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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-368-2
-------
Chevron Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-0890210
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
575 Market Street, San Francisco, California 94105
-------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 894-7700
NONE
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of June 30, 1999
---------------------------------- -------------------------------
Common stock, $1.50 par value 655,985,275
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INDEX Page No.
Cautionary Statements Relevant to Forward-Looking
Information for the Purpose of "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the three months
and six months ended June 30, 1999 and 1998 2
Consolidated Statement of Comprehensive Income for
the three months and six months ended June 30, 1999 and 1998 2
Consolidated Balance Sheet at June 30, 1999
and December 31, 1998 3
Consolidated Statement of Cash Flows for the six months
ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26-27
Item 6. Listing of Exhibits and Reports on Form 8-K 27
Signature 27
Exhibit:Computation of Ratio of Earnings to Fixed Charges 28
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR
THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report on Form 10-Q contains forward-looking statements relating
to Chevron's operations that are based on management's current expectations,
estimates and projections about the petroleum and chemicals industries. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements.
Among the factors that could cause actual results to differ materially are crude
oil and natural gas prices; refining margins and marketing margins; chemicals
prices and competitive conditions affecting supply and demand for the company's
aromatics, olefins and additives products; potential failure to achieve, and
potential delays in achieving, expected production from existing and future oil
and gas development projects; potential disruption or interruption of the
company's production, manufacturing or transportation facilities due to
accidents or political events; potential disruption to the company's operations
due to untimely or incomplete resolution of Year 2000 issues by the company and
other entities with which it has material relationships; potential liability for
remedial actions under existing or future environmental regulations; and
potential liability resulting from pending or future litigation. In addition,
such statements could be affected by general domestic and international economic
and political conditions.
-1-
PART I. FINANCIAL INFORMATION
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
Millions of Dollars, Except Per-Share Amounts 1999 1998 1999 1998 (1)
- ---------------------------------------------------------------------------------------------------------------
Revenues
- --------
Sales and other operating revenues* $ 8,473 $ 7,754 $ 14,872 $ 15,218
Income from equity affiliates 133 155 277 281
Other income 135 60 281 98
--------------------------------------------------------
Total Revenues 8,741 7,969 15,430 15,597
--------------------------------------------------------
Costs and Other Deductions
- --------------------------
Purchased crude oil and products 4,286 3,549 7,067 7,184
Operating expenses 1,444 1,355 2,604 2,561
Selling, general and administrative expenses 449 276 846 529
Exploration expenses 96 134 184 235
Depreciation, depletion and amortization 633 557 1,199 1,111
Taxes other than on income* 1,143 1,140 2,221 2,151
Interest and debt expense 113 99 218 193
--------------------------------------------------------
Total Costs and Other Deductions 8,164 7,110 14,339 13,964
--------------------------------------------------------
Income Before Income Tax Expense 577 859 1,091 1,633
Income Tax Expense 227 282 412 549
--------------------------------------------------------
Net Income $ 350 $ 577 $ 679 $ 1,084
========================================================
Per Share of Common Stock:
Net Income - Basic $ .54 $ .88 $ 1.04 $ 1.66
- Diluted $ .53 $ .88 $ 1.03 $ 1.65
Dividends $ .61 $ .61 $ 1.22 $ 1.22
Weighted Average Number of
Shares Outstanding (000s) - Basic 656,910 655,459 655,800 655,167
- Diluted 660,033 657,762 658,770 657,503
* Includes consumer excise taxes. $ 986 $ 988 $ 1,898 $ 1,840
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
Millions of Dollars 1999 1998 1999 1998(1)
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 350 $ 577 $ 679 $ 1,084
--------------------------------------------------------
Currency translation adjustment (11) (1) (11) (1)
Unrealized holding loss on securities (4) (3) (10) (1)
Minimum pension liability adjustment - - (11) (16)
--------------------------------------------------------
Other Comprehensive Income, net of tax (15) (4) (32) (18)
--------------------------------------------------------
Comprehensive Income $ 335 $ 573 $ 647 $ 1,066
========================================================
(1) Restated for accounting changes effective January 1, 1998, the net effect
of which was immaterial.
See accompanying notes to consolidated financial statements.
-2-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
At June 30,
1999 At December 31,
Millions of Dollars (Unaudited) 1998
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 752 $ 569
Marketable securities 955 844
Accounts and notes receivable 3,027 2,813
Inventories:
Crude oil and petroleum products 573 600
Chemicals 523 559
Materials, supplies and other 320 296
----------------------------
Inventories, total 1,416 1,455
Prepaid expenses and other current assets 1,007 616
----------------------------
Total Current Assets 7,157 6,297
Long-term receivables 863 872
Investments and advances 4,916 4,604
Properties, plant and equipment, at cost 52,674 51,337
Less: accumulated depreciation, depletion and amortization 28,244 27,608
----------------------------
Properties, plant and equipment, net 24,430 23,729
Deferred charges and other assets 1,036 1,038
----------------------------
Total Assets $38,402 $36,540
============================
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 3,801 $ 3,165
Accounts payable 2,384 2,170
Accrued liabilities 2,187 1,202
Federal and other taxes on income 512 226
Other taxes payable 463 403
----------------------------
Total Current Liabilities 9,347 7,166
Long-term debt 4,044 4,128
Capital lease obligations 275 265
Deferred credits and other noncurrent obligations 1,735 2,560
Deferred income taxes 4,080 3,645
Reserves for employee benefit plans 1,775 1,742
----------------------------
Total Liabilities 21,256 19,506
----------------------------
Preferred stock (authorized 100,000,000
shares, $1.00 par value, none issued) - -
Common stock (authorized 1,000,000,000 shares,
$1.50 par value, 712,487,068 shares issued) 1,069 1,069
Capital in excess of par value 2,205 2,097
Deferred compensation (646) (691)
Accumulated other comprehensive income (122) (90)
Retained earnings 16,828 16,942
Treasury stock, at cost (56,553,770 and 59,460,666 shares
at June 30, 1999 and December 31, 1998, respectively) (2,188) (2,293)
----------------------------
Total Stockholders' Equity 17,146 17,034
----------------------------
Total Liabilities and Stockholders' Equity $38,402 $36,540
============================
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-3-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
Millions of Dollars 1999 1998(1)
- ------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 679 $ 1,084
Adjustments
Depreciation, depletion and amortization 1,199 1,111
Dry hole expense related to prior years' expenditures 24 33
Distributions less than income from equity affiliates (164) (152)
Net before-tax (gains) losses on asset retirements and sales (250) 105
Net foreign currency losses (gains) 28 (23)
Deferred income tax provision (58) 231
Net decrease (increase) in operating working capital 1,254 (826)
Other (722) (101)
-------------------------
Net Cash Provided by Operating Activities 1,990 1,462
-------------------------
Investing Activities
Capital expenditures (1,641) (1,705)
Proceeds from asset sales 361 94
Net (purchases) sales of marketable securities (121) 130
Other investing cash flows, net 54 (126)
-------------------------
Net Cash Used for Investing Activities (1,347) (1,607)
-------------------------
Financing Activities
Net borrowings of short-term obligations 631 1,421
Proceeds from issuance of long-term debt 48 118
Repayments of long-term debt and other financing obligations (433) (284)
Cash dividends (800) (798)
Net sales (purchases) of treasury shares 95 (139)
-------------------------
Net Cash (Used For) Provided by Financing Activities (459) 318
-------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1) (3)
-------------------------
Net Change in Cash and Cash Equivalents 183 170
Cash and Cash Equivalents at January 1 569 1,015
-------------------------
Cash and Cash Equivalents at June 30 $ 752 $ 1,185
=========================
(1) Restated for accounting changes effective January 1, 1998, the net of which
was immaterial. Certain other 1998 amounts have been reclassified to
conform to the 1999 presentation.
See accompanying notes to consolidated financial statements.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of Chevron Corporation and
its subsidiaries (the company) have not been audited by independent accountants,
except for the balance sheet at December 31, 1998. In the opinion of the
company's management, the interim data include all adjustments necessary for a
fair statement of the results for the interim periods. These adjustments were of
a normal recurring nature, except for the special items described in Note 2, and
the material reclassification described in Note 3.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
company's 1998 Annual Report on Form 10-K.
The results for the three- and six-month periods ended June 30, 1999 are not
necessarily indicative of future financial results.
Note 2. Net Income
Net income for the second quarter 1999 included net charges of $134 million for
special items, compared with net charges of $43 million in the 1998 second
quarter. The 1999 second quarter included charges of $146 million for previously
announced staff reductions and other restructuring costs, $74 million for net
environmental remediation provisions, $43 million for asset write-offs and $23
million for a regulatory matter. These were partially offset by benefits of $92
million from gains on asset dispositions and $60 million from favorable
prior-year tax adjustments.
Net income for the first six months of 1999 included net charges of $86 million
from special items, compared with net benefits of $28 million in the comparable
1998 period. The net charges of $134 million for the second quarter 1999 were
partially offset by net benefits of $48 million from special items in the first
quarter of 1999. The 1999 first quarter results included a special gain of $60
million from the sale of the company's interest in a coal mining affiliate,
which was partially offset by net environmental remediation provisions of $12
million.
Foreign currency losses of $32 million were included in second quarter 1999 net
income, compared with gains of $96 million in the comparable 1998 quarter. For
the six-month periods, foreign currency losses were $41 million in 1999,
compared with gains of $50 million in 1998.
Note 3. Information Relating to the Statement of Cash Flows
The "Net decrease (increase) in operating working capital" is composed of the
following:
Six Months Ended
June 30,
--------------------------
Millions of Dollars 1999 1998
- ------------------------------------------------------------------------------------------
(Increase) Decrease in accounts and notes receivable $ (216) $ 400
Decrease (Increase) in inventories 47 (67)
Increase in prepaid expenses and other current assets (111) (188)
Increase (Decrease) in accounts payable and accrued liabilities 1,191 (932)
Increase (Decrease) in income and other taxes payable 343 (39)
- ------------------------------------------------------------------------------------------
Net decrease (increase) in operating working capital $ 1,254 $ (826)
- ------------------------------------------------------------------------------------------
In June 1999, the company reclassified a reserve of $964 million established for
the Cities Service litigation from "Deferred credits and other noncurrent
obligations" to "Accrued liabilities." The 1998 decreases in "Accounts payable
and accrued liabilities" and "Accounts and notes receivable" were largely
related to lower 1998 prices for crude oil and refined products.
-5-
"Net Cash Provided by Operating Activities" includes the following cash payments
for interest on debt and for income taxes:
Six Months Ended
June 30,
-------------------------
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Interest paid on debt (net of capitalized interest) $ 220 $ 195
Income taxes paid $ 189 $ 421
- --------------------------------------------------------------------------------
The "Net (purchases) sales of marketable securities" consists of the following
gross amounts:
Six Months Ended
June 30,
-------------------------
Millions of Dollars 1999 1998
- ----------------------------------------------------------------
Marketable securities purchased $(1,551) $(1,110)
Marketable securities sold 1,430 1,240
- ----------------------------------------------------------------
Net (purchases) sales of
marketable securities $ (121) $ 130
- ----------------------------------------------------------------
The Consolidated Statement of Cash Flows excludes the following non-cash
transactions:
The company's Employee Stock Ownership Plan (ESOP) repaid $70 million and $60
million of matured debt guaranteed by Chevron Corporation in January of 1999 and
1998, respectively. These payments were recorded by the company as a reduction
in its debt outstanding and in "Deferred compensation." In June 1999, the ESOP
borrowed an additional $25 million, which is guaranteed by Chevron Corporation.
This was recorded by the company as an increase in its debt outstanding and in
"Deferred compensation."
Note 4. Operating Segments and Geographic Data
Chevron manages its exploration and production; refining, marketing and
transportation; and chemicals businesses separately. The company's primary
country of operation is the United States, its country of domicile. Activities
in no other country meet the materiality requirements for separate disclosure.
-6-
Sales and other operating revenues by segments, including internal transfers,
for the three-and six-month periods ended June 30, 1999 and 1998, are presented
in the following table.
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
Millions of Dollars 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Exploration and Production
- --------------------------
United States $ 835 $ 864 $ 1,463 $ 1,733
International 1,393 1,096 2,381 2,340
- --------------------------------------------------------------------------------------------------------------
Sub-total 2,228 1,960 3,844 4,073
Intersegment Elimination - United States (416) (373) (722) (786)
Intersegment Elimination - International (648) (479) (1,088) (1,038)
- --------------------------------------------------------------------------------------------------------------
Total Exploration and Production 1,164 1,108 2,034 2,249
- --------------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
- --------------------------------------
United States 5,208 4,545 9,026 8,845
International 1,243 1,301 2,162 2,499
- --------------------------------------------------------------------------------------------------------------
Sub-total 6,451 5,846 11,188 11,344
Intersegment Elimination - United States (85) (60) (148) (121)
Intersegment Elimination - International (4) (3) (8) (9)
- --------------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 6,362 5,783 11,032 11,214
- --------------------------------------------------------------------------------------------------------------
Chemicals
- ---------
United States 720 660 1,347 1,340
International 192 140 368 285
- --------------------------------------------------------------------------------------------------------------
Sub-total 912 800 1,715 1,625
Intersegment Elimination - United States (41) (28) (80) (57)
Intersegment Elimination - International - - - -
- --------------------------------------------------------------------------------------------------------------
Total Chemicals 871 772 1,635 1,568
- --------------------------------------------------------------------------------------------------------------
All Other
- ---------
United States 87 103 194 209
International 2 2 4 3
- --------------------------------------------------------------------------------------------------------------
Sub-total 89 105 198 212
Intersegment Elimination - United States (12) (13) (25) (24)
Intersegment Elimination - International (1) (1) (2) (1)
- --------------------------------------------------------------------------------------------------------------
Total All Other 76 91 171 187
- --------------------------------------------------------------------------------------------------------------
Sales and Other Operating Revenues
- ----------------------------------
United States 6,850 6,172 12,030 12,127
International 2,830 2,539 4,915 5,127
- --------------------------------------------------------------------------------------------------------------
Sub-total 9,680 8,711 16,945 17,254
Intersegment Elimination - United States (554) (474) (975) (988)
Intersegment Elimination - International (653) (483) (1,098) (1,048)
- --------------------------------------------------------------------------------------------------------------
Total Sales and Other Operating Revenues $ 8,473 $7,754 $14,872 $15,218
- --------------------------------------------------------------------------------------------------------------
-7-
The company evaluates the performance of its operating segments on an after-tax
basis, excluding the effects of debt financing interest expense or investment
interest income, both of which are managed by the Chevron Corporation on a
worldwide basis. Corporate administrative costs and assets are not allocated to
the operating segments; however, operating segments are billed for direct
corporate services. Nonbillable costs remain as corporate center expenses.
After-tax earnings by segment for the three- and six-month month periods ended
June 30, 1999 and 1998 are presented in the following table.
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
Millions of Dollars 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Exploration and Production
- --------------------------
United States $ 98 $ 85 $ 145 $ 191
International 221 211 337 344
- --------------------------------------------------------------------------------------------------------------
Total Exploration and Production 319 296 482 535
- --------------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
- --------------------------------------
United States 109 225 191 270
International 61 116 148 192
- --------------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 170 341 339 462
- --------------------------------------------------------------------------------------------------------------
Chemicals
- ---------
United States (59) 38 (21) 82
International 19 9 31 28
- --------------------------------------------------------------------------------------------------------------
Total Chemicals (40) 47 10 110
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Total Segment Income $ 449 $ 684 $ 831 $1,107
- --------------------------------------------------------------------------------------------------------------
Interest Expense (80) (66) (154) (129)
Interest Income 14 16 27 32
Other (33) (57) (25) 74
- --------------------------------------------------------------------------------------------------------------
Net Income $ 350 $ 577 $ 679 $1,084
==============================================================================================================
-8-
Segment assets at June 30, 1999 and year-end 1998 are presented in the following
table. Segment assets do not include intercompany investments or intercompany
receivables.
June 30, December 31,
Millions of Dollars 1999 1998
- -----------------------------------------------------------------------------------
Exploration and Production
- --------------------------
United States $ 6,010 $ 6,026
International 11,819 10,794
- -----------------------------------------------------------------------------------
Total Exploration and Production 17,829 16,820
- -----------------------------------------------------------------------------------
Refining, Marketing and Transportation
- --------------------------------------
United States 8,189 8,084
International 3,677 3,559
- -----------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 11,866 11,643
- -----------------------------------------------------------------------------------
Chemicals
- ---------
United States 3,143 3,045
International 865 828
- -----------------------------------------------------------------------------------
Total Chemicals 4,008 3,873
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Total Segment Assets 33,703 32,336
- -----------------------------------------------------------------------------------
All Other
- ---------
United States 2,758 2,467
International 1,941 1,737
- -----------------------------------------------------------------------------------
Total All Other 4,699 4,204
- -----------------------------------------------------------------------------------
Total Assets - United States 20,100 19,622
Total Assets - International 18,302 16,918
- -----------------------------------------------------------------------------------
Total Assets $38,402 $36,540
===================================================================================
Note 5. Summarized Financial Data - Chevron U.S.A. Inc.
At June 30, 1999, Chevron U.S.A. Inc. was Chevron Corporation's principal
operating company, consisting primarily of the company's U.S. integrated
petroleum operations (excluding most of the domestic pipeline operations) and
the majority of the company's worldwide petrochemical operations. These
operations were conducted by Chevron U.S.A. Production Company, Chevron Products
Company and Chevron Chemical Company LLC. Summarized financial information for
Chevron U.S.A. Inc. and its consolidated subsidiaries is presented as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
Millions of Dollars 1999 1998 1999 1998
- --------------------------------------------------------------------------------------
Sales and other operating revenues $7,047 $6,446 $12,299 $12,308
Costs and other deductions 6,993 6,156 12,224 11,861
Net income 130 46 208 242
======================================================================================
-9-
At June 30, At December 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------
Current assets $ 3,621 $ 3,227
Other assets 19,594 18,306
Current liabilities 5,490 3,809
Other liabilities 6,239 6,517
Net worth 11,486 11,207
=========================================================================
The increase in "Current liabilities" since December 31, 1998 reflects the
reclassification of a reserve established for the Cities Service litigation from
"Other liabilities" to "Current liabilities" and an increase in short-term debt.
Note 6. Summarized Financial Data - Chevron Transport Corporation
Chevron Transport Corporation (CTC), a Liberian corporation, is an indirect,
wholly owned subsidiary of Chevron Corporation. CTC is the principal operator of
Chevron's international tanker fleet and is engaged in the marine transportation
of crude oil and refined petroleum products. Most of CTC's shipping revenue is
derived by providing transportation services to other Chevron companies. Chevron
Corporation has guaranteed this subsidiary's obligations in connection with
certain debt securities where CTC is deemed to be an issuer. In accordance with
the Securities and Exchange Commission's disclosure requirements for CTC,
summarized financial information for CTC and its consolidated subsidiaries is
presented below. This summarized financial data was derived from the financial
statements prepared on a stand-alone basis in conformity with generally accepted
accounting principles.
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
Millions of Dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
Sales and other operating revenues $148 $155 $270 $290
Costs and other deductions 161 164 297 295
Net (loss) income (5) (2) (11) 6
==========================================================================================
June 30, December 31,
Millions of Dollars 1999 1998
- ------------------------------------------------------------------------------------------
Current assets $ 296 $ 270
Other assets 877 982
Current liabilities 839 898
Other liabilities 275 284
Net worth 59 70
==========================================================================================
Separate financial statements and other disclosures with respect to CTC are
omitted as such separate financial statements and other disclosures are not
material to investors in the debt securities deemed issued by CTC. There were no
restrictions on CTC's ability to pay dividends or make loans or advances at June
30, 1999.
Effective July 1, 1999, CTC was merged into CTC Limited, a Bermuda corporation,
which assumed all of the assets and liabilities of CTC.
-10-
Note 7. Summarized Financial Data - Caltex Group of Companies
Summarized financial information for the Caltex Group of Companies, owned 50
percent by Chevron and 50 percent by Texaco Inc., is as follows (amounts
reported are on a 100 percent Caltex Group basis):
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
Millions of Dollars 1999 1998 1999 1998 (1)
- ------------------------------------------------------------------------------------------------------
Gross revenues $4,706 $4,249 $8,666 $8,555
Income before income taxes 229 270 518 590
Net income before cumulative effect
of accounting change 140 222 343 427
Cumulative effect of accounting change - - - (50)
- ------------------------------------------------------------------------------------------------------
Net income 140 222 343 377
======================================================================================================
(1) 1998 amounts have been restated for the cumulative effect of Caltex's
adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities,"
effective January 1, 1998.
Note 8. Income Taxes
Income tax expense for the second quarter and first half of 1999 was $227 and
$412 million, respectively, compared with $282 million and $549 million for the
comparable 1998 periods. The effective tax rate for the 1999 six months was 37.7
percent compared with 33.6 percent for last year's first half. The increase in
the effective tax rate was primarily the result of prior period tax adjustments
in 1998, which lowered the effective tax rate in the 1998 first half. Partially
offsetting the increase in effective rates in 1999 were higher equity
affiliates' after-tax earnings as a proportion of before-tax income.
Note 9 - Employee Staff Reductions and Other Restructuring Costs
In the second quarter 1999, the company recorded a net special before-tax charge
of $187 million, substantially all of which pertained to separation benefits
payable to approximately 2,700 employees as part of a companywide staff
reduction program. Staff reductions were identified prior to June 30, 1999, and
employees will be separated by June 30, 2000. Of the amount recorded, $137
million was classified as "Operating expense" and $40 million as "Selling,
general and administrative expense."
Termination benefits for approximately 2,400 of the 2,700 employees - accrued in
accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Plans and for Termination Benefits" - are
payable from the funded assets of the company's U.S. and Canadian pension plans.
Payments to other employees are from company funds. As of June 30, 1999,
payments of approximately $20 million had been made to 350 employees.
In addition to the charge discussed above, the company's share of second quarter
1999 net income included a charge of $25 million for reorganization costs
recorded by Caltex.
Note 10. Litigation
The company is a party, along with other oil companies, to numerous lawsuits and
claims, including actions challenging oil and gas royalty and severance tax
payments based on posted prices and actions related to the use of the chemical
MTBE in certain oxygenated gasolines. Plaintiffs may seek to recover large and
sometimes
-11-
unspecified amounts, and some matters may remain unresolved for
several years. It is not practical to estimate a range of possible loss for
these litigation matters, and losses could be material with respect to earnings
in any given period. However, management is of the opinion that resolution of
these matters will not result in any significant liability to the company in
relation to its consolidated financial position or have a significant effect on
its liquidity.
The company is a defendant in a lawsuit that OXY U.S.A. brought in its capacity
as successor in interest to Cities Service Company. The lawsuit claims damages
resulting from the allegedly improper termination of a tender offer made by Gulf
Oil Corporation, acquired by Chevron in 1984, to purchase Cities Service in
1982. A 1996 trial resulted in a judgment against the company of $742 million,
including interest that continues to accrue while this matter is pending. The
Oklahoma Supreme Court affirmed the lower court's decision in March 1999, and
accordingly, the company recorded in 1998 results a litigation reserve of $637
million after-tax, substantially all of which pertained to this lawsuit, for the
judgment and accrued interest through December 1998. Interest was accrued
subsequently and will continue to accrue until this matter is resolved. In March
1999, the company filed a petition for rehearing in the Oklahoma Supreme Court
on the issue of damages and requested oral argument. In June 1999, the Oklahoma
Supreme Court denied Chevron's motion. In July, the Oklahoma Supreme Court
granted a motion to stay the judgment pending Chevron's intended petition for a
hearing by the U.S. Supreme Court. The ultimate outcome of this matter cannot be
presently determined with certainty, and is dependent on the U.S. Supreme
Court's evaluation of Chevron's petition.
In a lawsuit in Los Angeles, California, brought in 1995, the company and five
other oil companies are contesting the validity of a patent granted to Unocal
Corporation (Unocal) for reformulated gasoline, which the company sells in
California during certain months of the year. The first two phases of the trial
were concluded in October and November 1997, with the jury upholding the
validity of the patent and assessing damages at the rate of 5.75 cents per
gallon of gasoline sold in infringement of the patent between March 1 and July
1, 1996. In the third phase of the trial, the judge heard evidence to determine
if the patent was enforceable. In August 1998, the judge ruled the patent was
enforceable. The defendants filed an appeal in January 1999 and oral arguments
were made before the court in July 1999. While the ultimate outcome of this
matter cannot be determined with certainty, the company believes Unocal's patent
is invalid and any unfavorable rulings should be reversed upon appeal. Unocal
continues to file for additional patents for alternate formulations. However,
should the jury's findings and Unocal's patents ultimately be upheld, the
company's exposure with respect to future reformulated gasoline sales would
depend on the availability of alternate formulations and the industry's ability
to recover additional costs of production through prices charged to its
customers.
Note 11. Other Contingencies and Commitments
The U.S. federal income tax and California income tax liabilities of the company
have been settled through 1990 and 1991, respectively.
In June 1997, Caltex Corporation received a claim from the U.S. Internal Revenue
Service (IRS) for $292 million in excise taxes, $140 million in penalties and
$1.6 billion in interest. The IRS claim relates to crude oil sales to Japanese
customers beginning in 1980. Caltex believes the underlying excise tax claim is
wrong and therefore the claim for penalties and interest is wrong. In May 1998,
Caltex filed a complaint in the United States Court of Federal Claims asking the
Court to hold that Caltex owes nothing on the IRS claim. A decision by the Court
remains pending. In February 1999, Caltex renewed a letter of credit for $2.52
billion to the IRS that was required to pursue the claim. In May 1999, the IRS
agreed to reduce the letter of credit, which is guaranteed by Chevron and
Texaco, to $200 million.
Settlement of open tax years is not expected to have a material effect on the
consolidated financial position or liquidity of the company and, in the opinion
of management, adequate provision has been made for income and franchise taxes
for all years under examination or subject to future examination.
The company and its subsidiaries have certain other contingent liabilities with
respect to guarantees, direct or indirect, of debt of affiliated companies or
others and long-term unconditional purchase obligations and
-12-
commitments, throughput agreements and take-or-pay agreements, some of which
relate to suppliers' financing arrangements.
The company is subject to loss contingencies pursuant to environmental laws and
regulations that in the future may require the company to take action to correct
or ameliorate the effects on the environment of prior disposal or release of
chemical or petroleum substances by the company or other parties. Such
contingencies may exist for various sites including, but not limited to:
Superfund sites and refineries, chemical plants, oil fields, service stations,
terminals and land development areas, whether operating, closed or sold. The
amount of such future cost is indeterminable due to such factors as the unknown
magnitude of possible contamination, the unknown timing and extent of the
corrective actions that may be required, the determination of the company's
liability in proportion to other responsible parties and the extent to which
such costs are recoverable from third parties. While the company has provided
for known environmental obligations that are probable and reasonably estimable,
the amount of future costs may be material to results of operations in the
period in which they are recognized. The company does not expect these costs to
have a material effect on its consolidated financial position or liquidity.
Also, the company does not believe its obligation to make such expenditures has
had or will have any significant impact on the company's competitive position
relative to other domestic or international petroleum or chemical concerns.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its integrated petroleum activities. All these
instruments are commonly used in oil and gas trading activities and are
relatively straightforward, involve little complexity and are of a short-term
duration. Most of the activity in these instruments is intended to hedge a
physical transaction; hence, gains and losses arising from these instruments
offset, and are recognized concurrently with, gains and losses from the
underlying transactions. The company believes it has no material market or
credit risks to its operations, financial position or liquidity as a result of
its commodities and other derivatives activities, including forward exchange
contracts and interest rate swaps. Its control systems are designed to monitor
and manage its financial exposures in accordance with company policies and
procedures. The results of operations and financial position of certain equity
affiliates may be affected by their business activities involving the use of
derivative instruments.
The company's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries, including the United States, in which it operates. In
certain locations, host governments have imposed restrictions, controls and
taxes, and, in others, political conditions have existed that may threaten the
safety of employees and the company's continued presence in those countries.
Internal unrest or strained relations between a host government and the company
or other governments may affect the company's operations. Those developments
have, at times, significantly affected the company's related operations and
results, and are carefully considered by management when evaluating the level of
current and future activity in such countries.
Areas in which the company has significant operations include the United States,
Canada, Australia, United Kingdom, Republic of Congo, Angola, Nigeria,
Democratic Republic of Congo, Papua New Guinea, China, Indonesia, Venezuela and
Thailand. The company's Caltex affiliates have significant operations in
Indonesia, Korea, Japan, Australia, Thailand, the Philippines, Singapore, and
South Africa. The company's Tengizchevroil affiliate operates in Kazakhstan.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1999 Compared With Second Quarter 1998
And First Half 1999 Compared With First Half 1998
Financial Results
- -----------------
Net income for the second quarter of 1999 was $350 million ($0.53 per share -
diluted), a decrease of 39 percent from net income of $577 million ($0.88 per
share - diluted) for the 1998 second quarter. Excluding special items, 1999
second quarter operating earnings were $484 million, compared with $620 million
in the prior-year quarter. Net income for the second quarter included net
special charges of $134 million in 1999, compared with $43 million in the
prior-year quarter. In the second quarter 1999, special charges of $146 million
for employee staff reductions and other restructuring costs, $74 million for net
environmental remediation provisions, $43 million for asset write-downs, and $23
million for litigation provisions were partially offset by gains of $92 million
from asset sales and $60 million from favorable prior-year tax adjustments. In
the 1998 quarter, special charges of $68 million for the write-off of certain
computer and telecommunications equipment, and provisions for environmental
remediation of $8 million, were partially offset by favorable prior-year tax
adjustments of $33 million
Net income for the first six months of 1999 was $679 million ($1.03 per share -
diluted), down from $1.084 billion ($1.65 per share - diluted) for the first
half of 1998. Net income for the 1999 period included net special charges of $86
million, while 1998 included benefits of $28 million from special items.
Excluding these items, six-month earnings were $765 million in 1999 compared
with $1.056 billion in the first half of 1998.
Chevron's worldwide exploration and production (upstream) earnings, excluding
special items, improved in the 1999 quarter, benefiting from higher crude oil
prices and from increases in liquids production in international areas. The
company's average U.S. crude oil realization of $14.29 per barrel in the second
quarter was nearly $3.00 higher than the same period last year, while U.S.
natural gas prices were about the same as last year. International liquids
realizations rose approximately $2.50 per barrel.
Chevron's refining, marketing and transportation (downstream) businesses
suffered significantly lower earnings. The company's Caltex affiliate's earnings
declined sharply are a result of weak refined products margins in the
Asia-Pacific region. Operating problems at Chevron's refineries in California
prevented the company from benefiting from improved industry margins on the U.S.
West Coast.
The effects of foreign currency changes also contributed to the decline in
earnings. Foreign currency losses reduced second quarter 1999 net income by $32
million, while gains of $96 million increased earnings in the year-ago quarter.
Changes between periods occurred primarily in Caltex's operations and in
Chevron's Australian and Canadian businesses. For the six-month periods, foreign
currency losses were $41 million in 1999, compared with gains of $50 million in
the 1998 first half.
Operating Environment and Outlook
- ---------------------------------
Chevron's earnings are affected significantly by fluctuations in the price of
crude oil and natural gas. The average spot price for West Texas Intermediate
(WTI), a benchmark crude oil, was $17.66 per barrel for the quarter - the
highest level since the fourth quarter of 1997 and 20 percent higher than the
same period last year. For the first six months of 1999, the average spot price
of WTI was $15.44 per barrel, slightly higher than for the same period last
year. In July, the price of WTI averaged around $20.00 per barrel. Liquids
production from international operations continues to increase, up 4 percent in
the second quarter and 6 percent year to date, compared with last year's
corresponding periods. The company expects international liquids production for
the balance of the year to remain at higher levels than 1998.
Certain countries in which Chevron has producing operations have mandated crude
oil production cuts to help boost sales prices of crude oil. To date, Chevron's
production has not been materially affected by these reductions, and the company
believes that in the current industry environment, the net effect of any
curtailments directed by host countries would not be significant to its overall
production levels. However, such curtailments or limits may have an adverse
effect on the level of new production from current and future development
projects.
-14-
Chevron has significant production and development projects under way in West
Africa. Its share of combined production from Nigeria, Angola, Republic of Congo
and Democratic Republic of Congo was more than 330,000 barrels per day in the
1999 first half. Civil unrest, political uncertainty and economic conditions in
this area may affect the company's producing operations. Community protests have
disrupted the company's production in these countries in the past. The company
continues to monitor developments in this area closely, including Nigeria where
a civilian government has been recently elected.
Higher prices for crude oil contributed to narrower margins in the downstream
business, except on the U.S. West Coast. However, operational problems at the
company's Richmond and El Segundo, California, refineries prevented Chevron from
realizing the benefits of the strengthened west coast refined products market.
Because the refinery problems restricted production of oxygenated gasoline,
mandated by California, the company had to purchase products from third parties
to meet its customers requirements. The company estimates these refinery upsets
reduced second quarter earnings by about $100 million. U.S. downstream earnings
in the second half of the year are expected to be negatively affected by lower
production capacity at the Richmond refinery, while repairs to facilities
continue. Repairs to a fluid catalytic cracker are expected to be finished by
mid-August 1999, but repairs to a hydrocracker are not expected to be completed
until the end of 1999. The company has business interruption insurance coverage
and expects to recover some of the losses attributable to the incidents at its
Richmond refinery. In addition, the company continues to pursue business
interruption and property damage claims for 1998 storm damages to its
Pascagoula, Mississippi, refinery. The timing and amount of recovery from these
claims are uncertain.
Likewise, earnings from international refining, marketing and transportation
businesses declined sharply, as Caltex operations in the Far East, particularly
Korea, continued to suffer from weak refined product margins resulting from
higher feedstock costs and competitive price discounting. Caltex may continue to
be adversely affected by these conditions through the second half of 1999.
Earnings of Chevron's chemicals operations, excluding special items, are not
expected to improve significantly in the near-term from last year's trough.
Results are expected to remain depressed because of continued downward pressure
on commodity chemical product prices and increasing feedstock costs. The low
margins are a result of industry manufacturing over-capacity, higher prices for
feed stocks and reduced Asian demand for U.S. manufactured products.
Although the recent increases in crude oil and natural gas prices have improved
the economic environment in which the company operates, Chevron remains focused
on efforts to significantly reduce its cost structure for the long-term.
Operating expense reductions, excluding the effects of special items, through
the first half of this year totaled about $100 million. On a per-barrel basis,
operating expenses fell 6 percent to $5.12. Excluding the costs associated with
the company's growth components international exploration and production and
international chemicals - operating expenses were about $200 million below last
year. The company still intends to reduce its total cost structure by $500
million in 1999 compared with 1998. Initiatives that began in the first half of
1999 are expected to reduce costs at a higher rate in the second half of the
year.
Significant Developments Since the First Quarter 1999
- -----------------------------------------------------
Some of the operational highlights since the first quarter of this year were as
follows:
Production of natural gas and condensate began from the subsea system at the
Gemini project, located in about 3,400 feet of water in the Gulf of Mexico,
about 90 miles southeast of New Orleans. Chevron holds a 40 percent interest in
the project, which is expected to produce at peak rates of 150-200 million cubic
feet per day of natural gas and 2,000-3,000 barrels of condensate per day by the
end of 1999.
A significant natural gas discovery was made 16 miles northwest of Fort Liard,
Northwest Territories, Canada. Based on the well-test data, expected production
of raw gas may reach 70-100 million cubic feet per day. Plans are being
developed for the construction of production and transportation facilities and
additional wells to permit first production by May 2000. Chevron is the operator
and has a 43.4 percent interest in the field.
Production of crude oil began in July 1999 from the Banzala oil field located 12
miles offshore Angola's Cabinda province in the Block 0 concession. Chevron owns
39.2 percent and operates the Block 0 concession. The Banzala Field was
producing 4,000 barrels per day at the end of July and is expected to reach a
production rate of 25,000
-15-
barrels per day when the field's initial development phase is complete and five
additional wells are brought into production later this year.
In August 1999, Chevron announced initial oil and gas production from its
Benchamas Field in Block 8/32, offshore Thailand. This is the first new
production from assets acquired from Rutherford-Moran Oil Corporation in early
1999. Initial production from Benchamas is 35 million cubic feet of natural gas
and 2,200 barrels of oil per day. Production from the field is expected to
increase to 75 million cubic feet of natural gas per day and 25,000 barrels of
oil per day by October. Chevron holds a 51.66 percent interest in the block and
will become, subject to necessary government approvals, operator of the
concession on October 1, 1999.
Total liquids production from the Tengiz Field in Kazakhstan averaged 211,000
barrels per day during the first half of 1999, up 20 percent compared with last
year's first half, and reached a new monthly record of 221,000 barrels per day
in June 1999. Chevron has a 45 percent interest in the field.
Site preparation is under way at the Caspian Pipeline Consortium's (CPC) marine
terminal at the Russian port of Novorossiysk. When completed in 2001, the
900-mile CPC crude oil pipeline will provide a vital crude oil transportation
link from the Tengiz Field in western Kazakhstan to the Black Sea. The pipeline
will have an initial export capacity of 560,000 barrels per day and is expected
to eventually reach 1.5 million barrels per day. It is the key transportation
element in the goal to expand crude oil production from the Tengiz Field to
700,000 barrels per day by 2010.
Chevron and Sasol Ltd., a South African operator of gas-to-liquid (GTL)
processing facilities, signed an agreement to create a global joint venture to
utilize GTL technology that converts natural gas into synthetic crude oil for
further processing into environmentally superior commercial products,
principally no-sulfur diesel and naphtha. The global joint venture will
participate in the operation of the previously announced wholly-owned Chevron
GTL facility in Nigeria, which is expected to come on-stream in 2003.
Target production is expected to be about 30,000 barrels per day.
Dynegy Inc., 28 percent owned by Chevron, announced an agreement to merge with
Illinova Corp., an energy services holding company in Illinois. Chevron intends
to invest an additional $200-$240 million to maintain a comparable percentage
interest in the combined company. The merger, which will accelerate Dynegy's
growth in the power generation and marketing business, is expected to be
completed by the end of the first quarter 2000.
In July, the company announced that it had completed the sale of the company's
remaining offshore California production assets to Arguello Inc., a wholly owned
subsidiary of Plains Resources Inc.. The sale completes Chevron's exit from
offshore California oil and gas production activities. At the time of the sale,
Chevron's share of net production from these facilities was about 4,600 barrels
of crude oil per day; less than one percent of Chevron's U.S. net production.
Caltex Corporation, Chevron's 50 percent owned affiliate, announced on July 28,
1999 that it had entered into a non-binding, written understanding with Nippon
Mitsubishi Oil Corporation (NMOC) relating to a public tender offer for shares
of Koa Oil Co. Ltd. (Koa), a Japanese refining enterprise. Caltex currently owns
72,600,000 shares, or 50 percent, of Koa. The understanding sets forth
conditions under which NMOC would undertake a public tender in Japan for
72,600,000 shares of Koa at 360 Yen (about $3.10) per share. NMOC separately
announced on July 28, 1999 an intended public tender offer in late August with
completion, pricing and other details subject to due diligence review and market
conditions. If formalized in late August, the tender would run until
mid-September. Caltex has not committed to tendering its shares under NMOC's
offer. There are numerous uncertainties surrounding the ultimate outcome of the
tender offer. If Caltex were to tender its shares to NMOC for the equivalent of
$3.10 per share, a loss from the sale of the shares tendered would be recorded
in the third quarter 1999.
Year 2000 Problem
- -----------------
The Year 2000 problem is the result of computer systems and other equipment with
embedded chips or processors using two digits, rather than four, to define a
specific year and potentially being unable to process accurately certain data
before, during or after 2000. This could result in system failures or
miscalculations, causing disruptions to various activities and operations.
-16-
Chevron has established a corporate-level Year 2000 project team to coordinate
the efforts of teams in the company's operating units and corporate departments
to address the Year 2000 issue in three major areas: information technology,
embedded systems and supply chain. Information technology includes the computer
hardware, systems and software used throughout the company's facilities.
Embedded systems exist in automated equipment and associated software, which are
used in the company's exploration and production facilities, refineries,
transportation operations, chemical plants and other business operations. Supply
chain includes the third parties with which Chevron conducts business. The
company also is monitoring the Year 2000 efforts of its equity affiliates and
joint-venture partners. Progress reports on the Year 2000 project are presented
regularly to the company's senior management and periodically to the Audit
Committee of the company's Board of Directors.
The company is addressing the Year 2000 issue in three overlapping phases: (1)
identification and assessment of all critical equipment, software systems and
business relationships that may require modification or replacement prior to
2000; (2) resolution of critical items through remediation and testing of
modifications, replacement, or development of alternative business processes;
and (3) development of contingency and business continuation plans for critical
items to mitigate any disruptions to the company's operations.
Chevron intends to address all critical items prior to 2000. Phase 1 -
identification and assessment - is complete. Regarding Phase 2, the company
estimates that at June 30, 1999, over 85 percent of embedded systems issues had
been completed, along with over 90 percent of information technology issues. The
company expects Phase 2 to be essentially finished by the end of the third
quarter 1999. Phase 3 - contingency planning - is also scheduled for completion
at the end of the third quarter. At June 30, 1999, the company estimates that it
had completed over 80 percent of the work in this area.
The company used a risk-based analysis of its operations to identify those items
deemed to be "mission critical," defined as having the potential for significant
adverse effects in one or more of five areas: environmental protection, safety,
ongoing business relationships, financial and legal exposure, and company
credibility and image. Over 400 items of varying degrees of complexity in the
company's own operations and about 800 third-party relationships have been
deemed mission-critical. Many mission-critical items already have been found to
be compliant, while others are undergoing remediation and testing. The company's
major financial systems and desktop computer systems were upgraded in separate
projects and are already compliant. Chevron is corresponding with all
mission-critical third parties and has met with a large percentage of them,
either alone or with other potentially affected parties, to determine the
relative risks of major Year 2000-related problems and to determine how to
mitigate such risks. Additional items and third-party relationships may be added
to or removed from this population, as more information becomes available.
Using practical risk assessment and testing techniques, Chevron has divided its
list of more than 400 mission-critical items in its own operations into three
categories: (1) those that are expected to be tested and made Year 2000
compliant prior to 2000; (2) items that will be removed from service without
testing and replaced with Year 2000 compliant items; and (3) items found not to
be Year 2000 compliant, will be "worked around," until they can be replaced or
made compliant. Because of the scope of Chevron's operations, the company
believes it is impractical to eliminate all potential Year 2000 problems before
they arise. As a result, Chevron expects that for non-mission-critical items and
those mission-critical items that remain "worked around," Year 2000 remedial
efforts will continue into the year 2000.
In the normal course of business, the company has developed and maintains
extensive contingency plans to respond to equipment failures, emergencies and
business interruptions. However, contingency planning for Year 2000 issues is
complicated by the possibility of multiple and simultaneous incidents, which
could significantly impede efforts to respond to emergencies and resume normal
business functions. Such incidents may be outside of the company's control, for
example, if mission-critical third parties do not successfully address their own
material Year 2000 problems.
The company is enhancing existing plans, where necessary, and in some cases
developing new plans specifically designed to mitigate the impact on its
operations of potential failures from the Year 2000 issue. The company expects
to complete and test, where appropriate, its contingency plans by the end of the
third quarter 1999. These plans will be designed to continue safe operations,
protect the environment, protect the company's assets and enable the resumption
of any interrupted operations in a timely and efficient manner. The company's
contingency plans will focus on: third-party relationships as necessary;
internal mission critical items that are not remediated or
-17-
otherwise addressed as expected by the end of the third quarter 1999, if any;
and other internal mission-critical items that have been remediated but could
not be fully tested prior to 2000.
The company utilizes both internal and external resources in its Year 2000
efforts. The cumulative total cost to achieve Year 2000 compliance is currently
estimated at approximately $200 million, mostly for expense-type items, not all
of which is incremental to the company's operations. This is about $25 million
lower than earlier estimates. Approximately $130 million had been spent through
June 30, 1999. Most of the future expenditures will be incurred during the
remainder of 1999. The foregoing amounts include the company's share of
expenditures by its major affiliates.
As part of the Securities and Exchange Commission's reporting requirements on
the Year 2000 problem, companies must include a description of their "most
reasonably likely worst-case scenarios" from potential Year 2000 issues. For
Chevron, its business diversity is expected to reduce the risk of widespread
disruptions to its worldwide operations from Year 2000-related incidents. The
company does not expect unusual risks to public safety or to the environment to
arise from potential Year 2000-related failures. While the company believes that
the impact of any individual Year 2000 failure most likely will be localized and
limited to specific facilities or operations, it is not yet able to fully assess
the likelihood of significant business interruptions occurring in one or more of
its operations around the world. Such interruptions could delay manufacturing
and delivery of refined products and chemicals products by the company to
customers. The company could also face interruptions in its ability to produce
crude oil and natural gas. While not expected, failures to address multiple
critical Year 2000 issues, including failures to implement contingency plans in
a timely manner, could materially and adversely affect the company's results of
operations or liquidity in any one period. The company is currently unable to
predict the aggregate financial or other consequences of such potential
interruptions.
The foregoing disclosure is based on Chevron's current expectations, estimates
and projections, which could ultimately prove to be inaccurate. Because of
uncertainties, the actual effects of the Year 2000 issues on Chevron may be
different from the company's current assessment. Factors, many of which are
outside the control of the company, that could affect Chevron's ability to be
Year 2000 compliant by the end of 1999, include: the failure of customers,
suppliers, governmental entities and others to achieve compliance, and the
inability or failure to identify all critical Year 2000 issues, or to develop
appropriate contingency plans for all Year 2000 issues that ultimately may
arise. The foregoing disclosure is made pursuant to the Federal Year 2000
Information and Readiness Disclosure Act.
Other Contingencies and Significant Litigation
- ----------------------------------------------
The company is a defendant in a lawsuit that OXY U.S.A. brought in its capacity
as successor in interest to Cities Service Company. The lawsuit claims damages
resulting from the allegedly improper termination of a tender offer made by Gulf
Oil Corporation, acquired by Chevron in 1984, to purchase Cities Service in
1982. A 1996 trial resulted in a judgment against the company of $742 million,
including interest that continues to accrue while this matter is pending. The
Oklahoma Supreme Court affirmed the lower court's decision in March 1999, and
accordingly, the company recorded in 1998 results a litigation reserve of $637
million after-tax, substantially all of which pertained to this lawsuit, for the
judgment and accrued interest through December 1998. Interest was accrued
subsequently and will continue to accrue until this matter is resolved. In March
1999, the company filed a petition for rehearing in the Oklahoma Supreme Court
on the issue of damages and requested oral argument. In June 1999, the Oklahoma
Supreme Court denied Chevron's motion. In July, the Oklahoma Supreme Court
granted a motion to stay the judgment pending Chevron's intended petition for a
hearing by the U.S. Supreme Court. The ultimate outcome of this matter cannot be
presently determined with certainty, and is dependent on the U.S. Supreme
Court's evaluation of Chevron's petition.
In a lawsuit in Los Angeles, California, brought in 1995, the company and five
other oil companies are contesting the validity of a patent granted to Unocal
Corporation (Unocal) for reformulated gasoline, which the company sells in
California during certain months of the year. The first two phases of the trial
were concluded in October and November 1997, with the jury upholding the
validity of the patent and assessing damages at the rate of 5.75 cents per
gallon of gasoline sold in infringement of the patent between March 1 and July
1, 1996. In the third phase of the trial, the judge heard evidence to determine
if the patent is enforceable, and in August 1998, ruled that the patent was
enforceable. The defendants filed an appeal in January 1999 and oral arguments
were made before the court in July 1999. While the ultimate outcome of this
matter cannot be determined with certainty, the company believes Unocal's patent
is invalid and any unfavorable rulings should be reversed upon appeal. Unocal
continues to file for
-18-
additional patents for alternate formulations. However, should the jury's
findings and Unocal's patents ultimately be upheld, the company's exposure with
respect to future reformulated gasoline sales would depend on the availability
of alternate formulations and the industry's ability to recover the additional
costs of production through prices charged to its customers.
In June 1997, Caltex Corporation received a claim from the U.S. Internal Revenue
Service (IRS) for $292 million in excise taxes, $140 million in penalties and
$1.6 billion in interest. The IRS claim relates to crude oil sales to Japanese
customers beginning in 1980. Caltex believes the underlying excise tax claim is
wrong and therefore the claim for penalties and interest is wrong. In May 1998,
Caltex filed a complaint in the United States Court of Federal Claims asking the
Court to hold that Caltex owes nothing on the IRS claim. A decision by the Court
remains pending. In February 1999, Caltex renewed a letter of credit for $2.52
billion to the IRS that was required to pursue the claim. In May 1999 the IRS
agreed to reduce the letter of credit, which is guaranteed by Chevron and
Texaco, to $200 million.
The company is a party to numerous lawsuits and claims, including, along with
other oil companies, actions challenging oil and gas royalty and severance tax
payments based on posted prices and others related to the use of the chemical
MTBE in certain oxygenated gasolines. These lawsuits and other contingent
liabilities are discussed in the notes to the accompanying consolidated
financial statements. The company believes that the resolution of these matters
will not materially affect its financial position or liquidity, although costs
associated with their resolution could be material with respect to earnings in
any given period.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its integrated petroleum activities. All these
instruments are commonly used in oil and gas trading activities and are
relatively straightforward, involve little complexity and are of a short-term
duration. Most of the activity in these instruments is intended to hedge a
physical transaction; hence, gains and losses arising from these instruments
offset, and are recognized concurrently with, gains and losses from the
underlying transactions. The company believes it has no material market or
credit risks to its operations, financial position or liquidity as a result of
its commodities and other derivatives activities, including forward exchange
contracts and interest rate swaps. Its control systems are designed to monitor
and manage its financial exposures in accordance with company policies and
procedures. The results of operations and financial position of certain equity
affiliates may be affected by their business activities involving the use of
derivative instruments.
The company's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries, including the United States, in which it operates.
Political uncertainty and civil unrest may, at times, threaten the safety of
employees and the company's continued presence in a country. Management
carefully considers these factors when evaluating the level of current and
future activity in such countries.
Chevron and its affiliates continue to review and analyze their operations and
may close, abandon, sell, exchange, acquire or restructure assets to achieve
operational or strategic benefits and to improve competitiveness and
profitability. In addition, Chevron receives claims from, and submits claims to,
customers, trading partners, contractors, insurers and suppliers. The amounts of
these claims, individually and in the aggregate, may be significant and take
lengthy periods to resolve. The company also suspends the costs of exploratory
wells pending a final determination of the commercial potential of the related
oil and gas fields. The ultimate disposition of these well costs is dependent on
the results of future drilling activity and/or development decisions. If the
company decides not to continue development, the costs of these wells are
expensed. These activities, individually or together, may result in gains or
losses in future periods.
-19-
Review of Operations
- --------------------
Total revenues for the quarter were $8.7 billion, an increase of 9 percent from
$8.0 billion in last year's second quarter. Higher realizations for refined
products and crude oil sales primarily drove the improvement. For the six-month
period, total revenues were $15.4 billion, about the same as the first half of
1998.
Second quarter 1999 "Selling, general and administrative" (SG&A) expenses of
$449 million were $173 million higher than the 1998 quarter. Excluding special
items, expenses in the 1999 quarter were $288 million, compared with $320
million in the 1998 quarter. For the six-month period, SG&A expenses of $846
million were $317 million higher than the first half of 1998. Excluding special
items, expenses in the 1999 period were $670 million, compared with $640 million
for the first half of 1998.
Second quarter 1999 "Depreciation, depletion and amortization" (DD&A) expenses
of $633 million were $76 million higher than the 1998 quarter. For the six-month
period, DD&A expenses of $1,199 million were $88 million higher than the first
half of 1998. Special items related to asset write-offs increased DD&A expenses
by $55 million for the second quarter and first half of 1999.
Income tax expense for the second quarter and first half of 1999 was $227 and
$412 million, respectively, compared with $282 million and $549 million for the
comparable 1998 periods. The effective tax rate for the 1999 six months was 37.7
percent compared with 33.6 percent for last year's first half. The increase in
the effective tax rate was primarily the result of prior period tax adjustments
in 1998, which lowered the effective tax rate in the 1998 first half. Partially
offsetting the increase in effective rates in 1999 were higher equity
affiliates' after-tax earnings as a proportion of before-tax income.
The following tables detail the company's after-tax earnings by major operating
area and selected operating data.
EARNINGS BY MAJOR OPERATING AREA
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
Millions of Dollars 1999 1998 1999 1998 (1)
- ----------------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 98 $ 85 $145 $ 191
International 221 211 337 344
- ----------------------------------------------------------------------------------------------------------
Total Exploration and Production 319 296 482 535
- ----------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 109 225 191 270
International 61 116 148 192
- ----------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 170 341 339 462
- ----------------------------------------------------------------------------------------------------------
Chemicals (40) 47 10 110
All Other (2) (99) (107) (152) (23)
- ----------------------------------------------------------------------------------------------------------
Net Income $350 $577 $679 $1,084
==========================================================================================================
(1) Restated for accounting changes effective January 1, 1998, the net effect
of which was immaterial.
(2) Includes interest expense, interest income on cash and marketable
securities, coal operations, corporate center costs, and real estate and
insurance activities.
-20-
SELECTED OPERATING DATA (1)(2)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
U.S. Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 312 337 309 336
Net Natural Gas Production (MMCFPD) 1,638 1,786 1,657 1,796
Sales of Natural Gas (MMCFPD) 3,265 3,336 3,312 3,416
Sales of Natural Gas Liquids (MBPD) 109 127 128 134
Revenue from Net Production
Crude Oil ($/Bbl.) $ 14.29 $ 11.35 $ 12.16 $ 11.92
Natural Gas ($/MCF) $ 2.06 $ 2.08 $ 1.85 $ 2.08
International Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 796 764 803 756
Net Natural Gas Production (MMCFPD) 837 559 835 602
Sales of Natural Gas (MMCFPD) 1,679 1,398 1,793 1,363
Sales of Natural Gas Liquids (MBPD) 51 60 51 58
Revenue from Liftings
Liquids ($/Bbl.) $ 14.86 $ 12.38 $ 12.81 $ 12.68
Natural Gas ($/MCF) $ 1.77 $ 1.81 $ 1.80 $ 1.89
Other Produced Volumes (MBPD) (3) 96 93 100 92
U.S. Refining, Marketing and Transportation
Sales of Gasoline (MBPD) (4) 694 689 655 644
Sales of Other Refined Products (MBPD) 674 618 623 576
Refinery Input (MBPD) 969 996 946 877
Average Refined Product Sales Price ($/Bbl.) $ 25.79 $ 22.75 $ 23.25 $ 23.17
International Refining, Marketing and Transportation
Sales of Refined Products (MBPD) (5) 895 803 902 812
Refinery Input (MBPD) 475 478 485 485
Chemical Sales and Other Operating Revenues (6)
United States $ 720 $ 660 $ 1,347 $ 1,340
International 192 140 368 285
- ----------------------------------------------------------------------------------------------------------
Worldwide $ 912 $ 800 $ 1,715 $ 1,625
- ----------------------------------------------------------------------------------------------------------
(1) Includes equity in affiliates.
(2) MBPD = thousand barrels per day; MMCFPD = million cubic feet per day; Bbl.
= barrel; MCF = thousand cubic feet
(3) Represents total field production
under the Boscan operating service agreement in Venezuela.
(4) Includes branded and unbranded gasoline.
(5) Volumes for 1998 are revised to conform to the 1999 presentation.
(6) Millions of dollars. Includes sales to other Chevron companies.
WORLDWIDE EXPLORATION AND PRODUCTION earned $319 million in the second quarter
of 1999, compared with $296 million in the corresponding 1998 period. Earnings
of $482 million in the first six months of 1999 were 10 percent lower than the
$535 million earned in the 1998 first half. U.S. EXPLORATION AND PRODUCTION net
income for the 1999 second quarter was $98 million, an increase of 15 percent
from $85 million earned in the 1998 second quarter. Net income for six months
was $145 million in 1999, compared with $191 million earned in the first six
months of 1998. Special items reduced 1999's second quarter earnings $26 million
for staff reductions and other restructuring costs;
-21-
$23 million for litigation and regulatory provisions and $6 million for
environmental remediation accruals. In addition to the second quarter items,
earnings for the 1999 six months benefited $3 million from the first quarter
1999 reversal of certain environmental remediation provisions. There were no
special items in the 1998 three- or six- month periods. Excluding special items,
1999 second quarter earnings nearly doubled to $153 million and six-month
earnings were $197 million, compared with $191 million in 1998.
Net U.S. liquids production averaged 312,000 barrels per day in the second
quarter of 1999 and 309,000 barrels per day year to date. In 1998, liquids
production was 337,000 barrels per day in the second quarter and 336,000 barrels
per day year to date. Net U.S. natural gas production of 1.6 billion cubic feet
per day in the 1999 second quarter and 1.7 billion cubic feet per day for six
months declined from 1.8 billion cubic feet per day for each of the two 1998
periods. The declines in U.S. production of liquids and natural gas were
primarily attributable to property sales and normal field declines, which more
than offset new production.
The company's 1999 average second quarter U.S. crude oil realizations of $14.29
per barrel improved $2.94, or 26 percent, compared with the second quarter 1998.
Average second quarter U.S. natural gas realizations of $2.06 per thousand cubic
feet were about flat with the second quarter of last year. On a year-to-date
basis, 1999 crude oil realizations were $12.16 per barrel, about 2 percent
higher than the $11.92 per barrel obtained in 1998; and natural gas prices were
$1.85 per thousand cubic feet, a decline of 11 percent from $2.08 per thousand
cubic feet last year.
Earnings for the 1999 second quarter also benefited from lower exploration and
operating expenses.
INTERNATIONAL EXPLORATION AND PRODUCTION net income for the second quarter 1999
was $221 million, up from $211 million in the prior year's quarter. Net income
for the 1999 second quarter included no net effect from special items, as
charges for staff reductions and other restructuring costs were completely
offset by a gain from the sale of Canadian seismic data. Earnings for the 1998
second quarter, excluding special prior-year tax benefits of $21 million, were
$190 million. The increase in earnings reflected higher crude oil prices and
increased crude oil liftings compared with the year-ago quarter.
Net income of $337 million in the first six months of 1999 was about flat with
the $344 million earned in the 1998 first half. There were no net effects from
special items in the 1999 period. The six-month results in 1998 were reduced a
net $3 million by a first quarter loss of $56 million on asset dispositions,
partially offset by a $32 million favorable cumulative effect from the change of
accounting for certain Canadian deferred income taxes, in addition to the second
quarter special items.
Net international liquids production of 796,000 barrels per day for the second
quarter 1999 increased 32,000 barrels per day compared with last year's quarter,
primarily due to new or increased production in Angola, Kazakhstan and offshore
eastern Canada (Hibernia). These increases were partially offset by lower net
liquids production in Australia, Indonesia, Nigeria and the Republic of Congo.
Lower production from these areas was primarily the result of field maintenance
activities and OPEC-related curtailments. Year-to-date 1999 production was
803,000 barrels per day, a 6 percent increase from 756,000 barrels per day
produced in 1998.
Net natural gas production increased about 50 percent to 837 million cubic feet
per day, reflecting production from the Britannia Field in the U.K. North Sea -
which began production in August 1998 - and higher production in western Canada.
Year-to-date natural gas production was 835 million cubic feet per day, up 39
percent from last year.
The company's average international crude oil realizations of $14.86 per barrel
in the 1999 second quarter improved $2.48, or 20 percent, compared with the
second quarter of 1998. Average 1999 international natural gas realizations of
$1.77 per thousand cubic feet were 4 cents lower than in the second quarter of
last year. On a year-to-date basis, 1999 crude oil realizations were $12.81 per
barrel, 13 cents higher than the $12.68 per barrel obtained in 1998. Natural gas
prices were $1.80 per thousand cubic feet, a decline of 5 percent from $1.89 per
thousand cubic feet last year.
Net income in the 1999 second quarter and six months included foreign currency
losses of $12 million and $28 million, respectively, compared with gains of $38
million and $23 million in the comparable periods in 1998. Effects in both years
were primarily in the company's Australian and Canadian operations.
-22-
WORLDWIDE REFINING, MARKETING AND TRANSPORTATION operations reported earnings of
$170 million in the 1999 second quarter, about half the $341 million earned in
last year's second quarter. The 1999 first-half earnings were $339 million, a 27
percent decrease from the corresponding 1998 period. U.S. REFINING, MARKETING
AND TRANSPORTATION net income was $109 million in the second quarter, compared
with $225 million in the second quarter of 1998. In the 1999 quarter, a $75
million gain from the sale of the company's interest in a pipeline affiliate was
partially offset by net charges of $40 million for environmental remediation and
a $24 million provision for staff reductions and other restructuring costs. A
net special environmental remediation charge of $8 million was recorded in the
1998 second quarter. Excluding special items, earnings were $98 million compared
with $233 million in last year's second quarter.
Six-month earnings for 1999 were $191 million compared with $270 million in the
comparable 1998 period. Special charges reduced earnings $4 million and $13
million, respectively in the 1999 and 1998 first half. In addition to the second
quarter special items, both six months periods included additional provisions
for environmental remediation - $15 million in 1999 and $5 million in 1998.
Excluding special items, year-to-date earnings were $195 million compared with
$283 million in the 1998 first half.
Refined products sales realizations increased over last year's quarter,
primarily reflecting stronger West Coast prices. However, due to operating
problems at Chevron's California refineries, these improved market conditions
did not lead to higher earnings for the company. Consequently, second quarter
and six-month 1999 earnings suffered by about $100 million, mainly the result of
substituting higher priced third-party refined products purchases for the
company's own production to meet marketplace demand. The purchase of third-party
products continues into the third quarter, as Chevron's gasoline production
capability at the Richmond, California, refinery remains restricted while
repairs are under way.
Total refined product sales volumes were 1.368 million barrels per day in the
second quarter 1999, up 5 percent from the comparable quarter last year.
Chevron-branded motor gasoline sales improved by 4 percent over last year's
quarter to 553,000 barrels per day. Year to date, sales volumes were up about 5
percent to 1.278 million barrels per day.
The company's average refined product prices were $25.79 per barrel in the 1999
second quarter compared with $22.75 in the 1998 quarter. Average refined product
prices were $23.25 and $23.17 in the first halves of 1999 and 1998,
respectively.
INTERNATIONAL REFINING, MARKETING AND TRANSPORTATION net earnings were $61
million and $148 million in the 1999 second quarter and six months,
respectively, compared with $116 million and $192 million in the comparable
periods last year. Results for the 1999 quarter and six months included net
benefits of $30 million from special items. These net benefits were comprised of
favorable Korean tax adjustments that were partially offset by restructuring
charges attributable to both Caltex and Chevron operations. Results for the 1998
six months included a special charge of $25 million for the company's share of
the cumulative effect from Caltex's adoption of a new accounting standard. Net
income included foreign currency losses of $21 million in the second quarter of
1999, compared with gains of $59 million in the 1998 quarter. In the first half
of 1999, foreign currency effects resulted in losses of $16 million, compared
with gains of $28 million in the 1998 first half.
Earnings from Caltex operations, after excluding the effects of foreign currency
losses of $19 million and net special gains of $35 million in the second quarter
1999, and foreign currency gains of $56 million in the second quarter of 1998,
were $25 million in second quarter 1999, compared with $30 million in the second
quarter of 1998. The 1999 quarter included a benefit of $34 million for the
company's share of Caltex's lower-of-cost-or-market inventory valuation
adjustment. For the six-month periods, after excluding foreign currency losses
of $12 million and net special gains of $35 million in 1999, and foreign
currency gains of $27 million and a net special charge of $25 million in 1998,
earnings for Caltex operations were $92 million in 1999, compared with $134
million in 1998. The 1999 period included a benefit of about $64 million for the
company's share of Caltex's lower-of-cost-or-market inventory valuation
adjustment, while the 1998 period included benefits of about $25 million from
the reversal of certain deferred income tax valuation allowances
After excluding the benefits from inventory valuation and deferred income tax
adjustments and special items in all periods, earnings from Caltex operations
have declined in both 1999 periods, despite increased sales volumes. This was
primarily due to depressed refined products sales margins in the Asia-Pacific
region. In particular, results from
-23-
Caltex's Korean operations suffered from lower refined products sales prices in
the second quarter and first half of 1999, compared with the corresponding
year-ago periods. The Asia-Pacific market continues to experience competitive
price discounting and has failed to recover rising crude oil costs in the prices
for refined products. We do not anticipate any immediate recovery in sales
margins, as the Asia-Pacific markets continue to experience surplus
manufacturing capacity and related oversupply conditions.
Total refined products sales volumes increased by 11 percent to 895,000 barrels
per day in the second quarter of 1999 and 902,000 barrels per day, year to date,
compared with the same periods last year. The increase occurred primarily in the
Caltex areas of operation and in the company's fuel and marine lubricants
affiliate that was formed in late 1998.
CHEMICALS recorded a net loss of $40 million in the 1999 second quarter,
compared with net earnings of $47 million in last year's second quarter. Results
in the first half of 1999 were $10 million compared with $110 million in 1998.
Net income for the second quarter and six months of 1999 included special
charges of $43 million for asset write-downs, $28 million for environmental
remediation, and $20 million for staff reductions and other restructuring costs.
There were no special items in the 1998 periods. Excluding special items,
earnings were $51 million and $101 million in the 1999 second quarter and six
months, respectively, compared with $47 million and $110 million in the
comparable periods last year. Operating earnings for the quarter and year to
date remained depressed because of prolonged unfavorable market conditions for
commodity chemicals and additives for lubricants and fuels. In addition, prices
have not increased sufficiently to offset rising feedstock costs.
ALL OTHER includes interest expense, interest income on cash and marketable
securities, coal operations, corporate center costs and real estate and
insurance operations. These activities incurred net charges of $99 million in
the second quarter of 1999, compared with net charges of $107 million in the
comparable prior-year quarter. The 1999 second quarter results included special
charges of $29 million for employee termination benefits. Special charges of $56
million in the 1998 quarter consisted of $68 million of asset write-offs,
partially offset by $12 million of favorable prior-year tax adjustments.
Year-to-date charges were $152 million in 1999, compared with $23 million in
last year's first half. Net special items of $31 million in the 1999 first half
included gains from asset sales of $60 million partially offset by the second
quarter charges for employee termination benefits. The 1998 year-to-date results
included favorable prior-year income tax related adjustments of $125 million in
addition to the second quarter special charge.
Earnings from the company's coal operations for the 1999 second quarter fell $5
million to $3 million and included a charge for the planned disposition of the
company's remaining coal assets. Net income in the 1999 six months was $82
million compared with $20 million last year. Results for the 1999 six months
included a $60 million gain from the sale of the company's equity interest in a
coal mining affiliate. Excluding the special gain, earnings were about flat at
$22 million. The company's exit from the coal business, which has experienced
unforeseen delays is expected to be substantially complete by the end of the
third quarter of 1999.
Excluding special items, ongoing charges from other activities in the second
quarter of 1999 were $73 million, compared with $59 million last year. Charges
for six months were $205 million compared with $112 million last year. Higher
charges in the 1999 periods were primarily the result of higher interest expense
on higher debt levels.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $752 million at June 30, 1999 - a $183 million
increase from year-end 1998. In addition to cash from operations, an increase in
short-term debt was required to fund the company's capital expenditures and
dividend payments to shareholders.
On July 28, 1999, Chevron declared a quarterly dividend of 61 cents per share,
unchanged from the preceding quarter.
In March 1999, Chevron purchased the Rutherford-Moran Oil Corporation and
another interest in Block 8/32, offshore Thailand, for approximately 1.1 million
shares of its treasury stock, $57 million in cash and the assumption of
outstanding debt of $341 million. Concurrent with the purchase, $202 million of
that debt was retired and the remaining $139 million was called and retired in
April 1999. The company financed these retirements through an increase in
short-term debt.
-24-
The company's debt and capital lease obligations totaled $8.120 billion at June
30, 1999, up $562 million or 7 percent from $7.558 billion at year-end 1998. The
increase was primarily from net additions of $636 million in short-term debt,
primarily commercial paper, and newly issued long-term obligations of $70
million. Partially offsetting these increases were scheduled and unscheduled
long-term debt repayments of $74 million and a scheduled non-cash retirement in
January of ESOP debt of $70 million. These changes in long-term debt exclude the
assumption and retirement of long-term debt included in the Rutherford-Moran
transaction.
Although the company benefits from lower interest rates on short-term debt, its
proportionately large amount of short-term debt has kept Chevron's ratio of
current assets to current liabilities at relatively low levels. This ratio was
.77 at June 30, 1999, down from .88 at year-end 1998. This reduction is
primarily due to an increase in current liabilities of $2.181 billion. This
increase is primarily due to the June 1999 reclassification from noncurrent to
current of a $964 million accrual established in 1998 for the Cities Service
litigation and the increase in short-term debt. Interest will continue to accrue
on the amount of judgment in this case until the matter is resolved. The
company continues to pursue the Cities Service matter in the courts.
The company's short-term debt, consisting primarily of commercial paper and the
current portion of long-term debt, totaled $6.526 billion at June 30, 1999. This
amount includes $2.725 billion that was reclassified as long-term since the
company has both the intent and ability, as evidenced by revolving credit
agreements, to refinance it on a long-term basis. The company's practice has
been to continually refinance its commercial paper, maintaining levels it
believes to be economically attractive.
The company's debt ratio (total debt : total debt plus stockholders' equity) was
32 percent at June 30, 1999, about the same as at year-end 1998. The company
continually monitors its spending level, market conditions and related interest
rates to maintain what it believes to be reasonable debt levels to fund its
operating and capital expenditure activities.
In December 1997, Chevron's Board of Directors approved the repurchase of up to
$2 billion of its outstanding common stock for use in its employee stock option
programs. To date, the company has purchased 6.4 million shares at a cost of
about $484 million under the repurchase program. There has been no activity
under that program in 1999.
In July, the company's Employee Stock Ownership Plan (ESOP) issued $620 million
of long-term debt at an average rate of 7.42%, guaranteed by Chevron
Corporation. The proceeds from the issuance of debt were paid to Chevron
Corporation in exchange for Chevron's assumption of the existing ESOP 8.11%
long-term debt of $620 million. Chevron used the proceeds to reduce existing
short-term debt, primarily commercial paper. These transactions will be
reflected in the company's third quarter 1999 financial statements.
WORLDWIDE CAPITAL AND EXPLORATORY EXPENDITURES for the first half of 1999,
including the company's share of affiliates' expenditures, totaled $2.609
billion, up 12 percent from $2.323 billion spent in the 1998 first half.
Expenditures for international exploration and production activities in the 1999
period were $1.418 billion or about 54 percent of total expenditures, reflecting
the company's continued emphasis on increasing international oil and gas
production. This amount included about $500 million in the first quarter of 1999
for the acquisition of the Rutherford-Moran Oil Corporation and another interest
in Block 8/32 offshore Thailand. The company's other segments have incurred
lower expenditures in 1999, compared with 1998 as the company restricts spending
in these areas to fund its international exploration and production prospects.
Spending outside the United States accounted for 62 percent of total
expenditures in 1999 compared with 50 percent in 1998. The actual C&E
expenditures for the full year 1999 in the international exploration and
production segment will be dependent upon, among other factors, the ability of
our partners, some of which are national petroleum companies, to fund their
share of project expenditures.
-25-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 3A of the Corporation's Annual Report on Form 10-K for the period ended
December 31, 1998 is hereby updated as follows:
Gulf's petition for rehearing in the Oklahoma Supreme Court was denied on June
22, 1999. Gulf intends to file a petition for certiorari asking the United
States Supreme Court to determine if the Oklahoma trial court properly barred
Gulf from raising its principal defense to liability based on the allegedly
preclusive effect of a non-final, non-appealable ruling in other litigation by a
federal district judge. The issue of preclusive effect is governed by federal
law.
The petition for writ of certiorari is due September 20, 1999. On July 12, 1999,
the Oklahoma Supreme Court granted Gulf's motion to suspend the effectiveness of
the court's mandate (thus preventing enforcement of the judgment by Cities)
until final disposition by the United States Supreme Court of Gulf's petition
and, should the Court grant the petition, until the Court's final decision on
the merits of the case.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of stockholders at the Annual
Meeting on April 28, 1999.
Voters elected 13 incumbent directors for one-year terms. The vote tabulation
for individual directors was:
Shares Shares
Directors For Withheld
------------------------------------------------------------------------
S. H. Armacost 486,052,444 22,095,068
K. T. Derr 486,780,099 21,367,413
S. Ginn 487,192,898 20,954,614
C. A. Hills 486,673,594 21,473,918
J. B. Johnston 486,333,067 21,814,445
R. H. Matzke 486,833,265 21,314,247
D. J. O'Reilly 487,262,485 20,885,027
C. M. Pigott 486,845,658 21,301,854
C. Rice 486,511,494 21,636,018
F. A. Shrontz 486,912,740 21,234,772
J. N. Sullivan 486,899,948 21,247,564
C. Tien 486,709,078 21,438,434
J. A. Young 487,042,612 21,104,900
Voters approved the appointment of PricewaterhouseCoopers LLP as the company's
independent accountants by a vote of 504,113,067 (99.5 percent) for and
2,344,331 (0.5 percent) against. There were also 1,690,013 abstentions and 101
broker non-votes.
A stockholder proposal to adopt a toxic chemicals information policy was
rejected. There were 26,461,991 votes (6.6 percent) for the proposal and
376,639,206 votes (93.4 percent) against. There were 25,205,948 abstentions and
79,840,367 broker non-votes.
A stockholder proposal to report on greenhouse gas emissions was rejected. There
were 29,847,863 votes (7.4 percent) for the proposal and 373,447,690 votes (92.6
percent) against. There were also 25,037,257 abstentions and 79,814,702 broker
non-votes.
-26-
A stockholder proposal to abandon Alaska Natural Wildlife Reserve drilling plans
was rejected. There were 15,988,163 votes (4.0 percent) for the proposal and
386,098,468 votes (96.0 percent) against. There were also 26,244,535 abstentions
and 79,816,346 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4) Pursuant to the Instructions to Exhibits, certain instruments
defining the rights of holders of long-term debt securities of the
company and its consolidated subsidiaries are not filed because the
total amount of securities authorized under any such instrument
does not exceed 10 percent of the total assets of the company and
its subsidiaries on a consolidated basis. A copy of any such
instrument will be furnished to the Commission upon request.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K, dated June 22, 1999, was filed by the
company on April 23, 1999. In this report, Chevron discussed a
meeting between Chevron's Chairman, Mr. K.T. Derr, security
analysts and institutional investors to review the company's growth
strategies and recent developments.
(2) A Current Report on Form 8-K, dated June 24, 1999, was filed by the
company on June 24, 1999. In this report, Chevron announced its
intent to petition the U.S. Supreme Court to hear the Cities
Service case following the Oklahoma Supreme Court's decision not to
reconsider its previous ruling.
SIGNATURE
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.
CHEVRON CORPORATION
----------------------------------
(Registrant)
Date August 5, 1999 /s/ M.R. KLITTEN
------------------------------------- --------------------------------
M. R. Klitten, Vice President
(Chief Financial Officer and
Duly Authorized Officer)
-27-
Exhibit 12
CHEVRON CORPORATION - TOTAL ENTERPRISE BASIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Six Months
Ended Year Ended December 31,
------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
Net Income (1) $ 679 $1,339 $ 3,256 $2,607 $ 930 $ 1,693
Income Tax Expense 500 658 2,428 2,624 1,094 1,322
Distributions (Less Than)
Greater Than Equity in Earnings of
Less Than 50% Owned Affiliates (71) (72) (70) 29 (5) (3)
Minority Interest 2 7 11 4 - 3
Previously Capitalized Interest
Charged to Earnings During Period 18 35 28 24 47 32
Interest and Debt Expense 257 492 405 471 557 453
Interest Portion of Rentals (2) 89 187 167 158 148 156
------- ------ ------- ------- ------- -------
Earnings before Provisions for
Taxes and Fixed Charges $ 1,474 $2,646 $ 6,225 $ 5,917 $ 2,771 $ 3,656
======= ====== ======= ======= ======= =======
Interest and Debt Expense $ 257 $ 492 $ 405 $ 471 $ 557 $ 453
Interest Portion of Rentals (2) 89 187 167 158 148 156
Capitalized Interest 4 39 82 108 141 80
------- ------ ------- ------- ------- -------
Total Fixed Charges $ 350 $ 718 $ 654 $ 737 $ 846 $ 689
======= ====== ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 4.21 3.68 9.52 8.03 3.28 5.31
- -------------------------------------------------------------------------------------------------------------------
(1) The information for 1995 and thereafter reflects the company's adoption of
the Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," effective October 1, 1995.
(2) Calculated as one-third of rentals.
-28-
5
1,000,000
6-MOS
DEC-31-1999
JUN-30-1999
752
955
3,054
27
1,416
7,157
52,674
28,244
38,402
9,347
4,319
0
0
1,069
16,077
38,402
14,872
15,430
0
14,339
0
0
218
1,091
412
679
0
0
0
679
1.04
1.03
