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CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 39

ChevronTexaco฀also฀uses฀ﬁnancial฀derivative฀commodity฀

instruments฀for฀trading฀purposes,฀and฀the฀results฀of฀this฀activity฀

were฀not฀material฀to฀the฀company’s฀ﬁnancial฀position,฀net฀income฀

or฀cash฀ﬂows฀in฀2004.

The฀company’s฀positions฀are฀monitored฀and฀reported฀on฀a฀

daily฀basis฀by฀an฀internal฀risk฀control฀group฀to฀ensure฀compliance฀

with฀the฀company’s฀risk฀management฀policy฀that฀has฀been฀approved฀

by฀the฀Audit฀Committee฀of฀the฀company’s฀Board฀of฀Directors.

The฀ﬁnancial฀derivative฀instruments฀used฀in฀the฀company’s฀

risk฀management฀and฀trading฀activities฀consist฀mainly฀of฀futures,฀

options฀and฀swap฀contracts฀traded฀on฀the฀New฀York฀Mercantile฀

Exchange฀and฀the฀International฀Petroleum฀Exchange.฀In฀addi-

tion,฀crude฀oil,฀natural฀gas฀and฀reﬁned฀product฀swap฀contracts฀

and฀options฀contracts฀are฀entered฀into฀principally฀with฀major฀

ﬁnancial฀institutions฀and฀other฀oil฀and฀gas฀companies฀in฀the฀

“over-the-counter”฀markets.

Virtually฀all฀derivatives฀beyond฀those฀designated฀as฀normal฀

purchase฀and฀normal฀sale฀contracts฀are฀recorded฀at฀fair฀value฀on฀

the฀Consolidated฀Balance฀Sheet฀with฀resulting฀gains฀and฀losses฀

reﬂected฀in฀income.฀Fair฀values฀are฀derived฀principally฀from฀mar-

ket฀quotes฀and฀other฀independent฀third-party฀quotes.

Each฀hypothetical฀10฀percent฀increase฀in฀the฀price฀of฀natural฀

gas฀and฀crude฀oil฀would฀increase฀the฀fair฀value฀of฀the฀natural฀gas฀

derivative฀contracts฀by฀approximately฀$40฀million฀and฀reduce฀

the฀fair฀value฀of฀the฀crude฀oil฀derivative฀contracts฀by฀about฀

$15฀million.฀The฀same฀hypothetical฀decreases฀in฀the฀prices฀of฀

these฀commodities฀would฀result฀in฀the฀same฀opposite฀effects฀on฀

the฀fair฀values฀of฀the฀contracts.

The฀hypothetical฀effect฀on฀these฀contracts฀was฀estimated฀

by฀calculating฀the฀cash฀value฀of฀the฀contracts฀as฀the฀difference฀

between฀the฀hypothetical฀and฀contract฀delivery฀prices฀multiplied฀

by฀the฀contract฀amounts.

Foreign฀Currency฀ The฀company฀enters฀into฀forward฀

exchange฀contracts,฀generally฀with฀terms฀of฀180฀days฀or฀less,฀to฀

manage฀some฀of฀its฀foreign฀currency฀exposures.฀These฀exposures฀

include฀revenue฀and฀anticipated฀purchase฀transactions,฀including฀

foreign฀currency฀capital฀expenditures฀and฀lease฀commitments฀

forecasted฀to฀occur฀within฀180฀days.฀The฀forward฀exchange฀

contracts฀are฀recorded฀at฀fair฀value฀on฀the฀balance฀sheet฀with฀

resulting฀gains฀and฀losses฀reﬂected฀in฀income.

The฀aggregate฀effect฀on฀foreign฀exchange฀contracts฀of฀a฀hypo-

thetical฀10฀percent฀change฀to฀year-end฀exchange฀rates฀would฀be฀

approximately฀$50฀million.

Interest฀Rates฀ The฀company฀enters฀into฀interest฀rate฀swaps฀

as฀part฀of฀its฀overall฀strategy฀to฀manage฀the฀interest฀rate฀risk฀

on฀its฀debt.฀Under฀the฀terms฀of฀the฀swaps,฀net฀cash฀settlements฀

are฀based฀on฀the฀difference฀between฀ﬁxed-rate฀and฀ﬂoating-rate฀

interest฀amounts฀calculated฀by฀reference฀to฀agreed฀notional฀

principal฀amounts.฀Interest฀rate฀swaps฀related฀to฀a฀portion฀of฀the฀

company’s฀ﬁxed-rate฀debt฀are฀accounted฀for฀as฀fair฀value฀hedges,฀

whereas฀interest฀rate฀swaps฀relating฀to฀a฀portion฀of฀the฀company’s฀

ﬂoating-rate฀debt฀are฀recorded฀at฀fair฀value฀on฀the฀balance฀sheet฀

with฀resulting฀gains฀and฀losses฀reﬂected฀in฀income.฀

During฀2004,฀four฀new฀swaps฀were฀initiated฀to฀hedge฀a฀

portion฀of฀the฀company’s฀ﬁxed-rate฀debt.฀At฀year-end฀2004,฀the฀

weighted฀average฀maturity฀of฀“receive฀ﬁxed”฀interest฀rate฀swaps฀

was฀approximately฀three฀years.฀There฀were฀no฀“receive฀ﬂoating”฀

swaps฀outstanding฀at฀year฀end.

A฀hypothetical฀increase฀of฀10฀basis฀points฀in฀market-ﬁxed฀

interest฀rates฀would฀reduce฀the฀fair฀value฀of฀the฀“receive฀ﬁxed”฀

swaps฀by฀approximately฀$4฀million.

For฀the฀ﬁnancial฀and฀derivative฀instruments฀discussed฀

above,฀there฀was฀not฀a฀material฀change฀in฀market฀risk฀from฀that฀

presented฀in฀2003.

The฀hypothetical฀variances฀used฀in฀this฀section฀were฀selected฀

for฀illustrative฀purposes฀only฀and฀do฀not฀represent฀the฀company’s฀

estimation฀of฀market฀changes.฀The฀actual฀impact฀of฀future฀

market฀changes฀could฀differ฀materially฀due฀to฀factors฀discussed฀

elsewhere฀in฀this฀report.



ChevronTexaco฀enters฀into฀a฀number฀of฀business฀arrange-

ments฀with฀related฀parties,฀principally฀its฀equity฀afﬁliates.฀These฀

arrangements฀include฀long-term฀supply฀and฀offtake฀agreements.฀

Internationally,฀there฀are฀long-term฀purchase฀agreements฀in฀place฀

with฀the฀company’s฀reﬁning฀afﬁliate฀in฀Thailand.฀Refer฀to฀page฀38฀

for฀further฀discussion.฀Management฀believes฀the฀foregoing฀agree-

ments฀and฀others฀have฀been฀negotiated฀on฀terms฀consistent฀with฀

those฀that฀would฀have฀been฀negotiated฀with฀an฀unrelated฀party.฀



MTBE฀ The฀company฀and฀many฀other฀companies฀in฀the฀petro-

leum฀industry฀have฀used฀methyl฀tertiary฀butyl฀ether฀(MTBE)฀as฀a฀

gasoline฀additive.฀

The฀company฀is฀a฀party฀to฀more฀than฀70฀lawsuits฀and฀claims,฀

the฀majority฀of฀which฀involve฀numerous฀other฀petroleum฀marketers฀

and฀reﬁners,฀related฀to฀the฀use฀of฀MTBE฀in฀certain฀oxygenated฀

gasolines฀and฀the฀alleged฀seepage฀of฀MTBE฀into฀groundwater.฀

Resolution฀of฀these฀actions฀may฀ultimately฀require฀the฀company฀

to฀correct฀or฀ameliorate฀the฀alleged฀effects฀on฀the฀environment฀

of฀prior฀release฀of฀MTBE฀by฀the฀company฀or฀other฀parties.฀Addi-

tional฀lawsuits฀and฀claims฀related฀to฀the฀use฀of฀MTBE,฀including฀

personal-injury฀claims,฀may฀be฀ﬁled฀in฀the฀future.

The฀company’s฀ultimate฀exposure฀related฀to฀these฀lawsuits฀

and฀claims฀is฀not฀currently฀determinable,฀but฀could฀be฀mate-

rial฀to฀net฀income฀in฀any฀one฀period.฀The฀company฀does฀not฀use฀

MTBE฀in฀the฀manufacture฀of฀gasoline฀in฀the฀United฀States฀and฀

there฀are฀no฀detectable฀levels฀of฀MTBE฀in฀that฀gasoline.

Environmental฀ The฀company฀is฀subject฀to฀loss฀contingen-

cies฀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฀release฀of฀

chemicals฀or฀petroleum฀substances,฀including฀MTBE,฀by฀the฀

company฀or฀other฀parties.฀Such฀contingencies฀may฀exist฀for฀vari-

ous฀sites,฀including,฀but฀not฀limited฀to,฀federal฀Superfund฀sites฀

and฀analogous฀sites฀under฀state฀laws,฀reﬁneries,฀oil฀ﬁelds,฀service฀

stations,฀terminals,฀and฀land฀development฀areas,฀whether฀oper-

ating,฀closed฀or฀sold.฀The฀following฀table฀displays฀the฀annual฀

changes฀to฀the฀company’s฀before-tax฀environmental฀remediation฀

reserves,฀including฀those฀for฀federal฀Superfund฀sites฀and฀analo-

gous฀sites฀under฀state฀laws.฀In฀2004,฀the฀company฀recorded฀

additional฀provisions฀for฀estimated฀remediation฀costs฀primarily฀

at฀reﬁned฀products฀marketing฀sites฀and฀various฀operating,฀closed฀

or฀divested฀facilities฀in฀the฀United฀States.฀

Millions฀of฀dollars  2003 2002

Balance at January 1  $ 1,090 $ 1,160

Net Additions   296 229

Expenditures   (237) (299)

  $ 1,149 $ 1,090

The฀company฀manages฀environmental฀liabilities฀under฀spe-

ciﬁc฀sets฀of฀regulatory฀requirements,฀which฀in฀the฀United฀States฀

include฀the฀Resource฀Conservation฀and฀Recovery฀Act฀and฀various฀

state฀or฀local฀regulations.฀No฀single฀remediation฀site฀at฀year-end฀