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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-368-2
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Chevron Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-0890210
------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
575 Market Street, San Francisco, California 94105
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 894-7700
NONE
---------------------------------
(Former name or former address, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
- -
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of June 30, 1998
---------------------------------- -------------------------------
Common stock, $1.50 par value 654,432,458
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<PAGE>
INDEX
Page No.
Cautionary Statements Relevant to Forward-Looking
Information for the Purpose of "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income for the three
months and six months ended June 30, 1998 and 1997 2
Consolidated Statement of Comprehensive Income
for the three months and six months ended
June 30, 1998 and 1997 2
Consolidated Balance Sheet at June 30, 1998
and December 31, 1997 3
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Listing of Exhibits and Reports on Form 8-K 21
Signature 21
Exhibit: Computation of Ratio of Earnings to Fixed Charges 22
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-
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
Millions of Dollars, Except Per-Share Amounts 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- --------
Sales and other operating revenues* $ 7,754 $ 9,947 $15,218 $20,741
Income from equity affiliates 155 193 306 371
Other income 60 134 98 255
-----------------------------------------
Total Revenues 7,969 10,274 15,622 21,367
-----------------------------------------
Costs and Other Deductions
- --------------------------
Purchased crude oil and products 3,549 4,887 7,184 10,597
Operating expenses 1,355 1,247 2,561 2,622
Selling, general and administrative expenses 276 391 529 736
Exploration expenses 134 98 235 179
Depreciation, depletion and amortization 557 549 1,111 1,095
Taxes other than on income* 1,140 1,630 2,151 3,125
Interest and debt expense 99 76 193 158
-----------------------------------------
Total Costs and Other Deductions 7,110 8,878 13,964 18,512
-----------------------------------------
Income Before Income Tax Expense 859 1,396 1,658 2,855
Income Tax Expense 282 573 581 1,201
-----------------------------------------
Net Income $ 577 $ 823 $ 1,077 $ 1,654
-----------------------------------------
Per Share of Common Stock:
Net Income - Basic $ .88 $ 1.26 $ 1.65 $ 2.53
- Diluted $ .88 $ 1.25 $ 1.64 $ 2.52
Dividends $ .61 $ .58 $ 1.22 $ 1.12
Weighted Average Number of
Shares Outstanding (000s) - Basic 655,459 654,965 655,167 654,819
- Diluted 657,762 656,656 657,503 656,424
* Includes consumer excise taxes. $ 988 $ 1,447 $ 1,840 $ 2,761
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
Millions of Dollars 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 577 $ 823 $ 1,077 $ 1,654
-----------------------------------------
Currency translation adjustment (1) (138) (1) (169)
Unrealized holding (loss) gain on securities (3) 4 (1) (1)
Minimum pension liability adjustment - - (16) 4
-----------------------------------------
Other Comprehensive Income, net of tax (4) (134) (18) (166)
-----------------------------------------
Comprehensive Income $ 573 $ 689 $ 1,059 $ 1,488
-----------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30,
1998 December 31,
Millions of Dollars (Unaudited) 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,185 $ 1,015
Marketable securities 525 655
Accounts and notes receivable 2,950 3,374
Inventories:
Crude oil and petroleum products 569 539
Chemicals 587 547
Materials, supplies and other 289 292
--------------------------
1,445 1,378
Prepaid expenses and other current assets 774 584
--------------------------
Total Current Assets 6,879 7,006
Long-term receivables 577 471
Investments and advances 4,733 4,496
Properties, plant and equipment, at cost 50,247 49,233
Less: accumulated depreciation, depletion and amortization 27,143 26,562
--------------------------
23,104 22,671
Deferred charges and other assets 883 829
--------------------------
Total Assets $36,176 $35,473
==========================
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 2,914 $ 1,637
Accounts payable 2,207 2,735
Accrued liabilities 1,095 1,450
Federal and other taxes on income 631 732
Other taxes payable 458 392
--------------------------
Total Current Liabilities 7,305 6,946
Long-term debt 4,069 4,139
Capital lease obligations 280 292
Deferred credits and other non-current obligations 1,690 1,745
Deferred income taxes 3,460 3,215
Reserves for employee benefit plans 1,698 1,664
--------------------------
Total Liabilities 18,502 18,001
--------------------------
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 2,063 2,022
Deferred compensation (691) (750)
Accumulated other comprehensive income (95) (77)
Retained earnings 17,472 17,185
Treasury stock, at cost (58,063,640 and 56,555,871 shares
at June 30, 1998 and December 31, 1997, respectively) (2,144) (1,977)
--------------------------
Total Stockholders' Equity 17,674 17,472
--------------------------
Total Liabilities and Stockholders' Equity $36,176 $35,473
==========================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------
Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,077 $ 1,654
Adjustments
Depreciation, depletion and amortization 1,111 1,095
Dry hole expense related to prior years' expenditures 33 18
Distributions less than income from equity affiliates (1) (177) (174)
Net before-tax losses (gains) on asset retirements and sales 105 (187)
Net foreign exchange gains (23) (15)
Deferred income tax provision 263 190
Net increase in operating working capital (831) (203)
Other (1) (222) (101)
----------------------------
Net Cash Provided by Operating Activities 1,336 2,277
----------------------------
Investing Activities
Capital expenditures (1,705) (1,660)
Proceeds from asset sales 94 298
Net sales of marketable securities 130 306
----------------------------
Net Cash Used for Investing Activities (1,481) (1,056)
----------------------------
Financing Activities
Net borrowings of short-term obligations 1,421 8
Proceeds from issuance of long-term debt 118 8
Repayments of long-term debt and other financing obligations (284) (202)
Cash dividends paid (798) (732)
Net (purchase) sale of treasury shares (1) (139) 92
----------------------------
Net Cash Provided by (Used for) Financing Activities 318 (826)
----------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (3) (7)
----------------------------
Net Change in Cash and Cash Equivalents 170 388
Cash and Cash Equivalents at January 1 1,015 892
----------------------------
Cash and Cash Equivalents at June 30 $ 1,185 $ 1,280
============================
<FN>
(1) Certain amounts in 1997 have been reclassified to conform to 1998
presentation
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
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, 1997. 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.
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 1997 Annual Report on Form 10-K.
The results for the three- and six-month periods ended June 30, 1998 are not
necessarily indicative of future financial results.
Note 2. Net Income
Net income for the second quarter 1998 included net charges of $43 million for
special items. Charges of $40 million resulting from the outsourcing of the
company's mainframe computer and telecommunications operations, $28 million for
the write-off of certain desktop computer equipment and $8 million for a
provision for environmental remediation at a U.S. refinery were offset partially
by benefits of $33 million from favorable prior-year tax adjustments.
Net income for the first six months of 1998 included net benefits of $21 million
from special items. The net charges of $43 million for the second quarter 1998
were more than offset by net benefits of $64 million from special items in the
first quarter of 1998. The 1998 first quarter results included special gains of
$125 million from favorable prior-year tax adjustments. Partially offsetting
these gains were special charges of $56 million for the deferred tax effects of
an exchange of international exploration and production properties and a net $5
million for provisions for environmental remediation in the company's U.S.
refining, marketing and transportation operations.
Net income for the second quarter of 1997 included net charges of $14 million
for special items. Charges of $66 million for the remaining unaccrued cost of
the company's broad-based employee performance stock option program and $12
million for a provision for environmental remediation at a U.S. refinery were
offset partially by gains of $50 million from the sales of 10 percent of the
company's ownership interest in the Tengizchevroil joint venture and upstream
properties in the North Perth Basin area of Australia and a $14 million
favorable prior-year tax adjustment.
In the six-month period ended June 30, 1997, net income included net benefits of
$13 million from special items. The net special charges of $14 million for the
second quarter 1997 were more than offset by net benefits of $27 million from
special items in the first quarter of 1997. The 1997 first quarter results
included special gains of $49 million from the sales of a producing property in
the Gulf of Mexico and one in southern California. Partially offsetting these
gains were special charges of $22 million for provisions for environmental
remediation and other items.
Foreign exchange gains included in second quarter 1998 net income were $96
million, compared with gains of $23 million in second quarter 1997. For the
first six months of 1998, net income included foreign exchange gains of $50
million, compared with gains of $5 million in the same period of 1997.
-5-
<PAGE>
Note 3. Information Relating to the Statement of Cash Flows
The "Net increase in operating working capital" is composed of the following:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in accounts and notes receivable $ 395 $ 617
Increase in inventories (67) (22)
(Increase) Decrease in prepaid expenses and other current assets (188) 23
Decrease in accounts payable and accrued liabilities (932) (924)
(Decrease) Increase in income and other taxes payable (39) 103
- --------------------------------------------------------------------------------------------
Net increase in operating working capital $ (831) $ (203)
- --------------------------------------------------------------------------------------------
</TABLE>
"Net Cash Provided by Operating Activities" includes the following cash payments
for interest on debt and for income taxes:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid on debt (net of capitalized interest) $ 195 $ 163
Income taxes paid $ 421 $ 962
- -------------------------------------------------------------------------------------------
</TABLE>
The "Net sales of marketable securities" consists of the following gross
amounts:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Marketable securities purchased $(1,110) $(1,390)
Marketable securities sold 1,240 1,696
- --------------------------------------------------------------------------------------------
Net sales of marketable securities $ 130 $ 306
- --------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Statement of Cash Flows excludes the following non-cash
transactions:
The company's Employee Stock Ownership Plan (ESOP) repaid $60 million and $50
million of matured debt guaranteed by Chevron Corporation in January of 1998 and
1997, respectively. These payments were recorded by the company as a reduction
in its debt outstanding and in Deferred Compensation.
In the second quarter 1997 the company's Venice, Louisiana natural gas
facilities were contributed to a partnership with NGC Corporation (renamed
Dynegy Incorporated in June 1998). The company's property, plant and equipment
was reduced for the net book value of the contributed assets and an investment
in the partnership, together with a deferred gain, were recorded. There was no
cash effect from the transaction and the amounts were not material to the
company's balance sheet.
Note 4. Summarized Financial Data - Chevron U.S.A. Inc.
At June 30, 1998, 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, effective February 1,
-6-
<PAGE>
1998, Chevron Chemical Company LLC. Summarized financial information for
Chevron U.S.A. Inc. and its consolidated subsidiaries is presented as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
Millions of Dollars 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and other operating revenues $6,446 $6,753 $12,308 $14,392
Costs and other deductions 6,156 6,373 11,861 13,560
Net income 46 256 242 634
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
Millions of Dollars 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Current assets $ 3,525 $ 2,854
Other assets 16,461 13,867
Current liabilities 3,486 3,282
Other liabilities 6,186 4,966
Net worth 10,314 8,473
- --------------------------------------------------------------------
</TABLE>
Note 5. Summarized Financial Data - Chevron Transport Corporation
Chevron Transport Corporation (CTC), a Liberian corporation, is an indirect,
wholly owned subsidiary of Chevron Corporation. CTC is the principal operator of
Chevron's international tanker fleet and is engaged in the marine transportation
of crude oil and refined petroleum products. Most of CTC's shipping revenue is
derived by providing transportation services to other Chevron companies. Chevron
Corporation has guaranteed this subsidiary's obligations in connection with
certain debt securities where CTC is deemed to be an issuer. In accordance with
the Securities and Exchange Commission's disclosure requirements, 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
Millions of Dollars 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and other operating revenues $155 $135 $290 $256
Costs and other deductions 164 138 295 275
Net income (2) 12 6 16
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
Millions of Dollars 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Current assets $ 298 $ 243
Other assets 870 897
Current liabilities 782 666
Other liabilities 297 311
Net worth 89 163
- -------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
In March 1998, CTC returned $80 million of paid-in capital to its parent in
partial settlement of a receivable balance.
Separate financial statements and other disclosures with respect to CTC are
omitted as such separate financial statements and other disclosures are not
material to investors in the debt securities deemed issued by CTC. There were no
restrictions on CTC's ability to pay dividends or make loans or advances at June
30, 1998.
Note 6. 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
Millions of Dollars 1998 1997(1) 1998 1997(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenues $4,249 $4,433 $8,555 $9,127
Income before income taxes 270 319 589 639
Net income 222 200 426 386
- ----------------------------------------------------------------------------------
<FN>
(1) 1997 amounts have been reclassified to conform to 1998 presentation.
</FN>
</TABLE>
Note 7. Income Taxes
Taxes on income for the second quarter and first half of 1998 were $282 million
and $581 million, respectively, compared with $573 million and $1.201 billion
for the comparable 1997 periods. The effective income tax rate for the first
half of 1998 decreased to 35 percent from 42 percent in the 1997 first half. The
lower tax rate was due to the adjustment of prior years' income taxes and
associated estimated interest reserves resulting from the favorable resolution
of certain open tax issues with the IRS and higher equity affiliates' after-tax
earnings as a proportion of before-tax income. The company also recognized
beneficial prior-year tax adjustments resulting from a favorable U.S. tax ruling
related to its investment in the Tengizchevroil (TCO) partnership in the
Republic of Kazakhstan and from the utilization of additional foreign tax
credits. These benefits were partially offset by a shift in the company's 1998
international earnings mix to countries with higher effective tax rates and by
additional deferred taxes arising from an exchange of international upstream
properties.
Note 8. Taxes Other Than On Income
Taxes other than on income for the second quarter and first half of 1998 were
$1.140 billion and $2.151 billion, respectively, compared with $1.630 billion
and $3.125 billion for the comparable 1997 periods. The effect of the company's
fourth quarter 1997 withdrawal from the U.K. refining and marketing business
contributes $557 million and $1.038 billion to the decrease in excise taxes when
comparing the second quarter and six month periods of 1998 and 1997,
respectively. These decreases in excise taxes are also components of the
decreases in sales and other operating revenues between periods. There was no
net income effect from the decreases in excise taxes in either period.
-8-
<PAGE>
Note 9. Contingent Liabilities
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 to purchase
Cities' stock in 1982 made by Gulf Oil Corporation, acquired by Chevron in 1984.
A trial with respect to the claims ended in July 1996 with a judgment against
the company of $742 million, including interest that continues to accrue at a
rate of 9.55 percent per year while the appeal is pending. The company has filed
an appeal with the Oklahoma Supreme Court and posted a bond for 1.5 times the
amount of the judgment. Although the ultimate outcome of this matter cannot be
determined presently with certainty, the company believes that errors were
committed by the trial court that should result in the judgment being reversed
on appeal.
In a lawsuit in Los Angeles, California, brought in 1995, the company and five
other oil companies are contesting the validity of a patent granted to Unocal
Corporation (Unocal) for reformulated gasoline, which the company sells in
California during certain months of the year. The first two phases of the trial
were concluded in October and November 1997, with the jury upholding the
validity of the patent and assessing damages at the rate of 5.75 cents per
gallon of gasoline sold in infringement of the patent between March 1 and July
1, 1996. In the third phase of the trial, the judge heard evidence to determine
if the patent is enforceable; the matter is currently under submission. 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. However, should the jury's findings and Unocal's
position 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 is the subject of other lawsuits and claims, including, along with
other oil companies, actions challenging oil and gas royalty and severance tax
payments based on posted prices. Plaintiffs may seek to recover large and
sometimes unspecified amounts, and some matters may remain unresolved for
several years. While it is not practical to estimate a range of possible loss
for the company's litigation matters, 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 materially affect its consolidated
financial position or liquidity.
Other Contingencies -
The U.S. federal income tax and California franchise tax liabilities of the
company have been settled through 1987 and 1991, respectively. In June 1997, the
company's Caltex affiliate 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 is challenging the claim and fully expects
to prevail. Caltex believes the underlying excise tax claim is wrong and
therefore the claim for penalties and interest is wrong. In February 1998,
Caltex provided an initial letter of credit for $2.33 billion to the IRS to
pursue the claim. The letter of credit is guaranteed by Chevron and Texaco.
Caltex has also made a cash deposit with the IRS, which it believes is
appropriate in order to pursue this matter to court. On May 8, 1998 Caltex filed
a complaint in the United States Court of Federal Claims requesting a refund of
the cash deposit and asking the court to hold that Caltex owes nothing on the
IRS claim.
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.
-9-
<PAGE>
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, 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's operations 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 and Venezuela.
The Caltex Group has significant operations in Indonesia, Korea, Japan,
Australia, Thailand, the Philippines, Singapore, and South Africa. The company's
Tengizchevroil affiliate operates in Kazakhstan.
Note 10. Issuance of New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes criteria for
when these types of costs should be expensed as incurred or capitalized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998, and earlier adoption is permitted in fiscal years for which
annual financial statements have not been issued. The company is currently
evaluating implementation of SOP 98-1 and the effects the Statement will have on
its financial statements and disclosures. The company believes that adoption of
the Statement will not have a material effect on the company's results of
operations, financial position, capital resources or liquidity.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities," which provides guidance on the financial reporting of start-up
costs and organization costs. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1998, and earlier
adoption is permitted in fiscal years for which annual financial statements have
not been issued. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. The company is currently evaluating
implementation of SOP 98-5 and the effects the Statement will have on its
financial statements and disclosures. The company believes that adoption of the
Statement will not have a material effect on the company's results of
operations, financial position, capital resources or liquidity.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.
-10-
<PAGE>
FAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are to be
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Earlier application of the
provisions of the Statement is encouraged and is permitted as of the beginning
of any fiscal quarter that begins after the issuance of the Statement. The
company is currently evaluating implementation of FASB Statement No. 133 and the
effects the Statement will have on its financial statements and disclosures. The
company believes that, due to its current limited use of derivative instruments,
adoption of the Statement will not have a material effect on the company's
results of operations, financial position, capital resources or liquidity.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1998 Compared With Second Quarter 1997
And First Half 1998 Compared With First Half 1997
Financial Results
- -----------------
Net income for the second quarter of 1998 was $577 million ($.88 diluted
earnings per share), a decrease of 30 percent from the net income of $823
million ($1.25 diluted earnings per share) for the 1997 second quarter. In the
1998 second quarter, net charges of $43 million for special items represented
the effect of $68 million associated with the costs of outsourcing the company's
U.S. mainframe computer and telecommunications operations and the write-off of
certain desktop computer equipment, and a provision of $8 million for
environmental remediation at a U.S. refinery, which were partially offset by
favorable prior-year tax adjustments of $33 million. In the 1997 quarter,
special items reduced earnings $14 million as asset sale gains and other net
special items totaling $52 million were more than offset by a $66 million charge
for the cost of the company's broad-based performance stock option program.
Excluding special items, 1998 second quarter operating earnings were $620
million, compared with record quarterly operating earnings of $837 million in
1997.
Net income for the first six months of 1998 was $1.077 billion ($1.64 diluted
earnings per share), down from $1.654 billion ($2.52 diluted earnings per share)
for the first half of 1997. Net income for the 1998 and 1997 year-to-date
periods included net benefits of $21 million and $13 million, respectively, from
special items. Excluding these benefits, six-month earnings were $1.056 billion
compared with $1.641 billion in the first half of 1997.
The collapse in crude oil prices, which began late last year, was the primary
cause of the decline in the company's worldwide exploration and production
(upstream) earnings for the three- and six-month periods ended June 30, 1998. In
June of 1998 crude oil prices fell to their lowest levels since 1986. Chevron's
second quarter average U.S. crude oil realizations were about $5.50 per barrel
lower than last year's quarter, a drop of 33 percent. For the first half of
1998, these prices were almost $6.50 per barrel lower than the same period last
year.
U.S. refining, marketing and transportation (downstream) operating results
improved from last year's quarter on higher margins and a 6 percent increase in
Chevron-branded motor gasoline sales volumes. International downstream earnings
also increased, as foreign currency gains helped mitigate the impact of
deteriorating Asian market conditions for the company's Caltex affiliate.
However, operating results from the company's chemicals business were down in
the second quarter 1998 compared with the same quarter of 1997, as lower prices
and sales volumes for major petrochemical products more than offset lower
feedstock costs and operating expenses.
Operating Environment and Outlook
- ---------------------------------
The company continues to monitor the crude oil market closely, but has not made
any substantive changes to its operations or capital spending plans. During the
first seven months of 1998, the spot price of West Texas Intermediate (WTI), an
industry benchmark light crude, averaged $15.09 per barrel, representing a 28
percent decline from the corresponding 1997 period. For the month of July 1998,
the WTI spot price averaged $14.08 per barrel and has fallen to lower levels in
early August.
Some countries in which Chevron has producing operations have mandated crude oil
production cuts to help boost the price of crude oil. To date, Chevron's
production has not been materially affected by these cuts, and the company
believes the net effect of any curtailments directed by host countries would be
insignificant 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.
The company's Caltex affiliate may continue to be affected adversely by a
decline in the demand for refined products in the Asian markets in which it
operates. As Asian marketers continue to sell a larger proportion of their
refined products into the highly competitive export market, lower prices and
narrower sales margins result.
Earnings of Chevron's chemicals operations are expected to decline in the second
half of 1998. The financial results will include the additional expenses
associated with the upcoming scheduled shutdown of the ethylene unit at the
company's Cedar Bayou manufacturing facility for maintenance and repairs. In
addition, the company anticipates continued downward pressure on commodity
chemical product prices as a result of industry manufacturing
-12-
<PAGE>
overcapacity, reduced Asian demand for U.S. manufactured products and the influx
of chemical products into the United States from Asian manufacturers.
Chevron and its affiliates continue to review and analyze their operations and
may close, sell, exchange, acquire or restructure assets to achieve operational
or strategic benefits to improve competitiveness and profitability. In addition,
Chevron receives claims from, and submits claims to, customers, trading
partners, contractors and suppliers. The amounts of these claims, individually
and in the aggregate, may be significant and require lengthy periods to resolve.
These activities may result in significant losses or gains in future periods. In
the second half of 1998, the company expects to realize the benefits from the
receipt of proceeds from certain insurance claims and to recognize favorable
income tax adjustments from its foreign operations that may be material to its
income.
Current Developments
- --------------------
In Angola, the company announced in May that production began from the Lomba
field, located in the Block O concession, 40 miles offshore Cabinda in 400 feet
of water. Natural gas, produced in association with the crude oil, will be
collected, compressed and re-injected into the formation to enhance production.
Lomba's production began at 15,000 barrels per day, which is expected to
increase to 22,000 barrels per day by November 1998. Chevron has a 39.2-percent
interest in the Block O concession.
Also in Angola, the company announced a third significant discovery in the
Chevron-operated Block 14 offshore concession, which is adjacent to the
Chevron-operated Block O concession. This discovery, named Benguela, is in
waters more than 1,300 feet deep. Other discoveries in the Block 14 exploration
program are Kuito and Landana. Development of Kuito, which has been
characterized as a giant field and was the first discovery in Block 14, is
currently moving forward. Chevron's interest in Block 14 is 31 percent.
Chevron began production in June from the Dibi oil field in Nigeria, the third
field brought into production this year in the western Niger Delta area. The
Opolo field began production in the first quarter of 1998 and the Gbokoda field
came on stream in April. The Dibi field will be Chevron's second "zero-flare"
oil field project in Nigeria following the lead of the Gbokoda field. Natural
gas that is produced with crude oil from the Dibi and Gbokoda fields will be
gathered and processed for commercial use through the Escravos Gas Project,
inaugurated in May 1997, to reduce gas flaring and commercialize Nigeria's gas
resources. Chevron has a 40-percent equity interest in these fields.
In July, Chevron received its official 1998 budget allocation approved by its
partner in Nigeria, the government-owned Nigerian National Petroleum Corporation
(NNPC), based on a total oil industry budget of $2.5 billion for joint ventures
in the country. Prior to the death of the former Nigerian leader, General
Abacha, NNPC had been funding the joint ventures in the country at 1997's
approved budget rate of $2.05 billion.
Chevron has significant production and development projects under way in West
Africa. Its share of combined production from Nigeria, Angola, Republic of Congo
and Democratic Republic of Congo is more than 310,000 barrels per day. Civil
unrest, political uncertainty and economic conditions in this area may affect
the company's producing operations. The company continues to monitor
developments closely.
In Venezuela, Chevron assumed responsibility for operations and the development
of the LL-652 oil field in May from Petroleos de Venezuela on behalf of an
international consortium. The consortium plans to invest about $2 billion to
develop the field and expand production over the 20-year life of the agreement.
Chevron has a 30-percent interest in the consortium.
Offshore eastern Canada, crude oil production returned to about 60,000 barrels
per day in June at the Hibernia oil project after the completion of a program
that began last winter to boost reservoir pressure. Production is expected to
exceed 100,000 barrels per day later in 1998 as new wells come on-stream.
Hibernia, located offshore on Newfoundland's Grand Banks, is Canada's first
major offshore project.
The company announced in early August that production had begun at the Britannia
gas condensate field in the U.K. North Sea. The field is operated jointly by
Chevron and Conoco on behalf of an international consortium and is expected to
reach its full daily capacity of 740 million standard cubic feet of gas per day
and over 50,000 barrels of condensate per day by October 1998. Chevron's equity
interest in Britannia is 30.2 percent.
-13-
<PAGE>
In the Gulf of Mexico, Chevron's Genesis project team in June installed the
28,700-ton hull of the floating spar platform in waters a half-mile deep, 150
miles south of New Orleans. The massive hull will serve as the foundation for
the drilling and production platform to be used to develop Green Canyon Block
205. Production from Green Canyon Block 205 is expected to begin in late 1998
and reach 55,000 barrels per day of oil and 72 million cubic feet per day of gas
by the year 2000. Chevron's equity interest in the Genesis project is 57
percent.
In Alaska, Chevron and Atlantic Richfield (ARCO) in early August signed two
agreements to partner equally in exploration and development projects on the
North Slope of Alaska. The first agreement provides for joint exploration and
appraisal of an approximate 4,000-square-mile area that includes leases recently
acquired by both companies in Alaska State Lease Sale 87. The second agreement
encompasses the McCovey/Salmon area, which included 196,000 offshore acres north
of the Prudhoe Bay oil field in the Beaufort Sea. ARCO has been designated as
exploration and development operator in both agreements.
Chevron Products Company signed an agreement in June to purchase Amoco
Corporation's U.S. lubricant business. This acquisition is expected to be a key
step in positioning Chevron as a leading marketer of heavy duty and industrial
oils in North America and significantly strengthens the company's position in
the mid-western region of the United States, where Amoco was a leading supplier.
Caltex, Chevron's 50-percent-owned equity affiliate, announced a major
restructuring in response to increased competition in its markets and the
economic impact of the Asian economic crisis. The restructuring includes the
realignment of global responsibilities from a geographic focus to a primarily
functional focus, the elimination of about 170 positions and the redeployment of
personnel. When fully implemented, direct before-tax savings for Caltex from the
restructuring are expected to be about $50 million annually. The company
anticipates that Caltex will record a charge associated with this restructuring
program during the second half of 1998.
Year 2000 compliance assessments of the company's information systems, software
and embedded technology continue and are coordinated by a specially formed Year
2000 Project Team. The company is also investigating the Year 2000 compliance
efforts of suppliers, contractors, and other third party entities with whom
Chevron does business and has material relationships, with a view to preventing
the company's operations from being adversely affected by significant compliance
problems of others. In several areas of the company's business, the assessment
stage is complete and corrective actions are under way. Specific areas where the
company could face material Year 2000 issues include the embedded technology in
certain of its exploration and production facilities, refinery operations and
chemical plants. Chevron has signed various consulting contracts with entities
which have expertise in Year 2000 assessment and remediation services for
embedded technology and information systems and software. While many
uncertainties exist, the company intends that substantially all material Year
2000 issues surrounding its information systems and software, embedded
technology and third party relationships will be identified by the end of 1998.
The company also intends that all material issues will be corrected or addressed
by the end of 1999. Concurrent with its efforts to correct Year 2000 issues, the
company will be developing appropriate contingency plans to help prevent the
company's operations from being materially impacted by a failure to correct a
Year 2000 problem. The total amount of costs to be incurred by the company to
address Year 2000 issues cannot be reliably estimated at this time. The ultimate
effects of certain Year 2000 technology problems may not be known until 2000.
Because of uncertainties, the actual effects of the Year 2000 issue on Chevron
may be different from the company's current assessment. However, the company
currently believes that Year 2000 issues will not have a material effect on its
results of operations, consolidated financial position or liquidity.
The European Economic Union will begin conversion of its various currencies to
the "Euro" on January 1, 1999. The company is evaluating what effect, if any,
the conversion to the Euro will have on the company's activities. The company
believes this conversion will not have a material effect on its results of
operations or liquidity.
Review of Operations
- --------------------
Total revenues for the quarter were $8.0 billion, a decrease of 22 percent from
$10.3 billion in last year's second quarter. For the six-month period, total
revenues were $15.6 billion, down 27 percent from $21.4 billion in the first
half of 1997. Except for U.S. natural gas in the second quarter, average sales
realizations from refined products, crude oil, and natural gas have declined
significantly in 1998 compared with the same periods of 1997. Additionally, the
absence of revenues from the U.K. refining and marketing business, due to the
company's exit in the fourth
-14-
<PAGE>
quarter 1997, represents about one third of the quarterly decline and one fourth
of the year-to-date decline in total revenues.
The company continues to keep tight control over its operating expense, which is
critically important during this period of low crude oil prices. For the first
six months of 1998, operating expenses were $5.32 per barrel, down about 6
percent from comparable operations in the 1997 first half, helping to mitigate
the effect of declining commodity and product prices. Total operating, general
and administrative expenses, adjusted for special items, declined $113 million
in the 1998 first half to $3.089 billion compared with $3.202 billion in the
first half of 1997 despite increases in oil and natural gas production and
refined products sales volumes.
Taxes on income for the second quarter and first half of 1998 were $282 million
and $581 million, respectively, compared with $573 million and $1.201 billion
for the comparable 1997 periods. The effective income tax rate for the first
half of 1998 decreased to 35 percent from 42 percent in the 1997 first half. The
lower tax rate was due to the adjustment of prior years' income taxes and
associated estimated interest reserves resulting from the favorable resolution
of certain open tax issues with the IRS and higher equity affiliates' after-tax
earnings as a proportion of before-tax income. The company also recognized
beneficial prior-year tax adjustments resulting from a favorable U.S. tax ruling
related to its investment in the Tengizchevroil (TCO) partnership in the
Republic of Kazakhstan and from the utilization of additional foreign tax
credits. These benefits were partially offset by a shift in the company's 1998
international earnings mix to countries with higher effective tax rates and by
additional deferred taxes arising from an exchange of international upstream
properties.
Foreign currency gains of $96 million and $23 million were included in the
second quarter net income for 1998 and 1997, respectively. Net income for the
first half of 1998 and 1997 included foreign currency gains of $50 million and
$5 million, respectively. The increases in foreign exchange gains occurred in
many of Caltex's countries of operations, and in Chevron's Australian and
Canadian businesses.
The following tables detail the company's after-tax earnings by major operating
area and selected operating data.
<TABLE>
<CAPTION>
EARNINGS BY MAJOR OPERATING AREA
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
Millions of Dollars 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration and Production
United States $ 85 $182 $ 191 $ 543
International 211 357 310 704
- ---------------------------------------------------------------------------------------------------------
Total Exploration and Production 296 539 501 1,247
- ---------------------------------------------------------------------------------------------------------
Refining, Marketing and Transportation
United States 225 182 270 252
International 115 92 216 148
- ---------------------------------------------------------------------------------------------------------
Total Refining, Marketing and Transportation 340 274 486 400
- ---------------------------------------------------------------------------------------------------------
Total Petroleum Operations 636 813 987 1,647
Chemicals 47 77 110 140
Coal and Other Minerals 9 6 20 21
Corporate and Other * (115) (73) (40) (154)
- ---------------------------------------------------------------------------------------------------------
Net Income $577 $823 $1,077 $1,654
- ---------------------------------------------------------------------------------------------------------
<FN>
* "Corporate and Other" includes interest expense, interest income on cash
and marketable securities, corporate center costs, and real estate and
insurance activities.
</FN>
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA (1) (2)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 337 340 336 344
Net Natural Gas Production (MMCFPD) 1,786 1,896 1,796 1,911
Sales of Natural Gas (MMCFPD) 3,336 3,324 3,416 3,545
Sales of Natural Gas Liquids (MBPD) (3) 127 100 134 128
Revenue from Net Production
Crude Oil ($/Bbl.) $11.35 $16.86 $11.92 $18.36
Natural Gas ($/MCF) $ 2.08 $ 1.95 $ 2.08 $ 2.36
International Exploration and Production
Net Crude Oil and Natural Gas Liquids Production (MBPD) 764 734 756 731
Net Natural Gas Production (MMCFPD) 559 543 602 580
Sales of Natural Gas (MMCFPD) 1,398 1,226 1,363 1,007
Sales of Natural Gas Liquids (MBPD) (3) 60 68 58 61
Revenue from Liftings
Liquids ($/Bbl.) $12.38 $17.14 $12.68 $18.51
Natural Gas ($/MCF) $ 1.81 $ 2.07 $ 1.89 $ 2.18
Other Produced Volumes (MBPD) (4) 93 81 92 80
U.S. Refining, Marketing and Transportation
Sales of Gasoline (MBPD) (5) 689 574 644 580
Sales of Other Refined Products (MBPD) 618 618 576 601
Refinery Input (MBPD) 996 979 877 913
Average Refined Product Sales Price ($/Bbl.) $22.75 $28.43 $23.17 $29.39
International Refining, Marketing and Transportation
Sales of Refined Products (MBPD) 791 882 800 897
Refinery Input (MBPD) 478 588 485 581
Chemical Sales and Other Operating Revenues(6)
United States $659 $798 $1,340 $1,550
International 140 151 285 285
- -------------------------------------------------------------------------------------------------------------------
Worldwide $799 $949 $1,625 $1,835
- -------------------------------------------------------------------------------------------------------------------
<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) 1997 restated to conform to 1998 presentation.
(4) Represents total field production under the Boscan operating service
agreement in Venezuela.
(5) Includes branded and unbranded gasoline.
(6) Millions of dollars. Includes sales to other Chevron companies.
</FN>
</TABLE>
Worldwide exploration and production earned $296 million in the second quarter
- -------------------------------------
of 1998, compared with $539 million in the corresponding 1997 period. Earnings
of $501 million in the first six months of 1998 were 60 percent lower than the
$1.247 billion earned in the 1997 first half. U.S. exploration and production
-------------------------------
net quarterly earnings were $85 million, less than half the $182 million earned
in the 1997 second quarter. Six-month earnings were $191 million in 1998,
compared with $543 million earned in the first six months of 1997. There were no
special items in the 1998 second quarter or year to date. However, the 1997
second quarter results were reduced by a special charge of $11 million for the
performance stock option program. Earnings for the 1997 six months benefited $49
million
-16-
<PAGE>
from the sale of assets, partially offset by environmental remediation charges
of $6 million and performance stock option program costs of $11 million.
Net U.S. liquids production averaged 337,000 barrels per day in the second
quarter of 1998 and 336,000 barrels per day year to date. In 1997, liquids
production was 340,000 barrels per day in the second quarter and 344,000 barrels
per day year to date. Net U.S. natural gas production of 1.8 billion cubic feet
per day in the 1998 second quarter and six months declined from 1.9 billion
cubic feet per day for the 1997 periods. The declines in U.S. production of
liquids and natural gas were primarily attributable to property sales, 1998
weather-related shut-ins of liquids production in California and normal field
declines.
The company's 1998 average second quarter U.S. crude oil realizations of $11.35
per barrel declined by $5.51, or 33 percent, compared with the second quarter
1997. Average second quarter U.S. natural gas realizations of $2.08 per thousand
cubic feet were 13 cents higher than in the second quarter of last year. On a
year-to-date basis, 1998 crude oil realizations were $11.92 per barrel, 35
percent lower than the $18.36 per barrel obtained in 1997, and natural gas
prices were $2.08 per thousand cubic feet, a decline of 12 percent from $2.36
per thousand cubic feet last year.
International exploration and production net earnings for the 1998 second
- ----------------------------------------
quarter were $211 million, a decline of 41 percent from $357 million earned in
the second quarter of 1997. Earnings of $310 million in the first six months of
1998 were less than half the $704 million earned in the 1997 first half. The
1998 second quarter results benefited $21 million from prior-year income tax
adjustments. Six-month 1998 results were reduced a net $35 million by a first
quarter loss of $56 million on asset dispositions in addition to the second
quarter special item. The 1997 quarter and six months benefited a net $59
million from special items as gains from asset sales and a favorable prior-year
tax adjustment were partially offset by a $5 million charge for the company's
performance stock option program.
Excluding special items, earnings were $190 million in the 1998 second quarter,
down from $298 million in the year-ago quarter. For the 1998 first half,
earnings of $345 million declined from $645 million earned in the first six
months of 1997. The decline in operating earnings reflected lower crude oil and
natural gas prices, combined with lower liftings, when compared with the
year-ago periods. The 1997 periods also benefited from lower effective income
tax rates arising from the utilization of about $50 million of tax-loss
carryforwards in certain countries.
Net liquids production increased 4 percent to 764,000 barrels per day in the
1998 second quarter, with most of the increase coming from Indonesia and Canada,
combined with new production in Norway. Smaller increases in Nigeria and the
Republic of Congo were offset by production declines in Angola and in the U.K.
North Sea, partially as a result of the first quarter swap of interests in U.K.
producing properties for properties in Norway. Year-to-date production was
756,000 barrels per day, a 3 percent increase from 731,000 barrels per day
produced in 1997.
Net natural gas production increased to 559 million cubic feet per day from 543
million in the 1997 second quarter. Six-month production in 1998 was 602 million
cubic feet per day compared with 580 million cubic feet per day last year. The
increases in both periods were from new production in Nigeria and increases in
Australia and Indonesia, partially offset by declines in Canada.
The company's 1998 average second quarter international crude oil realizations
of $12.38 per barrel declined by $4.76, or 28 percent, compared with the second
quarter 1997. Average second quarter international natural gas realizations of
$1.81 per thousand cubic feet were 26 cents, or 13 percent, lower than in the
second quarter of last year. On a year-to-date basis, 1998 crude oil
realizations were $12.68 per barrel, 31 percent lower than the $18.51 per barrel
obtained in 1997. Natural gas prices were $1.89 per thousand cubic feet, a
decline of 13 percent from $2.18 per thousand cubic feet last year.
Foreign currency effects benefited earnings in all periods. Foreign currency
gains increased 1998 earnings $38 million in the second quarter and $23 million
in the first half. Foreign exchange gains were $12 million in the first quarter
and $17 million for the six months of 1997. Most of the foreign exchange gains
in both years were related to the U.S. dollar's fluctuation against the
Australian and Canadian currencies.
Worldwide refining, marketing and transportation operations reported earnings of
- ------------------------------------------------
$340 million in the 1998 second quarter, an increase of 24 percent over the $274
million earned in last year's second quarter. The 1998 first-half earnings were
$486 million, a 22 percent increase from the corresponding 1997 period.
U.S. refining, marketing and transportation net earnings were $225 million in
- ------------------------------------------
the 1998 second quarter, an increase of 24 percent
-17-
<PAGE>
from $182 million in the 1997 second quarter, and five times the $45 million
earned in this year's first quarter. Six-month earnings for 1998 were $270
million compared with $252 million in the 1997 six months.
Earnings in all periods were reduced by special charges. In the 1998 second
quarter and first half of 1998, results were reduced $8 million and $13 million,
respectively, for environmental remediation activities. The 1997 second quarter
included charges of $23 million for the performance stock option program and $12
million for environmental remediation provisions. In addition to the second
quarter special items, the 1997 six months included an $8 million provision for
litigation. Excluding special charges, 1998 second quarter results of $233
million increased 7 percent from $217 million in 1997; six-month earnings in
1998 were $283 million, down slightly from $295 million in the 1997 six months.
The improvement in second quarter earnings primarily resulted from stronger
margins and increased sales volumes of Chevron-branded motor gasoline.
Total refined product sales volumes were 1.31 million barrels per day in the
second quarter of 1998, up 10 percent from the comparable quarter last year.
Chevron-branded motor gasoline sales improved by 6 percent over last year's
quarter, while other refined products sales volumes increased by 12 percent.
Year to date, sales volumes were up more than 3 percent to 1.22 million barrels
per day. Sales volumes for Chevron-branded motor gasoline had declined in the
first quarter 1998 compared to the fourth quarter and full year 1997. Poor
weather caused by the effects of El Nino depressed the demand for motor gasoline
in this year's first quarter, especially in California.
The company's average refined product prices were $22.75 per barrel in the 1998
second quarter compared with $28.43 in the 1997 quarter. Average refined product
prices were $23.17 and $29.39 in the first halves of 1998 and 1997,
respectively.
International refining, marketing and transportation net earnings were $115
- --------------------------------------------------------
million and $216 million in the 1998 second quarter and six months,
respectively, compared with $92 million and $148 million in the comparable
periods last year. Results for the 1997 quarter and six months were reduced $3
million by a special charge for the performance stock option program. There were
no special items in the 1998 earnings.
In the Caltex areas of operations, foreign currency gains of $56 million offset
declines in sales margins in most of the Asian markets. The region's economic
problems have resulted in reduced refined products demand, which Caltex has
experienced primarily in Korea and Thailand, combined with oversupply
conditions. A larger portion of sales by Asian marketers is occurring in the
highly competitive export market, where lower prices are reducing sales margins.
Total refined products sales volumes declined by 10 percent to 791,000 barrels
per day in the second quarter of 1998 and 11 percent to 800,000 barrels per day,
year to date, compared with last year. The decline reflects the effect of the
company's exit from the U.K. refining and marketing business in the fourth
quarter of 1997.
Foreign currency gains in the second quarter 1998 were $59 million, compared
with gains of $13 million in the 1997 quarter. In the first half of 1998,
foreign currency effects resulted in gains of $28 million compared with a loss
of $16 million in the 1997 first half.
Chemicals net earnings were $47 million in the 1998 quarter, compared with net
- ---------
earnings of $77 million in last year's second quarter. Earnings in the first
half of 1998 were $110 million compared with $140 million in 1997. Net income
for the second quarter and six months of 1997 included a $9 million special
charge for the company's performance stock option program. There were no special
items in the 1998 periods. The decrease in operating earnings was the result of
declines in prices and sales volumes for the company's major chemical products,
reflecting excess industry capacity and the effects of the Asian economic
crisis. Also contributing to the decline were lower earnings from equity
affiliates, due to the sale of the company's interest in a U.K. affiliate in the
fourth quarter of 1997.
Coal and other minerals second quarter net earnings increased to $9 million from
- -----------------------
$6 million in last year's second quarter. Six-month earnings were $20 million
compared with $21 million in last year's six months. Results in both 1997
periods included a $2 million special charge for the company's performance stock
option program; there were no special items in 1998.
Corporate and other includes interest expense, interest income on cash and
- --------------------
marketable securities, corporate center costs and real estate and insurance
operations. These activities incurred net charges of $115 million in the second
-18-
<PAGE>
quarter of 1998, compared with net charges of $73 million in the comparable
prior-year quarter. The second quarter earnings in 1998 included net special
charges of $56 million. Costs resulting from the outsourcing of the company's
mainframe computer and telecommunications operations and the write-off of
certain desktop computer equipment were partially offset by favorable prior-year
income tax adjustments. The 1997 quarter included special charges of $13 million
for the company's performance stock option program.
Year-to-date charges were $40 million in 1998, compared with $154 million in
last year's first half. Special items of $69 million in the 1998 first half
included favorable prior-year income tax related adjustments of $125 million, in
addition to the second quarter net special charges. The 1997 year-to-date
results included an $8 million special charge for environmental remediation in
addition to the second quarter special charge. Excluding special items, ongoing
net charges in the 1998 second quarter were about flat with last year, and first
half charges were lower due primarily to recoveries of certain prior-year claims
and lower costs of variable components of employee compensation plans, which
were offset in part by higher interest expense.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $1.185 billion at June 30, 1998, a $170
million increase from year-end 1997. Cash from operations and an increase in
short-term debt funded the company's capital expenditures and dividend payments
to stockholders.
The company's debt and capital lease obligations totaled $7.263 billion at June
30, 1998, up 20 percent from $6.068 billion at year-end 1997. The increase was
primarily from net additions of $1.421 billion in short-term debt, primarily
commercial paper, and newly issued long-term variable-rate obligations of $118
million. Partially offsetting these increases were scheduled and unscheduled
long-term debt repayments of $282 million and a scheduled non-cash retirement in
January of $60 million of 8.11 percent ESOP debt.
Although the company benefits from lower interest rates on short-term debt, its
proportionately large amount of short-term debt has kept Chevron's ratio of
current assets to current liabilities at relatively low levels. This ratio was
.94 at June 30, 1998, down from 1.01 at year-end 1997. The company's short-term
debt, consisting primarily of commercial paper and the current portion of
long-term debt, totaled $5.639 billion at June 30, 1998. This amount includes
$2.725 billion that was reclassified as long-term since the company has both the
intent and ability, as evidenced by revolving credit agreements, to refinance it
on a long-term basis. The company's practice has been to continually refinance
its commercial paper, maintaining levels it believes to be economically
attractive.
The company's debt ratio (total debt : total debt plus stockholders' equity) was
29 percent at June 30, 1998, up from 26 percent at year-end 1997, primarily as a
result of the increase in outstanding commercial paper debt. The company
continually monitors its spending level, market conditions and related interest
rates to maintain what it believes to be reasonable debt levels to fund its
operating and capital expenditure activities.
In December 1997, Chevron's Board of Directors approved the repurchase of up to
$2 billion of its outstanding common stock for use in its employee stock option
programs. In the first quarter of 1998, the company purchased 2.8 million shares
at a cost of about $200 million. There were no further purchases in the second
quarter of 1998. As of July 31, the company had purchased 4 million shares of
its stock at a cost of about $300 million under the repurchase program.
The company expects the receipt of cash proceeds in the third quarter in
settlement of a long-term receivable balance from an equity affiliate.
Additionally, the company expects the receipt of cash proceeds in the second
half of 1998 arising from the settlement of certain insurance claims.
Worldwide capital and exploratory expenditures for the first half of 1998,
- ----------------------------------------------
including the company's share of affiliates' expenditures, totaled $2.323
billion, up 3.5 percent from $2.245 billion spent in the 1997 first half. Total
expenditures for exploration and production activities were $1.538 billion
compared with $1.476 billion, about 66 percent of total spending in both years.
Total capital spending in both years was about evenly split between projects in
the United States and outside the United States.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is in settlement discussions with the Utah Department of Air Quality
in relation to a group of notices issued by the agency which allege that the
company violated benzene waste NESHAP regulations. The settlement may involve
the payment of penalties by the company.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of stockholders at the Annual
Meeting on April 29, 1998. Voters elected 13 incumbent directors for one-year
terms. The vote tabulation for individual directors was:
Shares Shares
Directors For Withheld
- --------------------------------------------------------------------------
S. H. Armacost 501,905,502 6,186,582
K. T. Derr 502,399,049 5,693,035
S. Ginn 502,712,017 5,380,067
C. A. Hills 502,286,083 5,806,001
J. B. Johnston 501,866,017 6,226,067
R. H. Matzke 502,487,649 5,604,435
C. M. Pigott 502,569,984 5,522,100
C. Rice 502,284,387 5,807,697
F. A. Shrontz 502,495,056 5,597,028
J. N. Sullivan 502,629,818 5,462,266
C. Tien 502,118,830 5,973,254
G. H. Weyerhaeuser 502,267,453 5,824,631
J. A. Young 502,486,369 5,605,715
Voters approved the appointment of Price Waterhouse LLP (known as
PricewaterhouseCoopers LLP as of July 1, 1998) as the company's independent
accountants by a vote of 503,925,766 (99.6 percent) for and 1,863,466 (0.4
percent) against. There were also 2,302,852 abstentions.
A stockholder proposal to provide information about toxic chemicals released by
Chevron's facilities was rejected. There were 35,332,879 votes (8.5 percent) for
the proposal and 377,793,468 votes (91.5 percent) against. There were 13,575,991
abstentions and 81,389,746 broker non-votes.
-20-
<PAGE>
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
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEVRON CORPORATION
--------------------
(Registrant)
Date August 11, 1998 /s/ M.R. KLITTEN
--------------------- -----------------------------
M. R. Klitten, Vice President
(Chief Financial Officer and
Duly Authorized Officer)
-21-
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
CHEVRON CORPORATION - TOTAL ENTERPRISE BASIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Six Months Year Ended December 31,
Ended --------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
--------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Income before Cumulative Effect
of Changes in Accounting Principles (1) . $ 1,077 $ 3,256 $ 2,607 $ 930 $ 1,693 $ 1,265
Income Tax Expense 663 2,428 2,624 1,094 1,322 1,389
Distributions (Less Than)
Greater Than Equity in Earnings of
Less Than 50% Owned Affiliates (55) (70) 29 (5) (3) 6
Minority Interest 4 11 4 - 3 (2)
Previously Capitalized Interest
Charged to Earnings During Period 14 28 24 47 32 20
Interest and Debt Expense 236 405 471 557 453 390
Interest Portion of Rentals (2) 99 167 158 148 156 169
------- ------- ------- ------- ------- -------
Earnings before Provisions for
Taxes and Fixed Charges $ 2,038 $ 6,225 $ 5,917 $ 2,771 $ 3,656 $ 3,237
======= ======= ======= ======= ======= =======
Interest and Debt Expense $ 236 $ 405 $ 471 $ 557 $ 453 $ 390
Interest Portion of Rentals (2) 99 167 158 148 156 169
Capitalized Interest 24 82 108 141 80 60
------- ------- ------- ------- ------- -------
Total Fixed Charges $ 359 $ 654 $ 737 $ 846 $ 689 $ 619
======= ======= ======= ======= ======= =======
======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 5.68 9.52 8.03 3.28 5.31 5.23
======= ======= ======= ======= ======= =======
<FN>
(1) The information for 1995 and thereafter reflects the company's adoption of
the Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," effective October 1, 1995.
(2) Calculated as one-third of rentals.
</FN>
</TABLE>
-22-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AT JUNE 30, 1998 AND INCOME STATEMENT FOR THE SIX MONTH
PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THEIR RELATED FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,185
<SECURITIES> 525
<RECEIVABLES> 2,981
<ALLOWANCES> 31
<INVENTORY> 1,445
<CURRENT-ASSETS> 6,879
<PP&E> 50,247
<DEPRECIATION> 27,143
<TOTAL-ASSETS> 36,176
<CURRENT-LIABILITIES> 7,305
<BONDS> 4,349
0
0
<COMMON> 1,069
<OTHER-SE> 16,605
<TOTAL-LIABILITY-AND-EQUITY> 36,176
<SALES> 15,218
<TOTAL-REVENUES> 15,622
<CGS> 0
<TOTAL-COSTS> 13,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 1,658
<INCOME-TAX> 581
<INCOME-CONTINUING> 1,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,077
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.64
</TABLE>
