================================================================================
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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-368-2
Chevron Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-0890210
----------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
575 Market Street, San Francisco, California 94105
-------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 894-7700
NONE
------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- --------
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of September 30, 1999
- ---------------------------------- ------------------------------------
Common stock, $1.50 par value 656,265,612
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INDEX
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, 1999 and 1998 2
Consolidated Statement of Comprehensive Income
for the three months and nine months ended
September 30, 1999 and 1998 2
Consolidated Balance Sheet at September 30, 1999
and December 31, 1998 3
Consolidated Statement of Cash Flows for the
nine months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Listing of Exhibits and Reports on Form 8-K 28-29
Signature 30
Exhibit: Computation of Ratio of Earnings to Fixed Charges 31
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR
THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report on Form 10-Q contains forward-looking statements relating
to Chevron's operations that are based on management's current expectations,
estimates and projections about the petroleum and chemicals industries. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements.
Among the factors that could cause actual results to differ materially are crude
oil and natural gas prices; refining margins and marketing margins; chemicals
prices and competitive conditions affecting supply and demand for the company's
aromatics, olefins and additives products; potential failure to achieve, and
potential delays in achieving, expected production from existing and future oil
and gas development projects; potential disruption or interruption of the
company's production, manufacturing or transportation facilities due to
accidents or political events; potential disruption to the company's operations
due to untimely or incomplete resolution of Year 2000 issues by the company and
other entities with which it has material relationships; potential liability for
remedial actions under existing or future environmental regulations; and
potential liability resulting from pending or future litigation. In addition,
such statements could be affected by general domestic and international economic
and political conditions.
-1-
PART I. FINANCIAL INFORMATION
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
Millions of Dollars, Except Per-Share Amounts 1999 1998 1999 1998(1)
- ---------------------------------------------------------------------------------------------------------------
Revenues
Sales and other operating revenues* $ 9,965 $ 7,561 $24,837 $22,779
Income from equity affiliates 127 13 404 294
Other income 85 104 366 202
--------------------------------------------------------
Total Revenues 10,177 7,678 25,607 23,275
--------------------------------------------------------
Costs and Other Deductions
Purchased crude oil and products 5,327 3,494 12,394 10,678
Operating expenses 1,117 1,113 3,721 3,674
Selling, general and administrative expenses 357 367 1,203 896
Exploration expenses 205 126 389 361
Depreciation, depletion and amortization 767 563 1,966 1,674
Taxes other than on income* 1,181 1,145 3,402 3,296
Interest and debt expense 116 103 334 296
--------------------------------------------------------
Total Costs and Other Deductions 9,070 6,911 23,409 20,875
--------------------------------------------------------
Income Before Income Tax Expense 1,107 767 2,198 2,400
Income Tax Expense 525 306 937 855
--------------------------------------------------------
Net Income $ 582 $ 461 $ 1,261 $ 1,545
========================================================
Per Share of Common Stock:
Net Income - Basic $ 0.88 $ 0.70 $ 1.92 $ 2.36
- Diluted $ 0.88 $ 0.70 $ 1.91 $ 2.35
Dividends $ 0.61 $ 0.61 $ 1.83 $ 1.83
Weighted Average Number of
Shares Outstanding (000s) - Basic 657,190 655,033 656,268 655,122
- Diluted 660,649 657,186 659,403 657,359
* Includes consumer excise taxes. $ 1,023 $ 973 $ 2,921 $ 2,813
<FN>
(1) Restated for accounting changes effective January 1, 1998, the net
effect of which was immaterial
</FN>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
Millions of Dollars, Except Per-Share Amounts 1999 1998 1999 1998(1)
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 582 $ 461 $ 1,261 $ 1,545
Currency translation adjustment (30) - (41) (1)
Unrealized holding (loss)gain on securities (4) 7 (14) 6
Minimum pension liability adjustment - - (11) (16)
--------------------------------------------------------
Other Comprehensive (Loss) Income, net of tax (34) 7 (66) (11)
--------------------------------------------------------
Comprehensive Income $ 548 $ 468 $ 1,195 $ 1,534
========================================================
<FN>
(1) Restated for accounting changes effective January 1, 1998, the net
effect of which was immaterial
See accompanying notes to consolidated financial statements.
</FN>
-2-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
1999 December 31,
Millions of Dollars (Unaudited) 1998
- --------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 703 $ 569
Marketable securities 762 844
Accounts and notes receivable 3,342 2,813
Inventories:
Crude oil and petroleum products 641 600
Chemicals 543 559
Materials, supplies and other 288 296
----------------------------------------
1,472 1,455
Prepaid expenses and other current assets 1,056 616
----------------------------------------
Total Current Assets 7,335 6,297
Long-term receivables 860 872
Investments and advances 5,105 4,604
Properties, plant and equipment, at cost 54,249 51,337
Less: accumulated depreciation, depletion
and amortization 28,558 27,608
----------------------------------------
25,691 23,729
Deferred charges and other assets 1,162 1,038
----------------------------------------
Total Assets $40,153 $36,540
========================================
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 3,460 $ 3,165
Accounts payable 2,790 2,170
Accrued liabilities 2,148 1,202
Federal and other taxes on income 968 226
Other taxes payable 475 403
----------------------------------------
Total Current Liabilities 9,841 7,166
Long-term debt 4,585 4,128
Capital lease obligations 272 265
Deferred credits and other non-current obligations 1,728 2,560
Deferred income taxes 4,621 3,645
Reserves for employee benefit plans 1,786 1,742
----------------------------------------
Total Liabilities 22,833 19,506
----------------------------------------
Preferred stock (authorized 100,000,000
shares, $1.00 par value, none issued) - -
Common stock (authorized 1,000,000,000 shares,
$1.50 par value, 712,487,068 shares issued) 1,069 1,069
Capital in excess of par value 2,214 2,097
Deferred compensation (646) (691)
Accumulated other comprehensive (loss)income (156) (90)
Retained earnings 17,016 16,942
Treasury stock, at cost (56,221,456
and 59,460,666 shares at September 30, 1999
and December 31, 1998, respectively) (2,177) (2,293)
----------------------------------------
Total Stockholders' Equity 17,320 17,034
----------------------------------------
Total Liabilities and
Stockholders' Equity $40,153 $36,540
========================================
- --------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-3-
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
Millions of Dollars 1999 1998(1)
- -------------------------------------------------------------------------------------------
Operating Activities
Net income $ 1,261 $ 1,545
Adjustments
Depreciation, depletion and amortization 1,966 1,674
Dry hole expense related to prior years' expenditures 103 38
Distributions less than income from equity affiliates (1) (244) (120)
Net before-tax (gains) losses on asset retirements and sales (300) 54
Net foreign exchange losses (gains) 37 (23)
Deferred income tax provision (120) 377
Net decrease (increase) in operating working capital 1,698 (312)
Other, net (767) (153)
-------------------------
Net Cash Provided by Operating Activities 3,634 3,080
-------------------------
Investing Activities
Capital expenditures (3,489) (2,779)
Proceeds from asset sales 583 210
Other investing cash flows, net 40 (87)
Net sales of marketable securities 72 47
-------------------------
Net Cash Used for Investing Activities (2,794) (2,609)
-------------------------
Financing Activities
Net borrowings of short-term obligations 127 1,339
Proceeds from issuance of long-term debt 702 176
Repayments of long-term debt and other financing obligations (443) (353)
Cash dividends paid (1,199) (1,198)
Net sale (purchase) of treasury shares 105 (298)
-------------------------
Net Cash Used for Financing Activities (708) (334)
-------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 2 -
-------------------------
Net Change in Cash and Cash Equivalents 134 137
Cash and Cash Equivalents at January 1 569 1,015
-------------------------
Cash and Cash Equivalents at September 30 $ 703 $ 1,152
=========================
<FN>
(1) Restated for accounting changes effective January 1, 1998, the net
effect of which was immaterial. Certain other 1998 amounts have been
reclassified to conform to the 1999 presentation.
See accompanying notes to consolidated financial statements.
</FN>
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of Chevron Corporation and
its subsidiaries (the company) have not been audited by independent accountants,
except for the balance sheet at December 31, 1998. In the opinion of the
company's management, the interim data include all adjustments necessary for a
fair statement of the results for the interim periods. These adjustments were of
a normal recurring nature, except for the special items described in Note 2, and
the material reclassification described in Note 3.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
company's 1998 Annual Report on Form 10-K.
The results for the three- and nine-month periods ended September 30, 1999, are
not necessarily indicative of future financial results.
Note 2. Net Income
Net income for the third quarter 1999 included net charges of $120 million for
special items, compared with net benefits of $75 million in the 1998 third
quarter. The 1999 third quarter included charges of $79 million for asset
write-downs; $31 million for the company's share of a loss on the sale of an
investment by Caltex, a 50 percent-owned affiliate; and $10 million for net
environmental remediation provisions.
Net income for the first nine months of 1999 included net charges of $206
million from special items, compared with net benefits of $103 million in the
comparable 1998 period. In addition to the third quarter special charges of $120
million noted above, the nine-month results included special charges of $146
million for previously announced staff reductions and other restructuring costs,
$86 million for net environmental remediation provisions, $43 million for asset
write-offs and $23 million for a regulatory matter. Partially offsetting these
charges were $152 million from gains on asset dispositions and $60 million from
favorable prior-year tax adjustments.
Foreign currency losses of $7 million and $26 million were included in third
quarter net income in 1999 and 1998, respectively. For the nine-month periods,
foreign currency losses were $48 million in 1999, compared with gains of $24
million in 1998.
Note 3. Information Relating to the Statement of Cash Flows
The "Net decrease (increase) in operating working capital" is composed of the
following:
Nine Months Ended
September 30,
--------------------------
Millions of Dollars 1999 1998
- ------------------------------------------------------------------------------------------
(Increase) Decrease in accounts and notes receivable $ (475) $ 331
Decrease in inventories 2 5
Increase in prepaid expenses and other current assets (143) (100)
Increase (Decrease) in accounts payable and accrued liabilities 1,532 (906)
Increase in income and other taxes payable 782 358
- ------------------------------------------------------------------------------------------
Net decrease (increase) in operating working capital $ 1,698 $ (312)
- ------------------------------------------------------------------------------------------
In June 1999, the company reclassified a reserve of approximately $1 billion
established for the Cities Service litigation from "Deferred credits and other
non-current obligations" to "Accrued liabilities." The remaining 1999 increase
in "Accounts payable and accrued liabilities" and the 1999 increase in "Accounts
and notes receivable" were largely due to higher 1999 prices for crude oil and
refined products. The 1998 decreases in "Accounts payable and accrued
liabilities" and "Accounts and notes receivable" were largely related to lower
1998 prices for crude oil and refined products.
-5-
"Net Cash Provided by Operating Activities" includes the following cash payments
for interest on debt and for income taxes:
Nine Months Ended
September 30,
-------------------------
Millions of Dollars 1999 1998
- -----------------------------------------------------------------------------------------
Interest paid on debt (net of capitalized interest) $ 333 $ 310
Income taxes paid $ 321 $ 500
- -----------------------------------------------------------------------------------------
The "Net sales of marketable securities" consists of the following gross
amounts:
Nine Months Ended
September 30,
-------------------------
Millions of Dollars 1999 1998
- -----------------------------------------------------------------------
Marketable securities purchased $(2,230) $(1,802)
Marketable securities sold 2,302 1,849
- -----------------------------------------------------------------------
Net sales of marketable securities $ 72 $ 47
- -----------------------------------------------------------------------
Included in "Proceeds from issuance of long-term debt" of $702 million are cash
proceeds of $620 million that the company received from its Employee Stock
Ownership Plan (ESOP) in exchange for the assumption of $620 million of existing
ESOP debt in July 1999. This transaction was recorded as an increase in cash and
a reduction in "Deferred Compensation."
The Consolidated Statement of Cash Flows excludes the following non-cash
transactions:
The Rutherford-Moran Oil Corporation and another interest in Block B 8/32
offshore Thailand were acquired in March 1999. The consideration for this
acquisition included 1.1 million shares of the company's treasury stock valued
at $91 million.
Concurrent with the ESOP transaction described above, the ESOP borrowed $620
million of fixed-rate debt in July 1999, guaranteed by Chevron Corporation, to
refinance the debt assumed by Chevron. This was recorded by the company as an
increase in its debt outstanding and in "Deferred compensation."
The company's ESOP repaid $70 million and $60 million of matured debt guaranteed
by Chevron Corporation in January of 1999 and 1998, respectively. These payments
were recorded by the company as a reduction in its debt outstanding and in
"Deferred compensation." In June 1999, the ESOP borrowed an additional $25
million, which is guaranteed by Chevron Corporation. This was recorded by the
company as an increase in its debt outstanding and in "Deferred compensation."
Note 4. Operating Segments and Geographic Data
Chevron manages its exploration and production; refining, marketing and
transportation; and chemicals businesses separately. The company's primary
country of operation is the United States, its country of domicile. Activities
in no other country meet the materiality requirements for separate disclosure.
-6-
Sales and other operating revenues by segments, including internal transfers,
for the three- and nine-month periods ended September 30, 1999 and 1998, are
presented in the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
Millions of Dollars 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 1,147 $ 751 $ 2,610 $ 2,484
International 1,853 794 4,234 3,134
- ----------------------------------------------------------------------------------------------------
3,000 1,545 6,844 5,618
Intersegment Elimination - United States (577) (362) (1,299) (1,148)
Intersegment Elimination - International (879) (201) (1,967) (1,239)
- ----------------------------------------------------------------------------------------------------
Total Exploration and Production 1,544 982 3,578 3,231
- ----------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 6,071 4,524 15,097 13,369
International 1,454 1,234 3,616 3,733
- ----------------------------------------------------------------------------------------------------
7,525 5,758 18,713 17,102
Intersegment Elimination - United States (107) (56) (255) (177)
Intersegment Elimination - International (3) (4) (11) (13)
- ----------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 7,415 5,698 18,447 16,912
- ----------------------------------------------------------------------------------------------------
Chemicals
United States 773 648 2,120 1,988
International 195 150 563 435
- ----------------------------------------------------------------------------------------------------
968 798 2,683 2,423
Intersegment Elimination - United States (45) (32) (125) (89)
Intersegment Elimination - International (1) - (1) -
- ----------------------------------------------------------------------------------------------------
Total Chemicals 922 766 2,557 2,334
- ----------------------------------------------------------------------------------------------------
All Other
United States 99 126 293 335
International 1 1 5 4
- ----------------------------------------------------------------------------------------------------
100 127 298 339
Intersegment Elimination - United States (15) (12) (40) (36)
Intersegment Elimination - International (1) - (3) (1)
- ----------------------------------------------------------------------------------------------------
Total All Other 84 115 255 302
- ----------------------------------------------------------------------------------------------------
Sales and Other Operating Revenues
United States 8,090 6,049 20,120 18,176
International 3,503 2,179 8,418 7,306
- ----------------------------------------------------------------------------------------------------
11,593 8,228 28,538 25,482
Intersegment Elimination - United States (744) (462) (1,719) (1,450)
Intersegment Elimination - International (884) (205) (1,982) (1,253)
- ----------------------------------------------------------------------------------------------------
Total Sales and Other Operating Revenues $ 9,965 $ 7,561 $24,837 $22,779
- ----------------------------------------------------------------------------------------------------
-7-
The company evaluates the performance of its operating segments on an after-tax
basis, excluding the effects of debt financing interest expense or investment
interest income, both of which are managed by Chevron Corporation on a worldwide
basis. Corporate administrative costs and assets are not allocated to the
operating segments; however, operating segments are billed for direct corporate
services. Nonbillable costs remain as corporate center expenses. Net income by
segment for the three- and nine-month periods ended September 30, 1999 and 1998
is presented in the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
Millions of Dollars 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
Exploration and Production
United States $ 233 $ 102 $ 378 $ 293
International 322 161 659 505
- ----------------------------------------------------------------------------------------------------
Total Exploration and Production 555 263 1,037 798
- ----------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 97 188 288 458
International (21) (46) 127 146
- ----------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 76 142 415 604
- ----------------------------------------------------------------------------------------------------
Chemicals
United States 25 13 4 95
International 6 1 37 29
- ----------------------------------------------------------------------------------------------------
Total Chemicals 31 14 41 124
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Total Segment Income 662 419 1,493 1,526
- ----------------------------------------------------------------------------------------------------
Interest Expense (82) (69) (236) (198)
Interest Income 17 14 44 46
Other (15) 97 (40) 171
- ----------------------------------------------------------------------------------------------------
Net Income $ 582 $ 461 $1,261 $1,545
- ----------------------------------------------------------------------------------------------------
-8-
Segment assets at September 30, 1999 and December 31, 1998, are presented in the
following table. Segment assets do not include intercompany investments or
intercompany receivables.
September 30, December 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------------
Exploration and Production
United States $ 5,948 $ 6,026
International 13,787 10,794
- ----------------------------------------------------------------------------------
Total Exploration and Production 19,735 16,820
- ----------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 8,112 8,084
International 3,698 3,559
- ----------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 11,810 11,643
- ----------------------------------------------------------------------------------
Chemicals
United States 3,228 3,045
International 916 828
- ----------------------------------------------------------------------------------
Total Chemicals 4,144 3,873
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Total Segment Assets 35,689 32,336
- ----------------------------------------------------------------------------------
All Other
United States 2,805 2,467
International 1,659 1,737
- ----------------------------------------------------------------------------------
Total All Other 4,464 4,204
- ----------------------------------------------------------------------------------
Total Assets - United States 20,093 19,622
Total Assets - International 20,060 16,918
- ----------------------------------------------------------------------------------
Total Assets $40,153 $36,540
- ----------------------------------------------------------------------------------
Note 5. Summarized Financial Data - Chevron U.S.A. Inc.
At September 30, 1999, Chevron U.S.A. Inc. was Chevron Corporation's principal
operating company, consisting primarily of the company's U.S. integrated
petroleum operations (excluding most of the domestic pipeline operations) and
the majority of the company's worldwide petrochemical operations. These
operations were conducted by Chevron U.S.A. Production Company, Chevron Products
Company and Chevron Chemical Company LLC. Summarized financial information for
Chevron U.S.A. Inc. and its consolidated subsidiaries is presented as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
Millions of Dollars 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
Sales and other operating revenues $8,182 $6,243 $20,481 $18,551
Costs and other deductions 7,918 5,965 20,142 17,826
Net income 213 240 421 483
- ---------------------------------------------------------------------------------------
-9-
At September 30, At December 31,
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------
Current assets $ 3,812 $ 3,227
Other assets 17,993 18,306
Current liabilities 5,398 3,809
Other liabilities 6,530 6,517
Net worth 9,877 11,207
- --------------------------------------------------------------------------
The increase in "Current liabilities" since December 31, 1998 reflects the
reclassification of a reserve of about $1 billion established for the Cities
Service litigation from "Other liabilities" to "Current liabilities" and an
increase in short-term debt. Within "Other liabilities," the reduction from this
reclassification is offset by increases in other liability accounts. The primary
cause of the reduction in "Net worth" shown above was a third quarter 1999
return of $2 billion of capital to Chevron Corporation in exchange for a loan.
Note 6. Summarized Financial Data - Chevron Transport Corporation Limited
Effective July 1, 1999, Chevron Transport Corporation, a Liberian corporation,
was merged into Chevron Transport Corporation Limited (CTC), which assumed all
of the assets and liabilities of Chevron Transport Corporation. 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 where CTC is deemed to be
an issuer. In accordance with the Securities and Exchange Commission's
disclosure requirements for CTC, summarized financial information for CTC and
its consolidated subsidiaries is presented below. This summarized financial data
was derived from the financial statements prepared on a stand-alone basis in
conformity with generally accepted accounting principles.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
Millions of Dollars 1999 1998 1999 1998
- -------------------------------------------------------------------------------------
Sales and other operating revenues $122 $149 $392 $439
Costs and other deductions 140 150 437 445
Net (loss) income (20) 4 (31) 10
- -------------------------------------------------------------------------------------
At September 30, At December 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------------
Current assets $ 182 $ 270
Other assets 782 982
Current liabilities 593 898
Other liabilities 273 284
Net worth 98 70
- -------------------------------------------------------------------------------------
In August 1999, CTC's parent contributed an additional $59 million of paid-in
capital to CTC.
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, 1999.
-10-
Note 7. Summarized Financial Data - Caltex Group of Companies
Summarized financial information for the Caltex Group of Companies, owned 50
percent by Chevron and 50 percent by Texaco Inc., is as follows (amounts
reported are on a 100 percent Caltex Group basis):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
Millions of Dollars 1999 1998(1) 1999 1998(1)
- -------------------------------------------------------------------------------------------------------
Gross revenues $6,951 $3,852 $15,617 $12,407
Income before income taxes 148 16 666 606
Net income before cumulative effect
of accounting change 35 (58) 378 369
Cumulative effect of accounting change - - - (50)
- -------------------------------------------------------------------------------------------------------
Net income 35 (58) 378 319
- -------------------------------------------------------------------------------------------------------
<FN>
(1) 1998 amounts have been restated for the effects of Caltex's
adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities,"
effective January 1, 1998.
</FN>
The increase in gross revenues for the three-month and nine-month periods is
driven by higher sales volumes and prices in 1999.
Note 8 - Employee Termination Benefits and Other Restructuring Costs
The company recorded net before-tax restructuring charges of $180 million for
the nine months ending September 30, 1999 - comprised of $197 million of charges
for employee termination benefits offset by a net credit of $17 million for
other items.
Accrual and payment activity for the employee termination benefits is presented
in the following table:
Termination Benefits Millions of Dollars
Number of Employees Activity During 1999 (Before Tax)
- ---------------------------------------------------------------------------
Accruals
-------------
2,723 Second Quarter $ 176
415 Third Quarter 21
- ---------------------------------------------------------------------------
3,138 197
(1,329) Cash Payments (86)
- ---------------------------------------------------------------------------
1,809 Balance at September 30 $ 111
- ---------------------------------------------------------------------------
The termination benefit charges for the nine-month period were classified $154
million as "Operating expense" and $43 million as "Selling, general and
administrative expense." The staff reduction program is being implemented in
all of the company's operating segments across several business functions.
Employees affected are primarily U.S.-based. All employees must be separated by
June 30, 2000.
Termination benefits for 2,742 of the 3,138 employees - accrued in accordance
with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Plans and for Termination Benefits" - are payable from the
funded assets of the company's U.S. and Canadian pension plans. Payments to
other employees are from company funds.
-11-
Included in the net before-tax credit of $17 million for other restructuring
items in the nine-month period was a net before-tax credit of $28 million in the
third quarter. The credits included in these net amounts for both periods were
associated mainly with restructuring-related pension settlement gains for
payments made to terminated employees. These credits were partially offset by
charges for employee and office relocations, lease termination penalties and
other items. These before-tax charges for the third quarter and nine-month
periods were $19 million and $43 million, respectively. Of the $43 million,
approximately one third remained unpaid at the end of the third quarter. Charges
and credits for these other restructuring costs were classified mainly as either
"operating expense" or "selling, general and administrative expense." Items are
either accrued or recognized as incurred under the guidelines of EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
or SFAS No. 88, as applicable.
The company's net income for nine months 1999 also included its $25 million
share of a restructuring charge recorded by Caltex in the second quarter.
Note 9 - Income Taxes
"Income Tax Expense" for the third quarter and first nine months of 1999 was
$525 million and $937 million, respectively, compared with $306 million and $855
million for the comparable 1998 periods. The effective income tax rate for 1999
year to date increased to 43 percent from 36 percent in the 1998 nine months.
The increase in the effective tax rates in 1999 was primarily the result of a
higher proportion of foreign income that is taxed at higher rates. Partially
offsetting this increase in effective rates in 1999 were higher equity
affiliates' after-tax earnings as a proportion of before-tax income and tax
credits connected with the utilization of capital loss benefits. Prior period
tax adjustments lowered the effective tax rate in 1998 nine months.
Note 10. Litigation
The company is a party, along with other oil companies, to numerous lawsuits and
claims, including actions challenging oil and gas royalty and severance tax
payments based on posted prices and actions related to the use of the chemical
MTBE in certain oxygenated gasolines. Plaintiffs may seek to recover large and
sometimes unspecified amounts, and some matters may remain unresolved for
several years. It is not practical to estimate a range of possible loss for
these litigation matters, and losses could be material with respect to earnings
in any given period. However, management is of the opinion that resolution of
these matters will not result in any significant liability to the company in
relation to its consolidated financial position or have a significant effect on
its liquidity.
The company is a defendant in a lawsuit that OXY U.S.A. brought in its capacity
as successor in interest to Cities Service Company. The lawsuit claims damages
resulting from the allegedly improper termination of a tender offer made by Gulf
Oil Corporation, acquired by Chevron in 1984, to purchase Cities Service in
1982. A 1996 trial resulted in a judgment against the company of $742 million,
including interest that continues to accrue while this matter is pending. The
Oklahoma Supreme Court affirmed the lower court's decision in March 1999, and
accordingly, the company recorded in its 1998 results a litigation reserve of
$637 million after-tax, substantially all of which pertained to this lawsuit,
for the judgment and accrued interest through December 1998. Interest was
accrued subsequently and will continue to accrue until this matter is resolved.
At September 30, 1999, the before-tax reserve balance was approximately $1
billion. In March 1999, the company filed a petition for rehearing in the
Oklahoma Supreme Court on the issue of damages and requested oral argument. In
June 1999, the Oklahoma Supreme Court denied the company's motion. In July, the
Oklahoma Supreme Court granted a motion to stay the judgment pending the
company's appeal to the U.S. Supreme Court. A petition for certiorari to the
U.S. Supreme Court was filed in September. All briefs have been filed and the
parties are now waiting for the U.S. Supreme Court to decide whether to grant
certiorari. The ultimate outcome of this matter cannot be presently determined
with certainty, and is dependent on the U.S. Supreme Court's evaluation of the
company's petition.
In a lawsuit in Los Angeles, California, brought in 1995, the company and five
other oil companies are contesting the validity of a patent granted to Unocal
Corporation (Unocal) for certain types of reformulated gasoline, which the
company sells in California during certain months of the year. The first two
phases of the trial were concluded in October and November 1997, with the jury
upholding the validity of the patent and assessing damages at the rate of 5.75
cents per gallon of gasoline sold in infringement of the patent between March 1
and July 1, 1996. In the third
-12-
phase of the trial, the judge heard evidence to determine if the patent was
enforceable. In August 1998, the judge ruled the patent was enforceable. The
defendants filed an appeal in January 1999 and oral arguments were made before
the court in July 1999. While the ultimate outcome of this matter cannot be
determined with certainty, the company believes Unocal's patent is invalid and
any unfavorable rulings should be reversed upon appeal. Unocal continues to file
for additional patents for alternate formulations. However, should the jury's
findings and Unocal's patents ultimately be upheld, the company's exposure with
respect to future reformulated gasoline sales would depend on the availability
of alternate formulations and the industry's ability to recover additional costs
of production through prices charged to its customers. The company believes that
its ultimate exposure in this matter will not materially affect its financial
position or liquidity, although the costs of resolution from any unfavorable
ruling could be material with respect to earnings in any given period.
Note 11. Other Contingencies and Commitments
The U.S. federal income tax and California income tax liabilities of the company
have been settled through 1990 and 1991, respectively.
In June 1997, Caltex Corporation received a claim from the U.S. Internal Revenue
Service (IRS) for $292 million in excise taxes, $140 million in penalties and
$1.6 billion in interest. The IRS claim relates to crude oil sales to Japanese
customers beginning in 1980. Caltex believes the underlying excise tax claim is
wrong and therefore the claim for penalties and interest is wrong. In May 1998,
Caltex filed a complaint in the United States Court of Federal Claims asking the
Court to hold that Caltex owes nothing on the IRS claim. A decision by the Court
remains pending. In February 1999, Caltex renewed a letter of credit for $2.52
billion to the IRS that was required to pursue the claim. In May 1999, the IRS
agreed to reduce the letter of credit, which is guaranteed by Chevron and
Texaco, to $200 million.
Settlement of open tax years is not expected to have a material effect on the
consolidated financial position or liquidity of the company and, in the opinion
of management, adequate provision has been made for income and franchise taxes
for all years under examination or subject to future examination.
The company and its subsidiaries have certain other contingent liabilities with
respect to guarantees, direct or indirect, of debt of affiliated companies or
others and long-term unconditional purchase obligations and commitments,
throughput agreements and take-or-pay agreements, some of which relate to
suppliers' financing arrangements.
The company is subject to loss contingencies pursuant to environmental laws and
regulations that in the future may require the company to take action to correct
or ameliorate the effects on the environment of prior disposal or release of
chemical or petroleum substances by the company or other parties. Such
contingencies may exist for various sites including, but not limited to:
Superfund sites and refineries, chemical plants, oil fields, service stations,
terminals and land development areas, whether operating, closed or sold. The
amount of such future cost is indeterminable due to such factors as the unknown
magnitude of possible contamination, the unknown timing and extent of the
corrective actions that may be required, the determination of the company's
liability in proportion to other responsible parties and the extent to which
such costs are recoverable from third parties. While the company has provided
for known environmental obligations that are probable and reasonably estimable,
the amount of future costs may be material to results of operations in the
period in which they are recognized. The company does not expect these costs to
have a material effect on its consolidated financial position or liquidity.
Also, the company does not believe its obligation to make such expenditures has
had or will have any significant impact on the company's competitive position
relative to other domestic or international petroleum or chemical concerns.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its integrated petroleum activities. All these
instruments are commonly used in oil and gas trading activities and are
relatively straightforward, involve little complexity and are of a short-term
duration. Most of the activity in these instruments is intended to hedge a
physical transaction; hence, gains and losses arising from these instruments
offset, and are recognized concurrently with, gains and losses from the
underlying transactions. The company believes it has no material market or
credit risks to its operations, financial position or liquidity as a result of
its commodities and other derivatives activities, including forward exchange
contracts and interest rate swaps. Its control systems are designed to monitor
and manage its financial exposures in accordance with company policies
-13-
and procedures. The results of operations and financial position of certain
equity affiliates may be affected by their business activities involving the use
of derivative instruments.
The company's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries, including the United States, in which it operates. In
certain locations, host governments have imposed restrictions, controls and
taxes, and, in others, political conditions have existed that may threaten the
safety of employees and the company's continued presence in those countries.
Internal unrest or strained relations between a host government and the company
or other governments may affect the company's operations. Those developments
have, at times, significantly affected the company's related operations and
results, and are carefully considered by management when evaluating the level of
current and future activity in such countries.
Areas in which the company has significant operations include the United States,
Canada, Australia, United Kingdom, Republic of Congo, Angola, Nigeria,
Democratic Republic of Congo, Papua New Guinea, China, Indonesia, Venezuela,
Argentina and Thailand. The company's Caltex affiliates have significant
operations in Indonesia, Korea, Australia, Thailand, the Philippines, Singapore,
and South Africa. The company's Tengizchevroil affiliate operates in Kazakhstan.
Note 12. Issuance of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). In June 1999, the FASB issued Statement No. 137, which deferred the
effective date of FAS 133, making the statement effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, with earlier adoption
encouraged. The company anticipates adoption of the provisions of FAS 133
effective January 1, 2001. The company and its affiliates are currently
evaluating implementation of FAS 133 and the effects the Statement will have on
its financial statements and disclosures.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1999 Compared With Third Quarter 1998
And First Nine Months 1999 Compared With First Nine Months 1998
Financial Results
- -----------------
Net income for the third quarter of 1999 was $582 million ($0.88 diluted
earnings per share), an increase of 26 percent from net income of $461 million
($0.70 diluted earnings per share) for the 1998 third quarter. In the 1999
quarter, net income included special charges of $120 million, compared with net
benefits of $75 million in the 1998 third quarter. Special charges in the 1999
third quarter included asset write-downs of $79 million, $31 million for losses
on asset dispositions and $10 million for environmental remediation. In the 1998
quarter, the company received $105 million of proceeds from several insurance
settlements related to environmental cost recovery claims and recognized a gain
of $18 million from the sale of a U.S. oil and gas property. These gains were
partially offset by the company's $43 million share of the costs associated with
the reorganization of management and administration functions of Caltex, the
company's 50 percent-owned equity affiliate, and a provision of $5 million for
environmental remediation. Excluding special items, 1999 third quarter earnings
were $702 million, an 82 percent increase from earnings of $386 million in 1998.
Net income for the first nine months of 1999 was $1.261 billion ($1.91 diluted
earnings per share), down from $1.545 billion ($2.35 diluted earnings per share)
for the 1998 nine months. Net income for the year-to-date periods included net
special charges of $206 million in 1999 and net special benefits of $103 million
in 1998. Nine-month 1999 net income was reduced by charges for restructuring of
$146 million, asset write-downs of $122 million, environmental remediation
provisions of $96 million and regulatory issues of $23 million. These were
partially offset by gains of $121 million from asset sales and the favorable
effects of $60 million from prior-year tax adjustments. The 1998 nine-months
benefited $190 million from tax adjustments and $80 million from claim
settlements, partially offset by asset write-downs of $68 million, restructuring
costs of $43 million, losses on asset sales of $38 million and environmental
remediation provisions of $18 million. Excluding these special charges, nine
month earnings were $1.467 billion in 1999 compared with $1.442 billion in the
first nine months of 1998.
Net income also included foreign exchange losses of $7 million in the 1999 third
quarter compared with losses of $26 million in the third quarter of 1998. Year
to date, foreign exchange fluctuations reduced earnings $48 million in 1999 and
increased earnings $24 million in 1998. Changes between periods occurred
primarily in Caltex's Australian operations and in Chevron's Australian and
Canadian exploration and production businesses.
Chevron's worldwide exploration and production (upstream) earnings, excluding
special items, improved in the 1999 quarter, benefiting from higher crude oil
prices and from increases in production in international areas. The company's
average U.S. crude oil realizations of $18.11 per barrel in the third quarter
1999 were nearly $7 per barrel higher than the same period last year. Average
U.S. natural gas realizations of $2.48 per thousand cubic feet were 56 cents
higher than in the 1998 third quarter.
Chevron's refining, marketing and transportation (downstream) businesses
suffered significantly lower earnings in the third quarter, compared with last
year. The company's U.S. downstream business experienced narrower margins as the
increases in crude oil prices outpaced refined products sales realizations. In
addition, continuing repairs to operating units at the Richmond, California,
refinery had an adverse impact on earnings. Earnings from the company's
international downstream operations remained depressed in the third quarter
1999, primarily as earnings from the company's Caltex affiliate continued to be
impacted by weak refined products margins in the Asia-Pacific region. In
addition, in the third quarter 1999 the company recorded lower earnings from its
international shipping operations.
Operating Environment and Outlook
- ---------------------------------
Chevron's earnings are affected significantly by fluctuations in the price of
crude oil and natural gas. The average spot price for West Texas Intermediate
(WTI), a benchmark crude oil, was $21.73 per barrel for the quarter - the
highest level since the first quarter of 1997 and 54 percent higher than the
same period last year. For the first nine months of 1999, the average spot price
of WTI was $17.58 per barrel, 18 percent higher than the same period last year.
Crude oil prices remain at levels higher than last year, as the price of WTI
averaged $22.64 per barrel during
-15-
October 1999. Average U.S. natural gas prices for the third quarter 1999 were
significantly higher than last year's quarter. Chevron's average U.S. natural
gas realizations increased 29 percent to $2.48 per thousand cubic feet.
Chevron's third quarter 1999 worldwide net oil equivalent production was 1.545
million barrels per day, an increase of 4 percent over the third quarter 1998.
Liquids production from international operations continues to increase, up 3
percent in the third quarter to 792,000 barrels per day and 5 percent year to
date, compared with the corresponding periods last year. The company expects
international liquids production to increase during the fourth quarter 1999,
primarily as a result of the acquisition of Petrolera Argentina San Jorge, an
oil and gas exploration and production company in Argentina, late in September
1999.
The rise in crude oil and natural gas prices were the primary driver for higher
comparative earnings for the company's exploration and production operations,
offsetting increases in exploration expenses. While prices are expected to
remain volatile during the fourth quarter 1999, they are likely to remain at
levels exceeding last year's fourth quarter if cutbacks in OPEC and non-OPEC
production continue.
Certain countries in which Chevron has producing operations have mandated crude
oil production cuts to help boost sales prices of crude oil. To date, Chevron's
production has not been materially affected by these reductions, and the company
believes that in the current industry environment, the net effect of any
curtailments directed by host countries would not be significant to its overall
production levels. However, such curtailments or limits may have an adverse
effect on the level of new production from current and future development
projects. 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.
The company continues to monitor developments closely in the countries in which
it operates.
Higher prices for crude oil contributed to narrower margins in the downstream
business, except on the U.S. West Coast where industry margins strengthened.
Operational problems at the company's Richmond, California, refinery prevented
Chevron from fully realizing the benefits of the higher west coast refined
products margins. Refinery problems restricted production of oxygenated
gasoline, mandated by California, making it necessary for the company to
purchase products from third parties to meet its customers' requirements. The
company estimates these refinery upsets adversely impacted third quarter
earnings by about $40 million. U.S. downstream earnings in the fourth quarter
1999 will continue to be affected by lower production capacity at the Richmond
refinery, although the impact is expected to be less than in the third quarter.
Repairs to a fluid catalytic cracker were completed by mid-August 1999, but
repairs to a hydrocracker are not expected to be completed before the end of
1999. The company has business interruption insurance coverage and expects to
recover some of the losses attributable to the incidents at its Richmond
refinery. In addition, the company continues to pursue business interruption and
property damage claims for 1998 storm damages to its Pascagoula, Mississippi,
refinery. The timing and amount of recovery from these claims are uncertain.
Caltex operations in the Far East, particularly Korea, continued to suffer from
weak refined product margins -resulting from higher feedstock costs and
competitive price discounting - and have failed to fully recover rising crude
oil costs in the prices for refined products. Caltex may continue to be
adversely affected by these conditions through the remainder of 1999 as the
Asia-Pacific markets continue to experience surplus manufacturing capacity and
related oversupply conditions.
Earnings of Chevron's chemicals operations are expected to remain depressed
because of continued downward pressure on industry margins as higher feedstock
costs are not yet being fully reflected in commodity chemical product prices.
The low margins are a result of industry manufacturing over-capacity, higher
prices for feedstocks and reduced Asian demand for U.S.-manufactured products.
Although the recent increases in crude oil and natural gas prices have improved
the overall economic environment in which the company operates, Chevron remains
focused on efforts to improve its efficiency. On a per-barrel basis, operating
expenses, after adjustments for special items and operations that have been
disposed of, were $5.01 per barrel for the first nine months, down about 7
percent from the 1998 comparable period. Excluding the costs associated with the
company's growth components - international exploration and production and
international chemicals - the company's cost structure declined about $400
million below last year.
-16-
Significant Developments
- ------------------------
In September, Chevron acquired 100 percent of Petrolera Argentina San Jorge, an
oil and gas exploration and producing company in Argentina. Included in this
acquisition was an interest in the major export pipeline to the Atlantic coast
of Argentina and exploration acreage in key petroleum basins in Argentina,
Colombia, Ecuador, Peru, Bolivia and Chile. San Jorge's recent gross operated
production reached 78,000 barrels of oil and 40 million cubic feet of gas per
day. In October, this company announced a new oil discovery in the Rio Negro
Province, Argentina. The discovery, the seventh since January 1999, tested 3,880
barrels per day of 39-degree API oil. Chevron holds a 37.5 percent interest in
this discovery.
Also in October, Chevron took over operatorship in Thailand of Block B8/32, in
which it acquired an approximate 52 percent interest earlier this year. Gross
production of natural gas reached over 140 million cubic feet per day in late
September, while production of liquids is expected to reach 30,000 barrels per
day by the end of this year.
In the Caspian Sea area, gross liquids production at the company's
Tengizchevroil joint venture in Kazakhstan averaged over 215,000 barrels per day
in the third quarter, up from 183,000 barrels per day in last year's third
quarter. Essential to the goal of expanding production from the Tengiz field to
700,000 barrels per day by 2010 is the completion of the pipeline under
construction by the Caspian Pipeline Consortium, in which Chevron has a 15
percent interest. Commitments exceeding $1.5 billion for material purchases and
contract services have been made to date to build this link from the Tengiz
field to the Black Sea. Over $500 million has been expended on the project thus
far. Pipeline completion is scheduled for 2001.
Chevron was appointed the Managing Sponsor of a six-company consortium that was
selected by the Governments of Benin, Ghana, Nigeria, and Togo to develop the
West African Gas Pipeline. This pipeline will be developed to link gas producers
in Western Nigeria with power generation plants in the other countries,
initially delivering an estimated 120 million cubic feet of natural gas per day.
This pipeline will help reduce air pollution by reducing gas flaring associated
with existing oil production in Nigeria and by delivering natural gas to replace
more polluting fuels.
Chevron announced in September a significant natural gas discovery offshore
Western Australia at the Geryon prospect. Geryon is operated by the West
Australian Petroleum Pty. Ltd. Joint Venture, of which Chevron is a 25 percent
participant.
In August, Chevron and two other partners announced they had reached agreement
to jointly develop The Athabasca Oil Sands Project in Alberta, Canada, subject
to final corporate approvals of each of the partners. The project is scheduled
to begin producing 150,000 barrels of synthetic crude oil per day in 2002 and
Chevron will have a 20 percent stake.
Year 2000 Problem
- -----------------
The Year 2000 problem is the result of computer systems and other equipment with
embedded chips or processors using two digits, rather than four, to define a
specific year and potentially being unable to process accurately certain data
before, during or after 2000. This could result in system failures or
miscalculations, causing disruptions to various activities and operations.
Chevron has established a corporate-level Year 2000 project team to coordinate
the efforts of teams in the company's operating units and corporate departments
to address the Year 2000 issue in three major areas: information technology,
embedded systems and supply chain. Information technology includes the computer
hardware, systems and software used throughout the company's facilities.
Embedded systems exist in automated equipment and associated software, which are
used in the company's exploration and production facilities, refineries,
transportation operations, chemical plants and other business operations. Supply
chain includes the third parties with which Chevron conducts business. The
company also is monitoring the Year 2000 efforts of its equity affiliates and
joint-venture partners. Progress reports on the Year 2000 project are presented
regularly to the company's senior management and periodically to the Audit
Committee of the company's Board of Directors.
The company is addressing the Year 2000 issue in three overlapping phases: (1)
identification and assessment of all critical equipment, software systems and
business relationships that may require modification or replacement prior to
2000; (2) resolution of critical items through remediation and testing of
modifications, replacement, or
-17-
development of alternative business processes; and (3) development and testing
of contingency and business continuation plans for critical items to mitigate
any disruptions to the company's operations.
Chevron's plans called for all critical items to be addressed prior to 2000. By
September 30, 1999 all three phases of Chevron's Year 2000 project -
identification and assessment, remediation and testing, and contingency planning
- - were essentially complete. Because of the scope of its operations, the company
believes it is impractical to eliminate all potential Year 2000 problems before
they arise. As a result, the company expects that for non-mission-critical items
and those mission-critical items for which temporary "work arounds" have been
developed, Year 2000 remedial efforts will continue into the year 2000.
In the normal course of business, the company has developed and maintains
extensive contingency plans to respond to equipment failures, emergencies and
business interruptions. However, contingency planning for Year 2000 issues is
complicated by the possibility of multiple and simultaneous incidents, which
could significantly impede efforts to respond to emergencies and resume normal
business functions. Such incidents may be outside of the company's control, for
example, if mission-critical third parties do not successfully address their own
material Year 2000 problems.
The company has enhanced existing plans, where necessary, and in some cases
developed new plans specifically designed to mitigate the impact on its
operations of potential failures relating to the Year 2000 issue. These plans
are designed to continue safe operations, protect the environment, protect the
company's assets and enable the resumption of any interrupted operations in a
timely and efficient manner. The company has dedicated significant resources
toward validating that contingency plans developed in individual operating units
are consistent and complementary across the company. Additionally, the company
is implementing plans designed to mitigate the risk of supply outages occurring
in its businesses that may result from potential increases in customer demand
prior to January 1, 2000. In the third quarter 1999, the company successfully
completed a test of its Corporate Year 2000 Information Center, which will
monitor the Year 2000 status of the company's facilities around the world. A
variety of potential Year 2000 scenarios were developed. The company tested
processes and procedures to manage both the information flow and its responses
to these different situations. As part of its contingency planning, the company
will place emergency response teams at key locations around the world in late
December and early January.
The company utilizes both internal and external resources in its Year 2000
efforts. The cumulative total cost to achieve Year 2000 compliance is currently
estimated at $175 million, mostly for expense-type items, not all of which is
incremental to the company's operations. Approximately $145 million had been
spent through September 30, 1999. The majority the future expenditures will be
incurred during the remainder of 1999 with some expenditures in 2000. The
foregoing amounts include the company's share of expenditures by its major
affiliates.
As part of the Securities and Exchange Commission's reporting requirements on
the Year 2000 problem, companies must include a description of their "most
reasonably likely worst-case scenarios" from potential Year 2000 issues. For
Chevron, its business diversity is expected to reduce the risk of widespread
disruptions to its worldwide operations from Year 2000-related incidents. The
company does not expect unusual risks to public safety or to the environment to
arise from potential Year 2000-related failures. While the company believes that
the impact of any individual Year 2000 failure most likely will be localized and
limited to specific facilities or operations, it is not yet able to fully assess
the likelihood of significant business interruptions occurring in one or more of
its operations around the world. Such interruptions could delay manufacturing
and delivery of refined products and chemicals products by the company to
customers. The company could also face interruptions in its ability to produce
crude oil and natural gas. While not expected, failures to address multiple
critical Year 2000 issues, including failures to implement appropriate
contingency plans in a timely manner, could materially and adversely affect the
company's results of operations or liquidity in any one period. The company is
currently unable to predict the aggregate financial or other consequences of
such potential interruptions.
The foregoing disclosure is based on the company's current expectations,
estimates and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effects of Year 2000 problems on the
company may be different from the company's current assessment. Factors that
could affect the company's ability to be Year 2000 compliant by the end of 1999,
many of which are outside its control, include: failures to achieve compliance
by customers, suppliers, governmental entities and others, and failures by the
company to identify all critical Year 2000 issues, or to develop appropriate
contingency plans for all Year 2000 issues that ultimately may
-18-
arise. The foregoing disclosure is made pursuant to the Federal Year 2000
Information and Readiness Disclosure Act.
Other Contingencies and Significant Litigation
- ----------------------------------------------
The company is a defendant in a lawsuit that OXY U.S.A. brought in its capacity
as successor in interest to Cities Service Company. The lawsuit claims damages
resulting from the allegedly improper termination of a tender offer made by Gulf
Oil Corporation, acquired by Chevron in 1984, to purchase Cities Service in
1982. A 1996 trial resulted in a judgment against the company of $742 million,
including interest that continues to accrue while this matter is pending. The
Oklahoma Supreme Court affirmed the lower court's decision in March 1999, and
accordingly, the company recorded in 1998 results a litigation reserve of $637
million after-tax, substantially all of which pertained to this lawsuit, for the
judgment and accrued interest through December 1998. Interest was accrued
subsequently and will continue to accrue until this matter is resolved. At
September 30, 1999, the before-tax reserve balance was approximately $1 billion.
In March 1999, the company filed a petition for rehearing in the Oklahoma
Supreme Court on the issue of damages and requested oral argument. In June 1999,
the Oklahoma Supreme Court denied the company's motion. In July, the Oklahoma
Supreme Court granted a motion to stay the judgment pending the company's appeal
to the U.S. Supreme Court. A petition for certiorari to the U.S. Supreme Court
was filed in September. All briefs have been filed and the parties are now
waiting for the U.S. Supreme Court to decide whether to grant certiorari. The
ultimate outcome of this matter cannot be presently determined with certainty,
and is dependent on the U.S. Supreme Court's evaluation of the company's
petition.
In a lawsuit in Los Angeles, California, brought in 1995, the company and five
other oil companies are contesting the validity of a patent granted to Unocal
Corporation (Unocal) for certain types of reformulated gasoline, which the
company sells in California during certain months of the year. The first two
phases of the trial were concluded in October and November 1997, with the jury
upholding the validity of the patent and assessing damages at the rate of 5.75
cents per gallon of gasoline sold in infringement of the patent between March 1
and July 1, 1996. In the third phase of the trial, the judge heard evidence to
determine if the patent is enforceable, and in August 1998, ruled that the
patent was enforceable. The defendants filed an appeal in January 1999 and oral
arguments were made before the court in July 1999. While the ultimate outcome of
this matter cannot be determined with certainty, the company believes Unocal's
patent is invalid and any unfavorable rulings should be reversed upon appeal.
Unocal continues to file for additional patents for alternate formulations.
However, should the jury's findings and Unocal's patents ultimately be upheld,
the company's exposure with respect to future reformulated gasoline sales would
depend on the availability of alternate formulations and the industry's ability
to recover the additional costs of production through prices charged to its
customers. The company believes that its ultimate exposure in this matter will
not materially affect its financial position or liquidity, although the costs of
resolution from any unfavorable ruling could be material with respect to
earnings in any given period.
In June 1997, Caltex Corporation received a claim from the U.S. Internal Revenue
Service (IRS) for $292 million in excise taxes, $140 million in penalties and
$1.6 billion in interest. The IRS claim relates to crude oil sales to Japanese
customers beginning in 1980. Caltex believes the underlying excise tax claim is
wrong and therefore the claim for penalties and interest is wrong. In May 1998,
Caltex filed a complaint in the United States Court of Federal Claims asking the
Court to hold that Caltex owes nothing on the IRS claim. A decision by the Court
remains pending. In February 1999, Caltex renewed a letter of credit for $2.52
billion to the IRS that was required to pursue the claim. In May 1999 the IRS
agreed to reduce the letter of credit, which is guaranteed by Chevron and
Texaco, to $200 million.
The company is a party to numerous lawsuits and claims, including, along with
other oil companies, actions challenging oil and gas royalty and severance tax
payments based on posted prices and others related to the use of the chemical
MTBE in certain oxygenated gasolines. The company believes that the resolution
of these matters will not materially affect its financial position or liquidity,
although costs associated with their resolution could be material with respect
to earnings in any given period.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its integrated petroleum activities. All these
instruments are commonly used in oil and gas trading activities and are
relatively straightforward, involve little complexity and are of a short-term
duration. Most of the activity in these instruments is intended to hedge a
physical transaction; hence, gains and losses arising from these instruments
offset, and are recognized concurrently with, gains and losses from the
underlying transactions. The company believes it has no material market or
credit risks to its operations, financial position or liquidity as a result of
its
-19-
commodities and other derivatives activities, including forward exchange
contracts and interest rate swaps. Its control systems are designed to monitor
and manage its financial exposures in accordance with company policies and
procedures. The results of operations and financial position of certain equity
affiliates may be affected by their business activities involving the use of
derivative instruments.
The company's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries, including the United States, in which it operates.
Political uncertainty and civil unrest may, at times, threaten the safety of
employees and the company's continued presence in a country. Management
carefully considers these factors when evaluating the level of current and
future activity in such countries.
The company and its affiliates continue to review and analyze their operations
and may close, abandon, sell, exchange, acquire or restructure assets to achieve
operational or strategic benefits and to improve competitiveness and
profitability. In addition, the company receives claims from, and submits claims
to, customers, trading partners, 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. These activities, individually or together,
may result in gains or losses in future periods.
Employee Staff Reductions and Restructurings
- --------------------------------------------
During the second quarter of 1999, Chevron began implementing a staff reduction
program and other restructuring activities across the company. While the
programs affect the activities of all the company's business segments, most of
the net costs relate to the termination and relocation of U.S.-based employees.
For the nine-month 1999 period, net income included restructuring costs of $141
million, including termination benefits for approximately 3,100 employees. These
restructuring costs include accrued employee termination benefits,
restructuring-related pension settlement gains and other items. Also included is
$25 million for Chevron's share of restructuring charges recorded by its Caltex
affiliate. The net-income effect of these costs in millions of dollars and the
estimated number of employees (excluding Caltex employees) to be terminated are
presented by business segment in the following table:
Net Expense Employees
Business Segment After Tax Affected
United States Exploration and Production $ 24 652
International Exploration and Production 14 473
United States Refining, Marketing & Transportation 28 703
International Refining, Marketing & Transportation 33 101
Worldwide Chemicals 17 384
All Other 25 825
-- -----
Total $ 141 3,138
The staff reductions began in the second quarter 1999 and will be completed by
the end of the second quarter 2000. The company will also continue to incur
restructuring costs that benefit ongoing operations. In addition, actuarial
gains will be recognized that are associated with payments made from the
company's pension plans for the terminated employees. These items will be
included in net income as they occur.
Review of Operations
- --------------------
Total revenues for the quarter were $10.2 billion, an increase of 32 percent
from $7.7 billion in last year's third quarter. For the nine-month period, total
revenues were $25.6 billion, up 10 percent from $23.3 billion in the comparable
1998 period. Revenue increases were mainly the result of higher sales
realizations for refined products, crude oil and natural gas.
-20-
Total "Operating expenses" and "Selling, general and administrative" (SG&A)
expenses, adjusted for special items, were $1.449 billion in the 1999 third
quarter compared with $1.632 billion in last year's third quarter. For nine
months, total operating expenses and SG&A expenses, excluding special items,
declined $164 million to $4.557 billion despite an increase in crude oil
production. The company continues to keep tight control over its operating
expenses.
Third quarter 1999 "Depreciation, depletion and amortization" (DD&A) expenses of
$767 million were $204 million higher than the 1998 third quarter. For the
nine-month period, DD&A expenses of $1.966 billion were $292 million higher than
the 1998 period. DD&A related to asset write-downs increased expenses by $156
million for the third quarter and $211 million for the first nine months of
1999.
"Income Tax Expense" for the third quarter and first nine months of 1999 was
$525 million and $937 million, respectively, compared with $306 million and $855
million for the comparable 1998 periods. The effective income tax rate for 1999
year to date increased to 43 percent from 36 percent in the 1998 nine months.
The increase in the effective tax rates in 1999 was primarily the result of a
higher proportion of foreign income that is taxed at higher rates. Partially
offsetting the increase in effective rates in 1999 were higher equity
affiliates' after-tax earnings as a proportion of before-tax income and tax
credits connected with the utilization of capital loss benefits. Prior period
tax adjustments lowered the effective tax rate in 1998 nine months.
The following tables detail the company's net income by major operating area and
selected operating data.
NET INCOME BY MAJOR OPERATING AREA
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------
Millions of Dollars 1999 1998 1999 1998(1)
- ------------------------------------------------------------------------------------------------------
Exploration and Production
United States $233 $102 $ 378 $ 293
International 322 161 659 505
- ------------------------------------------------------------------------------------------------------
Total Exploration and Production 555 263 1,037 798
- ------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 97 188 288 458
International (21) (46) 127 146
- ------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 76 142 415 604
- ------------------------------------------------------------------------------------------------------
Chemicals 31 14 41 124
Corporate and Other (2) (80) 42 (232) 19
- ------------------------------------------------------------------------------------------------------
Net Income $582 $461 $1,261 $1,545
- ------------------------------------------------------------------------------------------------------
<FN>
(1) Restated for accounting changes effective January 1, 1998, the net effect
of which was immaterial.
(2) Includes interest expense, interest income on cash and marketable
securities, coal operations, corporate center costs, and real estate and
insurance activities.
</FN>
-21-
SELECTED OPERATING DATA (1),(2)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
U.S. Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 321 323 313 332
Net Natural Gas Production (MMCFPD) 1,664 1,703 1,659 1,765
Sales of Natural Gas (MMCFPD) 3,436 3,233 3,354 3,354
Sales of Natural Gas Liquids (MBPD) 127 113 127 126
Revenue from Net Production
Crude Oil ($/BBL) $18.11 $11.31 $14.20 $11.72
Natural Gas ($/MCF) $ 2.48 $ 1.92 $ 2.06 $ 2.03
International Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 792 768 799 759
Net Natural Gas Production (MMCFPD) 929 636 867 613
Sales of Natural Gas (MMCFPD) 1,884 1,587 1,823 1,439
Sales of Natural Gas Liquids (MBPD) 64 57 56 58
Revenue from Liftings
Liquids ($/BBL) $19.63 $11.47 $15.11 $12.26
Natural Gas ($/MCF) $ 1.89 $ 2.01 $ 1.83 $ 1.93
Other Produced Volumes (MBPD) (3) 92 96 97 93
U.S. Refining, Marketing and Transportation
Sales of Gasoline (MBPD) (4) 680 681 664 657
Sales of Other Refined Products (MBPD) 677 638 641 597
Refinery Input (MBPD) 999 1,022 964 926
Average Refined Product Sales Price ($/BBL) $29.48 $21.91 $25.43 $22.73
International Refining, Marketing and Transportation
Sales of Refined Products (MBPD) (5) 892 791 902 805
Refinery Input (MBPD) 416 455 427 475
Chemical Sales and Other Operating Revenues (6)
United States $ 773 $ 648 $2,120 $1,988
International 194 150 562 435
----------------------------------------
Worldwide $ 967 $ 798 $2,682 $2,423
<FN>
(1) Includes equity in affiliates.
(2) MBPD = thousand barrels per day; MMCFPD = million cubic feet per day; BBL =
barrel; MCF = thousand cubic feet
(3) Represents total field production under the Boscan operating service
agreement in Venezuela.
(4) Includes branded and unbranded gasoline.
(5) 1998 volumes are restated to conform to 1999 presentation.
(6) Millions of dollars. Includes sales to other Chevron companies.
</FN>
Worldwide exploration and production net income was $555 million in the third
quarter of 1999, more than double the $263 million for the corresponding 1998
period. Net income of $1.037 billion in the first nine months of 1999 was 30
percent higher than the $798 million earned in the 1998 period. U.S. exploration
and production third quarter 1999 net income was $233 million, more than twice
the $102 million earned in last year's third quarter. Nine-month net income was
$378 million in 1999, compared with $293 million earned in the 1998 nine months.
Special items for the 1999 third quarter included write-downs of $45 million for
oil and gas properties in the Gulf of Mexico. In addition to the third quarter
write-downs, earnings in the 1999 nine months were reduced by special charges of
$26 million for restructuring costs, $23 million for litigation and regulatory
issues and $3 million for environmental remediation provisions. The 1998 quarter
and year-to-date net income included special benefits of $18 million from the
sale of an oil and gas property in the U.S. Gulf of Mexico. Excluding special
items in all periods, 1999 third quarter earnings more than tripled to $278
million. Nine-month earnings were $475 million, compared with $275
-22-
million in 1998. The improved 1999 results were primarily the result of higher
crude oil and natural gas prices and lower operating expenses.
The company's average 1999 third quarter U.S. crude oil realizations of $18.11
per barrel increased $6.80 over last year's third quarter. Average U.S. natural
gas realizations of $2.48 per thousand cubic feet were 56 cents higher than the
1998 third quarter. On a year-to-date basis, 1999 crude oil realizations were
$14.20 per barrel, 21 percent higher than the $11.72 per barrel obtained in
1998, and natural gas prices were $2.06 per thousand cubic feet, slightly higher
than the $2.03 per thousand cubic feet obtained last year. The higher crude oil
prices were primarily a result of production cutbacks by OPEC and non-OPEC
producing countries.
Net U.S. liquids production averaged 321,000 barrels per day in the third
quarter of 1999 and 313,000 barrels per day for the first nine months. In 1998,
liquids production averaged 323,000 barrels per day in the third quarter and
332,000 barrels per day for the year-to-date period. Net U.S. natural gas
production was 1.664 billion cubic feet per day in the 1999 third quarter and
1.659 billion cubic feet per day for nine months, compared with 1.703 billion
cubic feet per day and 1.765 billion cubic feet per day, respectively, for the
corresponding 1998 periods. The lower U.S. production of liquids and natural gas
resulted from new production having been more than offset by property sales and
normal field production declines in both the third quarter- and nine-month
periods. Also a factor in the production volume change between periods was the
adverse effect on third quarter 1998 production caused by September 1998 storms
in the Gulf of Mexico.
International exploration and production net income for the 1999 third quarter
was $322 million, double the $161 million earned in the third quarter of 1998.
Net income of $659 million in the first nine months of 1999 was 30 percent more
than the $505 million earned in the 1998 period. There were no special items in
the third quarters of 1999 or 1998. There was no impact from special items on
earnings in the 1999 nine months as a gain on an asset sale offset charges for
restructuring costs. Earnings in the 1998 nine months were reduced a net $3
million when a loss related to an asset swap was mostly offset by favorable tax
adjustments. The increase in 1999 earnings reflected significantly higher crude
oil and natural gas prices and higher crude-oil liftings compared with the
corresponding 1998 periods. Higher exploration expenses, including a $42 million
write-off of an exploratory well in China, reduced earnings by about $70 million
in the 1999 third quarter, compared with the 1998 quarter. For the nine-month
periods, higher exploration expenses in 1999 partially offset the benefits of
higher crude oil and natural gas prices by approximately $55 million.
The company's 1999 average third quarter international crude oil realizations of
$19.63 per barrel increased $8.16, or 71 percent, compared with the 1998
quarter. Average third quarter international natural gas realizations of $1.89
per thousand cubic feet were 12 cents, or 6 percent, lower than in the third
quarter of last year. On a year-to-date basis, 1999 crude oil realizations were
$15.11 per barrel, 23 percent higher than the $12.26 per barrel obtained in
1998. Natural gas prices were $1.83 per thousand cubic feet, a decline of 5
percent from $1.93 per thousand cubic feet last year.
Net international liquids production of 792,000 barrels per day increased 24,000
barrels per day from last year's third quarter, and nine months production was
799,000 barrels per day compared with 759,000 barrels per day in 1998. The
year-to-date production increases were primarily in Angola and Kazakhstan
partially offset by declines in Australia and Nigeria.
Net natural gas production for the 1999 third quarter increased 46 percent to
929 million cubic feet per day, and increased 41 percent to 867 million cubic
per day for nine months. The increases reflect higher production in the U.K.
North Sea - where the Britannia Field began producing in August 1998; in
Thailand - as a result of the company's Rutherford-Moran acquisition in early
1999; and in Kazakhstan and western Canada.
Earnings also included foreign exchange losses of $3 million in the 1999 third
quarter compared with gains of $8 million in the third quarter of 1998. Year to
date, foreign exchange fluctuations reduced earnings $31 million in 1999 and
increased earnings $31 million in 1998. These changes occurred primarily in
Chevron's Australian and Canadian businesses.
Worldwide refining, marketing and transportation operations reported net income
of $76 million in the 1999 third quarter, about half of the $142 million earned
in last year's third quarter. The 1999 nine-month net income was $415 million, a
31 percent decrease from the corresponding 1998 period. U.S. refining, marketing
and
-23-
transportation net income was $97 million in the 1999 third quarter, compared
with $188 million in the 1998 quarter. Nine-month net income for 1999 was $288
million compared with $458 million in the 1998 nine months. Net income for the
third quarter of 1999 included special charges of $10 million for environmental
remediation. There were no special items in the 1998 third quarter. On a year to
date basis, 1999 net income was reduced by a net charge of $14 million.
Provisions for environmental remediation ($65 million) and reorganization costs
($24 million), were partially offset by a gain on the sale of pipeline interests
($75 million). Nine-month 1998 results were reduced $13 million by environmental
remediation provisions.
The company's refined products margins declined as raw material cost increases
outpaced product realizations. In addition, unplanned unit shutdowns at the
Richmond, California, refinery had an adverse impact on earnings. The
hydrocracker is under repair from damages incurred in a March 1999 fire, and the
fluid catalytic cracker was taken out of operation for repairs in the current
quarter as well. Third quarter 1998 earnings were reduced by insurance
deductible costs for damages to the Pascagoula, Mississippi, refinery and other
facilities resulting from Hurricane Georges.
Total refined product sales volumes were 1.357 million barrels per day in the
third quarter of 1999, up 3 percent from the comparable quarter last year. Year
to date refined products sales volumes of 1.305 million barrels per day were up
4 percent from 1.254 million barrels per day last year. Chevron-branded motor
gasoline sales also improved by 3 percent over last year's quarter to 559,000
barrels per day. Through the first nine months of this year, branded motor
gasoline sales have increased 5 percent when compared with the same 1998 period.
The company's average refined product prices were $29.48 per barrel in the 1999
third quarter, compared with $21.91 in the 1998 quarter. Average refined product
prices were $25.43 and $22.73 in the year-to-date periods of 1999 and 1998,
respectively.
International refining, marketing and transportation operations incurred net
losses of $21 million and $46 million in the third quarter 1999 and 1998,
respectively. The net loss for the third quarter of 1999 included the company's
$31 million share of Caltex's loss from the sale of its investment in the
Japanese refiner, Koa Oil Company. The 1998 third quarter included the company's
$43 million share of costs associated with the reorganization of Caltex's
management and administration functions. Net income in the 1999 nine-month
period was $127 million, compared with $146 million in the comparable period
last year. In addition to the third quarter special item discussed above, the
1999 nine-month period included a special gain of $60 million for favorable
Korean tax adjustments, partially offset by $30 million for restructuring
charges attributable to both Caltex and Chevron operations. Results for the 1998
nine months included a special charge of $25 million for the company's share of
the cumulative effect from Caltex's adoption of a new accounting standard, in
addition to the third quarter special charge discussed above. Net income
included foreign currency gains of $1 million in the third quarter 1999,
compared with losses of $26 million in the 1998 quarter. 1999 nine-month
earnings included foreign currency losses of $15 million, compared with gains of
$2 million in the 1998 nine months.
Refined products trade sales volumes were 892,000 barrels per day in the third
quarter 1999, up 13 percent from the comparable quarter last year. Year to date
sales volumes were up about 12 percent to 902,000 barrels per day. In both
periods, the increased volumes occurred primarily in Caltex's operations.
Net Income from Caltex operations contains the effects from special items, other
non-recurring items, and foreign currency gains and losses. The following table
identifies the effects of these items:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
Millions of Dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
Reported Net (loss)income $(18) $(58) $ 97 $ 78
Less:
Special items (31) (43) (66) (68)
Foreign currency gain(loss) 1 (28) (11) (1)
Inventory adjustments 14 - 78 -
Reversal of deferred income tax allowances - - - 25
------------------------------------------------
Adjusted Net (Loss)Income $ (2) $ 13 $ 96 $122
- ------------------------------------------------------------------------------------------------
-24-
As indicated by the table above,adjusted net income from Caltex operations has
declined in both 1999 periods, despite increased sales volumes primarily from
trading of crude oil and refined products. This was primarily due to depressed
refined products refining and sales margins in the Asia-Pacific region. In
particular, results from Caltex's Korean operations suffered from lower refined
products sales margins in the third quarter and first nine months of 1999,
compared with the corresponding year-ago periods. The Asia-Pacific market
continues to experience competitive price discounting and has failed to recover
rising crude oil costs in the prices for refined products.
In addition to the decline in adjusted Caltex earnings in both periods shown
above, earnings from the company's international shipping operations were $12
million lower in the third quarter 1999 and $25 million lower for 1999 nine
months, compared with the corresponding periods last year.
Chemicals net income was $31 million in the 1999 third quarter, compared with
$14 million in last year's third quarter. Net income for the first nine months
of 1999 was $41 million compared with $124 million in 1998. There were no
special items for the 1999 third quarter, but year-to-date charges of $43
million for asset write-offs, $28 million for environmental remediation and $20
million for restructuring charges reduced nine-month net income by $91 million.
Net income for the third quarter and nine months of 1998 included charges of $5
million for environmental remediation provisions. Excluding special items in all
periods, third quarter 1999 chemicals net income was $31 million, compared with
$19 million in the 1998 quarter and $132 million compared with $129 million for
the first nine months of 1999 and 1998, respectively. The increase in earnings
excluding special charges for the third quarter was the result of improvements
in margins for the company's major chemical products, primarily polyethylene,
where higher selling prices improved margins despite a slight decline in sales
volume. Additionally, operating expenses fell between periods.
All Other activities include coal operations, interest expense, interest income
on cash and marketable securities, real estate and insurance activities and
corporate center costs. These activities incurred net charges of $80 million in
the third quarter of 1999, compared with income of $42 million in the comparable
prior-year quarter. The third quarter of 1999 included a special charge for an
adjustment to the carrying value of the company's coal assets, which are
currently under negotiation for sale. In the 1998 quarter, the company
recognized special gains of $105 million reflecting proceeds from several
settlements with various insurers related to environmental cost recovery claims.
Year-to-date charges were $232 million in 1999, compared with net income of $19
million in last year's first nine months. Special items included in nine month
1999 results included an asset sale gain of $60 million and restructuring
charges of $29 million, in addition to the third quarter write-down of the coal
assets. Special items of $174 million in the first nine months of 1998 included
favorable prior-year income tax related adjustments of $137 million and asset
write-offs of $68 million in addition to the third quarter special gains.
Excluding special items, ongoing charges from activities other than coal in the
third quarter of 1999 were $53 million compared with $82 million last year.
Income tax benefits and gains associated with pension plan activity in 1999 were
partially offset by higher net interest expense. Charges for nine months were
$258 million compared with $191 million last year. Higher charges in the 1999
nine months were primarily the result of higher interest expense on higher debt
levels in 1999. The net costs in 1998 included recoveries of certain prior-year
claims and lower costs of variable components of employee compensation plans.
Third quarter coal earnings, excluding special items, were $7 million compared
with $19 million in the 1998 quarter. Year-to-date earnings, excluding special
items, were $29 million compared with $37 million in 1998.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $703 million at September 30, 1999 - a $134
million increase from year-end 1998. In addition to cash from operations,
increases in long- and short-term debt funded the company's capital expenditures
and dividend payments to shareholders.
On October 27, 1999, Chevron declared a quarterly dividend of 65 cents per
share, an increase of 4 cents a share from the preceding quarter.
In March 1999, Chevron purchased the Rutherford-Moran Oil Corporation and
another interest in Block 8/32, offshore Thailand, for approximately 1.1 million
shares of its treasury stock, $57 million in cash and the assumption
-25-
of outstanding debt of $341 million. Concurrent with the purchase, $202 million
of that debt was retired and the remaining $139 million was called and retired
in April 1999. The company financed these retirements through an increase in
short-term debt.
In September 1999, the company completed the acquisition of Petrolera Argentina
San Jorge, a privately-held oil and gas exploration and production company in
Argentina. This acquisition was financed with a combination of cash and an
increase in short-term debt.
The company's debt and capital lease obligations totaled $8.317 billion at
September 30, 1999, up $759 million or 10 percent from $7.558 billion at
year-end 1998. Newly issued long-term debt and capital lease obligations for
nine months 1999 totaled $728 million. This increase was primarily due to $620
million of long-term debt issued in July by the company's Employee Stock
Ownership Plan (ESOP) at an average rate of 7.42% and guaranteed by Chevron
Corporation. The proceeds from the issuance of debt were paid to Chevron
Corporation in exchange for Chevron's assumption of the existing ESOP 8.11%
long-term debt of $620 million. Chevron used the cash proceeds to reduce
existing short-term debt, primarily commercial paper. The additions to long-term
debt were partially offset by scheduled and unscheduled long-term debt
repayments of $81 million and a scheduled non-cash retirement in January of ESOP
debt of $70 million. These changes in long-term debt exclude the assumption and
retirement of long-term debt included in the Rutherford-Moran transaction. There
was a net increase of $182 million in short-term debt (excluding the current
portion of long-term debt due for repayment in 12 months or less), primarily
commercial paper and short-term debt assumed in acquisitions, from year-end
1998.
Although the company benefits from lower interest rates on short-term debt, its
proportionately large amount of short-term debt has kept its ratio of current
assets to current liabilities at relatively low levels. This ratio was .75 at
September 30, 1999, down from .88 at year-end 1998. A major factor in this
reduction is an increase in current liabilities of $2.675 billion. This increase
was primarily due to the June 1999 reclassification from noncurrent to current
of an accrual of about $1 billion established in 1998 for the Cities Service
litigation, an increase of $620 million in third-party accounts payable balances
in line with the 1999 increases in crude oil and refined products prices, the
increase in short-term debt and an increase in the current portion of long-term
debt. Interest will continue to accrue on the amount of the judgment in the
Cities Service case until the matter is resolved. The company continues to
pursue the Cities Service matter in the courts.
The company's short-term debt, consisting primarily of commercial paper and the
current portion of long-term debt, totaled $6.185 billion at September 30, 1999.
This amount includes $2.725 billion with termination dates beyond one year that
was reclassified as long-term since the company has both the intent and ability,
as evidenced by revolving credit agreements, to refinance it on a long-term
basis. The company's practice has been to continually refinance its commercial
paper, maintaining levels it believes to be economically attractive.
At October 31, 1999, Chevron had $3.750 billion in committed credit facilities
with various major banks, $2.725 billion of which had termination dates beyond
one year.
The company's debt ratio (total debt : total debt plus stockholders' equity) was
32 percent at September 30, 1999, about the same as at year-end 1998. The
company continually monitors its spending level, market conditions and related
interest rates to maintain what it believes to be reasonable debt levels to fund
its operating and capital expenditure activities.
In October, the company issued $500 million of new 6.625% long-term debt. The
newly issued debt will mature in 2004. The cash proceeds from the debt issue
were used to reduce existing short-term debt, primarily commercial paper. This
debt issue reduced the company's existing "shelf" registrations on file with the
Securities and Exchange Commission to $800 million from $1.3 billion at December
31, 1998.
In December 1997, Chevron's Board of Directors approved the repurchase of up to
$2 billion of its outstanding common stock for use in its employee stock option
programs. To date, the company has purchased 6.4 million shares at a cost of
about $484 million under the repurchase program. There has been no activity
under that program in 1999.
Worldwide capital and exploratory expenditures for the first nine months of
1999, including the company's share of affiliates' expenditures, totaled $4.781
billion, up 25 percent from $3.815 billion spent in the first nine months of
-26-
1998. Expenditures for international exploration and production activities in
the 1999 period were $3.024 billion or about 63 percent of total expenditures,
reflecting the company's continued emphasis on increasing international oil and
gas production. 1999 expenditures include two significant acquisitions in the
international exploration and production segment - Petrolera Argentina San
Jorge, acquired in the third quarter 1999, and the Rutherford-Moran Oil
Corporation, acquired in the first quarter 1999. The company's other segments in
the aggregate have incurred lower expenditures in 1999, compared with 1998, as
the company restricts spending in these areas to fund its international
exploration and production prospects. Spending outside the United States
accounted for 70 percent of total expenditures in nine months 1999, compared
with 50 percent in 1998. The C&E expenditures for the full year 1999 in the
international exploration and production segment will be dependent upon, among
other factors, the ability of our partners, some of which are national petroleum
companies, to fund their share of project expenditures.
-27-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A. Cities Service Co. Litigation
Item 3A of the company's Annual Report on Form 10-K for the period ended
December 31, 1998 and Item 1 of the company's Amended Quarterly Report for the
period ended June 30, 1999 are hereby updated as follows:
A petition for certiorari to the U.S. Supreme Court was filed in September. All
briefs have been filed with the Court and the parties are now waiting for the
Court to decide whether to grant certiorari.
B. El Paso Refinery - Generation of Benzene
Item 3C of the company's Annual Report on Form 10-K for the period ended
December 31, 1998 is hereby updated as follows:
Chevron has agreed to settle this matter by paying $200,000 for a one-year
vehicle scrappage program in the El Paso/Sunland Park, New Mexico/Ciudad Juarez,
Mexico area as a supplemental environmental project. Chevron also agreed to an
order setting forth the details of the supplemental environmental project under
the terms of a resolution by the Texas Natural Resource Conservation Commission
on August 31, 1999. No civil penalties were paid as part of the settlement.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4) Pursuant to the Instructions to Exhibits, certain instruments
defining the rights of holders of long-term debt securities of the
company and its consolidated subsidiaries are not filed because the
total amount of securities authorized under any such instrument
does not exceed 10 percent of the total assets of the company and
its subsidiaries on a consolidated basis. A copy of any such
instrument will be furnished to the Commission upon request.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K was filed by the company on September
28, 1999. In this report, Chevron filed a press release announcing
the acquisition of 100 percent of Petrolera Argentina San Jorge, an
oil and gas exploration and production company in Argentina.
(2) A Current Report on Form 8-K was filed by the company on September
28, 1999. In this report, Chevron filed a press release issued by
its affiliate Caltex Corporation, announcing that Caltex has sold
97.2 percent of its 50 percent equity interest in KOA Oil Co. Ltd.
to Nippon Mitsubishi Oil Corporation.
(3) A Current Report on Form 8-K was filed by the company on September
30, 1999. In this report, Chevron filed two press releases
announcing executive changes at the corporation.
-28-
(4) A Current Report on Form 8-K was filed by the company on October 8,
1999. In this report, Chevron filed an exhibit replacing
information set forth under Exhibit 25.1 in Chevron Corporation's
Registration Statement on Form S-3 (No. 33-58463).
(5) A Current Report on Form 8-K was filed by the company on October
15, 1999. In this report, Chevron filed as an exhibit (Exhibit
4.1), the First Supplemental Indenture between Chevron Corporation
and The Chase Manhattan Bank, as Trustee, dated October 13, 1999.
-29-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEVRON CORPORATION
-------------------------
(Registrant)
Date November 4, 1999 /s/ S.J. Crowe
----------------------------------- ------------------------------
S. J. Crowe, Comptroller
(Principal Accounting Officer
and Duly Authorized Officer)
-30-