10-Q 1 form10q2001b.txt FORM 10-Q ================================================================================ 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 ---------- 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. ================================================================================ 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 ~~March~~June 3130, 2001 and 2000 1 Consolidated Balance Sheets as of ~~March~~June 3130, 2001 and December 31, 2000 2 Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March~~June 3130, 2001 and 2000 3 Condensed Consolidated Statements of Comprehensive Income for the six and three months ended ~~March~~June 3130, 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 ~~Exhibits~~ Exhibit ~~10(iii)(k). Separation Agreement and General Release dated May 2, 2001, between Texaco Inc. and Mr. Peter I. Bijur~~ Exhibit 12. Computation of Ratio of Earnings to Fixed Charges

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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 ~~March~~June 3130, ended June 30, ------------------ -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES Sales and services $1326,~~872~~310 $22,862 $12,438 $11,~~086~~776 Equity in income of affiliates, interest, asset sales and other ~~262~~732 ~~185~~478 470 293 ------- ------- 14------- ------- 27,~~134~~042 1123,~~271~~340 12,908 12,069 ------- ------- ------- ------- DEDUCTIONS Purchases and other costs 1120,~~093~~924 818,~~630~~055 9,831 9,425 Operating expenses 1,312 1,268 656 ~~590~~678 Selling, general and administrative expenses ~~344~~682 ~~325~~581 338 256 Exploratory expenses 49112 53113 63 60 Depreciation, depletion and amortization ~~319~~639 ~~484~~875 320 391 Interest expense ~~115~~218 ~~122~~231 103 109 Taxes other than income taxes ~~116~~231 ~~103~~194 115 91 Minority interest 4176 2757 35 30 ------- ------- 12------- ------- 24,~~733~~194 1021,~~334~~374 11,461 11,040 ------- ------- ~~Income~~------- ~~before~~------- ~~income~~INCOME ~~taxes~~BEFORE INCOME TAXES 2,848 1,~~401~~966 ~~937~~1,447 ~~Provision~~1,029 ~~for~~PROVISION ~~income~~FOR ~~taxes~~INCOME ~~568~~TAXES ~~363~~1,231 767 663 404 ------- ------- ------- ------- NET INCOME $ ~~833~~1,617 $ ~~574~~1,199 $ 784 $ 625 ======= ======= ~~Per~~======= ~~common~~======= ~~share~~PER COMMON SHARE Basic net income $ 2.98 $ 2.19 $ 1.5344 $ 1.0514 Diluted net income $ 2.97 $ 2.19 $ 1.5344 $ 1.0514 Cash dividends paid $ 0.90 $ 0.90 $ 0.45 $ 0.45 See accompanying notes to consolidated financial statements.

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~~March~~TEXACO 31INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Millions of dollars) June 30, December 31, 2001 2000 ----------- ------------ (Unaudited) ----------- ASSETS Current Assets Cash and cash equivalents $ ~~333~~166 $ 207 Short-term investments - at fair value 6046 46 Accounts and notes receivable, less allowance for doubtful accounts of $26 million in 2001 and $27 million in 2000 56,~~885~~258 5,583 Inventories 1,~~466~~440 1,023 Deferred income taxes and other current assets ~~474~~466 194 ------- ------- Total current assets 8,~~218~~376 7,053 Investments and Advances 67,~~899~~726 6,889 Properties, Plant and Equipment - at cost 33,~~300~~813 32,821 Less - Accumulated Depreciation, Depletion and Amortization 17,~~407~~641 17,140 ------- ------- Net properties, plant and equipment 1516,~~893~~172 15,681 Deferred Charges 1,~~341~~336 1,244 ------- ------- Total $3233,~~351~~610 $30,867 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt $ ~~354~~598 $ 376 Accounts payable and accrued liabilities Trade liabilities 4,~~274~~635 3,314 Accrued liabilities 1,~~165~~220 1,347 Income and other taxes 1,~~140~~008 947 ------- ------- Total current liabilities 67,~~933~~461 5,984 Long-Term Debt and Capital Lease Obligations 6,~~544~~748 6,815 Deferred Income Taxes 1,~~625~~754 1,547 Employee Retirement Benefits 1,~~098~~109 1,118 Deferred Credits and Other Non-current Liabilities 1,~~370~~495 1,246 Minority Interest in Subsidiary Companies ~~702~~713 713 ------- ------- Total 1819,~~272~~280 17,423 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,~~309~~305 1,301 Retained earnings 1112,~~883~~421 11,297 Unearned employee compensation and benefit plan trust (~~300~~293) (310) Accumulated other comprehensive income (loss) ~~Currency~~Net currency translation adjustment (~~104~~105) (106) Minimum pension liability adjustment (18) (27) Unrealized net gain on investments 4 3 Deferred net hedging loss (1311) -- ------- ------- Total (~~131~~130) (130) ------- ------- 1415,~~835~~077 14,232 Less - Common stock held in treasury, at cost ~~756~~747 788 ------- ------- Total stockholders' equity 14,~~079~~330 13,444 ------- ------- Total $3233,~~351~~610 $30,867 ======= ======= See accompanying notes to consolidated financial statements.

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TEXACO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------ (Millions of dollars) (Unaudited) ------------------------- For the ~~three~~six months ended ~~March~~June 3130, ------------------------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,617 ~~833~~ $1,199 ~~574~~ Reconciliation to net cash provided by (used in) operating activities Depreciation, depletion and amortization ~~319~~639 ~~484~~875 Deferred income taxes 72160 ~~(103)~~15 Minority interest in net income 4176 2757 Dividends from affiliates, greater (less) than equity in income (49224) ~~(21)~~108 Gains on asset sales (923) (2295) Changes in operating working capital 52(120) (35337) Other - net 77(7) 9658 ------ ------- Net cash provided by operating activities 12,~~336~~118 1,~~000~~880 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (~~636~~1,477) (~~577~~1,356) Proceeds from asset sales 30120 ~~271~~490 Purchases of investment instruments (~~100~~283) (~~112~~206) Sales/maturities of investment instruments 88139 95202 ------ ------- Net cash used in investing activities (~~618~~1,501) (~~323~~870) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings having original terms in excess of three months Proceeds 5450 ~~555~~762 Repayments (~~732~~812) (~~731~~1,836) Net increase ~~(decrease)~~ in other borrowings ~~392~~986 ~~(42)~~532 Purchases of common stock -- (171) Redemption of market auction preferred shares (300) -- Dividends paid to the company's stockholders Common (~~243~~487) (~~245~~489) Preferred (27) (58) Dividends paid to minority stockholders (5175) (2853) ------ ------- Net cash used in financing activities (~~582~~645) (~~497~~1,163) CASH AND CASH EQUIVALENTS Effect of exchange rate changes on cash and cash equivalents (1013) (5) ------ ------- ~~Increase~~Decrease during period ~~126~~(41) ~~175~~(158) Beginning of year 207 419 ------ ------- End of period $ ~~333~~166 $ ~~594~~261 ====== ======= See accompanying notes to consolidated financial statements.

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TEXACO INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME --------------------------------------------------------- (Millions of dollars) (Unaudited) -------------------------------------------------- For the six months For the three months ended ~~March~~June 3130, ended June 30, --------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- NET INCOME $~~833~~1,617 $~~574~~1,199 $ 784 $ 625 Other comprehensive income (loss), net of tax ~~Currency~~Net currency translation adjustment 21 -- (1) -- Minimum pension liability adjustment 9 (4) -- -- Unrealized net gain (loss) on investments 1 61 -- (5) Deferred net hedging gain (loss) (1311) -- 2 -- ------ ------ ------ -------- -- (3) 1 (5) 2------ ------ ------ -------- COMPREHENSIVE INCOME $~~832~~1,617 $~~576~~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 ~~March~~June 3130, ended June 30, -------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) Basic Net Income Per Common Share: Net income $ ~~833~~1,617 $ ~~574~~1,199 $ 784 $ 625 Less: Preferred stock dividends 36 7 3 4 ------- ------- ------- ------- Net income available for common stock $ ~~830~~1,611 $ ~~571~~1,192 $ 781 $ 621 ======= ======= ======= ======= Weighted average shares outstanding (thousands) 541,~~052~~396 543,~~899~~334 541,739 542,770 ======= ======= ======= ======= Basic net income per common share (dollars) $ 2.98 $ 2.19 $ 1.5344 $ 1.0514 ======= ======= ======= ======= Diluted Net Income Per Common Share: Net income available for common stock $ ~~830~~1,611 $ ~~571~~1,192 $ 781 $ 621 ======= ======= ======= ======= Adjustment for the dilutive effect of stock-based compensation 2 2 1 1 ------- 1------- ------- ------- Income for diluted earnings per share $ ~~830~~1,613 $ ~~572~~1,194 $ 782 $ 622 ======= ======= ======= ======= Weighted average shares outstanding (thousands) 541,~~052~~396 543,~~899~~334 541,739 542,770 Dilutive effect of stock-based compensation (thousands) 2,163 1,~~907~~611 2,419 1,~~579~~642 ------- ------- ------- ------- Weighted average shares outstanding for diluted computation (thousands) ~~542~~543,~~959~~559 ~~545~~544,~~478~~945 544,158 544,412 ======= ======= ======= ======= Diluted net income per common share (dollars) $ 2.97 $ 2.19 $ 1.5344 $ 1.0514 ======= ======= ======= =======

Note 5. Segment Information ---------------------------

For the six months ended June 30, --------------------------------------------------------------------------------- 2001 2000 ------------------------------------------ ------------------------------------- Sales and Services Sales and Services ---------------------- After ---------------------- After ~~Assets~~ Inter- Tax atInter- ~~Quarter~~Tax ~~Ended~~Outside ~~March~~Segment ~~31,~~Total ~~2001~~Profit (Loss) Outside Segment Total Profit (Loss) ~~Quarter~~-~~End~~ ------ ------- ----- ---------- ---~~----~~ ------- ----- -- ----- ------ -------~~----~~ (Unaudited) Exploration and production United States $ ~~940~~1,675 $1,556 ~~895~~$ 3,231 $1,000 $ 1,~~835~~682 $ ~~589~~924 $ 82,~~426~~606 $ 647 International 1,~~005~~894 ~~109~~391 2,285 505 1,~~114~~669 ~~243~~684 62,~~429~~353 554 Refining, marketing and distribution United States 12,~~502~~860 929 12,~~511~~889 38234 32,~~698~~767 106 2,873 63 International 613,~~851~~958 91255 614,~~942~~213 88150 913,~~070~~851 191 14,042 141 Global gas, power and energy technology 35,~~568~~915 43146 36,~~611~~061 523 32,~~072~~887 81 2,968 20 ------- ------ -- ---- ----- ------- ------ ------ ----- Segment totals $1326,~~866~~302 $2,377 28,679 1,~~147~~912 15$22,~~013~~856 ~~963~~$1,986 3024,~~695~~842 1,425 ======= ====== ======= ====== Other business units 916 (337) ~~474~~15 (2) Corporate/Non-operating 24 (~~127~~258) ~~1,543~~3 (224) Intersegment eliminations (12,~~152~~389) -- (~~361~~1,998) -- ----- -- ------ ------- ------ Consolidated $1326,~~872~~310 $1,617 ~~833~~$22,862 $321,~~351~~199 ======= ======= ======= ======

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For the three months ended June 30, -------------------------------------------------------------------------------- 2001 2000 ---------------------------------------- -------------------------------------- Sales and Services Sales and Services --------------------- After --------------------- After ~~Assets~~ Inter- Tax atInter- ~~Quarter~~Tax ~~Ended~~Outside ~~March~~Segment ~~31,~~Total ~~2000~~Profit (Loss) Outside Segment Total Profit (Loss) ~~December 31, 2000~~ ------- ------- ----- --------- ----~~---~~ ------- ----- -- -----~~------~~ -------------~~----~~ (Unaudited) Exploration and production United States $ ~~823~~735 $~~430~~ 661 $ 1,~~253~~396 $411 ~~294~~$ 859 $494 8$ 1,~~442~~353 $353 International ~~873~~889 ~~411~~282 1,~~284~~171 ~~293~~262 6796 273 1,~~343~~069 261 Refining, marketing and distribution United States 1,~~380~~358 2420 1,~~404~~378 18196 31,~~495~~387 82 1,469 45 International 67,~~721~~107 95164 67,~~816~~271 5162 87,~~865~~130 96 7,226 90 Global gas, power and energy technology 12,~~285~~347 35103 2,450 18 1,~~320~~602 2046 21,~~580~~648 -- ------- ------ ------- ---- ------- ---- ------- ---- Segment totals $12,436 $1,230 13,666 949 $11,~~082~~774 $~~995~~991 12,~~077~~765 ~~676~~749 ~~29,725~~======= ====== ======= ==== Other business units 107 --(34) ~~341~~5 (2) Corporate/Non-operating 12 (~~102~~131) ~~1,185~~2 (122) Intersegment eliminations (1,~~002~~237) -- (~~384~~996) -- ----- -- ---- ------- ---- Consolidated $1112,~~086~~438 $784 ~~574~~ $3011,~~867~~776 $625 ======= ===== ======= ====

AsAssets as of --------------------------------------------- ~~March~~June 3130, December 31, 2001 2000 ----------- ------------ (Unaudited) ~~Crude~~Exploration ~~oil~~and production United States $ ~~178~~8,716 $8,442 ~~127~~International ~~Petroleum~~7,059 ~~products~~6,343 Refining, marketing and ~~other~~distribution 1United States 3,~~116~~855 ~~732~~3,495 ~~Materials~~International 9,356 8,865 Global gas, power and ~~supplies~~energy ~~172~~technology ~~164~~3,309 2,580 ------- ------- ~~Total~~Segment $totals 32,295 29,725 Other business units 439 341 Corporate/Non-operating 1,~~466~~285 $1,~~023~~185 Intersegment eliminations (409) (384) ------- ------- Consolidated $33,610 $30,867 ======= =======

- 7 - Note 6. Inventories ------------------- The inventory accounts of Texaco are presented below:

~~For~~As ~~the~~of ~~three months ended March 31,~~ ------------------------------------- June 30, December 31, 2001 2000 ---------- ----------- ~~Gross~~(Unaudited) ~~revenues~~Crude oil $~~11,151~~ 185 $9 127 Petroleum products and other 1,~~957~~073 ~~Income~~732 ~~(loss)~~Materials ~~before~~and ~~income~~supplies ~~taxes~~182 $164 39------ ------ Total $1,440 ~~(31)~~$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 ~~March~~June 3130, ended June 30, -------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Gross revenues $424,~~730~~075 $421,~~391~~186 $12,924 $11,229 Income before income taxes $ ~~130~~353 $ 6318 $ 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 ~~March~~June 3130, ended June 30, -------------------- --------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Gross revenues $310,~~977~~022 $9,137 $5,292 $4,~~253~~746 Income before income taxes $ ~~345~~629 $ ~~219~~217 ~~Net income~~ $ ~~206~~499 $ ~~102~~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 ~~March~~June 3130, ended June 30, -------------------- -------------------- 2001 2000 2001 2000 ---- ---- ~~(Unaudited)~~---- ~~Income~~---- ~~before~~Gross ~~special~~revenues ~~items~~$8,349 $9,414 ~~836~~$4,372 $5,161 ~~602~~Income ~~Per~~before ~~share~~income ~~(dollars)~~taxes $~~1.54~~ 550 $~~1.10~~ 483 $ 205 $ 264 Net income $ ~~833~~279 $ ~~574~~230 ~~Per~~$ ~~share~~73 ~~(dollars)~~ $~~1.53~~ ~~$1.05~~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 ~~March~~June 3130, ended June 30, --------------------- ----------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) Income before special items $~~836~~1,653 $~~602~~1,243 ~~Net~~$ ~~losses~~817 on$ ~~major~~641 ~~asset~~Per ~~sales~~share -- (67dollars) ~~Tax~~$ ~~issue~~3.03 --$ 462.27 ~~Litigation~~$1.50 ~~issue~~$1.17 --Net ~~(13)~~income ~~Employee~~$1,617 ~~related~~$1,199 ~~costs~~$ --784 6$ ~~Merger~~625 ~~costs~~Per ~~(3)~~share ~~-- ---- ---- Special items~~ (3dollars) ~~(28)~~$ ~~----~~2.97 ~~----~~$ ~~Net~~2.19 ~~income~~ $~~833~~1.44 $~~574 ==== ====~~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 ~~United~~ended ~~States~~June 30, ended ~~March~~June 3130, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ~~Operating~~---- ~~income~~---- (Unaudited) Income before special items $~~589~~1,653 $~~361~~1,243 ~~Special~~$817 ~~items~~$641 ------ ------ ---- ---- Write-downs of assets (6725) -- (25) -- Net gains (losses) on major asset sales -- (65) -- ~~Operating~~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 $~~589~~1,617 $~~294~~1,199 $784 $625 ====== ====== ==== ====

OPERATING RESULTS EXPLORATION AND PRODUCTION

For the six months For the three months ~~International~~United States ended ~~March~~June 3130, ended June 30, ------------------ -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating income before special items $~~243~~1,000 $~~293~~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 ~~United~~International ~~States~~ended June 30, ended ~~March~~June 3130, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating income before special items $38505 $13488 $262 $195 Special items -- 566 -- 66 ---- ---- ---- ---- Operating income $38505 $18554 $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 ~~International~~United States ended ~~March~~June 3130, ended June 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating income before special items $88234 $6393 $196 $80 Special items -- (1230) -- (35) ---- --- ---- --- Operating income $88234 $5163 $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 ~~March~~June 3130, ended June 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating income before special items $150 5$153 $62 20$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 ~~March~~June 3130, ended June 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating ~~loss~~income $23 ~~(3)~~$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 ~~March~~June 3130, ended June 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ~~Results~~---- ---- Operating loss before special items $(~~124~~12) $ (~~148~~2) $ (9) $ (2) Special items (325) 46-- (25) -- ---- ---- ---- ~~Total Corporate/non~~-~~operating~~--- Operating loss $(~~127~~37) $ (~~102~~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 ~~March~~June 3130, ~~-----------------------~~ended ~~2001~~June ~~2000~~30, ---- ---- ~~(Millions of dollars) (Unaudited) CAPITAL AND EXPLORATORY EXPENDITURES~~ ----------- --------------------~~-----~~ ~~Exploration~~2001 ~~and~~2000 ~~production~~2001 ~~United~~2000 ~~States $ 214 $ 175 International 417 353~~ ------ ------ ~~Total 631 528~~ ------ ------ ~~Refining,~~Results ~~marketing~~before ~~and~~special ~~distribution~~items ~~United~~$(247) ~~States~~$(263) 63$(123) 65$(115) ~~International~~Special 52items ~~100~~(11) ~~------~~39 ~~------~~(8) ~~Total~~(7) ~~115 165~~ ------ ------ ~~Global gas, power and energy technology 12 28~~ ------ ------ Total Corporate/Non-operating ~~segments~~$(258) ~~758~~$(224) ~~721 Other business units 3 3 ------ ------ Total~~ $(131) ~~761~~ $(122) ~~724~~ ====== ====== ~~Exploratory expenses included above United States $ 33 $ 19 International 16 34 ------ ------ Total $ 49 $ 53~~ ====== ======

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 ~~March~~June 3130, ended June 30, -------------------- ~~2001 2000~~ ---- ---------------- ~~(Unaudited)~~2001 ~~OPERATING~~2000 ~~DATA~~2001 2000 ---- ---- ---- ---- ~~Exploration~~(Millions ~~and~~of ~~Production~~dollars) (Unaudited) CAPITAL AND EXPLORATORY EXPENDITURES -------------------------- ~~United States~~ ----------~~---~~ ~~Net~~Exploration and production ofUnited ~~crude~~States ~~oil~~$ ~~and~~500 ~~natural~~$ ~~gas~~384 ~~liquids~~$ ~~(MBPD)~~286 ~~325~~$ ~~377~~209 ~~Net~~International ~~production~~878 of879 ~~natural~~461 ~~gas~~526 ------ ~~available~~------ ~~for~~------ ~~sale~~------ ~~(MMCFPD)~~Total 1,~~255~~378 1,~~361~~263 747 735 ------ ------ ~~Total~~------ ~~net~~------ ~~production (MBOEPD) 534 604 Natural gas sales (MMCFPD) 4~~Refining,~~627~~ ~~3,394~~marketing ~~Average~~and ~~U.S.~~distribution ~~crude~~United ~~(per~~States ~~bbl)~~151 ~~$24.31~~136 ~~$24.46~~88 ~~Average~~71 ~~U.S.~~International ~~natural~~122 ~~gas~~141 ~~(per~~70 ~~mcf)~~41 $------ ~~7.14~~------ $------ ~~2.45~~------ ~~Average~~Total ~~WTI~~273 ~~(Spot)~~277 ~~(per~~158 ~~bbl)~~112 ~~$28.72~~------ ~~$28.91 Average Kern (Spot) (per bbl) $19.89 $22.84 International~~ ------ ------ ------ ~~Net~~Global ~~production~~gas, ofpower ~~crude oil~~ and ~~natural~~energy ~~gas~~technology ~~liquids~~120 ~~(MBPD)~~184 ~~Europe~~108 ~~119~~156 ~~144~~------ ~~Indonesia~~------ ~~133 124 Partitioned Neutral Zone 147 135 Other 55 70~~ ------ ------ Total ~~454~~segments ~~473~~1,771 ~~Net~~1,724 ~~production~~1,013 of1,003 ~~natural~~Other ~~gas~~business -units ~~available~~5 ~~for~~45 ~~sale~~2 ~~(MMCFPD)~~42 ~~Europe 267 289 Colombia 202 208 Other 188 152~~ ------ ------ ~~Total 657 649~~ ------ ------ Total ~~net~~$1,776 ~~production~~$1,769 ~~(MBOEPD)~~$1,015 ~~564~~$1,045 ~~581~~====== ~~Natural~~====== ~~gas~~====== ~~sales~~====== ~~(MMCFPD)~~Exploratory ~~673~~expenses ~~685~~included ~~Average~~above ~~International~~United ~~crude~~States ~~(per bbl)~~ $~~21.61~~ ~~$23.32~~49 ~~Average International natural gas (per mcf)~~ $ ~~2.00~~41 $ ~~1.48~~17 ~~Average U.K. natural gas (per mcf)~~ $ ~~3.63~~22 $International 2.63 ~~Average~~72 ~~Colombia~~46 ~~natural~~38 ~~gas~~------ ~~(per~~------ ~~mcf) $ 1.40 $ .94 Worldwide~~ ------ ------ Total ~~worldwide~~$ ~~net~~112 ~~production~~$ ~~(MBOEPD)~~113 ~~1,098~~$ ~~1,185~~63 $ 60 ====== ====== ====== ======

- 18 -

For the six months For the three months ended ~~March~~June 3130, ended June 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) OPERATING DATA -------------- ~~Refining,~~EXPLORATION ~~Marketing~~AND ~~and~~PRODUCTION ~~Distribution~~ -------------------------- United States ------------- ~~United~~Net ~~States~~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 ------ ------ ~~Refinery~~------ ~~input~~------ Total net production (~~MBPD~~MBOEPD) ~~Equilon~~533 ~~area~~597 ~~198~~531 ~~277~~589 ~~Motiva~~Natural ~~area~~gas ~~309~~sales ~~265~~(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 ----- -------- ~~Total~~Net ~~507~~production ~~542~~of ~~Refined~~crude ~~product~~oil ~~sales~~and natural gas liquids (MBPD) ~~Equilon~~Europe ~~area~~116 ~~651~~120 ~~690~~112 ~~Motiva~~98 ~~area~~Indonesia ~~416~~128 ~~341~~124 123 124 Partitioned Neutral Zone 147 135 147 136 Other ~~375~~52 ~~292~~68 50 64 ------ ------ ~~Total 1,442 1,323 International~~ ------ ------ Total 443 447 432 422 Net production of natural gas - ~~Refinery~~available ~~input~~for sale (~~MBPD~~MMCFPD) Europe ~~365~~233 ~~364~~248 ~~Caltex~~200 ~~area~~205 ~~365~~Colombia ~~346~~206 ~~Latin~~197 ~~America/West~~210 ~~Africa~~188 66Other 52190 148 192 145 ------ ------ ------ ------ Total ~~796~~629 ~~762~~593 ~~Refined~~602 ~~product~~538 ------ ------ ------ ------ Total net production (MBOEPD) 548 546 532 512 Natural gas sales (~~MBPD~~MMCFPD) ~~Europe~~645 ~~584~~626 ~~635~~618 ~~Caltex~~567 ~~area~~Average ~~523~~International ~~580~~crude ~~Latin~~(per ~~America/West~~bbl) ~~Africa~~$22.10 ~~519~~$23.47 ~~448~~$22.58 ~~Other~~$23.64 ~~163~~Average 95International 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,~~789~~081 1,~~758~~143 1,063 1,101

-19 -

- 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 -

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