Chevron 2004 Annual Report Download - page 40

38 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Oil฀Company฀(Shell)฀for฀any฀claims฀arising฀from฀the฀guarantees.฀
The฀company฀has฀not฀recorded฀a฀liability฀for฀these฀guarantees.฀
Approximately฀45฀percent฀of฀the฀amounts฀guaranteed฀will฀expire฀
within฀the฀2005฀through฀2009฀period,฀with฀the฀guarantees฀of฀the฀
remaining฀amounts฀expiring฀by฀2019.
Indemnifications฀ The฀company฀provided฀certain฀indemnities฀
of฀contingent฀liabilities฀of฀Equilon฀and฀Motiva฀to฀Shell฀and฀Saudi฀
Refining,฀Inc.,฀in฀connection฀with฀the฀February฀2002฀sale฀of฀the฀
company’s฀interests฀in฀those฀investments.฀The฀indemnities฀cover฀
certain฀contingent฀liabilities,฀including฀those฀associated฀with฀
the฀Unocal฀patent฀litigation.฀The฀company฀would฀be฀required฀to฀
perform฀should฀the฀indemnified฀liabilities฀become฀actual฀losses.฀
Should฀that฀occur,฀the฀company฀could฀be฀required฀to฀make฀future฀
payments฀up฀to฀$300฀million.฀Through฀the฀end฀of฀2004,฀the฀
company฀paid฀approximately฀$28฀million฀under฀these฀contingen-
cies฀and฀had฀agreed฀to฀pay฀approximately฀$10฀million฀additional฀
under฀an฀award฀of฀arbitration,฀subject฀to฀minor฀adjustments฀yet฀
to฀be฀resolved.฀The฀company฀may฀receive฀additional฀requests฀for฀
indemnification฀payments฀in฀the฀future.
The฀company฀has฀also฀provided฀indemnities฀relating฀to฀
contingent฀environmental฀liabilities฀related฀to฀assets฀originally฀
contributed฀by฀Texaco฀to฀the฀Equilon฀and฀Motiva฀joint฀ventures฀
and฀environmental฀conditions฀that฀existed฀prior฀to฀the฀forma-
tion฀of฀Equilon฀and฀Motiva฀or฀that฀occurred฀during฀the฀periods฀
of฀Texaco’s฀ownership฀interests฀in฀the฀joint฀ventures.฀In฀general,฀
the฀environmental฀conditions฀or฀events฀that฀are฀subject฀to฀these฀
indemnities฀must฀have฀arisen฀prior฀to฀December฀2001.฀Claims฀
relating฀to฀Equilon฀indemnities฀must฀be฀asserted฀either฀as฀early฀
as฀February฀2007,฀or฀no฀later฀than฀February฀2009,฀and฀claims฀
relating฀to฀Motiva฀must฀be฀asserted฀no฀later฀than฀February฀2012.฀
Under฀the฀terms฀of฀the฀indemnities,฀there฀is฀no฀maximum฀limit฀
on฀the฀amount฀of฀potential฀future฀payments.฀The฀company฀
has฀not฀recorded฀any฀liabilities฀for฀possible฀claims฀under฀these฀
indemnities.฀The฀company฀posts฀no฀assets฀as฀collateral฀and฀has฀
made฀no฀payments฀under฀the฀indemnities.฀
The฀amounts฀payable฀for฀the฀indemnities฀described฀above฀
are฀to฀be฀net฀of฀amounts฀recovered฀from฀insurance฀carriers฀and฀
others฀and฀net฀of฀liabilities฀recorded฀by฀Equilon฀or฀Motiva฀prior฀
to฀September฀30,฀2001,฀for฀any฀applicable฀incident.฀฀
Securitization฀ In฀other฀off-balance-sheet฀arrangements,฀the฀
company฀securitizes฀certain฀retail฀and฀trade฀accounts฀receivable฀
in฀its฀downstream฀business฀through฀the฀use฀of฀qualifying฀special฀
purpose฀entities฀(SPEs).฀At฀December฀31,฀2004,฀approximately฀
$1.2฀billion,฀representing฀about฀10฀percent฀of฀ChevronTexaco’s฀
total฀current฀accounts฀receivable฀balance,฀were฀securitized.฀
ChevronTexaco’s฀total฀estimated฀financial฀exposure฀under฀these฀
securitizations฀at฀December฀31,฀2004,฀was฀approximately฀$50฀
million.฀These฀arrangements฀have฀the฀effect฀of฀accelerating฀Chevron-
Texaco’s฀collection฀of฀the฀securitized฀amounts.฀In฀the฀event฀of฀the฀
SPEs฀experiencing฀major฀defaults฀in฀the฀collection฀of฀receivables,฀
ChevronTexaco฀believes฀that฀it฀would฀have฀no฀loss฀exposure฀con-
nected฀with฀third-party฀investments฀in฀these฀securitizations.
Long-Term฀Unconditional฀Purchase฀Obligations฀and฀Commit-
ments,฀Throughput฀Agreements,฀and฀Take-or-Pay฀Agreements฀ The฀
company฀and฀its฀subsidiaries฀have฀certain฀other฀contingent฀lia-
bilities฀relating฀to฀long-term฀unconditional฀purchase฀obligations฀
and฀commitments,฀throughput฀agreements,฀and฀take-or-pay฀
agreements,฀some฀of฀which฀relate฀to฀suppliers’฀financing฀arrange-
ments.฀The฀agreements฀typically฀provide฀goods฀and฀services,฀such฀
as฀pipeline฀and฀storage฀capacity,฀utilities,฀and฀petroleum฀prod-
ucts,฀to฀be฀used฀or฀sold฀in฀the฀ordinary฀course฀of฀the฀company’s฀
business.฀The฀aggregate฀approximate฀amounts฀of฀required฀pay-
ments฀under฀these฀various฀commitments฀are฀2005฀–฀$1.6฀billion;฀
2006฀–฀$1.7฀billion;฀2007฀–฀$1.6฀billion;฀2008฀–฀$1.5฀billion;฀2009฀
–฀$1.5฀billion;฀2010฀and฀after฀–฀$2.3฀billion.฀Total฀payments฀
under฀the฀agreements฀were฀approximately฀$1.6฀billion฀in฀2004,฀
$1.4฀billion฀in฀2003฀and฀$1.2฀billion฀in฀2002.฀The฀most฀signifi-
cant฀take-or-pay฀agreement฀calls฀for฀the฀company฀to฀purchase฀
approximately฀55,000฀barrels฀per฀day฀of฀refined฀products฀from฀
an฀equity฀affiliate฀refiner฀in฀Thailand.฀This฀purchase฀agreement฀
is฀in฀conjunction฀with฀the฀financing฀of฀a฀refinery฀owned฀by฀the฀
affiliate฀and฀expires฀in฀2009.฀The฀future฀estimated฀commitments฀
under฀this฀contract฀are:฀2005฀–฀$1.2฀billion;฀2006฀–฀$1.2฀billion;฀
2007฀–฀$1.3฀billion;฀2008฀–฀$1.3฀billion;฀and฀2009฀–฀$1.3฀billion.฀
Additionally,฀in฀2004฀the฀company฀entered฀into฀a฀20-year฀agree-
ment฀to฀acquire฀regasification฀capacity฀at฀the฀Sabine฀Pass฀LNG฀
terminal.฀Payments฀of฀$1.2฀billion฀over฀the฀20-year฀period฀are฀
expected฀to฀commence฀in฀2010.฀
Minority฀Interests฀ The฀company฀has฀commitments฀of฀
approximately฀$172฀million฀related฀to฀minority฀interests฀in฀sub-
sidiary฀companies.฀
The฀following฀table฀summarizes฀the฀company’s฀significant฀
contractual฀obligations:
Contractual฀Obligations
Millions฀of฀dollars Payments Due by Period
2006 – After
Total 2005 2008 2009 2009
On Balance Sheet:
Short-Term Debt $ 816 $ 816 $ – $ – $ –
Long-Term Debt1, 2 10,217 – 8,123 455 1,639
Noncancelable Capital
Lease Obligations 239 – 110 29 100
Interest Expense 4,830 465 1,120 270 2,975
Off Balance Sheet:
Noncancelable Operating
Lease Obligations 2,232 390 857 236 749
Unconditional Purchase
Obligations 1,000 300 600 100 –
Through-Put and
Take-or-Pay Agreements 9,400 1,350 4,250 1,450 2,350
1 $4.7 billion of short-term debt that the company expects to refinance is included
in long-term debt. The repayment schedule above reflects the repayment of the
entire amount in the 2006 through 2008 period.
2 Includes guarantees of $360 of LESOP (leverage employee stock ownership plan)
debt, $127 due in 2005 and $233 due after 2006.

Commodity฀Derivative฀Instruments฀ ChevronTexaco฀is฀exposed฀to฀
market฀risks฀related฀to฀the฀volatility฀of฀crude฀oil,฀refined฀prod-
ucts,฀electricity,฀natural฀gas฀and฀refinery฀feedstock฀prices.฀The฀
company฀uses฀financial฀derivative฀commodity฀instruments฀to฀
manage฀its฀exposure฀to฀price฀volatility฀on฀a฀small฀portion฀of฀its฀
activity,฀including฀firm฀commitments฀and฀anticipated฀transac-
tions฀for฀the฀purchase฀or฀sale฀of฀crude฀oil฀and฀refined฀products;฀
feedstock฀purchases฀for฀company฀refineries;฀crude฀oil฀and฀refined฀
products฀inventories;฀and฀fixed-price฀contracts฀to฀sell฀natural฀gas฀
and฀natural฀gas฀liquids.