SEC Filing | Chevron Corporation

================================================================================ United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q ---------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 Commission file number 1-27 Texaco Inc. (Exact name of the registrant as specified in its charter) Delaware 74-1383447 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2000 Westchester Avenue White Plains, New York 10650 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (914) 253-4000 ---------- Texaco Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. As of July 31, 2000, there were 551,250,186 shares outstanding of Texaco Inc. Common Stock - par value $3.125. ================================================================================

TEXACO INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 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, 2000 and 1999 1 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 3 Condensed Consolidated Statements of Comprehensive Income for the six and three months ended June 30, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information Item 1. Legal Proceedings 17 Item 5. Other Information 17-19 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Exhibit Exhibit 12. Computation of Ratio of Earnings to Fixed Charges - 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, -------------------- --------------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES Sales and services $22,862 $15,030 $11,776 $ 8,116 Equity in income of affiliates, interest, asset sales and other 478 429 293 153 ------- ------- ------- -------- 23,340 15,459 12,069 8,269 ------- ------- ------- -------- DEDUCTIONS Purchases and other costs 18,055 11,806 9,425 6,356 Operating expenses 1,268 1,109 678 550 Selling, general and administrative expenses 581 601 256 311 Exploratory expenses 113 210 60 80 Depreciation, depletion and amortization 875 726 391 365 Interest expense 231 245 109 124 Taxes other than income taxes 194 148 91 72 Minority interest 57 35 30 16 ------- ------- ------- -------- 21,374 14,880 11,040 7,874 ------- ------- ------- -------- Income before income taxes 1,966 579 1,029 395 Provision for income taxes 767 107 404 122 ------- ------- ------- -------- NET INCOME $ 1,199 $ 472 $ 625 $ 273 ======= ======= ======= ======== Per common share Basic net income $ 2.19 $ 0.85 $ 1.14 $ 0.50 Diluted net income $ 2.19 $ 0.85 $ 1.14 $ 0.50 Cash dividends paid $ 0.90 $ 0.90 $ 0.45 $ 0.45 See accompanying notes to consolidated financial statements. - 1 -

TEXACO INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Millions of dollars) June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) ----------- ASSETS Current Assets Cash and cash equivalents $ 261 $ 419 Short-term investments - at fair value 35 29 Accounts and notes receivable, less allowance for doubtful accounts of $25 million in 2000 and $27 million in 1999 4,789 4,060 Inventories 1,422 1,182 Deferred income taxes and other current assets 325 273 ------- ------- Total current assets 6,832 5,963 Investments and Advances 6,485 6,426 Properties, Plant and Equipment - at cost 33,816 36,527 Less - Accumulated Depreciation, Depletion and Amortization 18,412 20,967 ------- ------- Net properties, plant and equipment 15,404 15,560 Deferred Charges 1,033 1,023 ------- ------- Total $29,754 $28,972 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt $ 559 $ 1,041 Accounts payable and accrued liabilities Trade liabilities 3,124 2,585 Accrued liabilities 1,121 1,203 Income and other taxes 1,155 839 Total current liabilities 5,959 5,668 Long-Term Debt and Capital Lease Obligations 6,519 6,606 Deferred Income Taxes 1,483 1,468 Employee Retirement Benefits 1,176 1,184 Deferred Credits and Other Non-current Liabilities 1,218 1,294 Minority Interest in Subsidiary Companies 716 710 ------- ------- Total 17,071 16,930 Stockholders' Equity Market auction preferred shares 300 300 Common stock (authorized: 850,000,000 shares, $3.125 par value; 567,576,504 shares issued) 1,774 1,774 Paid-in capital in excess of par value 1,285 1,287 Retained earnings 10,449 9,748 Unearned employee compensation and benefit plan trust (285) (306) Accumulated other comprehensive income (loss) Currency translation adjustment (99) (99) Minimum pension liability adjustment (27) (23) Unrealized net gain on investments 4 3 ------- ------- Total (122) (119) ------- ------- 13,401 12,684 Less - Common stock held in treasury, at cost 718 642 ------- ------- Total stockholders' equity 12,683 12,042 ------- ------- Total $29,754 $28,972 ======= ======= See accompanying notes to consolidated financial statements. -2-

TEXACO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Millions of dollars) (Unaudited) ----------------------- For the six months ended June 30, ----------------------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,199 $ 472 Reconciliation to net cash provided by (used in) operating activities Depreciation, depletion and amortization 875 726 Deferred income taxes 15 (96) Exploratory expenses 113 210 Minority interest in net income 57 35 Dividends from affiliates, greater than equity in income 108 58 Gains on asset sales (95) (62) Changes in operating working capital (337) (267) Other - net 58 (23) ------ ------ Net cash provided by operating activities 1,993 1,053 CASH FLOWS FROM INVESTING ACTIVITIES Capital and exploratory expenditures (1,469) (1,109) Proceeds from asset sales 490 219 Purchases of investment instruments (206) (283) Sales/maturities of investment instruments 202 606 Collection of note from affiliate -- 101 ------ ------ Net cash used in investing activities (983) (466) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings having original terms in excess of three months Proceeds 762 1,843 Repayments (1,836) (298) Net increase (decrease) in other borrowings 532 (1,522) Purchases of common stock (71) -- Dividends paid to the company's stockholders Common (489) (474) Preferred (8) (23) Dividends paid to minority stockholders (53) (15) ------ ------ Net cash used in financing activities (1,163) (489) CASH AND CASH EQUIVALENTS Effect of exchange rate changes on cash and cash equivalents (5) (24) ------ ------ Increase (decrease) during period (158) 74 Beginning of year 419 249 ------ ------ End of period $ 261 $ 323 ======= ====== See accompanying notes to consolidated financial statements. -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, -------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- NET INCOME $1,199 $ 472 $ 625 $ 273 Other comprehensive income (loss), net of tax Minimum pension liability adjustment (4) - - - Unrealized net gain (loss) on investments 1 (22) (5) (2) ------ ------- ------ ------- (3) (22) (5) (2) ------ ------- ------ ------- COMPREHENSIVE INCOME $1,196 $ 450 $ 620 $ 271 ====== ======= ====== ======= TEXACO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Note 1. Basis of Preparing Interim Financial Statements - ------------------------------------------------------- The accompanying unaudited consolidated interim financial statements of Texaco Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. We have condensed or omitted from these financial statements certain footnotes and other information included in our 1999 Annual Report on Form 10-K. You should read these unaudited condensed financial statements in conjunction with our 1999 Annual Report. Certain prior period amounts have been reclassified to conform to current year presentation. All dollar amounts are in millions, unless otherwise noted. We have consistently applied the accounting policies described in our 1999 Annual Report on Form 10-K in preparing the unaudited financial statements for the six-month and three-month periods ended June 30, 2000 and 1999. We have made all adjustments and disclosures necessary, in our opinion, to present fairly our results of operations, financial position and cash flows for such periods. These adjustments were of a normal recurring nature. The information is subject to year-end audit by independent public accountants. The results for the interim periods are not necessarily indicative of trends or future financial results. - 4 -

Note 2. Net Income Per Common Share - ----------------------------------- For the six months For the three months ended June 30, ended June 30, ------------------ -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) Basic Net Income Per Common Share: Net income $ 1,199 $ 472 $ 625 $ 273 Less: Preferred stock dividends 7 23 4 10 ------- ------- ------- ------- Net income available for common stock $ 1,192 $ 449 $ 621 $ 263 ======= ======= ======= ======= Weighted average shares outstanding (thousands) 543,334 526,965 542,770 527,700 ======= ======= ======= ======= Basic net income per common share (dollars) $ 2.19 $ 0.85 $ 1.14 $ 0.50 ======= ======= ======= ======= Diluted Net Income Per Common Share: Net income available for common stock $ 1,192 $ 449 $ 621 $ 263 Adjustment for the dilutive effect of stock-based compensation 2 2 1 1 ------- ------- ------- ------- Income for diluted earnings per share $ 1,194 $ 451 $ 622 $ 264 ======= ======= ======= ======= Weighted average shares outstanding (thousands) 543,334 526,965 542,770 527,700 Dilutive effect of stock-based compensation (thousands) 1,611 2,675 1,642 2,536 ------- ------- ------- ------- Weighted average shares outstanding for diluted computation (thousands) 544,945 529,640 544,412 530,236 ======= ======= ======= ======= Diluted net income per common share (dollars) $ 2.19 $ 0.85 $ 1.14 $ 0.50 ======= ======= ======= ======= Note 3. Segment Information - --------------------------- For the six months ended June 30, ------------------------------------------------------------------------------- 2000 1999 -------------------------------------- ------------------------------------- Sales and Services Sales and Services ------------------------ After ------------------------ After Inter- Tax Inter- Tax Outside Segment Total Profit (Loss) Outside Segment Total Profit (Loss) ------- ------- ----- ------------- ------- ------- ----- ------------- (Unaudited) Exploration and production United States $1,682 $ 924 $2,606 $ 647 $ 826 $ 666 $ 1,492 $ 186 International 1,669 684 2,353 554 1,022 294 1,316 60 Refining, marketing and distribution United States 2,767 106 2,873 63 1,440 7 1,447 86 International 13,851 191 14,042 141 9,856 23 9,879 371 Global gas and power 2,887 81 2,968 20 1,879 47 1,926 7 ------- ------ ------- ------ ------- ------ ------- ----- Segment totals $22,856 $1,986 24,842 1,425 $15,023 $1,037 16,060 710 ======= ====== ======= ====== Other business units 15 (2) 20 (2) Corporate/Non-operating 3 (224) 4 (236) Intersegment eliminations (1,998) -- (1,054) -- ------- ------ ------ ----- Consolidated $22,862 $1,199 $15,030 $ 472 ======= ====== ======= ===== - 5 -

For the six months ended June 30, ------------------------------------------------------------------------------- 2000 1999 -------------------------------------- ------------------------------------- Sales and Services Sales and Services ------------------------ After ------------------------ After Inter- Tax Inter- Tax Outside Segment Total Profit (Loss) Outside Segment Total Profit (Loss) ------- ------- ----- ------------- ------- ------- ----- ------------- (Unaudited) Exploration and production United States $ 859 $494 $ 1,353 $353 $ 477 $370 $ 847 $148 International 796 273 1,069 261 577 184 761 78 Refining, marketing and distribution United States 1,387 82 1,469 45 829 4 833 24 International 7,130 96 7,226 90 5,310 20 5,330 151 Global gas and power 1,602 46 1,648 -- 919 24 943 1 ------- ---- ------- --- ------ ---- ------ ---- Segment totals $11,774 $991 12,765 749 $8,112 $602 8,714 402 ======= ==== ====== ==== Other business units 5 (2) 9 (1) Corporate/Non-operating 2 (122) 3 (128) Intersegment eliminations (996) -- (610) -- ------- ---- ------ ---- Consolidated $11,776 $625 $8,116 $273 ======= ==== ====== ==== Assets as of --------------------------------------------- June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) Exploration and production United States $8,325 $8,696 International 5,792 5,333 Refining, marketing and distribution United States 3,326 3,714 International 9,219 8,542 Global gas and power 1,800 1,297 ------- ------- Segment totals 28,462 27,582 Other business units 362 365 Corporate/Non-operating 1,307 1,430 Intersegment eliminations (377) (405) ------- ------- Consolidated $29,754 $28,972 ======= ======= - 6 -

Note 4. Inventories - ------------------- The inventory accounts of Texaco are presented below: As of -------------------------------------- June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) Crude oil $ 218 $ 141 Petroleum products and other 1,023 857 Materials and supplies 181 184 ------ ------ Total $1,422 $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 six months For the three months ended June 30, ended June 30, -------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Gross revenues $21,186 $11,352 $11,229 $ 5,751 Income (loss) before income taxes $ 18 $ 48 $ 49 $ (123) 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 six months For the three months ended June 30, ended June 30, -------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Gross revenues $9,137 $4,965 $4,746 $2,815 Income (loss) before income taxes $ 217 $ 20 $ 154 $ (21) 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 six months For the three months ended June 30, ended June 30, ------------------ --------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Gross revenues $8,905 $6,137 $4,795 $3,247 Income before income taxes $ 483 $ 518 $ 264 $ 229 Net income $ 230 $ 343 $ 128 $ 140 Note 6. Commitments and Contingencies - ------------------------------------- Information relative to commitments and contingent liabilities of Texaco is presented in Note 15, Other Financial Information, Commitments and Contingencies, pages 54-55, of our 1999 Annual Report. It is impossible for us to determine the ultimate legal and financial liability with respect to contingencies and commitments. However, we do not anticipate that the aggregate amount of such liability in excess of accrued liabilities will be materially important in relation to our consolidated financial position or results of operations. - 8 -

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- RESULTS OF OPERATIONS - --------------------- The following table provides a summary of Texaco's net income and income before special items for the second quarter and first six months of 2000 and 1999. All dollar amounts are in millions, unless otherwise noted. For the six months For the three months ended June 30, ended June 30, --------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) Income before special items $1,243 $391 $ 641 $286 Per share (dollars) $ 2.27 $.70 $1.17 $.52 Net income $1,199 $472 $ 625 $273 Per share (dollars) $ 2.19 $.85 $1.14 $.50 Our strong earnings performance during the quarter was driven by high crude oil prices and increased U.S. natural gas prices, reflecting strong worldwide demand and low industry inventories. Our upstream operations contributed the greatest share of our earnings improvement during this period. During the quarter, the divestiture of several non-core producing assets added over $200 million to our cash flow. We continue to be encouraged by the results of our exploration program as well as the progress on our major development activities. In addition, the Petronius field offshore in the Gulf of Mexico began producing on July 9 and our production there should grow to 20,000 barrels per day in October. In the downstream, our overall results improved versus this year's first quarter but were below last year. While our refining results have improved in Europe and on the Gulf and East Coasts of the United States, the combination of high crude oil costs and the extremely competitive environment contributed to weak marketing margins in most areas. Margins in the Caltex region have been especially weak and, accordingly, our performance there has been disappointing. During the quarter, the sale of Equilon's Wood River refinery was completed, furthering our long term strategy of reducing our refining exposure. Notwithstanding our strong earnings and cash flow, we continue to maintain a disciplined approach to our capital spending throughout the company. Results for the second quarter and first six months of 2000 and 1999 are summarized in the following table. Details on special items are included in the segment analysis which follows this table. The following discussion of operating earnings is presented on an after-tax basis. - 9 -

For the six months For the three months ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) Income before special items $1,243 $391 $641 $286 Gains (losses) on major asset sales (65) (55) 2 (55) Tax issues 46 65 -- 54 Inventory valuation adjustments -- 138 -- 55 Employee benefits revision 18 -- -- -- Reorganization, restructuring and employee separation costs (12) (67) -- (67) Litigation issue (17) -- (4) -- Net loss on Erskine pipeline (14) -- (14) -- ------ ---- ---- ---- Special items (44) 81 (16) (13) ------ ---- ---- ---- Net income $1,199 $472 $625 $273 ====== ==== ==== ==== OPERATING RESULTS EXPLORATION AND PRODUCTION For the six months For the three months United States ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating income before special items $754 $165 $393 $138 Special items (107) 21 (40) 10 ---- ---- --- ---- Operating income $647 $186 $353 $148 ==== ==== ==== ==== U.S. exploration and production earnings for the second quarter and first six months of 2000 were considerably better than last year due to higher crude oil and natural gas prices. Tight oil supplies caused second quarter WTI crude oil prices to average nearly $29.00 per barrel. Our realized crude oil prices for the second quarter and first six months of 2000 were $24.90 and $24.67 per barrel, 95 percent and 125 percent higher than last year. Increased demand and low storage levels caused U.S. natural gas prices to rise. For the second quarter and first six months of 2000, average natural gas prices were $3.28 and $2.86 per MCF, 60 percent and 49 percent above last year. Daily production decreased nine percent for the second quarter and eight percent for the first six months of the year. This expected reduction was due to natural field declines and sales of non-core producing properties. During the second quarter, we received $67 million from these sales, bringing our total cash proceeds for the year to $330 million. Our operating expenses increased eight percent for the second quarter and six months as higher crude oil and natural gas prices led to higher utilities expenses and production taxes. Exploratory expenses for the second quarter and first six months of 2000 were $22 million and $41 million before tax, $16 million and $51 million below last year, reflecting reduced activities in the U.S. Results for the first six months of 2000 included special charges of $107 million, including $40 million in the second quarter, for net losses on sales of non-core producing assets. This charge was comprised of write-downs of assets sold to their sales prices and related disposal costs, partially offset by gains on the sale of certain other assets. Results for the second quarter of 1999 included a special gain of $21 million for the sale of our interest in several California fields. Also included in that quarter was a special charge of $11 million for employee separation costs. See the section entitled, Reorganizations, Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for additional information. Results for 1999 also included a first quarter special benefit of $11 million for a production tax refund. - 10 -

For the six months For the three months International ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating income before special items $488 $62 $195 $80 Special items 66 (2) 66 (2) ---- --- ---- --- Operating income $554 $60 $261 $78 ==== === ==== === International exploration and production earnings for the second quarter and first six months of 2000 were significantly higher than last year due to higher crude oil prices and lower expenses. Market conditions have kept crude oil prices strong throughout the first six months. Our realized crude oil prices for the second quarter and first six months of 2000 were $23.64 and $23.47 per barrel, 72 percent and 102 percent higher than last year. Average natural gas prices were $1.44 per MCF for the second quarter and $1.46 per MCF for the first six months of 2000, 17 percent and seven percent above last year. Daily production decreased 10 percent for the second quarter and five percent for the first six months due to scheduled maintenance and repairs in our U.K. North Sea operations, lower lifting entitlements for cost recovery in Indonesia as a result of higher crude oil prices and the sale of non-core producing properties. Production continues to increase in the Partitioned Neutral Zone and the Karachaganak field in the Republic of Kazakhstan. During the second quarter, we received proceeds of $137 million from the sales of non-core producing properties. In line with lower production, our operating expenses decreased eight percent for the second quarter and seven percent for the first six months of 2000. Exploratory expenses for the second quarter were $38 million before tax, slightly lower than last year. Exploratory expenses for the first six months were $72 million before tax, $46 million lower than last year which included an unsuccessful exploratory well in a new offshore area of Trinidad. Results for the second quarter of 2000 included a special benefit of $80 million for net gains on the sale of non-core producing properties and a special charge of $14 million for net losses resulting from the Erskine pipeline interruption in the U.K. North Sea. Results for the second quarter of 1999 included a special charge of $2 million for employee separation costs. See the section entitled, Reorganizations, Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for additional information. REFINING, MARKETING AND DISTRIBUTION For the six months For the three months United States ended June 30, ended June 30, ------------- ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating income before special items $93 $165 $80 $111 Special items (30) (79) (35) (87) --- ---- --- ---- Operating income $63 $ 86 $45 $ 24 === ==== === ==== U.S. refining, marketing and distribution earnings before special items were lower than last year for both the second quarter and first six months. U.S. downstream activities are primarily conducted through Equilon Enterprises LLC, our western alliance with Shell Oil Company, and Motiva Enterprises LLC, our eastern alliance with Shell Oil Company and Saudi Refining, Inc. During the second quarter and first six months of 2000, Equilon's earnings declined due to weak marketing and lubricant margins. Maintenance activity at the Puget Sound, Martinez and Wood River refineries adversely impacted results for both years. Marketing margins were depressed because pump prices lagged increases in supply costs in a very competitive market. - 11 -

Motiva's results for the second quarter and first six months of 2000 benefited from improved East and Gulf Coast refining margins. Maintenance activities this year in both quarters at the Delaware City refinery and in the second quarter at the Port Arthur refinery adversely impacted results. Lower gasoline and distillate inventory levels and tight supplies due to industry refinery downtime helped refining margins. While refining results improved, marketing margins were negatively impacted by higher supply costs which were not fully recovered in the competitive market. Results for the first six months of 2000 included net special charges of $30 million, comprised of a second quarter charge of $31 million for the loss on the sale of the Wood River refinery, a charge for a patent litigation issue of $17 million, $4 million in the second quarter, and a first quarter gain of $18 million for an employee benefits revision. Results for the first six months of 1999 included net special charges of $79 million. This was comprised of second quarter charges of $76 million for asset write-downs to their estimated sales value due to the pending sales by Equilon of its El Dorado and Wood River refineries and $11 million for alliance reorganization, restructuring and employee separation costs. Results for 1999 included a first quarter special benefit of $8 million due to higher inventory values on March 31, 1999. This follows a fourth quarter 1998 charge of $34 million to reflect lower prices on December 31, 1998 for inventories of crude oil and refined products. For the six months For the three months International ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating income before special items $153 $ 221 $90 $ 76 Special items (12) 150 -- 75 ---- ----- --- ---- Operating income $141 $ 371 $90 $151 ==== ===== === ==== International refining and marketing earnings before special items for the second quarter of 2000 increased from last year. Refining results improved dramatically in Europe as margins improved in the U.K. and the Netherlands. However, marketing results declined due to increased costs and highly competitive market conditions in our European and Latin American areas of operation. Refining results in Latin America were nearly level with the second quarter of 1999. Operating results for our Caltex affiliate decreased due to lower marketing margins in the Asia-Pacific area. Results for the first six months of 2000 declined due to weak marketing margins in the Caltex region, Latin America and Europe. Refining results were mixed as European and Asian margins improved, while increased crude costs negatively impacted refining margins in Panama. Results for 2000 included first quarter special charges of $12 million for employee separation costs. See the section entitled, Reorganizations, Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for additional information. The second quarter of 1999 included a special gain of $54 million for a Korean tax benefit, Caltex restructuring charges of $25 million and employee separation costs in Europe and Latin America of $9 million. Results for 1999 also included first and second quarter special benefits of $75 million and $55 million due to higher 1999 inventory values. This follows a fourth-quarter 1998 charge of $108 million to reflect lower market prices on December 31, 1998 for inventories of crude oil and refined products, as well as additional charges recorded in prior years. - 12 -

GLOBAL GAS AND POWER For the six months For the three months ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating income before special items $20 $10 $ -- $ 4 Special items -- (3) -- (3) --- --- -- --- Operating income $20 $ 7 $ -- $ 1 === === == === Operating results for our global gas and power operations for the first six months of 2000 benefited from the first quarter recovery of natural gas liquids prices which was not sustained in the second quarter. Results for 1999 included gains from several asset sales, including a gas gathering pipeline in the U.S. and our 50 percent interest in a U.K. retail gas marketing venture. Results for the second quarter of 1999 included a special charge of $3 million for employee separation costs. See the section entitled, Reorganizations, Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for additional information. OTHER BUSINESS UNITS For the six months For the three months ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating loss $ (2) $(2) $ (2) $(1) ==== === ==== === Our other business units mainly include our insurance operations. There were no significant items in these results. CORPORATE/NON-OPERATING For the six months For the three months ended June 30, ended June 30, ------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Results before special items $(263) $(230) $(115) $(122) Special items 39 (6) (7) (6) ----- ----- ----- ----- Total Corporate/Non-operating $(224) $(236) $(122) $(128) ===== ===== ===== ===== Corporate and non-operating expenses before special items for the second quarter benefited from a favorable prior period tax revision and lower interest expense. The first six months of 2000 included expenses for our Olympic sponsorship program and higher other corporate expenses. Results for the first six months of 1999 benefited from a $21 million gain on the sale of marketable securities. Results for the first six months of 2000 included a first quarter special benefit of $46 million for favorable income tax settlements in the first quarter and a second quarter special charge of $7 million for early extinguishment of debt associated with the anticipated sale of an offshore producing facility in the U.K. North Sea. Results for 1999 included a second quarter special charge of $6 million for employee separation costs. See the section entitled, Reorganizations, Restructurings and Employee Separation Programs on page 14 of this Form 10-Q for additional information. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Our cash, cash equivalents and short-term investments were $296 million at June 30, 2000, compared with $448 million at year-end 1999. - 13 -

During the first six months of 2000, strong earnings from our operations provided cash of $2.0 billion. We also had cash inflows of $490 million from assets sales, primarily from the sale of several non-core producing properties. We spent $1.5 billion on our capital and exploratory program, paid $550 million in common, preferred and minority interest dividends and used $613 million to reduce debt and repurchase common stock. As of June 30, 2000, our ratio of total debt to total borrowed and invested capital was 34.6%, compared with 37.5% at year-end 1999. At June 30, 2000, our long-term debt included $2.05 billion of debt scheduled to mature within one year, which we have both the intent and ability to refinance on a long-term basis. During the first six months of 2000, our overall debt level decreased by $542 million. This was comprised of debt repayments of $1,359 million, increased commercial paper of $287 million and the issuance of $530 million of medium-term notes from our existing "shelf" registration. As of June 30, 2000, we maintained, but had not used, $2.05 billion in revolving credit facilities that provide liquidity and support our commercial paper program. As of June 30, 2000, the total dollar amount of debt and equity securities remaining available for issuance and sale under our "shelf" registration statement is $1,445 million. In March 2000, we resumed purchasing common stock under the $1 billion common stock repurchase program we initiated in March 1998. We purchased about $70 million of common stock under this program during the first six months of 2000 and an additional $58 million from July 1 through August 4, 2000. This brings our total purchases under this program, including $474 million purchased during 1998, to about $600 million. No shares were purchased under this program in 1999. We will continue to repurchase shares of common stock, subject to market conditions, through open market purchases or privately negotiated transactions. We consider our financial position to be sufficiently strong to meet our anticipated future financial requirements. REORGANIZATIONS, RESTRUCTURINGS AND EMPLOYEE SEPARATION PROGRAMS - ---------------------------------------------------------------- On pages 26 and 27 of our 1999 Annual Report, we discussed our fourth quarter 1998 reorganizations, restructurings and employee separation programs. In 1998, we accrued $115 million ($80 million, net of tax) for employee separations, curtailment costs and special termination benefits. During the second quarter of 1999, we expanded the employee separation programs and recorded an additional provision of $48 million ($31 million, net of tax). Through June 30, 2000, cash payments totaled $149 million and transfers to long-term obligations totaled $12 million. We will pay the remaining obligations of $2 million in future periods in accordance with plan provisions. Refer to our 1999 Annual Report for a further discussion of these programs. During the first quarter of 2000, we announced an additional employee separation program for our international downstream, primarily our marketing operations in Brazil and Ireland. We accrued $17 million ($12 million, net of tax) for employee separations, curtailment costs and special termination benefits for about 200 employees. These separation accruals are shown as selling, general and administrative expenses in the Consolidated Statements of Income. Through June 30, 2000, employee reductions totaled 91. The remaining reductions will occur during the last half of this year. During the first six months of 2000, we made cash payments of $2 million and transfers to long-term obligations of $8 million. We will pay the remaining obligations of $7 million in future periods in accordance with plan provisions. - 14 -

NEW ACCOUNTING STANDARDS - ------------------------ In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137, which deferred the effective date of SFAS 133. This was followed in June 2000 by the issuance of SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amends SFAS 133. SFAS 133 and 138 establishes accounting and reporting standards for derivative financial instruments. The standards require that all derivative financial instruments be recorded on the Consolidated Balance Sheets at their fair value. Changes in fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. We will adopt these standards effective January 1, 2001 and are currently assessing the effects of adoption. CAPITAL AND EXPLORATORY EXPENDITURES - ------------------------------------ Worldwide capital and exploratory expenditures, including our share of affiliates, were $1,769 million for the first six months of 2000, compared with $1,458 million for 1999. Led by a 57 percent increase in our international segment, total upstream expenditures increased 24 percent as we continued to focus on high-margin, high-impact projects. Investment continued in the Malampaya natural gas project in the Philippines and the Karachaganak field in Kazakhstan. In addition to spending on these projects, expenditures for platform development work continued on the Captain B project in the U.K. North Sea. In the United States, upstream spending decreased by 17 percent primarily due to the completion, last year, of the Gemini project in the Deepwater Gulf of Mexico. In the United States downstream, refinery expenditures declined as we continued to reduce our exposure to the refining business with Equilon's sale of the El Dorado refinery in November of 1999 and the Wood River refinery in June of 2000. Internationally, expenditures decreased due to the completion of a project at the Pembroke refinery last year and lower marketing investments in Latin America. Expenditures for global gas and power more than doubled from last year primarily from the purchase of a 20 percent interest in Energy Conversion Devices, Inc., which develops and commercializes enabling technologies for use in the fields of alternative energy and information technologies. This investment further advances our goal to be a leader in the development and commercialization of advanced, environmentally-smart alternative energy technologies. FORWARD-LOOKING STATEMENTS - -------------------------- Portions of the foregoing discussion contain a number of "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements made concerning our expected performance and financial results in future periods are based on our current expectations and beliefs and are subject to a number of known and unknown risks and uncertainties. This could cause actual results to differ materially from those described in the "forward-looking statements." The following factors known to us, among other factors, could cause our actual results to differ materially from those described in the "forward-looking statements": incorrect estimation of reserves; inaccurate seismic data; mechanical failures; decreased demand for crude oil, natural gas, motor fuels and other products; worldwide and industry economic conditions; inaccurate forecasts of crude oil, natural gas and petroleum product prices; increasing price and product competition; price fluctuations; and higher costs, expenses and interest rates. In addition, you are encouraged to review our latest reports filed with the Securities and Exchange Commission, including our 1999 Annual Report on Form 10-K filed with the SEC on March 24, 2000, which describes a number of additional risks and uncertainties that could cause actual results to vary materially from those listed in the "forward-looking statements" made in this Quarterly Report on Form 10-Q. - 15 -

SUPPLEMENTAL MARKET RISK DISCLOSURES We are exposed to the following types of market risks: o The price of crude oil, natural gas and petroleum products o The value of foreign currencies in relation to the U.S. dollar o Interest rates We use derivative financial instruments, such as futures, forwards, options and swaps, in managing these risks. There were no material changes during the first six months of 2000 in our exposures to loss from possible future changes in the price of crude oil, natural gas and petroleum products, the value of foreign currencies in relation to the U. S. dollar or interest rates. - 16 -

PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- We have provided information about legal proceedings pending against Texaco in Note 6 to the Consolidated Financial Statements of this Form 10-Q, in Item 1 of our first quarter 2000 Form 10-Q and in Item 3 of our 1999 Annual Report on Form 10-K. Note 6 of this Form 10-Q, Item 1 of our first quarter 2000 Form 10-Q and Item 3 of our 1999 Form 10-K are incorporated here by reference. Item 5. Other Information - ------------------------- For the six months For the three months ended June 30, ended June 30, ------------------ -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Millions of dollars) (Unaudited) CAPITAL AND EXPLORATORY EXPENDITURES - ------------------------------------ Exploration and production United States $ 384 $ 461 $ 209 $ 205 International 879 561 526 340 ------ ------ ------ ----- Total 1,263 1,022 735 545 ------ ------ ------ ----- Refining, marketing and distribution United States 136 158 71 85 International 141 176 41 99 ------ ------ ------ ----- Total 277 334 112 184 ------ ------ ------ ----- Global gas and power 184 86 156 51 ------ ------ ------ ----- Total operating segments 1,724 1,442 1,003 780 Other business units 45 16 42 9 ------ ------ ------ ----- Total $1,769 $1,458 $1,045 $ 789 ====== ====== ====== ===== Exploratory expenses included above United States $ 41 $ 92 $ 22 $ 38 International 72 118 38 42 ------ ------ ------ ----- Total $ 113 $ 210 $ 60 $ 80 ====== ====== ====== ===== - 17 -

For the six months For the three months ended June 30, ended June 30, ------------------ -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) OPERATING DATA Exploration and Production United States Net production of crude oil and natural gas liquids (MBPD) 371 404 364 399 Net production of natural gas - available for sale (MMCFPD) 1,355 1,483 1,349 1,479 ----- ----- ----- ----- Total net production (MBOEPD) 597 651 589 646 Natural gas sales (MMCFPD) 3,724 3,295 4,054 3,015 Average U.S. crude (per bbl) $24.67 $10.95 $24.90 $12.80 Average U.S. natural gas (per mcf) $ 2.86 $ 1.92 $ 3.28 $ 2.05 Average WTI (Spot) (per bbl) $28.94 $15.44 $28.97 $17.66 Average Kern (Spot) (per bbl) $23.00 $ 9.49 $23.17 $11.26 International Net production of crude oil and natural gas liquids (MBPD) Europe 120 136 98 143 Indonesia 124 165 124 150 Partitioned Neutral Zone 135 119 136 121 Other 68 67 64 69 ----- ----- ----- ----- Total 447 487 422 483 Net production of natural gas - available for sale (MMCFPD) Europe 248 265 205 244 Colombia 197 157 188 160 Other 148 111 145 112 ----- ----- ----- ----- Total 593 533 538 516 ----- ----- ----- ----- Total net production (MBOEPD) 546 576 512 569 Natural gas sales (MMCFPD) 626 557 567 549 Average International crude (per bbl) $23.47 $11.60 $23.64 $13.73 Average International natural gas (per mcf) $ 1.46 $ 1.37 $ 1.44 $ 1.23 Average U.K. natural gas (per mcf) $ 2.32 $ 2.39 $ 2.27 $ 2.17 Average Colombia natural gas (per mcf) $ 1.03 $ 0.62 $ 1.12 $ 0.59 Worldwide Total worldwide net production (MBOEPD) 1,143 1,227 1,101 1,215 -18 -

For the six months For the three months ended June 30, ended June 30, ------------------ -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Unaudited) OPERATING DATA - -------------- Refining, Marketing and Distribution - ------------------------------------ United States - ------------- Refinery input (MBPD) Equilon area 286 369 295 373 Motiva area 270 307 279 313 ----- ----- ----- ----- Total 556 676 574 686 Refined product sales (MBPD) Equilon area 725 641 760 710 Motiva area 353 378 365 376 Other 318 299 344 291 ----- ----- ----- ----- Total 1,396 1,318 1,469 1,377 International - ------------- Refinery input (MBPD) Europe 375 367 385 368 Caltex area 354 427 361 416 Latin America/West Africa 58 73 64 72 ----- ----- ----- ----- Total 787 867 810 856 Refined product sales (MBPD) Europe 626 619 616 601 Caltex area 588 667 563 663 Latin America/West Africa 457 489 466 501 Other 92 93 91 82 ----- ----- ----- ----- Total 1,763 1,868 1,736 1,847 - 19-

Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits -- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on a Total Enterprise Basis. -- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (including portions of Texaco Inc.'s Annual Report to Stockholders for the year 1999), dated March 24, 2000, and a copy of Texaco Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, dated May 8, 2000, both incorporated herein by reference, SEC File No. 1-27. -- (27) Financial Data Schedule (included only in the electronic filing of this document). b) Reports on Form 8-K: During the second quarter of 2000, we filed a Current Report on Form 8-K for the following event: 1. April 25, 2000 Item 5. Other Events -- reported that Texaco issued an Earnings Press Release for the first quarter of 2000. - 20 -

SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Texaco Inc. ------------------ (Registrant) By: George J. Batavick ------------------ (Comptroller) By: Michael H. Rudy ------------------ (Secretary) Date: August 10, 2000 --------------- - 21 -

EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES OF TEXACO ON A TOTAL ENTERPRISE BASIS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1999 -------------------------------------------------- (Millions of dollars) For the Six Years Ended December 31, Months Ended ----------------------------------------- June 30, 2000 1999 1998 1997 1996 1995 ------------- ---- ---- ---- ---- ---- Income from continuing operations, before provision or benefit for income taxes and cumulative effect of accounting changes effective 1-1-98 and 1-1-95.......... $2,072 $1,955 $ 892 $3,514 $3,450 $1,201 Dividends from less than 50% owned companies more or (less) than equity in net income................ 145 189 -- (11) (4) 1 Minority interest in net income............................ 57 83 56 68 72 54 Previously capitalized interest charged to income during the period................................ 8 14 22 25 27 33 ------ ------ ------ ------ ------ ------ Total earnings..................................... 2,282 2,241 970 3,596 3,545 1,289 ------ ------ ------ ------ ------ ------ Fixed charges Items charged to income Interest charges...................................... 282 587 664 528 551 614 Interest factor attributable to operating lease rentals.................................... 44 90 120 112 129 110 Preferred stock dividends of subsidiaries guaranteed by Texaco Inc......................... 53 55 33 33 35 36 ------ ------ ------ ------ ------ ------ Total items charged to income...................... 379 732 817 673 715 760 Interest capitalized.................................... 35 28 26 27 16 28 Interest on ESOP debt guaranteed by Texaco Inc.......... -- -- 3 7 10 14 ------ ------ ------ ------ ------ ------ Total fixed charges................................ 414 760 846 707 741 802 ------ ------ ------ ------ ------ ------ Earnings available for payment of fixed charges............ $2,661 $2,973 $1,787 $4,269 $4,260 $2,049 ====== ====== ====== ====== ====== ====== (Total earnings + Total items charged to income) Ratio of earnings to fixed charges of Texaco on a total enterprise basis............................. 6.43 3.91 2.11 6.04 5.75 2.55 ====== ====== ====== ====== ====== ======

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEXACO INC.'S 2000 QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

6-MOS JUN-30-2000 JAN-1-2000 JUN-30-2000 261 35 4,814 25 1,422 6,832 33,816 18,412 29,754 5,959 6,519 0 300 2,056 10,327 29,754 22,862 23,340 18,055 19,323 1,820 0 231 1,966 767 1,199 0 0 0 1,199 2.19 2.19