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42 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT

Management’s Discussion and Analysis of Financial Condition and Results of Operations

be฀discussed฀again฀at฀a฀future฀EITF฀meeting.฀While฀this฀issue฀is฀

under฀deliberation,฀the฀SEC฀staff฀directed฀ChevronTexaco฀and฀

other฀companies฀in฀its฀January฀and฀February฀2005฀comment฀letters฀

to฀disclose฀on฀the฀face฀of฀the฀income฀statement฀the฀amounts฀asso-

ciated฀with฀buy/sell฀contracts฀and฀to฀discuss฀in฀a฀footnote฀to฀the฀

ﬁnancial฀statements฀the฀basis฀for฀the฀underlying฀accounting.฀

With฀regard฀to฀the฀latter,฀the฀company’s฀accounting฀treat-

ment฀for฀buy/sell฀contracts฀is฀based฀on฀the฀view฀that฀such฀

transactions฀are฀monetary฀in฀nature.฀Monetary฀transactions฀are฀

outside฀the฀scope฀of฀APB฀29.฀The฀company฀believes฀its฀accounting฀

is฀also฀supported฀by฀the฀indicators฀of฀gross฀reporting฀of฀purchases฀

and฀sales฀in฀paragraph฀3฀of฀EITF฀Issue฀No.฀99-19,฀“Reporting฀

Revenue฀Gross฀as฀a฀Principal฀versus฀Net฀as฀an฀Agent.”฀Addition-

ally,฀FASB฀Interpretation฀No.฀39,฀“Offsetting฀of฀Amounts฀Related฀

to฀Certain฀Contracts”฀(FIN฀39),฀prohibits฀a฀receivable฀from฀being฀

netted฀against฀a฀payable฀when฀the฀receivable฀is฀subject฀to฀credit฀

risk฀unless฀a฀right฀of฀offset฀exists฀that฀is฀enforceable฀by฀law.฀The฀

company฀also฀views฀netting฀the฀separate฀components฀of฀buy/sell฀

contracts฀in฀the฀income฀statement฀to฀be฀inconsistent฀with฀the฀

gross฀presentation฀that฀FIN฀39฀requires฀for฀the฀resulting฀receiv-

able฀and฀payable฀on฀the฀balance฀sheet.฀

The฀company’s฀buy/sell฀transactions฀are฀also฀similar฀to฀

the฀“barrel฀back”฀example฀used฀in฀other฀accounting฀literature,฀

including฀EITF฀Issue฀No.฀03-11,฀“Reporting฀Realized฀Gains฀and฀

Losses฀on฀Derivative฀Instruments฀That฀Are฀Subject฀to฀FASB฀State-

ment฀No.฀133฀and฀Not฀‘Held฀for฀Trading฀Purposes’฀as฀Deﬁned฀

in฀Issue฀No.฀02-3”฀(which฀indicates฀a฀company’s฀decision฀to฀

show฀buy/sell-types฀of฀transactions฀gross฀on฀the฀income฀state-

ment฀as฀being฀a฀matter฀of฀judgment฀of฀the฀relevant฀facts฀and฀

circumstances฀of฀the฀company’s฀activities)฀and฀Derivatives฀

Implementation฀Group฀(DIG)฀Issue฀No.฀K1,฀“Miscellaneous:฀

Determining฀Whether฀Separate฀Transactions฀Should฀be฀Viewed฀

as฀a฀Unit.”

The฀company฀further฀notes฀that฀the฀accounting฀for฀buy/sell฀

contracts฀as฀separate฀purchases฀and฀sales฀is฀in฀contrast฀to฀the฀

accounting฀for฀other฀types฀of฀contracts฀typically฀described฀by฀

the฀industry฀as฀exchange฀contracts,฀which฀are฀considered฀non-

monetary฀in฀nature฀and฀appropriately฀shown฀net฀on฀the฀income฀

statement.฀Under฀an฀exchange฀contract,฀for฀example,฀one฀com-

pany฀agrees฀to฀exchange฀reﬁned฀products฀in฀one฀location฀for฀

another฀company’s฀same฀quantity฀of฀reﬁned฀products฀in฀another฀

location.฀Upon฀transfer,฀the฀only฀amounts฀that฀may฀be฀invoiced฀

are฀for฀transportation฀and฀quality฀differentials.฀Among฀other฀

things,฀unlike฀buy/sell฀contracts,฀the฀obligations฀of฀each฀party฀

to฀perform฀under฀the฀contract฀are฀not฀independent฀and฀the฀risks฀

and฀rewards฀of฀ownership฀are฀not฀separately฀transferred.

As฀shown฀on฀the฀company’s฀Consolidated฀Statement฀of฀

Income,฀“Sales฀and฀other฀operating฀revenues”฀for฀the฀three฀years฀

ending฀December฀31,฀2004,฀included฀$18,650฀million,฀$14,246฀

million฀and฀$7,963฀million,฀respectively,฀for฀buy/sell฀contracts.฀

These฀revenue฀amounts฀associated฀with฀buy/sell฀contracts฀repre-

sented฀12฀percent฀of฀total฀“Sales฀and฀other฀operating฀revenues”฀in฀

2004฀and฀2003฀and฀8฀percent฀in฀2002.฀The฀costs฀associated฀with฀

these฀buy/sell฀revenue฀amounts฀are฀included฀in฀“Purchased฀crude฀

oil฀and฀products”฀on฀the฀Consolidated฀Statement฀of฀Income฀in฀

each฀period.

Other฀Contingencies฀ ChevronTexaco฀receives฀claims฀from,฀

and฀submits฀claims฀to,฀customers,฀trading฀partners,฀U.S.฀federal,฀

state฀and฀local฀regulatory฀bodies,฀host฀governments,฀contractors,฀

insurers,฀and฀suppliers.฀The฀amounts฀of฀these฀claims,฀indi-

vidually฀and฀in฀the฀aggregate,฀may฀be฀signiﬁcant฀and฀may฀take฀

lengthy฀periods฀to฀resolve.฀

The฀company฀and฀its฀afﬁliates฀also฀continue฀to฀review฀and฀

analyze฀their฀operations฀and฀may฀close,฀abandon,฀sell,฀exchange,฀

acquire฀or฀restructure฀assets฀to฀achieve฀operational฀or฀strategic฀

beneﬁts฀and฀to฀improve฀competitiveness฀and฀proﬁtability.฀These฀

activities,฀individually฀or฀together,฀may฀result฀in฀gains฀or฀losses฀in฀

future฀periods.



Virtually฀all฀aspects฀of฀the฀businesses฀in฀which฀the฀company฀

engages฀are฀subject฀to฀various฀federal,฀state฀and฀local฀environ-

mental,฀health฀and฀safety฀laws฀and฀regulations.฀These฀regulatory฀

requirements฀continue฀to฀increase฀in฀both฀number฀and฀com-

plexity฀over฀time฀and฀govern฀not฀only฀the฀manner฀in฀which฀the฀

company฀conducts฀its฀operations,฀but฀also฀the฀products฀it฀sells.฀

Most฀of฀the฀costs฀of฀complying฀with฀laws฀and฀regulations฀per-

taining฀to฀company฀operations฀and฀products฀are฀embedded฀in฀

the฀normal฀costs฀of฀doing฀business.

Accidental฀leaks฀and฀spills฀requiring฀cleanup฀may฀occur฀

in฀the฀ordinary฀course฀of฀business.฀In฀addition฀to฀the฀costs฀for฀

environmental฀protection฀associated฀with฀its฀ongoing฀operations฀

and฀products,฀the฀company฀may฀incur฀expenses฀for฀corrective฀

actions฀at฀various฀owned฀and฀previously฀owned฀facilities฀and฀at฀

third-party-owned฀waste-disposal฀sites฀used฀by฀the฀company.฀

An฀obligation฀may฀arise฀when฀operations฀are฀closed฀or฀sold฀or฀

at฀non-ChevronTexaco฀sites฀where฀company฀products฀have฀been฀

handled฀or฀disposed฀of.฀Most฀of฀the฀expenditures฀to฀fulﬁll฀these฀

obligations฀relate฀to฀facilities฀and฀sites฀where฀past฀operations฀fol-

lowed฀practices฀and฀procedures฀that฀were฀considered฀acceptable฀

at฀the฀time฀but฀now฀require฀investigative฀or฀remedial฀work฀or฀

both฀to฀meet฀current฀standards.฀Using฀deﬁnitions฀and฀guidelines฀

established฀by฀the฀American฀Petroleum฀Institute,฀ChevronTexaco฀

estimated฀its฀worldwide฀environmental฀spending฀in฀2004฀at฀

approximately฀$1.1฀billion฀for฀its฀consolidated฀companies.฀Included฀

in฀these฀expenditures฀were฀$285฀million฀of฀environmental฀capital฀

expenditures฀and฀approximately฀$810฀million฀of฀costs฀associated฀

with฀the฀prevention,฀control,฀abatement฀or฀elimination฀of฀hazard-

ous฀substances฀and฀pollutants฀from฀operating,฀closed฀or฀divested฀

sites฀and฀the฀abandonment฀and฀restoration฀of฀sites.

For฀2005,฀total฀worldwide฀environmental฀capital฀expenditures฀

are฀estimated฀at฀$710฀million.฀These฀capital฀costs฀are฀in฀addition฀

to฀the฀ongoing฀costs฀of฀complying฀with฀environmental฀regulations฀

and฀the฀costs฀to฀remediate฀previously฀contaminated฀sites.

It฀is฀not฀possible฀to฀predict฀with฀certainty฀the฀amount฀of฀

additional฀investments฀in฀new฀or฀existing฀facilities฀or฀amounts฀

of฀incremental฀operating฀costs฀to฀be฀incurred฀in฀the฀future฀

to:฀prevent,฀control,฀reduce฀or฀eliminate฀releases฀of฀hazardous฀

materials฀into฀the฀environment;฀comply฀with฀existing฀and฀new฀

environmental฀laws฀and฀regulations;฀or฀remediate฀and฀restore฀

areas฀damaged฀by฀prior฀releases฀of฀hazardous฀materials.฀Although฀

these฀costs฀may฀be฀signiﬁcant฀to฀the฀results฀of฀operations฀in฀any฀

single฀period,฀the฀company฀does฀not฀expect฀them฀to฀have฀a฀mate-

rial฀effect฀on฀the฀company’s฀liquidity฀or฀ﬁnancial฀position.