================================================================================
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 March 31, 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 March 31, 1999
---------------------------------- --------------------------------
Common stock, $1.50 par value 655,349,740
================================================================================
<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
ended March 31, 1999 and 1998 2
Consolidated Statement of Comprehensive Income for
the three months ended March 31, 1999 and 1998 2
Consolidated Balance Sheet at March 31, 1999
and December 31, 1998 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Listing of Exhibits and Reports on Form 8-K 25
Signature 25
Exhibit: Computation of Ratio of Earnings to Fixed Charges 26
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 forecast 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; inability of the company's
joint-venture partners to fund their share of operations and development
activities; potential failure to achieve expected production from existing and
future oil and gas development projects; potential disruption or interruption of
the company's production or manufacturing 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
March 31,
Millions of Dollars, Except Per-Share Amounts 1999 1998(1)
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues
Sales and other operating revenues* $ 6,399 $ 7,464
Income from equity affiliates 144 126
Other income 146 38
----------------------
Total Revenues 6,689 7,628
----------------------
Costs and Other Deductions
Purchased crude oil and products 2,781 3,635
Operating expenses 1,160 1,206
Selling, general and administrative expenses 397 253
Exploration expenses 88 101
Depreciation, depletion and amortization 566 554
Taxes other than on income* 1,078 1,011
Interest and debt expense 105 94
----------------------
Total Costs and Other Deductions 6,175 6,854
----------------------
Income Before Income Tax Expense 514 774
Income Tax Expense 185 267
----------------------
Net Income $ 329 $ 507
======================
Per Share of Common Stock:
Net Income - Basic $ .50 $ .78
- Diluted $ .50 $ .77
Dividends $ .61 $ .61
Weighted Average Number of
Shares Outstanding (000s) - Basic 654,677 654,871
- Diluted 657,493 657,128
<FN>
* Includes consumer excise taxes. $ 912 $ 852
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
Millions of Dollars 1999 1998(1)
- -----------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 329 $ 507
----------------------
Unrealized holding (loss) gain on securities (6) 2
Minimum pension liability adjustment (11) (16)
----------------------
Other Comprehensive Income, net of tax (17) (14)
----------------------
Comprehensive Income $ 312 $ 493
======================
<FN>
See accompanying notes to consolidated financial statements.
(1) Restated for the company's share of the cumulative effect of Caltex's
implementation, effective January 1, 1998, of accounting standard - SOP
98-5, "Reporting the Costs of Start-Up Activities" and the cumulative
effect from a change in the company's method of applying an accounting
principle relating to certain Canadian deferred income taxes, effective
January 1, 1998.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31,
Millions of Dollars 1999 December 31,
(Unaudited) 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 538 $ 569
Marketable securities 947 844
Accounts and notes receivable 2,773 2,813
Inventories:
Crude oil and petroleum products 584 600
Chemicals 545 559
Materials, supplies and other 300 296
---------------------------
Inventories, total 1,429 1,455
Prepaid expenses and other current assets 772 616
---------------------------
Total Current Assets 6,459 6,297
Long-term receivables 945 872
Investments and advances 4,794 4,604
Properties, plant and equipment, at cost 52,162 51,337
Less: accumulated depreciation,
depletion and amortization 27,763 27,608
---------------------------
Properties, plant and equipment, net 24,399 23,729
Deferred charges and other assets 1,169 1,038
---------------------------
Total Assets $37,766 $36,540
===========================
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 3,795 $ 3,165
Accounts payable 2,282 2,170
Accrued liabilities 1,169 1,202
Federal and other taxes on income 348 226
Other taxes payable 397 403
---------------------------
Total Current Liabilities 7,991 7,166
Long-term debt 4,053 4,128
Capital lease obligations 285 265
Deferred credits and other
noncurrent obligations 2,561 2,560
Noncurrent deferred income taxes 3,923 3,645
Reserves for employee benefit plans 1,763 1,742
---------------------------
Total Liabilities 20,576 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 2,183 2,097
Deferred compensation (621) (691)
Accumulated other comprehensive income (107) (90)
Retained earnings 16,878 16,942
Treasury stock, at cost (57,184,966
and 59,460,666 shares at March 31, 1999
and December 31, 1998, respectively) (2,212) (2,293)
---------------------------
Total Stockholders' Equity 17,190 17,034
---------------------------
Total Liabilities
and Stockholders' Equity $37,766 $36,540
===========================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
Millions of Dollars 1999 1998(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 329 $ 507
Adjustments
Depreciation, depletion and amortization 566 554
Dry hole expense related to prior years' expenditures 19 22
Distributions less than equity in affiliates' income (102) (74)
Net before-tax (gains) losses on asset retirements and sales (108) 8
Net foreign exchange losses 15 16
Deferred income tax provision 60 132
Net decrease (increase) in operating working capital 90 (760)
Other (78) (28)
------------------------
Net Cash Provided by Operating Activities 791 377
------------------------
Investing Activities
Capital expenditures (797) (730)
Proceeds from asset sales 145 12
Net (purchases) sales of marketable securities (102) 153
Other investing cash flows, net (22) (57)
------------------------
Net Cash Used for Investing Activities (776) (622)
------------------------
Financing Activities
Net borrowings of short-term obligations 484 1,059
Proceeds from issuance of long-term debt 12 9
Repayments of long-term debt and other financing obligations (214) (7)
Cash dividends (399) (399)
Net sales (purchases) of treasury shares 70 (164)
------------------------
Net Cash (Used For) Provided by Financing Activities (47) 498
------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 1 (3)
------------------------
Net Change in Cash and Cash Equivalents (31) 250
Cash and Cash Equivalents at January 1 569 1,015
------------------------
Cash and Cash Equivalents at March 31 $ 538 $1,265
========================
<FN>
See accompanying notes to consolidated financial statements.
(1) Restated for the company's share of the cumulative effect of Caltex's
implementation, effective January 1, 1998, of accounting standard - SOP
98-5, "Reporting the Costs of Start-Up Activities" and the cumulative
effect from a change in the company's method of applying an accounting
principle relating to certain Canadian deferred income taxes, effective
January 1, 1998. Certain other 1998 amounts have been reclassified to
conform to the 1999 presentation.
</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, 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.
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-month period ended March 31, 1999, are not necessarily
indicative of future financial results.
Note 2. Net Income
Net income for the first quarter of 1999 benefited $48 million from special
items, compared with net benefits of $71 million in the 1998 first quarter. In
the 1999 first quarter, a gain of $60 million from the sale of the company's
interest in a coal mining affiliate was partially offset by net environmental
remediation provision of $12 million for the company's U.S. exploration and
production (upstream) and refining, marketing and transportation (downstream)
operations.
The 1998 results included benefits of $125 million from favorable prior-year
income tax adjustments and $32 million from the cumulative effect from a change
in the company's method of applying an accounting principle relating to certain
Canadian deferred income taxes, effective January 1, 1998. Partially offsetting
these benefits were special charges of $56 million for the deferred tax effects
from an exchange of international upstream properties, $25 million for the
company's share of the cumulative effect from Caltex's adoption of a new
accounting standard for the costs of start-up activities and $5 million for net
provisions for environmental remediation in the company's U.S. downstream
operations.
Foreign exchange losses of $9 million and $46 million were included in first
quarter 1999 and 1998 net income, respectively.
Note 3. Information Relating to the Statement of Cash Flows
The "Net decrease (increase) in operating working capital" is composed of the
following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Decrease in accounts and notes receivable $ 41 $ 267
Decrease (increase) in inventories 34 (61)
Increase in prepaid expenses and other current assets (153) (169)
Increase (decrease) in accounts payable
and accrued liabilities 57 (726)
Increase (decrease) in income and other taxes payable 111 (71)
- --------------------------------------------------------------------------------
Net decrease (increase) in operating working capital $ 90 $ (760)
- --------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE>
Changes in accounts payable and accrued liabilities in both periods were largely
related to changes in accounts payable balances. A decrease in the 1998 period
reflected lower prices and amounts owed for crude oil and refined products. The
1999 period reflected an opposite trend in commodity prices and accounts
payable.
"Net Cash Provided by Operating Activities" includes the following cash
payments for interest on debt and for income taxes:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest paid on debt (net of capitalized interest) $ 110 $ 102
Income taxes paid $ 9 $ 205
- --------------------------------------------------------------------------------
</TABLE>
The "Net (purchases) sales of marketable securities" consists of the following
gross amounts:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Marketable securities purchased $ (793) $ (534)
Marketable securities sold 691 687
- --------------------------------------------------------------------------------
Net (purchases) sales of marketable securities $ (102) $ 153
- --------------------------------------------------------------------------------
</TABLE>
The Consolidated Statement of Cash Flows excludes the following significant
non-cash transactions:
In March 1999, the company acquired the Rutherford-Moran Oil Corporation and
another interest in Block 8/32 offshore Thailand. The company recorded a $600
million increase in property, plant and equipment, to reflect the fair value of
assets acquired. The company paid $43 million in cash, net of cash acquired, $91
million of Chevron stock, and assumed net long-term debt of $341 million. The
company also recorded a deferred tax liability of $104 million and a capital
lease obligation of $22 million. Only the net cash component of these
acquisitions is included as "Capital expenditures" in the Consolidated Statement
of Cash Flows. In March 1999, the company repaid $202 million of the assumed
debt, which is included in "Repayments of long-term debt and other financing
obligations."
The company's Employee Stock Ownership Plan (ESOP) repaid $70 million and $60
million of matured debt guaranteed by Chevron Corporation in January of 1999 and
1998, respectively. These payments were recorded by the company as a reduction
in its debt outstanding and in Deferred Compensation - ESOP.
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-
<PAGE>
Reportable segments sales and other operating revenues, including internal
transfers, for the three-month periods ended March 31, 1999 and 1998, are
presented in the following table.
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------
Exploration and Production
United States $ 628 $ 869
International 988 1,244
-----------------
Sub-total 1,616 2,113
Intersegment Elimination - United States (306) (413)
Intersegment Elimination - International (440) (559)
-----------------
Total Exploration and Production 870 1,141
-----------------
Refining, Marketing and Transportation
United States 3,818 4,300
International 919 1,198
-----------------
Sub-total 4,737 5,498
Intersegment Elimination - United States (63) (61)
Intersegment Elimination - International (4) (6)
-----------------
Total Refining, Marketing and Transportation 4,670 5,431
-----------------
Chemicals
United States 627 680
International 176 145
-----------------
Sub-total 803 825
Intersegment Elimination - United States (39) (29)
Intersegment Elimination - International - -
-----------------
Total Chemicals 764 796
-----------------
All Other
United States 107 106
International 2 1
-----------------
Sub-total 109 107
Intersegment Elimination - United States (13) (11)
Intersegment Elimination - International (1) -
-----------------
Total All Other 95 96
-----------------
Sales and Other Operating Revenues
United States 5,180 5,955
International 2,085 2,588
- ----------------------------------------------------------------------------
Sub-total 7,265 8,543
Intersegment Elimination - United States (421) (514)
Intersegment Elimination - International (445) (565)
- ----------------------------------------------------------------------------
Total Sales and Other Operating Revenues $6,399 $7,464
============================================================================
-7-
<PAGE>
The company evaluates the performance of its operating segments on an after-tax
basis, without considering the effects of debt financing interest expense or
investment interest income, both of which are managed by the Chevron Corporation
on a worldwide basis. Corporate administrative costs and assets are not
allocated to the operating segments; however, operating segments are billed for
direct corporate services. Nonbillable costs remain as corporate center
expenses. After-tax segment earnings for the three-month periods ended March 31,
1999 and 1998 are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production
United States $ 47 $ 106
International 116 133
-----------------
Total Exploration and Production 163 239
-----------------
Refining, Marketing and Transportation
United States 82 45
International 87 76
-----------------
Total Refining, Marketing and Transportation 169 121
-----------------
Chemicals
United States 38 44
International 12 19
-----------------
Total Chemicals 50 63
-----------------
-----------------
Total Segment Income 382 423
-----------------
Interest Expense (105) (94)
Interest Income 21 29
Other 31 149
- ----------------------------------------------------------------------------
Net Income $ 329 $ 507
============================================================================
</TABLE>
-8-
<PAGE>
Segment assets at March 31, 1999 and year-end 1998 are presented in the
following table. Segment assets do not include intercompany investments or
intercompany receivables.
<TABLE>
<CAPTION>
March 31, December 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production
United States $ 6,002 $ 6,026
International 11,567 10,794
-----------------------------
Total Exploration and Production 17,569 16,820
-----------------------------
Refining, Marketing and Transportation
United States 8,124 8,084
International 3,643 3,559
-----------------------------
Total Refining, Marketing and Transportation 11,767 11,643
-----------------------------
Chemicals
United States 3,172 3,045
International 829 828
-----------------------------
Total Chemicals 4,001 3,873
-----------------------------
-----------------------------
Total Segment Assets 33,337 32,336
-----------------------------
All Other
United States 2,616 2,467
International 1,813 1,737
-----------------------------
Total All Other 4,429 4,204
-----------------------------
Total Assets - United States 19,914 19,622
Total Assets - International 17,852 16,918
- ----------------------------------------------------------------------------
Total Assets $37,766 $36,540
============================================================================
</TABLE>
The first quarter 1999 increase in international exploration and production
assets shown above is primarily due to the company's acquisitions in March 1999
of the Rutherford-Moran Oil Corporation and another interest offshore Thailand.
Note 5. Income Taxes
Taxes on income for the first quarter of 1999 were $185 million, compared with
$267 million in last year's first quarter. The effective tax rate for the first
quarter of 1999 was 36 percent, compared with 34.5 percent in last year's first
quarter. The increase in the effective tax rate was primarily the result of
prior-period tax adjustments, which lowered the effective tax rate for the 1998
quarter. Partially offsetting this effect were a shift in international earnings
from countries with higher effective income taxes to those with lower effective
taxes, the utilization of capital loss benefits and higher equity affiliates'
after-tax earnings as a proportion of before-tax income.
Note 6. Selling, General and Administrative Expenses
First quarter 1999 selling, general and administrative expenses of $397 million
were $144 million higher than the 1998 quarter. Expenses in the 1999 quarter
were higher on increased interest expense associated with the Cities Service
judgement and increased selling expenses. Expenses in the 1998 quarter were
reduced as a result of the
-9-
<PAGE>
effects of the interest component of favorable prior-year tax adjustments and
recoveries of certain prior-year claims, which did not recur in the 1999
quarter.
Note 7. Summarized Financial Data - Chevron U.S.A. Inc.
At March 31, 1999, Chevron U.S.A. Inc. was Chevron Corporation's principal U.S.
operating subsidiary, 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 in the
following tables.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Sales and other operating revenues $5,252 $5,862
Costs and other deductions 5,231 5,705
Net income 78 196
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
Millions of Dollars 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Current assets $ 3,289 $ 3,227
Other assets 19,160 18,306
Current liabilities 4,279 3,809
Other liabilities 6,576 6,517
Net worth 11,594 11,207
- -----------------------------------------------------------------
</TABLE>
Note 8. 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
March 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Sales and other operating revenues $122 $135
Costs and other deductions 136 131
Net (loss) income (6) 8
- -------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
Current assets $ 293 $ 270
Other assets 1,004 982
Current liabilities 951 898
Other liabilities 282 284
Net worth 64 70
- ----------------------------------------------------------
</TABLE>
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
March 31, 1999.
Note 9. Summarized Financial Data - Caltex Group of Companies
Summarized financial information for the Caltex Group of Companies, owned 50
percent by Chevron and 50 percent by Texaco Inc., is as follows (amounts
reported are on a 100 percent Caltex Group basis):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Millions of Dollars 1999 1998(1)
- -------------------------------------------------------------------------
<S> <C> <C>
Gross revenues $3,960 $4,306
Income before income taxes 289 320
Net income before
cumulative effect of accounting change 203 205
Cumulative effect of accounting change - (50)
-----------------------
Net income 203 155
-----------------------
<FN>
(1) 1998 amounts have been restated for the cumulative effect of Caltex's
adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities,"
effective January 1, 1998.
</FN>
</TABLE>
Note 10. Contingent Liabilities - Litigation
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. 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 the
company's 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 liquidity.
The company is a defendant in a lawsuit that OXY U.S.A. brought in its capacity
as successor in interest to Cities Service Company. The lawsuit claims damages
resulting from the allegedly improper termination of a tender offer made by Gulf
Oil Corporation, acquired by Chevron in 1984, to purchase Cities Service in
1982. A 1996 trial resulted in a judgment against the company of $742 million,
including interest that continues to accrue while this matter is pending. The
Oklahoma Supreme Court affirmed the lower court's decision in March 1999, and
accordingly the company recorded in 1998 results a litigation reserve of $637
million after-tax, substantially all of
-11-
<PAGE>
which pertained to this lawsuit, for the
judgement and accrued interest through December 1998. The company continues to
add to the litigation reserve by recording additional accrued interest for each
accounting period. The company has filed a petition for rehearing in the
Oklahoma Supreme Court. The ultimate outcome of this matter cannot be presently
determined with certainty, and the company will seek further review of this case
in the appropriate courts.
Note 11. Other Contingencies and Commitments
The U.S. federal income tax and California income tax liabilities of the company
have been settled through 1987 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 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.
-12-
<PAGE>
The company's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries, including the United States, in which it operates. In
certain locations, host governments have imposed restrictions, controls and
taxes, and, in others, political conditions have existed that may threaten the
safety of employees and the company's continued presence in those countries.
Internal unrest or strained relations between a host government and the company
or other governments may affect the company's operations. Those developments
have, at times, significantly affected the company's related operations and
results, and are carefully considered by management when evaluating the level of
current and future activity in such countries.
Areas in which the company has significant operations include the United States,
Canada, Australia, United Kingdom, Republic of Congo, Angola, Nigeria,
Democratic Republic of Congo, Papua New Guinea, China, Indonesia, Venezuela and
Thailand. The company's Caltex affiliates have significant operations in
Indonesia, Korea, Japan, Australia, Thailand, the Philippines, Singapore, and
South Africa. The company's Tengizchevroil affiliate operates in Kazakhstan.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 1999 Compared With First Quarter 1998
Financial Results
- -----------------
Net income for the 1999 first quarter was $329 million ($0.50 per share-diluted
and basic), a decrease of 35 percent from 1998 first quarter net income of $507
million ($0.77 per share-diluted, $0.78 per share-basic). Net income for 1999
benefited from net special items of $48 million, compared with net benefits of
$71 million in last year's first quarter. In the 1999 first quarter, a $60
million gain from the sale of the company's interest in a coal mining affiliate
was partially offset by $12 million of net environmental remediation provisions
for the company's U.S. operations.
This year's earnings were adversely affected by severely depressed crude oil,
natural gas and commodity chemical prices. The company has been operating in a
difficult price environment for more than a year. Although the upward trend in
crude oil and natural gas prices, which began in mid-February, was encouraging,
the improvement came too late to significantly increase first quarter earnings.
Chevron's worldwide exploration and production (upstream) earnings suffered
appreciably from the decline in crude oil and natural gas prices since last
year's first quarter. These lower prices were the primary drivers for the
decline in earnings. The company's average U.S. crude oil realization of $9.97
per barrel in the first quarter 1999 fell 20 percent compared with the 1998
first quarter; its average U.S. natural gas realization of $1.63 per thousand
cubic feet (MCF) declined 22 percent. On the positive side, international
liquids production continued to grow. During the first quarter of 1999, net
international liquids production was up more than 8 percent from the first
quarter of last year, primarily due to increased production in Angola, Indonesia
and Kazakhstan.
The company's U.S. refining, marketing and transportation results for the first
quarter of 1999 improved compared with last year, mainly reflecting higher sales
margins and higher refined products sales volumes. The 1999 first quarter
benefited from less downtime and lower expenses from planned maintenance at our
refineries than last year's first quarter. Total U.S. refined products sales
volumes were nearly 5 percent above last year's levels, including a 9 percent
increase in branded motor gasoline sales.
Operating Environment and Outlook
- ---------------------------------
The company's earnings are affected significantly by fluctuations in the price
of crude oil and natural gas. While depressed much of the quarter, the price of
West Texas Intermediate (WTI), a benchmark crude oil, has risen significantly
from its low point of $11.38 per barrel in mid-February of this year to over
$18.50 per barrel in late April/early May. The benchmark Henry Hub natural gas
spot price has also risen to about $2.20 per thousand cubic feet in the late
April, up over 50 cents from its low in early March.
Certain countries in which Chevron has producing operations have mandated
reductions in crude oil production to help boost sales prices of crude oil. To
date, Chevron's overall 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 will 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.
Chevron has significant production and development projects under way in West
Africa. Its share of combined production from Nigeria, Angola, Republic of Congo
and Democratic Republic of Congo was more than 330,000 barrels per day in the
1999 first quarter. Civil unrest, political uncertainty and economic conditions
in this area may affect the company's producing operations. Community protests
have disrupted the company's production in these countries in the past. The
company continues to monitor developments in this area closely, including the
effects of the upcoming change to the recently elected government in Nigeria.
For U.S. downstream operations, excluding the effects of certain crude oil
pricing adjustments, sales margins strengthened late in the first quarter and
remained strong early into the second quarter.
-14-
<PAGE>
The company's Caltex affiliate may continue to be affected adversely by the
Asian economic downturn and its impact on the demand for, and the excess supply
of, refined products in the markets in which it operates.
Chevron announced several consolidations and reorganizations that are expected
to be completed later in 1999 and will result in increased efficiencies and
lower costs. These include the relocation of the headquarters of chemicals and
pipeline operations to Houston, Texas, from the San Francisco Bay Area; the
closing of the LaHabra, California, research facility and relocation of these
research activities to other company locations; the reorganizations of the
company's San Joaquin Valley, Permian Basin, Mid-continent and Gulf of Mexico
Shelf exploration and production operations; and the consolidation of the
company's Australia and Papua New Guinea strategic business units. The company
expects to record a charge to earnings in the second quarter 1999 for employee
termination benefits and certain restructuring costs associated with these and
other organizational changes.
Significant Developments Since the Beginning of 1999
- ----------------------------------------------------
Some of the operational highlights since the beginning of the year were as
follows:
The acquisitions of Rutherford-Moran Oil Corporation and another interest in
Block B8/32 offshore Thailand were completed in late March. These purchases
provide Chevron with an entry into the Southeast Asian gas market through a 52
percent interest in Block B8/32. The new property is located 125 miles offshore
Thailand in 250 feet of water. The company will become the operator of the Block
on October 1, 1999.
In February, Chevron and its partners celebrated first crude oil production from
the Huizhou 32-5 Field, located in the Pearl River Mouth Basin of the South
China Sea. Production from this field is expected to reach 27,000 barrels a day.
Production began in January from Genesis, Chevron's first deepwater project in
the Gulf of Mexico. Production is anticipated to reach 50,000 barrels per day of
oil and equivalent gas by year-end 1999, with peak production expected to reach
67,000 barrels per day by 2002.
In February 1999, Chevron completed the sale of platforms Gail and Grace located
in federal waters in the southeast end of the Santa Barbara Channel, along with
the associated platform-to-shore pipelines, certain onshore pipeline assets and
an onshore processing facility. At the same time, the company also sold its
non-operated interest in the Dos Cuadras producing operations and their
associated pipeline assets and onshore facilities.
The company continues to pursue the sale of its remaining offshore California
assets, including its interests in the Point Arguello Unit and the related
onshore processing facilities. Concurrent with pursuing sale options, Chevron
has notified its partners of its intent to resign operatorship of these assets.
As part of this resignation process, the company commenced shut-in of the
operations on May 1. If an agreement to sell these assets cannot be reached, or
if the partners in the operations take no action to appoint another operator,
the company estimates that all of its Point Arguello assets could be shut in by
the end of August 1999. A sale of the assets or a permanent shut-in will
complete Chevron's exit from offshore California oil and gas producing
activities. If a sale cannot be accomplished, but a new operator is appointed,
then Chevron would hold, at least temporarily, a non-operated interest in the
continuing operations.
In March, Chevron completed the sale of its one-third interest in the Black
Beauty Coal Co. for cash proceeds of about $130 million and recorded an
after-tax gain of $60 million. The company's remaining coal mining assets are
also held for sale.
Chevron Chemical Company LLC began commercial production from its new fuel and
lubricating oil additives manufacturing plant in Singapore during the first
quarter of 1999, with most of the first quarter 1999 production used to build
inventories. Increased sales volumes are expected in the second quarter, as
product qualification is completed.
-15-
<PAGE>
In April 1999, Chevron announced discontinuation of discussions with ARCO to
combine the two companies' oil and gas producing assets in the Permian Basin of
West Texas and southeast New Mexico because of the announced acquisition of ARCO
by BP Amoco.
The Caspian Pipeline Consortium, in April 1999, awarded the first major
construction contract for its project to refurbish an existing pipeline and
construct a new pipeline to transport the Tengiz crude oil to the Russian port
of Novorossiysk. Other major contracts will be awarded during the second quarter
1999 with construction of the marine terminal at Novorossiysk set to begin in
May 1999. The projected total cost of the project is $2.2 billion. The pipeline
and associated facilities are expected to transport first oil in mid-2001.
Chevron signed an agreement to sell its shares of Plantation Pipe Line Company
to Kinder Morgan Energy Partners L.P. for $124 million in cash. Plantation Pipe
Line Company is a major transporter of petroleum products from Gulf Coast
refineries to markets throughout the Southeastern states. The sale is subject to
regulatory approvals and is expected to be completed in the second or third
quarter of 1999. The company anticipates recording a significant gain upon
completion of this transaction. Chevron also signed an agreement to sell its
West Texas Gathering Pipeline System to Plains All American Pipeline, L.P. for
approximately $40 million in cash. The assets include about 400 miles of
pipeline, gathering lines, pump stations and trunk lines used to transport about
98,000 barrels of crude oil per day to Midland, Texas. Chevron will continue to
use the pipeline under a contractual arrangement. The sale is expected to be
completed in the third quarter of 1999 with no gain or loss expected to be
recognized.
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 whom 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) the identification and
assessment of all critical equipment, software systems and business
relationships that may require modification or replacement prior to 2000; (2)
the resolution of critical items through remediation and testing of
modifications, replacement, or development of alternative business processes;
and (3) the development of contingency and business continuation plans for
critical items to mitigate any disruptions to the company's operations.
Chevron intends to address all critical items prior to 2000. Phase 1 -
identification and assessment - is essentially complete. Regarding Phase 2, the
company estimates that at March 31, 1999, about 60 percent of embedded systems
issues had been completed, along with about 75 percent of information technology
issues. Phase 2 overall is expected to be essentially finished by the end of the
third quarter 1999. Phase 3 - contingency planning - is also scheduled for
completion at the end of the third quarter. At March 31, 1999, the company
estimates that it had completed about 50 percent of the work in this area.
The company is using a risk-based analysis of its operations to identify those
items deemed to be "mission critical," defined as having the potential for
significant adverse effects in one or more of five areas: environmental
protection, safety, ongoing business relationships, financial and legal
exposure, and company credibility and image. Over 400 items of varying degrees
of complexity in the company's own operations and about 1,000 third-party
relationships have been deemed mission-critical. Many mission-critical items
already have been found to be compliant, while others are undergoing remediation
and testing. The company's major financial systems and desktop computer
-16-
<PAGE>
systems were upgraded in separate projects and are already compliant. Chevron is
corresponding with all mission-critical third parties and expects to meet with a
large percentage of them, either alone or with other potentially affected
parties, to determine the relative risks of major Year 2000-related problems and
to determine how to mitigate such risks. Additional items and third-party
relationships may be added to or removed from this population as more
information becomes available.
Using practical risk assessment and testing techniques, Chevron is dividing its
list of more than 400 internal items into three categories: (1) those that are
expected to be tested and made Year 2000 compliant prior to 2000; (2) items that
will be removed from service without testing and replaced with Year 2000
compliant items; and (3) items to be "worked around," if found not to be Year
2000 compliant, until the items can be replaced or made compliant. Because of
the scope of Chevron's operations, the company believes it is impractical to
eliminate all potential Year 2000 problems before they arise. As a result,
Chevron expects that for nonmission-critical items and those mission-critical
items that remain "worked around," Year 2000 remedial efforts will continue into
the year 2000.
In the normal course of business, the company has developed and maintains
extensive contingency plans to respond to equipment failures, emergencies and
business interruptions. However, contingency planning for Year 2000 issues is
complicated by the possibility of multiple and simultaneous incidents, which
could significantly impede efforts to respond to emergencies and resume normal
business functions. Such incidents may be outside of the company's control, for
example, if mission-critical third parties do not successfully address their own
material Year 2000 problems.
The company is enhancing existing plans, where necessary, and in some cases
developing new plans specifically designed to mitigate the impact on its
operations of potential failures from the Year 2000 issue. The company expects
to complete and test, where appropriate, its contingency plans by the end of the
third quarter 1999. These plans will be designed to protect the company's
assets, continue safe operations, protect the environment and enable the
resumption of any interrupted operations in a timely and efficient manner. The
company's contingency plans will be focused on: third-party relationships as
necessary; internal mission critical items, if any, that are not remediated or
otherwise addressed as expected by the end of the third quarter 1999; and other
internal mission-critical items that have been remediated but will not be fully
tested prior to 2000.
The company utilizes both internal and external resources in its Year 2000
efforts. The cumulative total cost to achieve Year 2000 compliance is currently
estimated at approximately $225 million, mostly for expense-type items, not all
of which are incremental to the company's operations. This is about $25 million
lower than earlier estimates as the company has determined Year 2000 compliance
issues with embedded systems to be less of a problem than originally
anticipated. Approximately $100 million had been spent through March 31, 1999.
Most of the future expenditures will be incurred during the remainder of 1999,
with the rate of expenditure expected to increase significantly as the year
progresses. The foregoing amounts include the company's share of expenditures by
its major affiliates.
As part of the Securities and Exchange Commission's reporting requirements on
the Year 2000 problem, companies must include a description of their "most
reasonably likely worst-case scenarios" from potential Year 2000 issues. For
Chevron, its business diversity is expected to reduce the risk of widespread
disruptions to its worldwide operations from Year 2000-related incidents. The
company does not expect unusual risks to public safety or to the environment to
arise from potential Year 2000-related failures. While the company believes that
the impact of any individual Year 2000 failure most likely will be localized and
limited to specific facilities or operations, it is not yet able to fully assess
the likelihood of significant business interruptions occurring in one or more of
its operations around the world. Such interruptions could delay manufacturing
and delivery of refined products and chemicals products by the company to
customers. The company could also face interruptions in its ability to produce
crude oil and natural gas. While not expected, failures to address multiple
critical Year 2000 issues, including failures to implement contingency plans in
a timely manner, could materially and adversely affect the company's results of
operations or liquidity in any one period. The company is currently unable to
predict the aggregate financial or other consequences of such potential
interruptions.
-17-
<PAGE>
The foregoing disclosure is based on Chevron's current expectations, estimates
and projections, which could ultimately prove to be inaccurate. Because of
uncertainties, the actual effects of the Year 2000 issues on Chevron may be
different from the company's current assessment. Factors, many of which are
outside the control of the company and that could affect Chevron's ability to be
Year 2000 compliant by the end of 1999, include: the failure of customers,
suppliers, governmental entities and others to achieve compliance, and the
inability or failure to identify all critical Year 2000 issues, or to develop
appropriate contingency plans for all Year 2000 issues that ultimately may
arise. The foregoing disclosure is made pursuant to the Federal Year 2000
Information and Readiness Disclosure Act.
Contingencies
- -------------
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
judgement and accrued interest through December 1998. The company continues to
add to the litigation reserve by recording additional accrued interest for each
accounting period. The company has filed a petition for rehearing in the
Oklahoma Supreme Court. The ultimate outcome of this matter cannot be presently
determined with certainty, and the company will seek further review of this case
in the appropriate courts.
Chevron and five other oil companies are contesting, so far unsuccessfully, the
validity of a patent granted to Unocal Corporation for reformulated gasoline,
which Chevron sells in California in certain months of the year. Chevron
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. Should Unocal's patents be upheld, Chevron's ultimate
exposure with respect to reformulated gasoline sales would depend on the
availability and costs of alternate formulations and the industry's ability to
recover additional costs of production through prices charged to its customers.
In June 1997, Caltex Corporation received a claim from the U.S. Internal Revenue
Service (IRS) for $292 million in excise taxes, $140 million in penalties and
$1.6 billion in interest. The IRS claim relates to crude oil sales to Japanese
customers beginning in 1980. Caltex believes the underlying excise tax claim is
wrong and therefore the claim for penalties and interest is wrong. In May 1998,
Caltex filed a complaint in the United States Court of Federal Claims asking the
Court to hold that Caltex owes nothing on the IRS claim. A decision by the Court
remains pending. In February 1999, Caltex renewed a letter of credit for $2.52
billion to the IRS that was required to pursue the claim. In May 1999 the IRS
agreed to reduce the letter of credit, which is guaranteed by Chevron and
Texaco, to $200 million.
The company is a party to numerous lawsuits and claims, including, along with
other oil companies, actions challenging oil and gas royalty and severance tax
payments based on posted prices and others related to the use of the chemical
MTBE in certain oxygenated gasolines. These lawsuits and other contingent
liabilities are discussed in the notes to the accompanying consolidated
financial statements. The company believes that the resolution of these matters
will not materially affect its financial position or liquidity, although costs
associated with their resolution could be material with respect to earnings in
any given period.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its integrated petroleum activities. All these
instruments are commonly used in oil and gas trading activities and are
relatively straightforward, involve little complexity and are of a short-term
duration. Most of the activity in these instruments is intended to hedge a
physical transaction; hence, gains and losses arising from these instruments
offset, and are recognized concurrently with, gains and losses from the
underlying transactions. The company believes it has no material market or
credit risks to its operations, financial position or liquidity as a result of
its commodities and other derivatives activities, including forward exchange
contracts and interest rate swaps. Its control systems are designed to monitor
and manage its financial exposures in accordance with company policies
-18-
<PAGE>
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. These factors are
carefully considered by management when evaluating the level of current and
future activity in such countries.
Chevron and its affiliates continue to review and analyze their operations and
may close, sell, exchange, acquire or restructure assets to achieve operational
or strategic benefits to improve competitiveness and profitability. These
activities may result in significant losses or gains in future periods.
Review of Operations
- --------------------
The following tables detail Chevron's after-tax earnings by major operating area
and selected operating data.
<TABLE>
<CAPTION>
EARNINGS BY MAJOR OPERATING AREA
Three Months Ended
March 31,
Millions of Dollars 1999 1998*
- -----------------------------------------------------------------------
<S> <C> <C>
Exploration and Production
United States $ 47 $106
International 116 133
- -----------------------------------------------------------------------
Total Exploration and Production 163 239
- -----------------------------------------------------------------------
Refining, Marketing and Transportation
United States 82 45
International 87 76
- -----------------------------------------------------------------------
Total Refining, Marketing and Transportation 169 121
- -----------------------------------------------------------------------
Chemicals 50 63
All Other (53) 84
- -----------------------------------------------------------------------
Net Income $329 $507
=======================================================================
<FN>
* Restated for the company's share of the cumulative effect of Caltex's
implementation, effective January 1, 1998, of accounting standard - SOP 98-5,
"Reporting on the Costs of Start-up Activities" and the cumulative effect
from a change in the company's method of applying an accounting principle
relating to certain Canadian deferred income taxes, effective January 1,
1998.
</FN>
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA (1) (2)
Three Months Ended
March 31,
--------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Exploration and Production
Net Crude Oil and Natural Gas
Liquids Production (MBPD) 306 336
Net Natural Gas Production (MMCFPD) 1,676 1,808
Sales of Natural Gas (MMCFPD) 3,359 3,497
Sales of Natural Gas Liquids (MBPD) 146 141
Revenue from Net Production
Crude Oil ($/Bbl.) $ 9.97 $12.49
Natural Gas ($/MCF) $ 1.63 $ 2.09
International Exploration and Production
Net Crude Oil and Natural Gas
Liquids Production (MBPD) 809 746
Net Natural Gas Production (MMCFPD) 832 644
Sales of Natural Gas (MMCFPD) 1,908 1,329
Sales of Natural Gas Liquids (MBPD) 52 56
Revenue from Liftings
Liquids ($/Bbl.) $10.71 $12.99
Natural Gas ($/MCF) $ 1.82 $ 1.96
Other Produced Volumes (MBPD) (3) 103 90
U.S. Refining, Marketing and Transportation
Sales of Gasoline (MBPD) (4) 617 599
Sales of Other Refined Products (MBPD) 571 534
Refinery Input (MBPD) 924 757
Average Refined Product Sales
Price ($/Bbl.) $20.30 $23.68
International Refining, Marketing
and Transportation
Sales of Refined Products (MBPD) 910 809
Refinery Input (MBPD) 494 491
Chemical Sales and Other Operating Revenues (5)
United States $627 $681
International 177 145
- --------------------------------------------------------------------------------
Worldwide $804 $826
================================================================================
<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) Total field production under the Boscan operating service agreement in
Venezuela.
(4) Includes branded and unbranded gasoline.
(5) Millions of dollars. Includes sales to other Chevron companies.
</FN>
</TABLE>
Excluding special items, first quarter 1999 operating earnings were $281 million
compared with earnings of $436 million in the 1998 quarter. In the 1999 first
quarter, a $60 million gain from the sale of the company's interest in a coal
mining affiliate was partially offset by net environmental remediation
provisions of $12 million for the
-20-
<PAGE>
company's U.S. operations. Special items in the 1998 quarter included favorable
prior-year tax adjustments of $157 million, which included $32 million for the
cumulative effect of a change in the method of applying an accounting principle
related to certain Canadian deferred income taxes. These were partially offset
by deferred tax effects of $56 million from an exchange of international
exploration and production properties, $25 million for the company's share of
the cumulative effect from Caltex's adoption of a new accounting standard and $5
million for net environmental remediation provisions in the company's U.S.
downstream operations.
Total revenues for the first quarter of 1999 were $6.7 billion, down 12 percent
from $7.6 billion in last year's first quarter, primarily due to lower prices
for crude oil, natural gas, refined products and chemicals.
Although the recent increases in crude oil and natural gas prices have improved
the economic environment in which the company operates, Chevron remains focused
on efforts to significantly reduce its cost structure for the long-term. Ongoing
operating expenses declined to $5.37 per barrel, down 15 cents from the year-ago
quarter, helping to mitigate the effect of lower average prices of crude oil,
natural gas, refined products and chemicals.
First quarter 1999 selling, general and administrative expenses of $397 million
were $144 million higher than the 1998 quarter. Expenses in the 1999 quarter
were higher on increased interest expense associated with the Cities Service
judgement and increased selling expenses. Expenses in the 1998 quarter were
reduced as a result of the effects of the interest component of favorable
prior-year tax adjustments and recoveries of certain prior-year claims, which
did not recur in the 1999 quarter.
Return on capital employed, excluding special items, declined to 8.3 percent for
the 12 months ended March 31, 1999, from 12.7 percent in the similar period last
year, primarily due to lower earnings in the 12 months ended March 31, 1999.
Due primarily to lower earnings, taxes on income for the first quarter of 1999
were $185 million compared with $267 million in last year's first quarter. The
effective tax rate for the first quarter of 1999 was 36 percent, compared with
34.5 percent in last year's first quarter. The increase in the effective tax
rate was primarily the result of prior-period tax adjustments, which lowered the
effective tax rate for the 1998 quarter. Partially offsetting this increase were
a shift in international earnings from countries with higher effective income
taxes to those with lower effective taxes, the utilization of capital loss
benefits and higher equity affiliates' after-tax earnings as a proportion of
before-tax income.
Foreign currency effects reduced net income by $9 million and $46 million in the
first quarters of 1999 and 1998, respectively. The improvement primarily
reflected lower foreign currency losses from the company's Caltex affiliate
operations in Korea, Thailand and the Philippines.
Worldwide exploration and production net income was $163 million in the first
quarter of 1999, down 32 percent from $239 million in the 1998 first quarter
when crude oil and natural gas prices were substantially higher. U.S.
exploration and production net income was $47 million, down from $106 million in
the 1998 first quarter on lower crude and natural gas prices and lower
production volumes. Special items for environmental provisions increased
earnings $3 million in the first quarter of 1999. There were no special items in
the first quarter of 1998. Also included in 1999 earnings were gains of $13
million from U.S. asset sales.
The company's average 1999 U.S. crude oil realizations of $9.97 per barrel and
natural gas realizations of $1.63 per thousand cubic feet declined by 20 percent
and 22 percent, respectively, compared with the first quarter 1998. The price
declines were primarily the result of a global oversupply of crude oil,
warmer-than-normal weather and higher levels of gas storage than in 1998. Net
U.S. liquids production decreased to 306,000 barrels per day from 336,000
barrels per day in the prior-year first quarter. Net U.S. natural gas production
of 1.7 billion cubic feet per day declined from 1.8 billion cubic feet per day
in the 1998 quarter. The drop in liquids and natural gas production was
primarily attributable to field declines and prior-year property sales.
International exploration and production net income was $116 million, down from
$133 million in the 1998 first quarter. Net income for the 1998 quarter included
a special charge of $56 million for the deferred tax effects of an
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<PAGE>
exchange of international exploration and production properties, partially
offset by a $32 million favorable cumulative effect from the change of
accounting for certain Canadian deferred income taxes. Excluding the special
charges in 1998, earnings were down 26 percent from last year's levels. The
decline in earnings reflected lower crude oil prices, offset partially by higher
liftings when compared with the year-ago quarter.
Net international liquids production increased 63,000 barrels per day to 809,000
barrels per day, mainly due to increased production in Angola, Indonesia and
Kazakhstan. These increases were partially offset by declines in Australia and
Nigeria. Natural gas production increased 29 percent to 832 million cubic feet
per day, primarily reflecting higher volumes from the Britannia Field in the
United Kingdom, which began operation in August 1998.
Foreign currency losses in the first quarter 1999 were $16 million, compared
with losses of $15 million in the 1998 quarter. Losses in both years occurred
primarily in the company's Australian, Canadian and U.K. operations.
Worldwide refining and marketing and transportation net income was $169 million
in the first quarter of 1999, up 40 percent from $121 million in last year's
first quarter. U.S. refining, marketing and transportation net income in 1999
was $82 million, compared with $45 million in the 1998 first quarter. After
excluding net special charges of $15 million and $5 million for environmental
remediation from the 1999 and 1998 results, respectively, earnings were $97
million, compared with $50 million reported in last year's first quarter.
The increase in earnings for 1999 was primarily the result of higher sales
margins that benefited from less downtime and lower expenses from major
scheduled maintenance at two of the company's refineries. Also contributing to
earnings was a $12 million after-tax partial payment of business interruption
insurance proceeds from the hurricane damage to the company's Pascagoula,
Mississippi, refinery last year. Earnings in the first quarter 1999 included a
loss of $13 million associated with the insurance deductible and other
third-party claims from the March 1999 fire at the company's Richmond,
California, refinery.
The company's average refined products sales price in the 1999 first quarter was
$20.30 per barrel, down 14 percent from $23.68 per barrel in last year's first
quarter. Total refined product sales volumes were 1.19 million barrels per day
in 1999, up about 5 percent from the comparable quarter last year. Most refined
products sales volumes increased, including branded motor gasoline sales
volumes, which rose by 9 percent to 525,000 barrels per day. The increase in
branded motor gasoline sales volumes primarily reflects the acquisition of new
accounts and the construction of new stations during 1998. Additionally, first
quarter 1998 sales volumes were hampered by poor weather, which reduced travel
and demand for motor gasoline.
International refining, marketing and transportation net income was $87 million,
up from $76 million reported for the first quarter of 1998. Results for the 1998
first quarter 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 for
the costs of start-up activities. Net income included foreign currency gains of
$5 million in the 1999 first quarter, compared with losses of $31 million in the
1998 period. Caltex's operations in Korea, Thailand and the Philippines were
primarily responsible for the favorable foreign currency swings.
Earnings for Caltex operations after excluding the effects of foreign currency
gains of $7 million in 1999 and losses of $29 million in 1998 and the special
charge in 1998, declined despite increased sales volumes, particularly in Korea
and Japan. This drop in earnings was primarily due to lower refined products
sales margins caused by competitive price discounting. A mitigating factor in
the profit decline in Korea was an increase in the ratio of more profitable
inland sales to export sales. The Asia-Pacific market continues to experience
reduced demand for refined products, along with surplus manufacturing capacity.
First quarter 1999 results included a benefit of about $30 million for the
company's share of Caltex's lower-of-cost-or-market inventory valuation
adjustment. First quarter 1998 results included benefits of about $25 million
from the reversal of certain deferred income tax valuation allowances. The
company's international shipping results also declined on lower freight rates in
1999 compared with 1998.
Sales volumes increased by 13 percent in the first quarter of 1999 to 910,000
barrels per day, primarily in the Caltex areas of operation and in the company's
fuels and marine lubricants affiliate that was formed in late 1998.
-22-
<PAGE>
Chemicals net income was $50 million in the 1999 quarter, compared with $63
million in last year's first quarter. Higher sales volumes, primarily resulting
from the acquisition of a viscosity index improver business in the second half
of 1998, were offset by lower sales margins for many of the company's chemical
products, as product prices declined faster than feedstock costs.
All Other activities include coal operations, interest expense, interest income
on cash and marketable securities, real estate and insurance activities, and
corporate center costs. In the first quarter of 1999, these activities incurred
net charges of $53 million, compared with net benefits of $84 million in the
comparable prior-year quarter. Results for 1999 included a gain of $60 million
from the sale of the company's equity interest in a coal mining affiliate, while
1998 results included net benefits from a favorable prior-years' tax adjustment
of $125 million.
Excluding special items, earnings from the company's coal operations improved to
$19 million in 1999, compared with $11 million in 1998. Depreciation of the
company's coal assets was discontinued in the second half of 1998 when a
disposition plan was put in place and the business was offered for sale.
Net charges, excluding special items, from other activities were $132 million in
1999, compared with $52 million in 1998. Higher charges in 1999 included
interest expense on higher debt levels, corporate tax and other adjustments and
costs associated with legal and other claims.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $538 million at March 31, 1999, down $31
million from year-end 1998. In addition to cash from operations, an increase in
short-term debt was required to fund the company's capital expenditures and
dividend payments to stockholders.
In March 1999, Chevron purchased the Rutherford-Moran Oil Corporation and
another interest in Block 8/32, offshore Thailand, for approximately 1.1 million
shares of its treasury stock, $57 million in cash and the assumption of
outstanding debt of $341 million. Concurrent with the purchase, $202 million of
that debt was retired and the remaining $139 million was called and retired in
April 1999.
Total debt and capital lease obligations were $8.133 billion at March 31, 1999,
up $575 million from $7.558 billion at year-end 1998. The fluctuation in debt
included a $630 million net increase in short-term debt, primarily commercial
paper outstanding and debt assumed in its purchase of the Rutherford-Moran Oil
Corporation. The increase in short-term debt was partially offset by a net
reduction in long-term debt including the scheduled non-cash retirement in
January of ESOP debt of $70 million.
Although the company benefits from lower interest rates available on short-term
debt, the large amount of short-term debt has kept Chevron's ratio of current
assets to current liabilities at relatively low levels. The current ratio was
0.81 at March 31, 1999, compared with 0.88 at year-end 1998. The company's
short-term debt, consisting primarily of commercial paper and the current
portion of long-term debt, totaled $6.520 billion at March 31, 1999. This amount
excludes $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 refinance
its commercial paper continually, maintaining levels it believes to be
appropriate to provide adequate funding for ongoing operations and capital
spending.
The company's debt ratio (total debt to total-debt-plus-equity) was 32.1 percent
at March 31, 1999, up from 30.7 percent at year-end 1998, primarily as a result
of the increase in the issuance of commercial paper. The company continually
monitors its spending levels, market conditions and related interest rates to
maintain what it perceives to be reasonable debt levels.
In December 1997, Chevron's Board of Directors approved the repurchase of up to
$2 billion of its outstanding common stock, providing shares 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.
-23-
<PAGE>
On April 28, 1999, Chevron declared a quarterly dividend of 61 cents per share,
unchanged from the preceding quarter.
Worldwide capital and exploratory expenditures for the first quarter of 1999,
including the company's share of affiliates' expenditures, were $1.425 billion
compared with $0.972 billion in the first quarter 1998. Expenditures for
international exploration and production projects were $860 million or 60
percent of total expenditures, reflecting the company's continued emphasis on
increasing international oil and gas production. The 1999 first quarter included
$489 million attributable to the acquisition of the Rutherford-Moran Oil
Corporation and another interest in Block B8/32 offshore Thailand. This amount
included $91 million in Chevron common stock (1.1 million shares) and the
assumption of $341 million of Rutherford-Moran debt.
-24-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 for three months ended March 31, 1999.
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K, dated April 23, 1999, was
filed by the company on April 23, 1999. In this report, Chevron
announced first quarter 1999 net income.
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 May 6, 1999 /s/ S.J. CROWE
---------------------------------- ----------------------------------
S. J. Crowe, Comptroller
(Principal Accounting Officer and
Duly Authorized Officer)
-25-
<TABLE>
<CAPTION>
Exhibit 12
CHEVRON CORPORATION - TOTAL ENTERPRISE BASIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Three Months Year Ended December 31,
Ended ------------------------------------------------
March 31, 1999 1998 1997 1996 1995 1994
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (1) $ 329 $ 1,339 $ 3,256 $ 2,607 $ 930 $ 1,693
Income Tax Expense 228 658 2,428 2,624 1,094 1,322
Distributions (Less Than)
Greater Than Equity in Earnings of
Less Than 50% Owned Affiliates (23) (72) (70) 29 (5) (3)
Minority Interest 1 7 11 4 - 3
Previously Capitalized Interest
Charged to Earnings During Period (2) 35 28 24 47 32
Interest and Debt Expense 124 492 405 471 557 453
Interest Portion of Rentals (2) 43 187 167 158 148 156
------- ------ ------- ------- ------- -------
Earnings before Provisions for
Taxes and Fixed Charges $ 700 $2,646 $ 6,225 $ 5,917 $ 2,771 $ 3,656
======= ====== ======= ======= ======= =======
Interest and Debt Expense $ 124 $ 492 $ 405 $ 471 $ 557 $ 453
Interest Portion of Rentals (2) 43 187 167 158 148 156
Capitalized Interest (9) 39 82 108 141 80
-------- ------ ------- ------- ------- -------
Total Fixed Charges $ 158 $ 718 $ 654 $ 737 $ 846 $ 689
======= ====== ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 4.42 3.68 9.52 8.03 3.28 5.31
- -------------------------------------------------------------------------------------------------------------------
<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>
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AT MARCH 31, 1999 AND INCOME STATEMENT FOR THE
THREE MONTHS ENDED MARCH 31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 538
<SECURITIES> 947
<RECEIVABLES> 2,800
<ALLOWANCES> 27
<INVENTORY> 1,429
<CURRENT-ASSETS> 6,459
<PP&E> 52,162
<DEPRECIATION> 27,763
<TOTAL-ASSETS> 37,766
<CURRENT-LIABILITIES> 7,991
<BONDS> 4,338
0
0
<COMMON> 1,069
<OTHER-SE> 16,121
<TOTAL-LIABILITY-AND-EQUITY> 37,766
<SALES> 6,399
<TOTAL-REVENUES> 6,689
<CGS> 0
<TOTAL-COSTS> 6,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 514
<INCOME-TAX> 185
<INCOME-CONTINUING> 329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
