income from cash flow hedges of forecasted
commodities transactions and foreign currency capital expenditures will reverse
to earnings at the time the associated hedged transactions affect earnings. The
amounts in the current balance sheet expected to reverse from this account
within the next 12 months are not material.
The maximum length of time over which we hedge future cash flows for forecasted
transactions normally does not exceed two years.
Note 3. New Accounting Standards
- --------------------------------
In June 2001, the Financial Accounting Standards Board agreed to issue SFAS No.
141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets
and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. SFAS No. 142 eliminates the requirement
to amortize goodwill over its estimated useful life. Rather, goodwill will be
subject to at least an annual assessment for impairment by applying a fair-value
based test. Adoption of SFAS No. 142 will not have a significant impact on us.
SFAS No. 143 requires companies to record liabilities equal to the fair value of
their asset retirement obligations and corresponding additional asset costs. The
obligations included are those for which there is a legal obligation as a result
of existing or enacted law, statute or contract. Under existing accounting
rules, we accrue for the estimated future costs of abandoning and restoring our
oil and gas production sites by way of additional unit-of-production
depreciation charges. We have not yet determined the effect of adopting SFAS No.
143. For Texaco and other calendar-year companies, SFAS No. 143 is effective
beginning January 1, 2003.
The accounting for the announced business combination between Chevron
Corporation and Texaco is grandfathered under accounting rules in-place at the
time of the merger announcement. Therefore, we expect the merger will be
accounted for under pooling of interests accounting.
- 5 -
Note 4. Net Income Per Common Share
- -----------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
Basic Net Income Per Common Share:
Net income $ 1,617 $ 1,199 $ 784 $ 625
Less: Preferred stock dividends 6 7 3 4
------- ------- ------- -------
Net income available for common stock $ 1,611 $ 1,192 $ 781 $ 621
======= ======= ======= =======
Weighted average shares outstanding (thousands) 541,396 543,334 541,739 542,770
======= ======= ======= =======
Basic net income per common share (dollars) $ 2.98 $ 2.19 $ 1.44 $ 1.14
======= ======= ======= =======
Diluted Net Income Per Common Share:
Net income available for common stock $ 1,611 $ 1,192 $ 781 $ 621
======= ======= ======= =======
Adjustment for the dilutive effect of
stock-based compensation 2 2 1 1
------- ------- ------- -------
Income for diluted earnings per share $ 1,613 $ 1,194 $ 782 $ 622
======= ======= ======= =======
Weighted average shares outstanding (thousands) 541,396 543,334 541,739 542,770
Dilutive effect of stock-based compensation (thousands) 2,163 1,611 2,419 1,642
------- ------- ------- -------
Weighted average shares outstanding for diluted
computation (thousands) 543,559 544,945 544,158 544,412
======= ======= ======= =======
Diluted net income per common share (dollars) $ 2.97 $ 2.19 $ 1.44 $ 1.14
======= ======= ======= =======
Note 5. Segment Information
- ---------------------------
For the six months ended June 30,
---------------------------------------------------------------------------------
2001 2000
------------------------------------------ -------------------------------------
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 $ 1,675 $1,556 $ 3,231 $1,000 $ 1,682 $ 924 $ 2,606 $ 647
International 1,894 391 2,285 505 1,669 684 2,353 554
Refining, marketing and distribution
United States 2,860 29 2,889 234 2,767 106 2,873 63
International 13,958 255 14,213 150 13,851 191 14,042 141
Global gas, power and
energy technology 5,915 146 6,061 23 2,887 81 2,968 20
------- ------ ------ ----- ------- ------ ------ -----
Segment totals $26,302 $2,377 28,679 1,912 $22,856 $1,986 24,842 1,425
======= ====== ======= ======
Other business units 16 (37) 15 (2)
Corporate/Non-operating 4 (258) 3 (224)
Intersegment eliminations (2,389) -- (1,998) --
------- ------ ------- ------
Consolidated $26,310 $1,617 $22,862 $1,199
======= ====== ======= ======
- 6 -
For the three months ended June 30,
--------------------------------------------------------------------------------
2001 2000
---------------------------------------- --------------------------------------
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 $ 735 $ 661 $ 1,396 $411 $ 859 $494 $ 1,353 $353
International 889 282 1,171 262 796 273 1,069 261
Refining, marketing and distribution
United States 1,358 20 1,378 196 1,387 82 1,469 45
International 7,107 164 7,271 62 7,130 96 7,226 90
Global gas, power
and energy technology 2,347 103 2,450 18 1,602 46 1,648 --
------- ------ ------- ---- ------- ---- ------- ----
Segment totals $12,436 $1,230 13,666 949 $11,774 $991 12,765 749
======= ====== ======= ====
Other business units 7 (34) 5 (2)
Corporate/Non-operating 2 (131) 2 (122)
Intersegment eliminations (1,237) -- (996) --
------- ---- ------- ----
Consolidated $12,438 $784 $11,776 $625
======= ==== ======= ====
Assets as of
---------------------------------------------
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
Exploration and production
United States $ 8,716 $8,442
International 7,059 6,343
Refining, marketing and distribution
United States 3,855 3,495
International 9,356 8,865
Global gas, power and energy technology 3,309 2,580
------- -------
Segment totals 32,295 29,725
Other business units 439 341
Corporate/Non-operating 1,285 1,185
Intersegment eliminations (409) (384)
------- -------
Consolidated $33,610 $30,867
======= =======
- 7 -
Note 6. Inventories
- -------------------
The inventory accounts of Texaco are presented below:
As of
-------------------------------------
June 30, December 31,
2001 2000
---------- -----------
(Unaudited)
Crude oil $ 185 $ 127
Petroleum products and other 1,073 732
Materials and supplies 182 164
------ ------
Total $1,440 $1,023
====== ======
Note 7. 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 six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Gross revenues $24,075 $21,186 $12,924 $11,229
Income before income taxes $ 353 $ 18 $ 314 $ 49
Summarized unaudited financial information for Motiva is presented below 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 interests in Motiva are subject to annual
adjustment through year-end 2005, based on the performance of the assets
contributed to Motiva. Accordingly, the interests in Motiva were adjusted
effective as of January 1, 2001. Currently, Texaco and Saudi Refining, Inc. each
has 35% and Shell has 30% of Motiva. These percentages will be effective through
year-end 2001. The Agreement provides that a final ownership percentage will be
calculated following the end of 2005.
For the six months For the three months
ended June 30, ended June 30,
-------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Gross revenues $10,022 $9,137 $5,292 $4,746
Income before income taxes $ 629 $ 217 $ 499 $ 154
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.
- 8 -
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 six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Gross revenues $8,349 $9,414 $4,372 $5,161
Income before income taxes $ 550 $ 483 $ 205 $ 264
Net income $ 279 $ 230 $ 73 $ 128
Note 8. Commitments and Contingencies
- -------------------------------------
Information relative to commitments and contingent liabilities of Texaco is
presented in Note 15, Other Financial Information, Commitments and
Contingencies, pages 68-69, of our 2000 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.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following table provides a summary of Texaco's income before special items
and net income for the first six months and second quarter of 2001 and 2000. All
dollar amounts are in millions, unless otherwise noted.
For the six months For the three months
ended June 30, ended June 30,
--------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
Income before special items $1,653 $1,243 $ 817 $ 641
Per share (dollars) $ 3.03 $ 2.27 $1.50 $1.17
Net income $1,617 $1,199 $ 784 $ 625
Per share (dollars) $ 2.97 $ 2.19 $1.44 $1.14
Our earnings exceeded $800 million for the fourth consecutive quarter. In an
environment of favorable industry conditions we continue to successfully execute
our business plans. This quarter's results included record earnings in our U.S.
downstream, as Equilon and Motiva sharply improved their operating performance.
Motiva's results were especially strong, benefiting from robust refining margins
on the East and Gulf Coasts and high refinery run rates. While refining margins
have contracted, marketing margins have increased from their low levels early in
the second quarter. This benefited Equilon's operations late in the quarter.
In the upstream, crude oil prices were firm while U.S. natural gas prices were
significantly higher than a year ago. However, weakening demand and increasing
inventories have caused crude oil and natural gas prices to drop in recent
weeks. Looking to the future, we continue to strengthen our upstream portfolio.
Our high-impact deepwater exploration program yielded two discoveries in the
Gulf of Mexico. The Blind Faith discovery on Mississippi Canyon Block 696 and
the Champlain discovery in Atwater Valley Block 63 should add significantly to
our future production and reserves. Also, the Hamaca project in Venezuela
attained major milestones this quarter with the closing of a $1.1 billion
financing package and the completion of a two-year site preparation program.
Our global gas, power and energy technology segment showed significant
improvement over last year. Our U.S. natural gas trading business continued to
capitalize on significantly increased trading volumes through the delivery of
structured, customer-based services. At the end of June, operations began at our
newest facility, the 320 megawatt Sunrise Power Project in California. This
plant started up ahead of schedule and will bring much-needed energy to homes
and businesses in California.
Results for the second quarter and first six months of 2001 and 2000 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.
- 10 -
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
Income before special items $1,653 $1,243 $817 $641
------ ------ ---- ----
Write-downs of assets (25) -- (25) --
Net gains (losses) on major asset sales -- (65) -- 2
Tax issue -- 46 -- --
Employee related issues -- 6 -- --
Litigation issue -- (17) -- (4)
Net loss on Erskine pipeline -- (14) -- (14)
Merger costs (11) -- (8) --
------ ------ ---- ----
Special items (36) (44) (33) (16)
------ ------ ---- ----
Net income $1,617 $1,199 $784 $625
====== ====== ==== ====
OPERATING RESULTS
EXPLORATION AND PRODUCTION
For the six months For the three months
United States ended June 30, ended June 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income before special items $1,000 $754 $411 $393
Special items -- (107) -- (40)
------ ---- ---- ----
Operating income $1,000 $647 $411 $353
====== ==== ==== ====
U.S. exploration and production earnings for this year's second quarter and
first six months exceeded last year due to higher natural gas prices. Market
conditions early in the year kept natural gas prices above last year's levels,
while crude oil prices receded slightly. U.S. natural gas prices declined in the
second quarter from the first quarter historic levels as demand softened and
storage injections from April into July improved inventory levels. Our average
realized natural gas prices for the second quarter and six months 2001 were
$4.48 and $5.86 per thousand cubic feet (MCF), 37 percent and 105 percent higher
than last year. For the second quarter and first six months 2001, our average
realized crude oil prices were $22.51 and $23.42 per barrel, ten percent and
five percent lower than last year.
Daily production decreased ten percent for the second quarter to 531,000 barrels
of oil equivalent per day (BOEPD) and 11 percent for the first six months to
533,000 BOEPD. More than 40 percent of this expected reduction in the second
quarter and almost half for the first six months was due to last year's sales of
non-core producing properties. The balance of the decrease was due to natural
field declines and lower production in our California fields as we economically
reduced steam production due to high natural gas prices.
Operating expenses increased for the second quarter and for the first six months
as higher natural gas prices led to significantly higher utilities expenses and
production taxes. Exploratory expenses for the second quarter were $17 million
before tax, $5 million lower than last year. Exploratory expenses for six months
2001 were $49 million before tax, $8 million higher than last year.
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 the
sales of non-core producing properties. This charge was comprised of write-downs
of assets sold to their sales prices and related disposal costs, partially
offset by gains on the sales of certain other assets.
- 11 -
For the six months For the three months
International ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income before special items $505 $488 $262 $195
Special items -- 66 -- 66
---- ---- ---- ----
Operating income $505 $554 $262 $261
==== ==== ==== ====
International exploration and production operating results for the second
quarter of 2001 were higher than last year due to higher natural gas prices,
increased production volumes and lower operating expenses. Earnings for the
first six months of 2001 were slightly higher than last year due to higher
natural gas prices and lower operating expenses. Our average realized natural
gas prices for the second quarter and six months 2001 were $1.78 and $1.90 per
MCF, 24 percent and 30 percent higher than last year. Average realized crude oil
prices were $22.58 per barrel for the second quarter and $22.10 per barrel for
six months, four percent and six percent below last year.
Daily production increased four percent for the second quarter from last year to
532,000 BOEPD and was flat for the first six months at 548,000 BOEPD. Production
from our ongoing operations increased nine percent for the second quarter and
six percent for six months, mainly in the North Sea, the Partitioned Neutral
Zone and in Latin America. Partly offsetting this increase were the sales of
non-core producing properties last year which caused a decrease in production of
five percent for the second quarter and six percent for the first six months.
Operating expenses decreased three percent in the second quarter and 13 percent
for six months due to the sales of non-core producing properties. Exploratory
expenses for the second quarter were $46 million before tax, $8 million higher
than last year. Exploratory expenses for the first six months were $63 million
before tax, $9 million lower than last year.
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.
Refining, Marketing and Distribution
For the six months For the three months
United States ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income before special items $234 $93 $196 $80
Special items -- (30) -- (35)
---- --- ---- ---
Operating income $234 $63 $196 $45
==== === ==== ===
U.S. refining, marketing and distribution earnings improved dramatically as
compared with last year for both the second quarter and first six months.
Motiva's earnings for the second quarter and first six months of 2001 benefited
from significantly improved refining margins and high refinery run rates in an
environment of tight supplies and industry refinery maintenance. In marketing,
margins improved materially in the second quarter and results were slightly
higher for the year.
- 12 -
During the second quarter and first six months of 2001, Equilon's earnings
improved due to substantially higher refining margins and improved refinery
operations. Maintenance activity in 2001 decreased from 2000 levels. Earnings
also benefited from higher lubricant margins, strong trading results and higher
utilization of proprietary pipelines. These improvements were reduced by
extremely high West Coast utilities expenses. Marketing earnings for Equilon
declined from last year due to depressed fuel marketing margins as pump prices
lagged increases in supply costs in a very competitive market. This was
especially true in the Los Angeles area where retail fuel margins were under
intense pressure. Marketing margins began to strengthen significantly in mid-May
and remained strong for the rest of the quarter.
Results for the first six months of 2000 included a second quarter special
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, including $4 million in the
second quarter, and a first quarter gain of $18 million for an employee benefits
revision.
For the six months For the three months
International ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income before special items $150 $153 $62 $90
Special items -- (12) -- --
---- ---- --- ---
Operating income $150 $141 $62 $90
==== ==== === ===
International refining and marketing earnings for the second quarter of 2001
declined from last year. Operating results decreased significantly in Europe due
to weak U.K. marketing margins, which were depressed by our inability to recover
higher supply costs in the marketplace. European refining earnings were
comparable with last year. In the Asia Pacific area, lower refining margins and
trading results negatively impacted earnings. Overall results in Latin America
were in line with last year, with improved refining earnings but lower marketing
results.
Results for the first six months of 2001 declined slightly. European earnings
decreased substantially from weak markets, particularly in the U.K. The
inability to recover increased supply costs in the marketplace resulted in
depressed marketing margins. Lower sales volumes and unscheduled maintenance
negatively impacted refining results. Earnings increased in the Asia Pacific
area from improved marketing margins and higher trading results. Operations in
Latin America improved with higher refining margins in Panama. However, lower
sales volumes and the weakening of the local currency in Brazil caused marketing
results to decline.
Results for 2000 included a first quarter special charge of $12 million for
employee separation costs. See the section entitled Reorganizations,
Restructurings and Employee Separation Programs on page 15 of this Form 10-Q for
additional information.
- 13 -
GLOBAL GAS, POWER AND ENERGY TECHNOLOGY
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income $23 $20 $18 $ --
=== === === ==
During the second quarter and the first six months of 2001, operating results
benefited from improved natural gas margins, sales of services which assist
customers in managing risk, and expanded storage and transportation activities.
Results also benefited from power projects in Indonesia and Thailand. Operating
results were negatively impacted by expenses for a new gasification project in
Singapore and higher fuel expense for the cogeneration facilities.
OTHER BUSINESS UNITS
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating loss before special items $(12) $ (2) $ (9) $ (2)
Special items (25) -- (25) --
---- ---- ---- ----
Operating loss $(37) $ (2) $(34) $ (2)
==== ==== ==== ====
Our other business units mainly includes our insurance operations and E-Business
activities. Results before special items were lower than last year due to higher
costs associated with E-Business activities.
Results for the second quarter of 2001 included a special charge of $25 million
for write-downs associated with selected E-Business investments, including our
investment in PetroCosm, a procurement marketplace, which ceased operations.
These impairments were caused by management's assessment of current technology
market conditions which indicated that the declines in value of these
investments were other than temporary.
CORPORATE/NON-OPERATING
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Results before special items $(247) $(263) $(123) $(115)
Special items (11) 39 (8) (7)
----- ----- ----- -----
Total Corporate/Non-operating $(258) $(224) $(131) $(122)
===== ===== ===== =====
Corporate and non-operating results before special items improved for the first
six months of 2001 as a result of lower interest rates and average debt levels,
and lower overhead expenses. Corporate expenses for the second quarter were
slightly higher than the second quarter of last year due to lower tax benefits
on overhead and interest.
Results for the first six months of 2001 included a special charge of $11
million, including $8 million in the second quarter, for costs associated with
the proposed merger with Chevron. Results for 2000 included a first quarter
special benefit of $46 million for favorable income tax settlements in the
quarter and a second quarter special charge of $7 million for the early
extinguishment of debt associated with the anticipated sale of an offshore
producing facility in the U.K. North Sea.
- 14 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $212 million at June
30, 2001, compared with $253 million at year-end 2000.
During the first six months of 2001, strong earnings from our operations
provided cash of $2.1 billion. We also had cash inflows of $120 million from
asset sales and $224 million from net borrowings. We spent $1,477 million on our
capital investment program, paid $569 million in common, preferred and minority
interest dividends and used $300 million to redeem our Market Auction Preferred
Shares.
As of June 30, 2001, our ratio of total debt to total borrowed and invested
capital was 32.8%, compared with 33.7% at year-end 2000. At June 30, 2001, our
long-term debt included $2,564 million of debt scheduled to mature within one
year, which we have both the intent and ability to refinance on a long-term
basis. As of June 30, 2001, we maintained, but did not use, $2,575 million in
revolving credit facilities that provide liquidity and support our commercial
paper program.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
REORGANIZATIONS, RESTRUCTURINGS AND EMPLOYEE SEPARATION PROGRAMS
- ----------------------------------------------------------------
During the first quarter of 2000, we announced an 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. By the end of
the first quarter of 2001, the estimated employee reductions were met, and we
had satisfied all remaining obligations in accordance with the plan provisions.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures, including our share of affiliates, were
$1,776 million for the first six months of 2001 compared with $1,769 million for
the same period last year.
Led by a 30 percent increase in the U.S., upstream expenditures increased more
than nine percent from 2000 levels. Investment continued to focus on drilling
and workover activity in New Orleans and the Permian Basin. Internationally,
development work continued in the Hamaca heavy oil project in Venezuela, the
Agbami field offshore Nigeria and the Malampaya natural gas project in the
Philippines. In Kazakhstan, development work continued in Karachaganak and in
North Buzachi, where phase two appraisal drilling was recently completed.
U.S. downstream expenditures were higher than last year as a result of increased
marketing development and refinery projects. Internationally, spending slowed
with lower marketing investments in the Caribbean and Central America.
Global gas, power and energy technology spending for 2001 included a 50 percent
investment in the Sunrise Power Project, which is jointly owned with Edison
International Company. Overall spending for global gas, power and energy
technology decreased from last year due to the completion of projects in
Thailand and Singapore and the 2000 purchase of a 20 percent interest in Energy
Conversion Devices, Inc., an alternate energy technology company.
- 15 -
CALIFORNIA POWER SITUATION
- --------------------------
The electric utility deregulation plan adopted by the state of California in
1996 required utilities to dispose of a portion of their power generation
assets. That plan further provided that utilities that serve California purchase
power on the open market, and, in turn, sell power to the retail customers at
capped rates. During the fourth quarter of 2000, and continuing in the first
quarter of 2001, California's power and gas markets experienced significant
price volatility. This commodity volatility exposed the California utilities to
significantly higher prices for power purchases, which could not be fully
recovered through rates charged to their customers. As a result, the utilities
have failed to pay some of their suppliers for certain power deliveries in the
last quarter of 2000 and the first quarter of 2001, and one of the utilities,
Pacific Gas & Electric Company (PG&E), has filed for protection under Chapter 11
of the bankruptcy laws. As both supplier to and purchaser from the utility
companies, Texaco has financial and operational exposure in California. While
the possible outcomes for the California utility situation remain uncertain, we
believe that they will not have a material adverse impact on our financial
condition or results of operations. Our principal exposure is the risk of
non-recovery of outstanding receivables held by our 50%-owned affiliates for
power sales to PG&E and Southern California Edison Company (SCE) under long-term
Qualifying Facility (QF) contracts. As of June 30, 2001, these receivables in
the aggregate approximated $55 million from PG&E and $254 million from SCE
(Texaco share: $28 million and $127 million, respectively). The affiliates are
receiving payment in full on current sales to both utilities, and expect to
ultimately recover substantially all QF receivables.
CHEVRON-TEXACO MERGER
- ---------------------
Chevron's merger with Texaco is expected to be completed within the twelve-month
timeframe envisioned when the transaction was announced in October 2000.
Remaining conditions include the receipt of necessary regulatory clearances and
approval by Texaco and Chevron stockholders. The merger is expected to qualify
as a "pooling of interests," which means that the companies will be treated as
if they had always been combined for accounting and financial reporting
purposes.
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; the possibility that costs or difficulties
related to the integration of our businesses with Chevron will be greater than
we expected; and fluctuations and/or increases in financial and operational
exposure arising from the California power situation. In addition, you are
encouraged to review our latest reports filed with the Securities and Exchange
Commission, including our 2000 Annual Report on Form 10-K filed with the SEC on
March 26, 2001, 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.
- 16 -
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 2001 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.
During the first six months of 2001, the notional amount of interest rate swaps
having variable rate exposure decreased by $755 million. During the same period,
our variable rate debt increased approximately $900 million.
- 17 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
We have provided information about legal proceedings pending against Texaco in
Note 8 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 2000 Annual Report on Form
10-K. Note 8 of this Form 10-Q, Item 1 of our first quarter 2000 Form 10-Q and
Item 3 of our 2000 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 a Notice of Violation that was issued during the
second quarter of 2001.
o On or about June 12, 2001, Region IX of the United States Environmental
Protection Agency issued a Notice of Violation to Texaco California Inc.
(TCI) and Texaco Exploration and Production Inc. (TEPI) alleging violations
of the Clean Air Act for failure to install pollution control equipment on
certain facilities in the Midway-Sunset and Kern River Oil Fields in Kern
County, California. TCI and TEPI have negotiated a
settlement of these claims in the form of a Consent Decree that is presently
subject to public comment and court approval. Under the terms of the proposed
Consent Decree, TCI and TEPI have agreed to install vapor recovery equipment
at certain facilities in the Midway-Sunset and Kern River Oil Fields based
upon an agreed upon schedule and pay a civil penalty in the amount of
$568,000, plus accrued interest. A civil complaint and the proposed Consent
Decree were lodged with the United States District Court in Fresno,
California on July 16, 2001.
Item 5. Other Information
-------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Millions of dollars)
(Unaudited)
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Exploration and production
United States $ 500 $ 384 $ 286 $ 209
International 878 879 461 526
------ ------ ------ ------
Total 1,378 1,263 747 735
------ ------ ------ ------
Refining, marketing and distribution
United States 151 136 88 71
International 122 141 70 41
------ ------ ------ ------
Total 273 277 158 112
------ ------ ------ ------
Global gas, power and energy technology 120 184 108 156
------ ------ ------ ------
Total segments 1,771 1,724 1,013 1,003
Other business units 5 45 2 42
------ ------ ------ ------
Total $1,776 $1,769 $1,015 $1,045
====== ====== ====== ======
Exploratory expenses included above
United States $ 49 $ 41 $ 17 $ 22
International 63 72 46 38
------ ------ ------ ------
Total $ 112 $ 113 $ 63 $ 60
====== ====== ====== ======
- 18 -
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
OPERATING DATA
- --------------
EXPLORATION AND PRODUCTION
- --------------------------
United States
- -------------
Net production of crude oil and natural
gas liquids (MBPD) 325 371 325 364
Net production of natural gas - available
for sale (MMCFPD) 1,246 1,355 1,237 1,349
------ ------ ------ ------
Total net production (MBOEPD) 533 597 531 589
Natural gas sales (MMCFPD) 4,526 3,724 4,426 4,054
Average U.S. crude (per bbl) $23.42 $24.67 $22.51 $24.90
Average U.S. natural gas (per mcf) $ 5.86 $ 2.86 $ 4.48 $ 3.28
Average WTI (Spot) (per bbl) $28.29 $28.94 $27.88 $28.97
Average Kern (Spot) (per bbl) $20.69 $23.00 $21.48 $23.17
International
- -------------
Net production of crude oil and natural
gas liquids (MBPD)
Europe 116 120 112 98
Indonesia 128 124 123 124
Partitioned Neutral Zone 147 135 147 136
Other 52 68 50 64
------ ------ ------ ------
Total 443 447 432 422
Net production of natural gas - available
for sale (MMCFPD)
Europe 233 248 200 205
Colombia 206 197 210 188
Other 190 148 192 145
------ ------ ------ ------
Total 629 593 602 538
------ ------ ------ ------
Total net production (MBOEPD) 548 546 532 512
Natural gas sales (MMCFPD) 645 626 618 567
Average International crude (per bbl) $22.10 $23.47 $22.58 $23.64
Average International natural gas (per mcf) $ 1.90 $ 1.46 $ 1.78 $ 1.44
Average U.K. natural gas (per mcf) $ 3.24 $ 2.32 $ 2.84 $ 2.27
Average Colombia natural gas (per mcf) $ 1.44 $ 1.03 $ 1.47 $ 1.12
Worldwide
- ---------
Total worldwide net production (MBOEPD) 1,081 1,143 1,063 1,101
-19 -
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
OPERATING DATA
- --------------
Refining, Marketing and Distribution
- ------------------------------------
United States
- -------------
Refinery input (MBPD)
Equilon area 200 286 202 295
Motiva area 313 270 317 279
----- ----- ----- -----
Total 513 556 519 574
Refined product sales (MBPD)
Equilon area 676 725 700 760
Motiva area 434 353 450 365
Other 367 318 361 344
----- ----- ----- -----
Total 1,477 1,396 1,511 1,469
International
- -------------
Refinery input (MBPD)
Europe 371 375 376 385
Caltex area 361 354 356 361
Latin America/West Africa 70 58 74 64
----- ----- ----- -----
Total 802 787 806 810
Refined product sales (MBPD)
Europe 671 626 687 616
Caltex area 520 555 517 530
Latin America/West Africa 487 457 474 466
Other 196 92 209 91
----- ----- ----- -----
Total 1,874 1,730 1,887 1,703
- 20-
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, 2000 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 2000),
dated March 26, 2001 (amended by Form 10-K/A filed on May 18,
2001), and a copy of Texaco Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001, dated May
14, 2001, all incorporated herein by reference, SEC File No.
1-27.
(b) Reports on Form 8-K:
During the second quarter of 2001, we filed a Current Report on Form 8-K
for the following event:
1. April 26, 2001
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the first quarter of 2001.
- 21 -
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 9, 2001
--------------
- 22 -