================================================================================
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 September 30, 2001
------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-368-2
ChevronTexaco 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
--------------
Chevron Corporation
-----------------------------------------------------------
(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 September 30, 2001
- ---------------------------------- ------------------------------------
Common stock, $.75 par value 642,482,348
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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 nine months ended September 30, 2001 and 2000 2
Consolidated Statement of Comprehensive Income for
the three months and nine months ended
September 30, 2001 and 2000 2
Consolidated Balance Sheet at September 30, 2001
and December 31, 2000 3
Consolidated Statement of Cash Flows for
the nine months ended September 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Listing of Exhibits and Reports on Form 8-K 26-27
Signature 28
Exhibit Computation of Ratio of Earnings to Fixed Charges 29
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 former Chevron (now ChevronTexaco) operations that are based on management's
current expectations, estimates and projections about the petroleum and
chemicals industries. Words such as "anticipates," "expects," "intends,"
"plans," "projects," "believes," "seeks," "estimates" and similar expressions
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control and are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Unless legally
required, Chevron undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Among the factors that could cause actual results to differ materially are crude
oil and natural gas prices; refining and marketing margins; chemicals prices and
competitive conditions affecting supply and demand for aromatics, olefins and
additives products; actions of competitors; the competitiveness of alternate
energy sources or product substitutes; technological developments; inability of
the company's joint-venture partners to fund their share of operations and
development activities; potential failure to achieve expected production from
existing and future oil and gas development projects; potential delays in the
development, construction or start-up of planned projects; the ability to
successfully integrate the operations of Chevron, Texaco and Caltex and realize
the expected associated synergies; potential disruption or interruption of the
company's production or manufacturing facilities due to accidents, political
events or other unexpected damage; potential liability for remedial actions
under existing or future environmental regulations and litigation; significant
investment or product changes under existing or future environmental regulations
(including, particularly, regulations and litigation dealing with gasoline
composition and characteristics); 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. Unpredictable or
unknown factors not discussed herein also could have material adverse effects on
forward-looking statements.
-1-
PART I. FINANCIAL INFORMATION
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
Millions of Dollars, Except Per-Share Amounts 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Revenues and Other Income
Sales and other operating revenues* $ 11,563 $ 12,997 $36,245 $37,364
Income from equity affiliates 162 276 625 647
Other income 184 348 343 561
----------------------------------------------------------
Total Revenues and Other Income 11,909 13,621 37,213 38,572
----------------------------------------------------------
Costs and Other Deductions
Purchased crude oil and products 6,141 6,953 18,730 20,460
Operating expenses 1,166 1,359 3,612 3,901
Selling, general and administrative expenses 537 399 1,440 1,162
Exploration expenses 75 98 360 317
Depreciation, depletion and amortization 713 801 2,085 2,151
Taxes other than on income* 1,253 1,240 3,713 3,572
Interest and debt expense 65 101 227 356
----------------------------------------------------------
Total Costs and Other Deductions 9,950 10,951 30,167 31,919
----------------------------------------------------------
Income Before Income Tax Expense 1,959 2,670 7,046 6,653
Income Tax Expense 791 1,139 2,954 2,962
----------------------------------------------------------
Net Income $ 1,168 $ 1,531 $ 4,092 $ 3,691
==========================================================
Per Share of Common Stock:
Net Income - Basic $ 1.82 $ 2.36 $ 6.37 $ 5.66
- Diluted $ 1.82 $ 2.35 $ 6.36 $ 5.65
Dividends $ 0.65 $ 0.65 $ 1.95 $ 1.95
Weighted Average Number of
Shares Outstanding (000s) - Basic 643,326 648,520 642,750 652,641
- Diluted 644,474 649,577 644,103 653,827
* Includes consumer excise taxes; 2000 conformed
to 2001 presentation. $ 1,074 $ 1,067 $ 3,141 $ 3,029
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
Millions of Dollars 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 1,168 $ 1,531 $ 4,092 $ 3,691
----------------------------------------------------------
Net derivatives (loss) gain on hedge transactions (7) - 9 -
Currency translation adjustment 14 - - (3)
Unrealized holding gain on securities
arising during period 20 55 28 59
Less: reclassification adjustment for gains
included in net income - (99) - (99)
----------------------------------------------------------
Net change during period 20 (44) 28 (40)
----------------------------------------------------------
Minimum pension liability adjustment - - - (15)
----------------------------------------------------------
Other Comprehensive Income (Loss), net of tax 27 (44) 37 (58)
----------------------------------------------------------
Comprehensive Income $ 1,195 $ 1,487 $ 4,129 $ 3,633
==========================================================
See accompanying notes to consolidated financial statements.
-2-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
At September 30 At December 31
Millions of Dollars 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,417 $ 1,896
Marketable securities 1,691 734
Accounts and notes receivable 3,119 3,837
Inventories:
Crude oil and petroleum products 611 631
Chemicals 196 191
Materials, supplies and other 246 250
--------------------------------------
1,053 1,072
Prepaid expenses and other current assets 657 674
--------------------------------------
Total Current Assets 9,937 8,213
Long-term receivables 733 802
Investments and advances 9,524 8,107
Properties, plant and equipment, at cost 53,738 51,908
Less: accumulated depreciation, depletion and amortization 30,697 29,014
--------------------------------------
Properties, plant and equipment, net 23,041 22,894
Deferred charges and other assets 1,294 1,248
--------------------------------------
Total Assets $ 44,529 $ 41,264
======================================
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 1,519 $ 1,079
Accounts payable 2,840 3,163
Accrued liabilities 1,308 1,530
Federal and other taxes on income 2,052 1,479
Other taxes payable 425 423
--------------------------------------
Total Current Liabilities 8,144 7,674
Long-term debt 4,804 4,872
Capital lease obligations 261 281
Deferred credits and other non-current obligations 1,652 1,768
Deferred income taxes 4,834 4,908
Reserves for employee benefit plans 1,831 1,836
--------------------------------------
Total Liabilities 21,526 21,339
--------------------------------------
Preferred stock (authorized 100,000,000
shares, $1.00 par value, none issued) - -
Common stock (authorized 2,000,000,000 shares,
712,487,068 shares issued, $.75 par value) 534 534
Capital in excess of par value 2,786 2,758
Deferred compensation (511) (611)
Accumulated other comprehensive loss (143) (180)
Retained earnings 23,757 20,909
Treasury stock, at cost (70,004,720 and 71,427,097 shares
at September 30, 2001 and December 31, 2000, respectively) (3,420) (3,485)
--------------------------------------
Total Stockholders' Equity 23,003 19,925
--------------------------------------
Total Liabilities and Stockholders' Equity $ 44,529 $ 41,264
======================================
See accompanying notes to consolidated financial statements.
-3-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-----------------------------------
Millions of Dollars 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 4,092 $ 3,691
Adjustments
Depreciation, depletion and amortization 2,085 2,151
Dry hole expenses* 214 168
Distributions less than income from equity affiliates (205) (247)
Net before-tax gains on asset retirements and sales (85) (215)
Net foreign exchange gains (37) (80)
Deferred income tax provision 47 285
Net decrease in operating working capital 743 752
Other, net (19) 47
-----------------------------------
Net Cash Provided by Operating Activities 6,835 6,552
-----------------------------------
Investing Activities
Capital expenditures* (3,216) (2,898)
Proceeds from asset sales 197 381
Other investing cash flows, net 4 857
Net (purchases) sales of marketable securities (265) 208
Net purchases of other short-term investments (665) (748)
-----------------------------------
Net Cash Used for Investing Activities (3,945) (2,200)
-----------------------------------
Financing Activities
Net borrowings (payments) of short-term obligations 938 (1,722)
Proceeds from issuance of long-term debt 34 25
Loans to equity affiliate (418) -
Repayments of long-term debt and other financing obligations (733) (127)
Cash dividends paid (1,255) (1,272)
Net issuances (purchases) of treasury shares 73 (1,259)
-----------------------------------
Net Cash Used for Financing Activities (1,361) (4,355)
-----------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (8) -
-----------------------------------
Net Change in Cash and Cash Equivalents 1,521 (3)
Cash and Cash Equivalents at January 1 1,896 1,345
-----------------------------------
Cash and Cash Equivalents at September 30 $ 3,417 $ 1,342
===================================
* Certain 2000 amounts have been reclassified to conform to the 2001 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 the former Chevron
Corporation and its subsidiaries (the company), have not been audited by
independent accountants, except for the balance sheet at December 31, 2000. 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 3.
On October 9, 2001, Texaco Inc. (Texaco) became a wholly owned subsidiary of
Chevron Corporation pursuant to a merger transaction and Chevron Corporation
changed its name to ChevronTexaco Corporation. Except for the summarized
financial data for the combined companies presented in Note 2, and unless
otherwise indicated elsewhere, the information provided in these financial
statements and corresponding notes is the information for Chevron Corporation on
a stand-alone basis.
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
Chevron's 2000 Annual Report on Form 10-K.
The results for the three- and nine-month periods ended September 30, 2001, are
not necessarily indicative of future financial results.
Note 2. Merger with Texaco Inc.
The Texaco merger transaction was accounted for as a pooling of interests. Each
share of Texaco common stock was converted on a tax-free basis into 0.77 shares
of ChevronTexaco common stock. As part of the merger, Chevron issued
approximately 425 million shares of common stock, representing about 40 percent
of the outstanding ChevronTexaco common stock after the merger.
The following table presents summarized financial data for the combined company
for periods prior to the merger.
Nine Months Ended Year Ended
September 30 December 31
---------------------- ---------------------------------
Millions of dollars, except per-share amounts 2001 2000 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenues and Other Income
- -------------------------
Chevron $37,213 $38,572 $ 52,129 $36,586 $30,557
Texaco(1) 39,469 38,478 53,520 37,779 33,800
Adjustments/Eliminations(2) 7,400 9,722 13,481 11,348 8,901
--------------------------------------------------------------
ChevronTexaco $84,082 $86,772 $ 119,130 $85,713 $73,258
==============================================================
(1) Includes certain reclassification adjustments to conform to historic Chevron presentation.
(2) Consolidation of former equity operations and intercompany eliminations.
Net Income
- ----------
Chevron $ 4,092 $ 3,691 $ 5,185 $ 2,070 $ 1,339
Texaco 1,718 1,997 2,542 1,177 578
-------------------------------------------------------------
ChevronTexaco $ 5,810 $ 5,688 $ 7,727 $ 3,247 $ 1,917
=============================================================
Per share of Common Stock:
Basic 5.47 5.30 7.23 3.01 1.76
Diluted 5.45 5.29 7.21 3.00 1.75
-5-
In connection with the merger, fees and expenses for Chevron and Texaco - mainly
for investment bankers, attorneys, accountants, SEC filings and financial
printing - totaled $80 million from announcement of the merger in October 2000
through September 30, 2001. Of this amount, $55 million was recorded in 2001.
Other merger-related expenses - mainly for special studies, information
technology and telecommunication linkage, meetings and travel - totaled $100
million through September 30, 2001, substantially all of which was recorded in
2001. Through October 31, 2001, fees and expenses approximated $120 million, and
other merger-related expenses approximated $110 million.
Significant other merger-related expenses are expected to be incurred from the
October 2000 merger announcement through the end of 2003. In addition to the
types of costs described above, significant charges will also be recorded for
employee termination payments, employee and office relocations, alignment of the
major accounting and information systems, and the elimination of redundant
facilities and operations. Quantification of these one-time expenses, as well as
the estimated annual savings from operating synergies made possible by the
merger, will be communicated later in the fourth quarter.
As a condition of approving the Texaco merger transaction, the U.S. Federal
Trade Commission (FTC) required the disposition of certain Texaco assets,
including investments in Equilon and Motiva - two joint ventures engaged in U.S.
refining, marketing and transportation businesses; other interests in U.S.
natural gas processing and transportation facilities; and a portion of the
general aviation fuel marketing business. Associated carrying values were $2,224
million at September 30, 2001. Net income from these assets for the year ended
December 31, 2000, and nine months ended September 30, 2001 and 2000, was
approximately $216 million, $367 million and $156 million, respectively. On
October 9, 2001, Texaco placed its interests in Equilon and Motiva into a trust,
as required by the FTC. Based on the terms of an October 2001 Memorandum of
Understanding (MOU) with Shell Oil Company (Shell) and Saudi Refining Inc.,
Texaco recorded an after-tax charge of $496 million in the third quarter 2001 as
an impairment of its investments in Equilon and Motiva. This charge was
partially offset by tax benefits of $103 million. If the terms of the MOU are
implemented, cash proceeds from the sale will be $2,150 million, including a $50
million deferred dividend distribution from Motiva. The sale of the portion of
Texaco's general aviation fuel marketing business was completed in October 2001,
and cash proceeds were not significant.
Note 3. Net Income
Net income for the third quarter 2001 included net charges of $31 million for
special items, compared with net charges of $116 million in the 2000 third
quarter. The 2001 third quarter included special charges of $43 million
associated with the write-down of chemicals assets and associated tax
adjustments; and $37 million for merger-related expenses. These charges were
partially offset by a gain of $49 million from the sale of the company's
interest in a U.S. exploration and production equity affiliate.
Net income for the first nine months of 2001 included net charges of $91 million
from special items, compared with net charges of $203 million in the comparable
2000 period. In addition to the third quarter 2001 net special charges of $31
million noted above, the nine-month 2001 results included special charges of $60
million for additional merger-related expenses and prior-year tax adjustments.
Foreign currency gains included in third quarter 2001 net income were $26
million, compared with gains of $75 million in 2000. For the nine-month periods,
foreign currency gains were $69 million in 2001, compared with gains of $150
million in the comparable 2000 period.
Note 4. Information Relating to the Statement of Cash Flows
The "Net decrease in operating working capital" is composed of the following:
Nine Months Ended
September 30
-----------------------------
Millions of Dollars 2001 2000
- -----------------------------------------------------------------------------------------
Decrease (increase) in accounts and notes receivable $ 710 $ (573)
Decrease (increase) in inventories 19 (59)
Increase in prepaid expenses and other current assets (41) (98)
(Decrease) increase in accounts payable and accrued liabilities (546) 481
Increase in income and other taxes payable 601 1,001
- -----------------------------------------------------------------------------------------
Net decrease in operating working capital $ 743 $ 752
- -----------------------------------------------------------------------------------------
-6-
"Net Cash Provided by Operating Activities" includes the following cash payments
for interest on debt and for income taxes:
Nine Months Ended
September 30
----------------------------
Millions of Dollars 2001 2000
- ------------------------------------------------------------------------------------------
Interest paid on debt (net of capitalized interest) $ 274 $ 352
Income taxes paid $ 2,333 $ 1,766
- ------------------------------------------------------------------------------------------
The "Net (purchases) sales of marketable securities" consists of the following
gross amounts:
Nine Months Ended
September 30
----------------------------
Millions of Dollars 2001 2000
- ------------------------------------------------------------------------------------------
Marketable securities purchased $(2,240) $(1,955)
Marketable securities sold 1,975 2,163
- ------------------------------------------------------------------------------------------
Net (purchases) sales of marketable securities $ (265) $ 208
- ------------------------------------------------------------------------------------------
"Other investing cash flows, net" included $835 million paid to Chevron in July
2000 by its affiliate, Chevron Phillips Chemical Company LLC.
"Net purchases of other short-term investments," of $665 million in 2001 and
$748 million in 2000, were in a variety of short-term money market instruments,
with maturities similar to the company's commercial paper portfolio.
The major components of "Capital expenditures" and the reconciliation of this
amount to the capital and exploratory expenditures, excluding equity affiliates,
presented in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are presented in the following table.
Nine Months Ended
September 30
------------------------
Millions of Dollars 2001 2000
- --------------------------------------------------------------------------------------------
Additions to properties, plant and equipment $ 2,242 (1) $ 2,137
Additions to investments 827 627
Current year dry-hole expenditures 169 141
Payments for other liabilities and assets, net (22) (7)
------------------------
Capital expenditures 3,216 2,898
Other exploration expenditures 146 149
Payments of long-term debt and other financing obligations 210 (2) 7
------------------------
Capital and exploratory expenditures, excluding equity affiliates 3,572 3,054
Equity in affiliates 933 628
------------------------
Capital and exploratory expenditures, including equity affiliates $ 4,505 $ 3,682
========================
(1)Net of non-cash reclassification of $80.
(2)Represents a deferred payment related to 1993 acquisition of
an interest in the Tengizchevroil joint venture.
The Consolidated Statement of Cash Flows excludes the following additional
non-cash transactions:
The company's Employee Stock Ownership Plan (ESOP) repaid $100 million and $10
million of matured debt guaranteed by Chevron Corporation in January of 2001 and
2000, respectively. These payments were recorded by the company as a reduction
in its debt outstanding and in "Deferred Compensation."
The company combined its petrochemicals businesses with those of Phillips
Petroleum Company in July 2000. An increase in Chevron's "Investments and
advances" of $2.8 billion resulted primarily from the contribution of
"Properties, plant and equipment"of $2.1 billion, net working capital assets of
$0.6 billion, and investments and advances of $0.1 billion.
-7-
Note 5. Operating Segments and Geographic Data
Chevron managed its exploration and production; refining, marketing and
transportation; and chemicals businesses separately.
"All Other" activities included the company's share of earnings from and
investment in Dynegy Inc., corporate administrative costs, worldwide cash
management and debt financing activities, coal mining operations, insurance
operations, real estate activities and certain e-businesses. The company's
primary country of operation was the United States of America, its country of
domicile. Activities in no other country met the materiality requirements for
separate disclosure.
Chevron evaluated 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 on a worldwide basis. Corporate
administrative costs and assets were not allocated to the operating segments;
however, operating segments were billed for direct corporate services.
Nonbillable costs remained as corporate center expenses. Net income by segment
for the three- and nine-month periods ended September 30, 2001 and 2000, is
presented in the following table.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
Millions of Dollars 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 330 $ 522 $ 1,496 $ 1,275
International 502 718 1,748 1,951
----------------------------------------------------
Total Exploration and Production 832 1,240 3,244 3,226
----------------------------------------------------
Refining, Marketing and Transportation
United States 317 105 785 265
International 72 47 268 76
----------------------------------------------------
Total Refining, Marketing and Transportation 389 152 1,053 341
----------------------------------------------------
Chemicals
United States (69) 3 (102) 93
International 21 21 45 50
----------------------------------------------------
Total Chemicals (48) 24 (57) 143
----------------------------------------------------
Total Segment Income 1,173 1,416 4,240 3,710
Interest Expense (43) (70) (151) (246)
Interest Income 29 22 84 57
Other 9 163 (81) 170
----------------------------------------------------
Net Income $ 1,168 $ 1,531 $ 4,092 $ 3,691
====================================================
-8-
Operating segment sales and other operating revenues, including internal
transfers, for the three- and nine-month periods ended September 30, 2001 and
2000, are presented in the following table. Chemicals segment revenues for the
2000 period were derived from the manufacture and sale of petrochemicals,
plastic resins, and lube oil and fuel additives. In 2001, only revenues from the
manufacture and sale of lube oil and fuel additives are included, following the
formation of the Chevron Phillips Chemicals Company LLC joint venture in July
2000, which is accounted for under the equity method.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
Millions of Dollars 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Exploration and Production
- --------------------------
United States $ 1,229 $ 1,693 $ 5,051 $ 4,254
International 2,185 2,696 7,173 7,644
----------------------------------------------------
3,414 4,389 12,224 11,898
Intersegment Elimination - United States (728) (863) (2,270) (2,343)
Intersegment Elimination - International (987) (1,183) (3,182) (3,426)
----------------------------------------------------
Total Exploration and Production 1,699 2,343 6,772 6,129
----------------------------------------------------
Refining, Marketing and Transportation
- --------------------------------------
United States 7,660 8,160 22,747 22,337
International 1,863 2,198 5,737 6,460
----------------------------------------------------
9,523 10,358 28,484 28,797
Intersegment Elimination - United States (32) (30) (86) (312)
Intersegment Elimination - International (4) (1) (12) (8)
----------------------------------------------------
Total Refining, Marketing and Transportation 9,487 10,327 28,386 28,477
----------------------------------------------------
Chemicals
- ---------
United States 107 82 286 2,055
International 188 193 560 593
----------------------------------------------------
295 275 846 2,648
Intersegment Elimination - United States (21) (20) (63) (119)
----------------------------------------------------
Total Chemicals 274 255 783 2,529
----------------------------------------------------
All Other
- ---------
United States 117 93 337 294
International 4 4 14 12
----------------------------------------------------
121 97 351 306
Intersegment Elimination - United States (16) (23) (41) (69)
Intersegment Elimination - International (2) (2) (6) (8)
----------------------------------------------------
Total All Other 103 72 304 229
----------------------------------------------------
Sales and Other Operating Revenues
- ----------------------------------
United States 9,113 10,028 28,421 28,940
International 4,240 5,091 13,484 14,709
----------------------------------------------------
13,353 15,119 41,905 43,649
Intersegment Elimination - United States (797) (936) (2,460) (2,843)
Intersegment Elimination - International (993) (1,186) (3,200) (3,442)
----------------------------------------------------
Total Sales and Other Operating Revenues $11,563 $ 12,997 $36,245 $37,364
====================================================
-9-
Segment assets at September 30, 2001, and December 31, 2000, are presented in
the following table. Segment assets do not include intercompany investments or
intercompany receivables.
At September 30 At December 31
Millions of Dollars 2001 2000
- ------------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 5,428 $ 5,568
International 14,959 14,493
-------------------------------------
Total Exploration and Production 20,387 20,061
-------------------------------------
Refining, Marketing and Transportation
United States 8,188 8,365
International 4,273 3,941
-------------------------------------
Total Refining, Marketing and Transportation 12,461 12,306
-------------------------------------
Chemicals
United States 2,179 2,342
International 714 728
-------------------------------------
Total Chemicals 2,893 3,070
-------------------------------------
-------------------------------------
Total Segment Assets 35,741 35,437
-------------------------------------
All Other
United States 5,413 4,398
International 3,375 1,429
-------------------------------------
Total All Other 8,788 5,827
-------------------------------------
Total Assets - United States 21,208 20,673
Total Assets - International 23,321 20,591
- ------------------------------------------------------------------------------------------------------
Total Assets $44,529 $41,264
======================================================================================================
Note 6. Gain from the Equity Accounting Effect of Common Stock Transactions
by Dynegy Inc.
In accordance with its accounting policy under the Securities and Exchange
Commission's Staff Accounting Bulletin No. 51 (SAB 51), the company recorded, as
part of other income, a before-tax gain of $42 million in the third quarter
2000, resulting mainly from stock issuances by its Dynegy Inc. (Dynegy)
affiliate related to employee stock option programs. Income tax expense includes
$15 million for deferred income taxes related to these transactions. In the
fourth quarter 2000, the company recorded an additional special before-tax gain
of about $119 million related to Dynegy's public common stock offering in
October 2000.
Note 7. Summarized Financial Data - Chevron U.S.A. Inc.
At September 30, 2001, 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).
During the first nine months of 2001, these operations were conducted by Chevron
U.S.A. Production Company and Chevron Products Company. During the first half of
2000, Chevron U.S.A. Inc. also included most of Chevron's worldwide
petrochemical operations. Chevron combined its petrochemicals businesses with
those of Phillips Petroleum Company on July 1, 2000, to form Chevron Phillips
Chemical Company LLC (CPChem). Chevron U.S.A. Inc. holds the investment in this
joint venture, which is accounted for using the equity method. Summarized
financial information for Chevron U.S.A. Inc. and its consolidated subsidiaries
is presented as follows:
-10-
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
Millions of Dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------
Sales and other operating revenues $9,400 $10,444 $29,245 $30,127
Costs and other deductions* 8,782 9,718 26,769 28,464
Net income 547 778 1,901 1,606
======================================================================================================
* Certain 2000 costs have been reclassified to conform to the 2001
presentation.
At September 30 At December 31
Millions of Dollars 2001 2000
- ------------------------------------------------------------------------------------------------------
Current assets $ 4,991 $ 4,396
Other assets 18,891 20,738
Current liabilities 3,943 4,094
Other liabilities 10,237 10,251
Net equity 9,702 10,789
======================================================================================================
Memo: Total Debt $ 7,039 $ 6,728
Note 8. Summarized Financial Data - Chevron Transport Corporation Limited
Chevron Transport Corporation Limited (CTC), a Bermuda 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 issued by a third party.
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 accounting
principles generally accepted in the United States of America.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------
Millions of Dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------
Sales and other operating revenues $162 $193 $653 $486
Costs and other deductions 157 205 574 548
Net income (loss) 5 (10) 80 (62)
======================================================================================================
At September 30 At December 31
Millions of Dollars 2001 2000
- ------------------------------------------------------------------------------------------------------
Current assets $ 186 $ 205
Other assets 519 530
Current liabilities 239 309
Other liabilities 321 361
Net equity 145 65
======================================================================================================
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
September 30, 2001.
-11-
Note 9. 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 Nine Months Ended
September 30 September 30
------------------------- -----------------
Millions of Dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------
Gross revenues* $3,864 $5,499 $12,213 $14,913
Income before income taxes 203 299 753 782
Net income 96 148 375 378
======================================================================================================
* 2000 restated to conform to 2001 presentation.
Note 10. Income Taxes
"Income Tax Expense" for the third quarter and nine months of 2001 was $791
million and $2,954 million, respectively, compared with $1,139 million and
$2,962 million for the comparable 2000 periods. The effective tax rate for the
2001 nine months was 42 percent, compared with 45 percent in last year's nine
months. The decrease in the effective tax rate was primarily the result of a
shift in international before-tax income from countries with higher income tax
rates to countries with lower tax rates. Partially offsetting this decrease were
higher state taxes.
Note 11. Litigation
Chevron, Texaco and four other oil companies ("refiners") filed suit in 1995
contesting the validity of a patent granted to Unocal Corporation ("Unocal") for
reformulated gasoline, which ChevronTexaco sells in California in certain months
of the year. In March 2000, the U. S. Court of Appeals for the Federal Circuit
upheld a September 1998 District Court decision that Unocal's patent was valid
and enforceable and assessed damages of 5.75 cents per gallon for gasoline
produced in infringement of the patent. In May 2000, the Federal Circuit Court
denied a petition for rehearing with the U.S. Court of Appeals for the Federal
Circuit filed by the refiners in this case. The refiners petitioned the U.S.
Supreme Court and in February 2001, the Supreme Court denied the petition to
review the lower court's ruling and the case was remanded to the District Court
for an accounting of all infringing gasoline produced from August 1, 1996, to
September 30, 2000. The District Court granted Unocal's motion for summary
judgment requesting an accounting and denied refiners' motion to stay the
proceedings and vacate the accounting order. The refiners intend to appeal.
Additionally, in May 2001 the U.S. Patent Office granted the refiners' petition
to reexamine the validity of Unocal's patent. The Federal Trade Commission has
also announced that it is investigating whether Unocal's failure to disclose to
the California Air Resources Board that they had filed a patent application was
unfair competition, which may make Unocal's patent unenforceable.
If Unocal's patent ultimately is upheld and is enforceable, the company's
financial exposure includes royalties, plus interest, for production of gasoline
that is proven to have infringed the patent. Chevron, Texaco, as well as
Texaco's affiliates Equilon and Motiva, have been accruing in the normal
course of business any future estimated liability for potential infringement of
the patent covered by the trial court's ruling. In 2000, Chevron and Texaco made
payments to Unocal totaling approximately $28 million for the original court
ruling, interest and fees.
Unocal has obtained additional patents for alternate formulations that could
affect a larger share of U.S. gasoline production. ChevronTexaco believes these
additional patents are invalid and unenforceable. However, if such patents are
ultimately upheld, the competitive and financial effects on the company's
refining and marketing operations, while presently indeterminable, could be
material.
Another issue involving the company is the ongoing public debate concerning the
petroleum industry's use of MTBE and its potential environmental impact through
seepage into groundwater. Along with other oil companies, the company is a party
to lawsuits and claims related to the use of the chemical MTBE in certain
oxygenated gasolines. These actions may require the company to correct or
ameliorate the alleged effects on the environment of prior release of MTBE by
the company or other parties. Additional lawsuits and claims related to the use
of MTBE may be filed in the future. Costs to the company related to these
lawsuits and claims are not currently determinable. ChevronTexaco has eliminated
the use of MTBE in gasoline it sells in certain areas.
-12-
Note 12. Other Contingencies and Commitments
Chevron's and Caltex's U.S. federal income tax have been settled through 1993,
while Texaco's has been settled through 1991. Chevron's California franchise tax
liabilities have been settled through 1991.
Settlement of open tax years, as well as tax issues in other countries where the
company conducts its businesses, 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.
ChevronTexaco 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 commitments,
throughput agreements and take-or-pay agreements, some of which relate to
suppliers' financing arrangements.
ChevronTexaco 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 release of
chemical or petroleum substances, including MTBE, by the company or other
parties. Such contingencies may exist for various sites including, but not
limited to: Superfund sites and refineries, 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 obligations to make such expenditures
have had, or will have, any significant impact on the company's competitive
position relative to other U.S. or international petroleum or chemical concerns.
ChevronTexaco believes it has no material market or credit risk to its
operations, financial position or liquidity as a result of its commodities, and
other derivatives activities. However, the results of operations and financial
position of certain equity affiliates may be affected by their business
activities involving the use of derivative instruments.
ChevronTexaco'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 operations and related
results, and are carefully considered by management when evaluating the level of
current and future activity in such countries.
For oil and gas producing operations, ownership agreements may provide for
periodic reassessments of equity interests in estimated oil and gas reserves.
These activities, individually or together, may result in gains or losses that
could be material to earnings in any given period. One such equity
redetermination process has been under way since 1996 for Chevron's interests in
four producing zones at the Naval Petroleum Reserve at Elk Hills in California,
for the time when the remaining interests in these zones were owned by the U.S.
Department of Energy (DOE). A wide range remains for a possible net settlement
amount for the four zones. ChevronTexaco currently estimates its maximum
possible net before-tax liability at less than $400 million. At the same time, a
possible maximum net amount that could be owed to ChevronTexaco is estimated at
more than $200 million. The timing of the settlement and the exact amount within
this range of estimates are uncertain.
Areas in which ChevronTexaco has significant operations include the United
States of America, Canada, Australia, the United Kingdom, Norway, Denmark,
Kuwait, Republic of Congo, Angola, Nigeria, Chad, Equatorial Guinea, Democratic
Republic of Congo, Papua New Guinea, China, Venezuela, Thailand, Argentina and
Brazil. The company's Caltex affiliate (which became consolidated operations
following the merger with Texaco) and its affiliates have significant operations
in Indonesia, Korea, Australia, Thailand, the Philippines, Singapore, and South
Africa. The company's Tengizchevroil affiliate operates in Kazakhstan. The
company's Chevron Phillips Chemical Company LLC affiliate manufactures and
markets a wide range of petrochemicals and plastics on a worldwide basis, with
manufacturing facilities in existence or under construction in the United
States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico
and Belgium. The company's Dynegy affiliate has operations in the United States
of America, Canada, the United Kingdom and other European countries.
-13-
ChevronTexaco receives claims from and submits claims to customers, trading
partners, U.S.federal, state and local regulatory bodies, host governments,
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. The company and its
affiliates also 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. These
activities, individually or together, may result in gains or losses in future
periods.
Note 13. New Accounting Standards
The company adopted The Financial Accounting Standards Board (FASB) Statement
No. 133, "Accounting for Derivative Instruments and Hedging Transactions" (FAS
133), as amended by FAS 138, "Accounting for Derivative Instruments and Hedging
Transactions - an amendment of FASB Statement No. 133," effective January 1,
2001. The adoption of these new standards did not have a significant impact on
the company's results of operations or financial position. The company uses, on
a limited basis, a variety of derivative instruments, principally swaps and
futures, to manage a small portion of its exposure to price volatility stemming
from its integrated petroleum activities. All of these instruments are commonly
used in oil and gas trading activities and involve little complexity. Because of
Chevron's limited use of derivative instruments, the company elected not to
account for its derivative instruments as hedges under the new standards.
Accordingly, upon adoption, the fair values of the derivative instruments were
recorded as assets or liabilities, with the associated immaterial gains or
losses reported in income. Changes in fair values of these instruments beyond
normal sales and purchases were also reflected in current income. The company
may elect in the future to apply the hedge accounting prescribed by FAS 133 and
FAS 138 if the use of derivative instruments changes significantly. Such an
election would reduce earnings volatility that might otherwise result if changes
in fair values were recognized in current income.
In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125" (FAS 140). FAS 140 is effective for
transfers occurring after March 31, 2001, and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Adoption of FAS 140 had no significant effect on Chevron's
accounting or disclosures for the types of transactions in the scope of the new
standard.
In June 2001, the FASB issued Statement No. 141, "Business Combinations" (FAS
141), Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142) and
Statement No. 143, "Asset Retirement Obligations" (FAS 143). FAS 141 is
effective for all business combinations initiated after June 30, 2001, and for
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later. FAS 142 is effective for fiscal
years beginning after December 15, 2001, except that goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
provisions of the Statement. FAS 143 is effective for fiscal years beginning
after June 15, 2002. Adoption of FAS 141 will have no effect on Chevron's
pooling-of-interests method of accounting for the merger with Texaco Inc., but
will affect possible future transactions. Similarly, adoption of FAS 142 may
affect possible future transactions, but does not have an effect on the
company's prior business combinations. FAS 143 differs in several significant
respects from current accounting for asset retirements obligations under FASB
Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies." The effect on the future accounting and reporting of the assets,
liabilities and expenses related to these obligations has not been quantified.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 is effective for
fiscal years beginning after December 15, 2001, with initial application
effective as of the beginning of the fiscal year adopted. Adoption of FAS 144
will not affect assets classified as held for disposal as a result of disposal
activities that were initiated prior to its initial application, but will affect
possible future disposals.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 2001 Compared With Third Quarter 2000
And Nine Months 2001 Compared With Nine Months 2000
Merger of Chevron Corporation and Texaco Inc.
- --------------------------------------------
On October 9, 2001, Texaco Inc. (Texaco) became a wholly owned subsidiary of
Chevron Corporation pursuant to a merger transaction, and Chevron Corporation
changed its name to ChevronTexaco Corporation. The merger was accounted for as a
pooling of interests and each share of Texaco common stock was converted on a
tax-free basis into 0.77 shares of ChevronTexaco common stock. As part of the
merger, Chevron issued approximately 425 million shares of common stock,
representing about 40 percent of the outstanding ChevronTexaco common stock of
the combined companies. Under pooling-of-interests accounting, the companies are
treated as if they had always been combined for accounting and financial
reporting purposes.
It is anticipated that the combined company will realize significant recurring
cost savings after one-time merger-related costs. In the fourth quarter 2001,
the company began a workforce reduction program that is expected to result in
the termination of approximately 7 percent of the company's 57,000 employees.
Substantially all of the terminations are expected to occur by the end of 2002.
Detailed information related to the expected annual savings from synergies made
possible by the merger, as well as quantification of the expected one-time
expenses to implement the merger, will be communicated later in the fourth
quarter.
Unless otherwise indicated, the financial results discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations reflect
those of the former Chevron Corporation only. Note 2, which accompanies the
financial statements contained in this Quarterly Report on Form 10-Q, contains
summarized financial data for the combined operations of ChevronTexaco
Corporation and information related to one-time merger-related expenses incurred
through October 31, 2001.
Financial Results
- -----------------
EARNINGS SUMMARY
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ --------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Operating Earnings
Exploration and Production $ 783 $1,290 $3,195 $3,276
Refining, Marketing and Transportation 389 307 1,053 558
Chemicals and Other 27 50 (65) 60
- ----------------------------------------------------------------------------------------------------------
Total* 1,199 1,647 4,183 3,894
Special Items (31) (116) (91) (203)
- ----------------------------------------------------------------------------------------------------------
Net Income* $1,168 $1,531 $4,092 $3,691
==========================================================================================================
* Includes Foreign Currency Gains $26 $75 $69 $150
Net income for ChevronTexaco's former Chevron operations in the third quarter of
2001 was $1.168 billion ($1.82 per share - diluted), compared with third quarter
2000 net income of $1.531 billion ($2.35 per share - diluted). Net income for
this year's third quarter included special charges of $43 million for the
write-down of assets and tax adjustments for a chemicals affiliate in Puerto
Rico and $37 million in merger-related expenses. Partially offsetting these
charges was a gain of $49 million from the sale of the company's interest in an
affiliate with producing properties in Utah. Last year's third quarter included
charges for environmental remediation for U.S. refining, marketing and chemicals
facilities of $136 million, impairments of U.S. producing properties and
pipeline assets of $80 million and prior-period tax adjustments of $26 million.
These charges were partially offset by gains of $99 million from the sale of
marketable securities and $27 million from the equity accounting effect of
common stock transactions by Chevron's equity affiliate, Dynegy Inc. Excluding
net charges for special items in both quarters, operating earnings declined 27
percent to $1.199 billion ($1.86 per share - diluted).
Net income for the first nine months of 2001 was $4.092 billion ($6.36 per share
- - diluted), compared with nine months 2000 net income of $3.691 billion ($5.65
per share - diluted). Net income for the first nine months of 2001
-15-
included net special charges of $91 million, while the 2000 period included net
special charges of $203 million. After excluding these special items, operating
earnings were $4.183 billion ($6.50 per share - diluted) in 2001, compared with
$3.894 billion ($5.96 per share - diluted) in 2000.
Chevron's financial results for the third quarter and year-to-date 2001
primarily reflected the improved performance of the refining, marketing and
transportation (downstream) segments and continued strength - although down from
recent periods - of its worldwide exploration and production (upstream)
operations. Return on average capital employed for the 12 months ending
September 30, 2001, was more than 21 percent.
The U.S. downstream earnings improvement reflected stronger industry margins for
motor gasolines, higher refined products sales volumes and the reliable
operation of its manufacturing facilities. International downstream operating
earnings, although improved from 2000 results, remained depressed in the 2001
periods, reflecting weak results from the company's Asia-Pacific operations.
Though refining margins gradually have improved in the Far East, product prices
have not risen sufficiently to recover the costs and improve marketing margins.
Declining crude oil and natural gas prices were the primary reason for the
decline in third quarter 2001 operating earnings from the upstream segment,
compared to the prior year. During the nine-month 2001 period, higher U.S.
natural gas prices were not sufficient to offset the effect on earnings of lower
crude oil prices.
Business Environment and Outlook
- --------------------------------
Chevron's earnings are affected significantly by fluctuations in industry price
levels for crude oil and natural gas. Earlier in 2001, average U.S. natural gas
prices were considerably higher than in the corresponding periods last year.
However, by the end of the third quarter of 2001, Henry Hub spot natural gas
prices had fallen sharply to $2.17 per thousand cubic feet, compared with $5.17
at the end of the third quarter of 2000. The average spot price for West Texas
Intermediate (WTI), a benchmark crude oil, declined to $26.69 per barrel in the
third quarter of 2001, compared with $31.62 for last year's third quarter, and
down from an average of just over $30 per barrel for all of 2000. Prices have
remained soft into the fourth quarter of 2001. At the end of October, the spot
price for WTI was $21.18 per barrel, while the Henry Hub spot natural gas price
had improved to $2.84 per thousand cubic feet. Following the September 11
terrorist attacks, OPEC announced its intention to maintain adequate crude oil
supplies. The long-term industry price outlook is uncertain.
Chevron's worldwide net oil-equivalent production was nearly flat in the third
quarter of 2000 but was up 2 percent year-to-date compared with the same period
last year. Chevron's oil and gas production levels have not been materially
affected by the various production increases and curtailments by OPEC and
non-OPEC producers. The company believes that in the current industry
environment, the net effect of any production changes directed by host countries
will not be significant to its overall production levels. However, limits on
production may have an adverse effect on the level of new production from
current and future development projects. In addition, civil unrest, political
uncertainty and economic conditions may affect the company's producing
operations. Community protests have disrupted the company's production in the
past, most recently in Nigeria and Indonesia. The company continues to monitor
developments closely in these and other countries in which it operates.
The earnings of Chevron's U.S. and Canadian downstream businesses strengthened
further from 2000 levels. Margins improved this year, with higher product prices
offsetting higher feedstock costs as well as the higher costs of fuel and
utilities used in refining operations. However, in this year`s third quarter,
product margins slipped somewhat - primarily on the Gulf Coast - due mainly to
high product inventories. In the Asia-Pacific region, conditions remain
depressed. Both excess supplies and weakened demand have squeezed industry
margins in this area of the world. It is uncertain how long these industry
conditions will continue.
For commodity chemical products, demand continues to be weak because of the
slowing U.S. economy, while prices are restrained by industry over-capacity and
the strong U.S. dollar. Sales margins remain weak, and no significant near-term
improvement is expected.
In the months immediately following the merger with Texaco, detailed assessments
are being conducted of operating plans and oil and gas reserve quantities of the
merged company that were not permitted during the regulatory review period.
Charges against earnings in future periods may result upon completion of these
studies.
-16-
Significant Developments
- ------------------------
Some of the operational highlights since the second quarter of this year were as
follows:
Caspian Pipeline: In October, the first tankers were loaded with crude oil from
the Caspian Pipeline Consortium (CPC) facilities near the Black Sea port of
Novorossiysk. CPC's pipeline connects the Tengiz Field in western Kazakhstan to
Novorossiysk, enabling full access to world market prices for Tengiz oil, and
greatly reduces transportation costs. CPC is owned 15 percent by Chevron.
Angola: Chevron and its partners announced the commencement of crude oil
production from the North Nemba Platform in Block 0, offshore Angola. Production
from North Nemba is expected to peak in the second quarter 2002 and average
40,000 barrels per day for the full year. Chevron is operator and owns a 39
percent interest. Also, the company, as operator of offshore Angola Block 14,
announced that crude oil production began from the deepwater Kuito Field Phase
1C development. The new phase has added more than 30,000 barrels per day of
production, bringing current daily production from the Kuito Field to
approximately 85,000 barrels of crude oil. Average daily production for Kuito in
2002 is expected to be approximately 66,000 barrels of oil. ChevronTexaco has a
31 percent interest in Block 14.
Nigeria: Chevron signed two joint venture agreements with the Nigerian National
Petroleum Corp. to begin the engineering design for Escravos Gas Project, Phase
3 and the Escravos Gas-to-Liquids Project. These major initiatives will help
eliminate the flaring of natural gas at the Nigerian producing operations and
generate additional revenue through the export of products derived from the
processed gas. Phase 3 will increase the gas processing capability to 680
million cubic feet per day. The gas-to-liquids project is expected to produce
about 34,000 barrels per day of ultra-clean synthetic fuel and naphtha for
export. The two projects are expected to be completed by late 2005.
United Kingdom: ChevronTexaco and its partners announced they would proceed with
Phase 1 development of the Clair Field, located about 50 miles west of The
Shetland Isles in the North Sea. First oil is expected in late 2004 from Phase
1, which will cost nearly $1 billion. The company has a 19 percent interest in
the Clair Field.
China/Australia: A Memorandum of Understanding was signed with a subsidiary of
the Chinese National Offshore Oil Company to explore the feasibility of that
subsidiary acquiring an equity interest in the Gorgon Area, offshore western
Australia, and developing the gas market in coastal China. ChevronTexaco owns a
combined 57 percent interest in the Gorgon project.
Bahrain: In November 2001, ChevronTexaco signed an exploration and production
sharing agreement with Bahrain. The company will explore for oil and natural gas
in eastern offshore areas of Bahrain and expects to drill the first well by the
end of 2002.
Deepwater Gulf of Mexico: Production began in late July at the Typhoon Field,
operated and 50 percent-owned by Chevron. Production is expected to average more
than 30,000 barrels of oil and 35 million cubic feet of gas per day in this
year's fourth quarter and to average approximately 29,000 barrels of
oil-equivalents in 2002. Chevron and its partners also announced the successful
Trident and Boris deepwater exploratory wells. Chevron has a 15 percent interest
in the Trident prospect and a 25 percent interest in Boris.
Dynegy: In November, ChevronTexaco announced that it had committed $2.5 billion
of new equity to Dynegy Inc. (Dynegy) in support of Dynegy's planned merger with
Enron. ChevronTexaco, which currently owns about 26 percent of Dynegy, will
immediately invest $1.5 billion and receive convertible preferred shares in
Dynegy, with an additional $1 billion to be invested in Dynegy common stock upon
the closing of the Dynegy-Enron merger. Following the closure of the merger,
which is subject to regulatory review and shareholder approvals, ChevronTexaco's
equity ownership in Dynegy will be maintained at about 26 percent. Additionally,
under the terms of its agreement with Dynegy, ChevronTexaco will be granted
warrants to purchase an additional $1.5 billion of Dynegy common stock over a
period of up to three years from completion of the merger.
Contingencies and Significant Litigation
- ----------------------------------------
Chevron, Texaco and four other oil companies ("refiners") filed suit in 1995
contesting the validity of a patent granted to Unocal Corporation ("Unocal") for
reformulated gasoline, which ChevronTexaco sells in California in certain months
of the year. In March 2000, the U. S. Court of Appeals for the Federal Circuit
upheld a September 1998 District Court decision that Unocal's patent was valid
and enforceable and assessed damages of 5.75 cents per gallon for gasoline
produced in infringement of the patent. In May 2000, the Federal Circuit Court
denied a petition for rehearing with the U.S. Court of Appeals for the Federal
Circuit filed by the refiners in this case. The refiners
-17-
petitioned the U.S. Supreme Court and in February 2001, the Supreme Court denied
the petition to review the lower court's ruling and the case was remanded to the
District Court for an accounting of all infringing gasoline produced from August
1, 1996, to September 30, 2000. The District Court granted Unocal's motion for
summary judgment requesting an accounting and denied refiners' motion to stay
the proceedings and vacate the accounting order. The refiners intend to appeal.
Additionally, in May 2001 the U.S. Patent Office granted the refiners' petition
to reexamine the validity of Unocal's patent. The Federal Trade Commission has
also announced that it is investigating whether Unocal's failure to disclose to
the California Air Resources Board that they had filed a patent application was
unfair competition, which may make Unocal's patent unenforceable.
If Unocal's patent ultimately is upheld and is enforceable, the company's
financial exposure includes royalties, plus interest, for production of gasoline
that is proven to have infringed the patent. Chevron, Texaco, as well as
Texaco's affiliates, Equilon and Motiva, have been accruing in the normal
course of business any future estimated liability for potential infringement of
the patent covered by the trial court's ruling. In 2000, Chevron and Texaco made
payments to Unocal totaling approximately $28 million for the original court
ruling, interest and fees.
Unocal has obtained additional patents for alternate formulations that could
affect a larger share of U.S. gasoline production. ChevronTexaco believes these
additional patents are invalid and unenforceable. However, if such patents are
ultimately upheld, the competitive and financial effects on the company's
refining and marketing operations, while presently indeterminable, could be
material.
Another issue involving the company is the ongoing public debate concerning the
petroleum industry's use of MTBE and its potential environmental impact through
seepage into groundwater. Along with other oil companies, the company is a party
to lawsuits and claims related to the use of the chemical MTBE in certain
oxygenated gasolines. These actions may require the company to correct or
ameliorate the alleged effects on the environment of prior release of MTBE by
the company or other parties. Additional lawsuits and claims related to the use
of MTBE may be filed in the future. Costs to the company related to these
lawsuits and claims are not currently determinable. ChevronTexaco has eliminated
the use of MTBE in gasoline it sells in certain areas.
Chevron's and Caltex's U.S. federal income tax have been settled through 1993,
while Texaco's has been settled through 1991. Chevron's California franchise tax
liabilities have been settled through 1991.
Settlement of open tax years, as well as tax issues in other countries where the
company conducts its businesses, 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.
ChevronTexaco 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 release of
chemical or petroleum substances, including MTBE, by the company or other
parties. Such contingencies may exist for various sites including, but not
limited to: Superfund sites and refineries, 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 obligations to make such expenditures
have had, or will have, any significant impact on the company's competitive
position relative to other U.S. or international petroleum or chemical concerns.
ChevronTexaco believes it has no material market or credit risk to its
operations, financial position or liquidity as a result of its commodities and
other derivatives activities. However, the results of operations and financial
position of certain equity affiliates may be affected by their business
activities involving the use of derivative instruments.
ChevronTexaco 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 commitments,
throughput agreements and take-or-pay agreements, some of which relate to
suppliers' financing arrangements.
-18-
ChevronTexaco's operations, particularly exploration and production, can be
affected by other changing economic, regulatory and political environments in
the various countries in which it operates, including the United States. 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.
For oil and gas producing operations, ownership agreements may provide for
periodic reassessments of equity interests in estimated oil and gas reserves.
These activities, individually or together, may result in gains or losses that
could be material to earnings in any given period. One such equity
redetermination process has been under way since 1996 for ChevronTexaco's
interests in four producing zones at the Naval Petroleum Reserve at Elk Hills in
California, for the time when the remaining interests in these zones were owned
by the U.S. Department of Energy (DOE). A wide range remains for a possible net
settlement amount for the four zones. ChevronTexaco currently estimates its
maximum possible net before-tax liability at less than $400 million. At the same
time, a possible maximum net amount that could be owed to ChevronTexaco is
estimated at more than $200 million. The timing of the settlement and the exact
amount within this range of estimates are uncertain.
Areas in which ChevronTexaco has significant operations include the United
States of America, Canada, Australia, the United Kingdom, Norway, Denmark,
Kuwait, Republic of Congo, Angola, Nigeria, Chad, Equatorial Guinea, Democratic
Republic of Congo, Papua New Guinea, China, Venezuela, Thailand, Argentina and
Brazil. The company's Caltex affiliates (which became consolidated operations
following the merger with Texaco) have significant operations in Indonesia,
Korea, Australia, Thailand, the Philippines, Singapore, and South Africa. The
company's Tengizchevroil affiliate operates in Kazakhstan. The company's Chevron
Phillips Chemical Company LLC affiliate manufactures and markets a wide range of
petrochemicals and plastics on a worldwide basis, with manufacturing facilities
in existence or under construction in the United States, Puerto Rico, Singapore,
China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. The company's
Dynegy affiliate has operations in the United States of America, Canada, the
United Kingdom and other European countries.
ChevronTexaco receives claims from and submits claims to customers, trading
partners, U.S. federal, state and local regulatory bodies, host governments,
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.
The company and its affiliates also 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. These activities, individually or together, may result in gains
or losses in future periods.
Review of Operations
- --------------------
Total Revenues and Other Income (revenues) for the third quarter were $11.9
billion, a 13 percent decline from $13.6 billion in last year's third quarter.
For the first nine months of 2001, total revenues were $37.2 billion, compared
with $38.6 billion in the 2000 nine months. Revenues declined primarily on lower
prices for crude oil and refined products. Natural gas prices were also sharply
lower in the third quarter, but were up on a year-to-date basis.
Third quarter 2001 total operating expenses (operating, selling, general and
administrative expenses) were $1.652 billion, excluding special items, or $113
million higher than during the 2000 third quarter. For the nine-month period,
total operating expenses, excluding special items, were $4.969 billion, compared
with $4.755 billion in last year's period.
Depreciation, depletion and amortization (DD&A) expense of $713 million in the
third quarter 2001 was $88 million lower than the 2000 quarter. For the
nine-month period, DD&A of $2.085 billion was $66 million lower than the 2000
nine months. The decrease in DD&A expense for 2001 is primarily due to the
absence of asset impairments that were recorded in the third quarter and first
nine months of 2000.
Taxes on income for the third quarter and nine months of 2001 were $791 million
and $2,954 million, respectively, compared with $1,139 million and $2,962
million for the comparable 2000 periods. The effective tax rate for the 2001
nine months was 42 percent, compared with 45 percent in last year's nine months.
The decrease in the effective
-19-
tax rate was primarily the result of a shift in international before-tax income
from countries with higher income tax rates to countries with lower tax rates.
Partially offsetting this decrease were higher state taxes.
Foreign currency gains increased third quarter 2001 net income by $26 million
compared with $75 million in the year-ago quarter. For the nine-month periods,
foreign currency gains were $69 million in 2001, compared with $150 million last
year.
The following table details the company's after-tax net income by major
operating area:
NET INCOME BY MAJOR OPERATING AREA
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 330 $ 522 $1,496 $1,275
International 502 718 1,748 1,951
- ----------------------------------------------------------------------------------------------------------
Total Exploration and Production 832 1,240 3,244 3,226
- ----------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 317 105 785 265
International 72 47 268 76
- ----------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 389 152 1,053 341
- ----------------------------------------------------------------------------------------------------------
Chemicals (48) 24 (57) 143
All Other * (5) 115 (148) (19)
- ----------------------------------------------------------------------------------------------------------
Net Income $1,168 $1,531 $4,092 $3,691
==========================================================================================================
* Includes coal-mining operations, the company's ownership in Dynegy Inc.,
worldwide cash management and debt financing activities, corporate
administrative costs, marketable securities, corporate center costs,
insurance operations and real estate activities and certain e-business
efforts.
U.S. Exploration and Production
- -------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------
Millions of Dollars 2001 2000 2001 2000
- ---------------------------------------------------------------------------
Operating Earnings $281 $572 $1,447 $1,325
Special Items 49 (50) 49 (50)
- ---------------------------------------------------------------------------
Segment Income $330 $522 $1,496 $1,275
- ---------------------------------------------------------------------------
U.S. exploration and production operating earnings of $281 million declined 51
percent in the 2001 third quarter - primarily the result of significantly lower
crude oil and natural gas realizations. Nine month operating earnings increased
$122 million to $1.447 billion. The special gain of $49 million in the third
quarter and nine months 2001 periods resulted from the sale of the company's
interest in Shenandoah Energy Inc., an equity affiliate with producing
properties in Utah. Special items for the third quarter and year-to-date 2000
consisted of charges for the impairment of Mobile Blocks 861 and 916 in the
Norphlet Trend and the Gemini development located in Mississippi Canyon Block
292.
The third quarter average natural gas realization was $2.76 per thousand cubic
feet, compared with $4.42 in the year-ago period. The average crude oil
realization of $23.22 per barrel declined 18 percent from $28.36 per barrel. On
a year-to-date basis, crude oil realization in 2001 was $23.86 per barrel, about
11 percent lower than the $26.67 per barrel obtained in 2000. Natural gas prices
were $5.35 per thousand cubic feet in the nine-month period, 57 percent higher
than the $3.41 per thousand cubic feet obtained last year. Natural gas prices
had fallen from highs near $10 per thousand cubic feet earlier in the year.
Third quarter net natural gas production averaged 1.444 billion cubic feet per
day, down 11 percent from the 2000 period. Net liquids production was down 3
percent to 309,000 barrels per day. In last year's third quarter, combined
liquids and natural gas production was the highest during the year - the result
of an intensive program of well workovers and development drilling projects,
especially in the Gulf of Mexico, to capture the benefit of higher prices. Also
contributing to the decrease in production in the 2001 quarter were reduced rig
activity, the August
-20-
impacts of Tropical Storm Barry and of an incident with another company's
pipeline that transports Chevron's production. On a year-to-date basis, natural
gas production was down about 1 percent to 1.53 billion cubic feet per day this
year. Liquids production decreased about 2 percent to 307,000 barrels per day.
International Exploration and Production
- ----------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Operating Earnings* $502 $718 $1,748 $1,951
Special Items - - - -
- ----------------------------------------------------------------------------------------------------------
Segment Income* $502 $718 $1,748 $1,951
==========================================================================================================
* Includes Foreign Currency Gains $ 25 $ 42 $ 46 $ 91
International exploration and production earnings declined $216 million to $502
million in the third quarter of 2001 and $203 million to $1.748 billion in the
nine months, primarily due to lower crude oil prices, offset partially by higher
oil-equivalent production. Net liquids production increased 4 percent versus the
2000 quarter to 853,000 barrels per day and 3 percent, compared with nine months
2000 to 863,000 barrels per day. Production increases in Kazakhstan, Argentina
and Nigeria offset declines in Angola and Congo.
Natural gas production increased 3 percent to 917 million cubic feet per day,
compared with last year's quarter. Increases in natural gas production occurred
primarily in Australia, Kazakhstan and Canada. These increases were partially
offset by decreases in production from Nigeria and the United Kingdom. On a
year-to-date basis, 2001 natural gas production was 979 million cubic feet per
day, up 8 percent from 2000 levels on higher production rates in Canada and
Kazakhstan. On an oil-equivalent basis, production rose 4 percent in the 2001
third quarter and year to date.
For the third quarter 2001, the company's average liquids realization of $23.80
per barrel declined 17 percent from $28.83 in the year-ago quarter. The
company's average natural gas realization of $2.05 per thousand cubic feet fell
13 percent. On a year-to-date basis, crude oil realizations in 2001 were $24.76
per barrel, off 8 percent from 2000; however, natural gas prices were $2.61 per
thousand cubic feet, up 15 percent from last year.
Results for the 2001 third quarter and nine months included net foreign currency
gains of $25 million and $46 million, respectively, compared with gains of $42
million and $91 million in the corresponding periods last year. The fluctuations
in both years primarily reflect favorable currency swings of the U.S. dollar
relative to the Australian and Canadian currencies.
U.S. Refining, Marketing and Transportation
- -------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Operating Earnings $317 $260 $785 $482
Special Items - (155) - (217)
- ----------------------------------------------------------------------------------------------------------
Segment Income $317 $105 $785 $265
==========================================================================================================
Third quarter operating earnings of $317 million improved 22 percent from the
year-ago quarter, and year-to-date operating earnings increased 63 percent from
2000. Higher refined products margins in the western United States were
complemented by higher sales volumes in all marketing areas. The margin
improvement resulted primarily from lower costs for refinery feedstocks -
primarily crude oil - which declined at a faster rate than sales realizations.
Operating earnings for the 2000 quarter included a $34 million benefit from
business interruption insurance related to a 1999 refinery incident.
Special items for the third quarter 2000 included charges of $125 million for
environmental remediation at the company's U.S. refining and marketing sites,
most of which are no longer owned or operated by the company, and a $30 million
charge for the impairment of a regulated pipeline system. In the first nine
months of 2000, special charges reduced net income $217 million. In addition to
the third quarter special items, a charge of $62 million for a litigation matter
reduced earnings in the 2000 nine months.
-21-
The company's average refined product sales realization decreased 14 percent
from the year-ago quarter to $35.41 per barrel. The company's average refined
product price was $37.74 per barrel in the first nine months of 2001, compared
with $38.47 in the 2000 nine months.
Refined product sales volumes increased 6 percent to 1,479,000 barrels per day
in the third quarter, including branded gasoline sales that increased about 2
percent to 569,000 barrels per day. Nine-month sales volumes increased 5 percent
to 1,392,000 barrels per day. Sales volumes for most products, except jet fuel
were higher than the prior-year periods.
International Refining, Marketing and Transportation
- ----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Operating Earnings* $72 $47 $268 $76
Special Items - - - -
- ----------------------------------------------------------------------------------------------------------
Segment Income* $72 $47 $268 $76
==========================================================================================================
* Includes Foreign Currency Gains $ 9 $36 $ 37 $70
International refining, marketing and transportation operating earnings are
composed primarily of Chevron's interest in Caltex Corporation and its
affiliates, international supply and trading activities, Canadian refining and
marketing and international shipping operations. Earnings for these businesses
of $72 million in this year's third quarter and $268 million for the nine months
increased significantly from $47 million and $76 million, respectively, for the
same periods last year. The increase was primarily from improved margins in the
Canadian and Asia-Pacific areas and lower operating expenses in the shipping
business.
Chevron's share of Caltex earnings, adjusted to exclude foreign currency
effects, was approximately break-even in the third quarter, compared with losses
of $34 million in the year-ago period. Such adjusted Caltex earnings for the
first nine months of 2001 were $6 million, compared with losses of $67 million
in 2000. The Asia-Pacific market continues to suffer from excess supply
conditions for refined products, limiting the company's ability to raise prices
to recover costs and improve margins. In the 2000 period, a rapid rise in crude
oil costs could not be immediately recovered in the marketplace due to
competitive pressures.
Chevron's total international product sales volumes increased 11 percent from
the 2000 third quarter to 845,000 barrels per day and 9 percent to 824,000
barrels per day for the nine months. The company's share of an affiliate's sales
of residual fuels and marine lubes accounted for most of the increase in both
periods.
Chemicals
- ---------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ---------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Operating (Loss) Earnings* $ (5) $35 $(14) $154
Special Items (43) (11) (43) (11)
- ----------------------------------------------------------------------------------------------------------
Segment (Loss) Income* $(48) $24 $(57) $143
==========================================================================================================
* Includes Foreign Currency Gains (Losses) $ 2 $(2) $ (3) $ (4)
Chemical operations incurred operating losses of $5 million in the third quarter
of 2001 and $14 million for nine months. In 2000 these operations recorded
earnings of $35 million and $154 million, respectively, in the corresponding
periods. The deterioration in performance was due to lower earnings by the
company's 50 percent-owned Chevron Phillips Chemical Company LLC affiliate
(CPChem), which was formed on July 1, 2000. Product sales margins and sales
volumes for CPChem deteriorated between periods, reflecting the general economic
downturn. The special charges in the 2001 periods were associated with the
write-down of assets and tax adjustments for CPChem's manufacturing facilities
in Puerto Rico, while the 2000 periods included special charges of $11 million
for environmental provisions.
-22-
All Other
- ---------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ---------------------
Millions of Dollars 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Net Operating Earnings (Charges)* $ 32 $ 15 $ (51) $ (94)
Special Items (37) 100 (97) 75
- ----------------------------------------------------------------------------------------------------------
Net (Loss) Income* $ (5) $ 115 $(148) $ (19)
==========================================================================================================
* Includes Foreign Currency Losses $ (10) $ (1) $ (11) $ (7)
All Other activities include coal-mining operations, the company's ownership
interest in Dynegy Inc., worldwide cash management and debt financing
activities, corporate administrative costs, insurance operations, real estate
activities and certain e-businesses.
Result for this year's third quarter and nine months included special charges of
$37 million and $66 million, respectively, for expenses associated with the
pending merger with Texaco. In addition, results for the 2001 nine months also
included a special charge of $31 million for a prior-year tax adjustment. The
net benefit from special items in the third quarter of 2000 consisted of $99
million of gains from the sale of marketable securities and $27 million from the
equity accounting effect of common stock transactions by Dynegy. These items
were partially offset by an unfavorable prior-year's income tax adjustment of
$26 million. Special charges for the 2000 nine months included an additional $25
million unfavorable prior-year's income tax adjustment in addition to the third
quarter items.
Chevron's share of Dynegy operating earnings increased by $15 million to $72
million in this year's third quarter. Dynegy contributed $141 million to company
earnings in the first nine months of 2001 compared with $90 million in the 2000
period. The increases in 2001 earnings were primarily due to strong natural gas
and power marketing revenues.
The company's coal business operated at about break-even in the third quarter of
2001, compared with an operating loss of $3 million in last year's third
quarter. Nine-month operating earnings were $13 million in 2001, compared with
an operating loss of $2 million last year. Operating earnings improved from the
2000 periods primarily due lower maintenance costs and improved geological
conditions this year and the negative effects last year of the United Mine
Workers of America work stoppages at two of the company's mines.
For activities other than coal operations and Dynegy, net operating charges were
about flat with the 2000 third quarter. For the nine-month period, net charges
were higher as lower interest expense was more than offset by higher employee
benefit costs and various other corporate charges.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $3.417 billion at September 30, 2001, an
increase of $1.521 billion from year end 2000. Cash provided by operating
activities was $6.835 billion in the first nine months of 2001, up $283 million
from the corresponding 2000 period. Capital expenditures and dividend payments
to stockholders totaled $4.471 billion in the first nine months of 2001. Cash
provided by operating activities in the 2001 nine months benefited from higher
natural gas prices and higher oil-equivalent production volumes.
Total debt and capital lease obligations were $6.584 billion at September 30,
2001, an increase of $352 million from year-end 2000. A net increase of $938
million in short-term debt (excluding the current portion of long-term debt due
within 12 months) was partially offset by a decrease of about $586 million in
long-term debt (including the current portion of long-term debt due within 12
months). These transactions included a non-scheduled redemption of $349 million
of 7.45 percent notes due 2004, a non-cash reduction of $100 million of ESOP
debt, and a scheduled repayment of $90 million of other long-term debt. The
company's debt ratio (total debt to total-debt-plus-equity) was 22.3 percent at
September 30, 2001, down from 23.8 percent at year-end 2000. The company
continually monitors its spending levels, market conditions and related interest
rates to maintain what it perceives to be reasonable debt levels.
In order to allow Chevron to maintain active relationships with institutional
investors in its commercial paper, the company continues a program instituted in
2000 under which it sells commercial paper and reinvests the borrowed funds in
money market instruments with similar terms. As a result of this program, net
commercial paper borrowings
-23-
and net purchases of short-term investments in the first nine months of 2001
rose $665 million from year-end 2000 levels.
In the second quarter 2001, Chevron loaned $418 million to Caltex Corporation,
and its subsidiaries, for the purpose of replacing some of Caltex's existing
bank financing. These loans bear interest at market-based floating rates.
Following the merger of Chevron and Texaco, these arrangements revert to
intercompany borrowings.
The company benefits from lower interest rates available on short-term debt;
however, Chevron's proportionately large amount of short-term debt keeps its
ratio of current assets to current liabilities at relatively low levels. The
current ratio was 1.22 at September 30, 2001, up from 1.07 at December 31, 2000.
The company's short-term debt, consisting primarily of commercial paper and the
current portion of long-term debt, totaled $4.719 billion at September 30, 2001.
Short-term debt of $3.2 billion was reclassified to long-term debt because
settlement of these obligations is not expected to require the use of working
capital during the next twelve months. The company has the intent and the
ability, as evidenced by committed credit arrangements, to refinance its
short-term debt on a long-term basis. At September 30, 2001, Chevron had $3.2
billion in committed credit facilities with various major banks, $2.725 billion
of which had termination dates beyond one year and $475 million was in evergreen
credit facilities. These facilities support commercial paper borrowing and also
can be used for general requirements. The company's practice has been to
continually refinance its commercial paper, maintaining levels it believes to be
appropriate. No borrowings were outstanding under these facilities at September
30, 2001.
The company's future debt level is dependent primarily on its results of
operations, capital-spending program and cash that may be generated from asset
dispositions following the merger with Texaco. Under the terms of an agreement
with the U.S. Federal Trade Commission, the company is required to divest a
number of assets, the most significant of which is its investments in the U.S.
refining, marketing and transportation affiliates, Equilon and Motiva. These
investments were placed in trust immediately before the closing of the merger.
In October 2001, Texaco executed a Memorandum of Understanding with Shell and
Saudi Refining Inc. for the sale of these investments for cash proceeds of $2.1
billion plus a deferred dividend distribution of $50 million from Motiva. The
company believes it has substantial borrowing capacity to meet unanticipated
cash requirements. ChevronTexaco's senior debt is rated AA by Standard and
Poor's Corporation and Aa2 by Moody's Investor Service, except for remaining
Texaco senior debt rated Aa3. ChevronTexaco's U.S. commercial paper is rated
A-1+ by Standard and Poor's and Prime 1 by Moody's, and the company's Canadian
commercial paper is rated R-1 (middle) by Dominion Bond Rating Service. All of
these ratings denote high quality, investment-grade securities.
In December 1997, Chevron's Board of Directors approved the repurchase of up to
$2 billion of the company's outstanding common stock for use in its employee
stock option programs. The program was formally rescinded in September 2001, at
which time 23.3 million common shares had been acquired at a cost of $1.897
billion.
On October 31, 2001, ChevronTexaco declared a quarterly dividend of 70 cents per
share, an increase of 5 cents per share over the preceding quarter.
In November, ChevronTexaco announced that it had committed $2.5 billion of new
equity to Dynegy in support of Dynegy's planned merger with Enron.
ChevronTexaco, which currently owns about 26 percent of Dynegy, will immediately
invest $1.5 billion and receive convertible preferred shares in Dynegy, with an
additional $1 billion to be invested in Dynegy common stock upon the closing of
the Dynegy-Enron merger. Additionally, under the terms of its agreement with
Dynegy, ChevronTexaco will be granted warrants to purchase an additional $1.5
billion of Dynegy common stock over a period of up to three years from
completion of the merger.
Worldwide capital and exploratory expenditures, including the company's share of
affiliates' expenditures, were $4.5 billion for the first nine months of 2001,
compared with $3.7 billion in the 2000 period. Expenditures for worldwide
exploration and production activities represented 69 percent of the total,
reflecting the company's continued emphasis on growing oil and gas production.
In 2001, expenditures included the acquisition of an additional 5 percent
interest in the Tengizchevroil affiliate. Expenditures in 2000 included an
additional investment of about $300 million in Dynegy Inc.
-24-
CAPITAL AND EXPLORATORY EXPENDITURES BY MAJOR OPERATING AREA
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ---------------------
Millions of Dollars 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
United States
- -------------
Exploration and Production $ 295 $ 372 $1,033 $ 934
Refining, Marketing and Transportation 125 128 325 303
Chemicals 36 3 102 68
All Other 58 74 516 557
------------------------------------------------
Total United States 514 577 1,976 1,862
------------------------------------------------
International
- -------------
Exploration and Production 493 511 2,082 1,409
Refining, Marketing and Transportation 167 133 429 369
Chemicals 6 13 18 42
------------------------------------------------
Total International 666 657 2,529 1,820
------------------------------------------------
Worldwide $1,180 $1,234 $4,505 $3,682
================================================
SELECTED OPERATING DATA (1),(2)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ --------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
U.S. Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 309 319 307 312
Net Natural Gas Production (MMCFPD) 1,444 1,615 1,525 1,546
Sales of Natural Gas (MMCFPD) 3,446 3,535 3,525 3,407
Sales of Natural Gas Liquids (MBPD) 171 180 173 151
Revenue from Net Production
Crude Oil ($/Bbl.) $ 23.22 $ 28.36 $ 23.86 $ 26.67
Natural Gas ($/MCF) $ 2.76 $ 4.42 $ 5.35 $ 3.41
International Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 853 822 863 836
Net Natural Gas Production (MMCFPD) 917 888 979 906
Sales of Natural Gas (MMCFPD) 2,033 1,770 1,833 1,873
Sales of Natural Gas Liquids (MBPD) 72 69 68 66
Revenue from Liftings
Liquids ($/Bbl.) $ 23.80 $ 28.83 $ 24.76 $ 26.83
Natural Gas ($/MCF) $ 2.05 $ 2.36 $ 2.61 $ 2.26
Other Produced Volumes (MBPD)(3) 103 124 106 126
U.S. Refining, Marketing and Transportation
Sales of Gasoline (MBPD) (4) 764 685 717 687
Sales of Other Refined Products (MBPD) 715 711 675 644
Refinery Input (MBPD) 1,029 1,020 978 953
Average Refined Product Sales Price ($/Bbl.) $ 35.41 $ 41.03 $ 37.74 $ 38.47
International Refining, Marketing and Transportation
Sales of Refined Products (MBPD) (5) 845 763 824 758
Refinery Input (MBPD) 422 413 415 409
- ----------------------------------------------------------------------------------------------------------
(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, and other operating service agreements.
(4) Includes branded and unbranded gasoline.
(5) 2000 amounts restated
-25-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A. Chevron Pipe Line Company - Contra Costa County Gasoline Release
The Chevron Pipe Line Company has agreed to pay a $100,000 civil penalty with
respect to an October 2000 gasoline pipeline release in Contra Costa County,
California. Cleanup operations were initiated immediately by the Company with
oversight by the California Department of Fish and Game. The civil penalty was
imposed pursuant to the California Government Code, with $25,000 being paid to
the Contra Costa District Attorney and $75,000 being paid to the State
Environmental Enhancement Fund.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of Chevron Corporation
stockholders at a special meeting on October 9, 2001.
Voters approved the issuance of common stock to Texaco Inc. stockholders at a
ratio of 0.77 shares of ChevronTexaco common stock for each share of Texaco
common stock, by a vote of 442,294,614 votes (98.9 percent) for and 4,754,183
(1.1 percent) against. There were 4,926,109 abstentions.
Voters approved the amendment of the Restated Certificate of Incorporation to
change the name of Chevron Corporation to "ChevronTexaco Corporation," by a vote
of 438,925,583 votes (97.9 percent) for and 9,456,781 (2.1 percent) against.
There were 3,594,154 abstentions.
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
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K was filed by Chevron on September 10,
2001. In this report, Chevron filed a joint press release issued by
Chevron and Texaco announcing that the Federal Trade Commission had
approved a consent order relating to their proposed merger,
announced by both companies on October 16, 2000.
(2) A Current Report on Form 8-K was filed by Chevron on October 1,
2001. In this report, Chevron announced that its Board of Directors
had terminated a $2 billion common stock repurchase program it
authorized in December 1997, thereby canceling the unused program
acquisition authority of $103 million.
(3) A Current Report on Form 8-K was filed by Chevron on October 9,
2001. In this report, Chevron announced that on October 9, 2001, a
wholly owned subsidiary of Chevron Corporation ("Chevron"), merged
with and into Texaco Inc., a Delaware corporation ("Texaco"),
pursuant to an Agreement and Plan of Merger, dated as of October
15, 2000, as amended, by and among Chevron, Texaco and Keepep Inc.,
a Delaware corporation ("Keepep"). As a result of the merger,
Texaco became a wholly owned subsidiary of Chevron. In addition,
Chevron changed its name to "ChevronTexaco Corporation" in
connection with the merger.
(4) An amended Current Report on Form 8-K was filed by ChevronTexaco on
October 19, 2001. In this report, ChevronTexaco amended the Current
Report on Form 8-K previously filed on October, 9, 2001,
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to include historic financial statements of Texaco Inc. and
unaudited condensed pro forma combined financial statements of
ChevronTexaco Corporation.
(5) A Current Report on Form 8-K was filed by ChevronTexaco on November
1, 2001. In this report, ChevronTexaco filed a description of
ChevronTexaco common stock and preferred stock purchase rights.
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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.
CHEVRONTEXACO CORPORATION
-----------------------------------
(Registrant)
Date November 13, 2001 By /s/ S.J. Crowe
-------------------------- -----------------------------------
S. J. Crowe, Vice President and Comptroller
(Principal Accounting Officer and
Duly Authorized Officer)
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CHEVRON CORPORATION - TOTAL ENTERPRISE BASIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Nine Months
Ended September 30, Year Ended December 31,
------------------- -----------------------------------------------------
2001 2000 1999 1998 1997 1996
---- --------- --------- --------- --------- ---------
Net Income $4,092 $5,185 $2,070 $1,339 $3,256 $2,607
Income Tax Expense 2,954 4,085 1,578 495 2,246 2,133
Distributions (Less Than) Greater Than
Equity in Earnings of Affiliates (205) (154) (258) 25 (353) 83
Minority Interest 4 6 4 7 11 4
Previously Capitalized Interest
Charged to Earnings During Period 30 48 59 35 28 24
Interest and Debt Expense 228 460 472 405 312 364
Interest Portion of Rentals* 189 246 160 172 151 143
--------- --------- --------- --------- --------- ---------
Earnings Before Provision for
Taxes And Fixed Charges $7,292 $9,876 $4,085 $2,478 $5,651 $5,358
========= ========= ========= ========= ========= =========
Interest and Debt Expense $ 228 $ 460 $ 472 $ 405 $ 312 $ 364
Interest Portion of Rentals* 189 246 160 172 151 143
Capitalized Interest 44 32 9 39 82 108
--------- --------- --------- --------- --------- ---------
Total Fixed Charges $ 461 $ 738 $ 641 $ 616 $ 545 $ 615
========= ========= ========= ========= ========= =========
Ratio Of Earnings To Fixed Charges 15.82 13.38 6.37 4.02 10.37 8.71
* Calculated as one-third of rentals.