Chevron 2004 Annual Report Download - page 38

36 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In฀the฀third฀quarter฀2004,฀$300฀million฀of฀6฀percent฀Texaco฀Capital฀
Inc.฀debt,฀due฀June฀2005,฀also฀was฀retired.
Texaco฀Capital฀LLC,฀a฀wholly฀owned฀finance฀subsidiary,฀
issued฀Deferred฀Preferred฀Shares,฀Series฀C฀(Series฀C),฀in฀December฀
1995.฀In฀February฀2005,฀the฀company฀redeemed฀the฀Series฀C฀and฀
accumulated฀dividends฀at฀a฀cost฀of฀approximately฀$140฀million.฀
In฀January฀2005,฀the฀company฀contributed฀$98฀million฀to฀
permit฀the฀ESOP฀to฀make฀a฀$144฀million฀debt฀service฀payment,฀
which฀included฀a฀principal฀payment฀of฀$113฀million.
In฀the฀second฀quarter฀2004,฀ChevronTexaco฀entered฀into฀
$1฀billion฀of฀interest฀rate฀fixed-to-floating฀swap฀transactions.฀
Under฀the฀terms฀of฀the฀swap฀agreements,฀of฀which฀$250฀million฀
and฀$750฀million฀terminate฀in฀September฀2007฀and฀February฀
2008,฀respectively,฀the฀net฀cash฀settlement฀will฀be฀based฀on฀the฀
difference฀between฀fixed-rate฀and฀floating-rate฀interest฀amounts.
ChevronTexaco’s฀senior฀debt฀is฀rated฀AA฀by฀Standard฀
and฀Poor’s฀Corporation฀and฀Aa2฀by฀Moody’s฀Investor฀Service,฀
except฀for฀senior฀debt฀of฀Texaco฀Capital฀Inc.,฀which฀is฀rated฀Aa3.฀
ChevronTexaco’s฀U.S.฀commercial฀paper฀is฀rated฀A-1+฀by฀Stan-
dard฀and฀Poor’s฀and฀Prime฀1฀by฀Moody’s,฀and฀the฀company’s฀
Canadian฀commercial฀paper฀is฀rated฀R-1฀(middle)฀by฀Dominion฀
Bond฀Rating฀Service.฀All฀of฀these฀ratings฀denote฀high-quality,฀
investment-grade฀securities.
The฀company’s฀future฀debt฀level฀is฀dependent฀primarily฀on฀
results฀of฀operations,฀the฀capital-spending฀program฀and฀cash฀that฀
may฀be฀generated฀from฀asset฀dispositions.฀Further฀reductions฀
from฀debt฀balances฀at฀December฀31,฀2004,฀are฀dependent฀upon฀
many฀factors,฀including฀management’s฀continuous฀assessment฀of฀
debt฀as฀an฀appropriate฀component฀of฀the฀company’s฀overall฀capi-
tal฀structure.฀The฀company฀believes฀it฀has฀substantial฀borrowing฀
capacity฀to฀meet฀unanticipated฀cash฀requirements,฀and฀during฀
periods฀of฀low฀prices฀for฀crude฀oil฀and฀natural฀gas฀and฀narrow฀
margins฀for฀refined฀products฀and฀commodity฀chemicals,฀the฀
company฀believes฀that฀it฀has฀the฀flexibility฀to฀increase฀borrowings฀
or฀modify฀capital-spending฀plans฀or฀both฀to฀continue฀paying฀the฀
common฀stock฀dividend฀and฀maintain฀the฀company’s฀high-quality฀
debt฀ratings.
Tengizchevroil฀Funding฀ As฀part฀of฀the฀funding฀of฀the฀expan-
sion฀of฀Tengizchevroil’s฀(TCO)฀production฀facilities,฀in฀the฀fourth฀
quarter฀2004฀ChevronTexaco฀purchased฀from฀TCO฀$2.2฀billion฀of฀
6.124฀percent฀Series฀B฀Notes฀(Series฀B),฀due฀2014.฀Interest฀on฀the฀
notes฀is฀payable฀semiannually,฀and฀principal฀is฀to฀be฀repaid฀semi-
annually฀in฀equal฀installments฀beginning฀in฀February฀2008.
Immediately฀following฀the฀purchase฀of฀the฀Series฀B,฀Chevron-
Texaco฀received฀from฀TCO฀approximately฀$1.8฀billion,฀representing฀
a฀repayment฀of฀subordinated฀loans฀from฀the฀company,฀interest฀
and฀dividends.฀The฀$2.2฀billion฀investment฀in฀the฀Series฀B฀Notes,฀
which฀the฀company฀intends฀to฀hold฀until฀maturity,฀and฀the฀$1.8฀
billion฀distribution฀were฀recorded฀on฀the฀Consolidated฀Balance฀
Sheet฀to฀“Investments฀and฀Advances.”฀
Common฀Stock฀Repurchase฀Program฀ The฀company฀
announced฀a฀stock฀repurchase฀program฀on฀March฀31,฀2004.฀
Acquisitions฀of฀up฀to฀$5฀billion฀may฀be฀made฀from฀time฀to฀
time฀at฀prevailing฀prices,฀as฀permitted฀by฀securities฀laws฀and฀
other฀legal฀requirements,฀and฀subject฀to฀market฀conditions฀and฀
other฀factors.฀The฀program฀is฀for฀a฀period฀of฀up฀to฀three฀years฀
and฀may฀be฀discontinued฀at฀any฀time.฀The฀company฀purchased฀
42,324,000฀shares฀in฀the฀open฀market฀for฀$2.1฀billion฀through฀
December฀2004.฀Purchases฀through฀February฀2005฀increased฀
the฀total฀shares฀acquired฀to฀47,969,000฀for฀$2.4฀billion.
Capital฀and฀Exploratory฀Expenditures฀ Total฀reported฀
expenditures฀for฀2004฀were฀$8.3฀billion,฀including฀$1.56฀bil-
lion฀for฀the฀company’s฀share฀of฀affiliates’฀expenditures,฀which฀
did฀not฀require฀cash฀outlays฀by฀the฀company.฀In฀2003฀and฀2002,฀
expenditures฀were฀$7.4฀billion฀and฀$9.3฀billion,฀respectively,฀
including฀the฀company’s฀share฀of฀affiliates’฀expenditures฀of฀
$1.1฀billion฀and฀$1.4฀billion฀in฀the฀corresponding฀periods.฀Of฀
the฀total฀2004฀reported฀expenditures,฀$6.3฀billion,฀or฀76฀percent,฀
was฀for฀upstream฀activities,฀compared฀with฀77฀percent฀in฀2003฀
and฀68฀percent฀in฀2002.฀International฀upstream฀accounted฀for฀
71฀percent฀of฀the฀worldwide฀upstream฀total฀in฀2004฀and฀2003฀and฀
70฀percent฀in฀2002,฀reflecting฀the฀company’s฀continuing฀focus฀on฀
international฀exploration฀and฀production฀activities.฀
Expenditures฀in฀2004฀increased฀13฀percent฀compared฀
with฀2003,฀primarily฀driven฀by฀higher฀upstream฀expenditures.฀
Downstream฀spending฀increased฀21฀percent฀from฀2003.฀Expen-
ditures฀were฀higher฀in฀2002฀than฀in฀2003,฀due฀in฀part฀to฀large฀
lease฀acquisitions฀in฀the฀North฀Sea฀and฀the฀Gulf฀of฀Mexico,฀
spending฀for฀the฀Athabasca฀Oil฀Sands฀Project฀in฀western฀Canada,฀
and฀additional฀common฀stock฀investments฀in฀Dynegy.
Including฀its฀share฀of฀spending฀by฀affiliates,฀the฀company฀
estimates฀2005฀capital฀and฀exploratory฀expenditures฀at฀$10฀bil-
lion,฀which฀is฀about฀20฀percent฀higher฀than฀2004.฀About฀$7.4฀
billion,฀or฀74฀percent฀of฀the฀total,฀is฀targeted฀for฀exploration฀and฀
production฀activities,฀with฀$4.9฀billion฀of฀that฀amount฀targeted฀
for฀outside฀the฀United฀States.฀The฀upstream฀spending฀is฀targeted฀
for฀the฀most฀promising฀exploratory฀prospects฀in฀the฀deepwater฀
Gulf฀of฀Mexico฀and฀West฀Africa฀and฀major฀development฀projects฀
in฀Angola,฀Nigeria,฀Kazakhstan฀and฀the฀deepwater฀Gulf฀of฀Mexico.฀
Included฀in฀the฀upstream฀expenditures฀is฀about฀$400฀million฀to฀
develop฀the฀company’s฀international฀natural฀gas฀resource฀base.฀
Worldwide฀downstream฀spending฀in฀2005฀is฀estimated฀at฀
$1.9฀billion,฀with฀about฀$1.5฀billion฀for฀refining฀and฀marketing฀
Capital฀and฀Exploratory฀Expenditures
 2003 2002
Millions฀of฀dollars U.S. Int’l. Total U.S. Int’l. Total U.S. Int’l. Total
Exploration and Production    $ 1,641 $ 4,034 $ 5,675 $ 1,888 $ 4,395 $ 6,283
Refining, Marketing and Transportation       403 697 1,100 750 882 1,632
Chemicals       173 24 197 272 37 309
All Other       371 20 391 855* 176* 1,031
Total    $ 2,588 $ 4,775 $ 7,363 $ 3,765 $ 5,490 $ 9,255
Total, Excluding Equity in Affiliates    $ 2,306 $ 3,920 $ 6,226 $ 3,312 $ 4,590 $ 7,902
*2002 conformed to 2004 presentation.