Chevron 2004 Annual Report Download - page 56

54 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT


General฀ ChevronTexaco฀manages฀its฀investments฀in฀and฀provides฀
administrative,฀financial฀and฀management฀support฀to฀U.S.฀and฀
foreign฀subsidiaries฀and฀affiliates฀that฀engage฀in฀fully฀integrated฀
petroleum,฀chemicals฀and฀coal฀mining฀operations.฀In฀addition,฀
ChevronTexaco฀holds฀investments฀in฀the฀power฀generation฀busi-
ness.฀Collectively,฀these฀companies฀conduct฀business฀activities฀in฀
more฀than฀180฀countries.฀Exploration฀and฀production฀(upstream)฀
operations฀consist฀of฀exploring฀for,฀developing฀and฀producing฀
crude฀oil฀and฀natural฀gas฀and฀also฀marketing฀natural฀gas.฀Refining,฀
marketing฀and฀transportation฀(downstream)฀operations฀relate฀
to฀refining฀crude฀oil฀into฀finished฀petroleum฀products;฀marketing฀
crude฀oil,฀natural฀gas฀and฀the฀many฀products฀derived฀from฀petro-
leum;฀and฀transporting฀crude฀oil,฀natural฀gas฀and฀petroleum฀
products฀by฀pipeline,฀marine฀vessel,฀motor฀equipment฀and฀rail฀
car.฀Chemical฀operations฀include฀the฀manufacture฀and฀marketing฀
of฀commodity฀petrochemicals,฀plastics฀for฀industrial฀uses,฀and฀fuel฀
and฀lubricant฀oil฀additives.
The฀company’s฀Consolidated฀Financial฀Statements฀are฀pre-
pared฀in฀accordance฀with฀principles฀generally฀accepted฀in฀the฀
United฀States฀of฀America.฀These฀require฀the฀use฀of฀estimates฀
and฀assumptions฀that฀affect฀the฀assets,฀liabilities,฀revenues฀and฀
expenses฀reported฀in฀the฀financial฀statements,฀as฀well฀as฀amounts฀
included฀in฀the฀notes฀thereto,฀including฀discussion฀and฀disclo-
sure฀of฀contingent฀liabilities.฀Although฀the฀company฀uses฀its฀best฀
estimates฀and฀judgments,฀actual฀results฀could฀differ฀from฀these฀
estimates฀as฀future฀confirming฀events฀occur.
The฀nature฀of฀the฀company’s฀operations฀and฀the฀many฀
countries฀in฀which฀it฀operates฀subject฀the฀company฀to฀changing฀
economic,฀regulatory฀and฀political฀conditions.฀The฀company฀does฀
not฀believe฀it฀is฀vulnerable฀to฀the฀risk฀of฀near-term฀severe฀impact฀
as฀a฀result฀of฀any฀concentration฀of฀its฀activities.
Subsidiary฀and฀Affiliated฀Companies฀ The฀Consolidated฀Financial฀
Statements฀include฀the฀accounts฀of฀controlled฀subsidiary฀com-
panies฀more฀than฀50฀percent฀owned฀and฀variable฀interest฀entities฀
in฀which฀the฀company฀is฀the฀primary฀beneficiary.฀Undivided฀
interests฀in฀oil฀and฀gas฀joint฀ventures฀and฀certain฀other฀assets฀
are฀consolidated฀on฀a฀proportionate฀basis.฀Investments฀in฀and฀
advances฀to฀affiliates฀in฀which฀the฀company฀has฀a฀substantial฀
ownership฀interest฀of฀approximately฀20฀percent฀to฀50฀percent฀or฀
for฀which฀the฀company฀exercises฀significant฀influence฀but฀not฀
control฀over฀policy฀decisions฀are฀accounted฀for฀by฀the฀equity฀
method.฀As฀part฀of฀that฀accounting,฀the฀company฀recognizes฀
gains฀and฀losses฀that฀arise฀from฀the฀issuance฀of฀stock฀by฀an฀affili-
ate฀which฀results฀in฀changes฀in฀the฀company’s฀proportionate฀share฀
of฀the฀dollar฀amount฀of฀the฀affiliate’s฀equity฀currently฀in฀income.฀
Deferred฀income฀taxes฀are฀provided฀for฀these฀gains฀and฀losses.
Investments฀are฀assessed฀for฀possible฀impairment฀when฀
events฀indicate฀that฀the฀fair฀value฀of฀the฀investment฀may฀be฀below฀
the฀company’s฀carrying฀value.฀When฀such฀a฀condition฀is฀deemed฀
to฀be฀other฀than฀temporary,฀the฀carrying฀value฀of฀the฀investment฀
is฀written฀down฀to฀its฀fair฀value,฀and฀the฀amount฀of฀the฀write-
down฀is฀included฀in฀net฀income.฀In฀making฀the฀determination฀as฀
to฀whether฀a฀decline฀is฀other฀than฀temporary,฀the฀company฀con-
siders฀such฀factors฀as฀the฀duration฀and฀extent฀of฀the฀decline,฀the฀
investee’s฀financial฀performance,฀and฀the฀company’s฀ability฀and฀
intention฀to฀retain฀its฀investment฀for฀a฀period฀that฀will฀be฀suf-
ficient฀to฀allow฀for฀any฀anticipated฀recovery฀in฀the฀investment’s฀
market฀value.฀The฀new฀cost฀basis฀of฀investments฀in฀these฀equity฀
investees฀is฀not฀changed฀for฀subsequent฀recoveries฀in฀fair฀value.฀
Subsequent฀recoveries฀in฀the฀carrying฀value฀of฀other฀investments฀
are฀reported฀in฀“Other฀comprehensive฀income.”
Differences฀between฀the฀company’s฀carrying฀value฀of฀an฀
equity฀investment฀and฀its฀underlying฀equity฀in฀the฀net฀assets฀
of฀the฀affiliate฀are฀assigned฀to฀the฀extent฀practicable฀to฀specific฀
assets฀and฀liabilities฀based฀on฀the฀company’s฀analysis฀of฀the฀various฀
factors฀giving฀rise฀to฀the฀difference.฀The฀company’s฀share฀of฀the฀
affiliate’s฀reported฀earnings฀is฀adjusted฀quarterly฀when฀appro-
priate฀to฀reflect฀the฀difference฀between฀these฀allocated฀values฀and฀
the฀affiliate’s฀historical฀book฀values.
Derivatives฀ The฀majority฀of฀the฀company’s฀activity฀in฀commodity฀
derivative฀instruments฀is฀intended฀to฀manage฀the฀price฀risk฀posed฀
by฀physical฀transactions.฀For฀some฀of฀this฀derivative฀activity,฀
generally฀limited฀to฀large,฀discrete฀or฀infrequently฀occurring฀
transactions,฀the฀company฀may฀elect฀to฀apply฀fair฀value฀or฀cash฀
flow฀hedge฀accounting.฀For฀other฀similar฀derivative฀instruments,฀
generally฀because฀of฀the฀short-term฀nature฀of฀the฀contracts฀or฀
their฀limited฀use,฀the฀company฀does฀not฀apply฀hedge฀accounting,฀
and฀changes฀in฀the฀fair฀value฀of฀those฀contracts฀are฀reflected฀in฀
current฀income.฀For฀the฀company’s฀trading฀activity,฀gains฀and฀
losses฀from฀the฀derivative฀instruments฀are฀reported฀in฀current฀
income.฀For฀derivative฀instruments฀relating฀to฀foreign฀currency฀
exposures,฀gains฀and฀losses฀are฀reported฀in฀current฀income.฀Interest฀
rate฀swaps฀–฀hedging฀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฀re-
corded฀at฀fair฀value฀on฀the฀Consolidated฀Balance฀Sheet,฀with฀
resulting฀gains฀and฀losses฀reflected฀in฀income.
Short-Term฀Investments฀ All฀short-term฀investments฀are฀classified฀
as฀available฀for฀sale฀and฀are฀in฀highly฀liquid฀debt฀securities.฀Those฀
investments฀that฀are฀part฀of฀the฀company’s฀cash฀management฀
portfolio฀and฀have฀original฀maturities฀of฀three฀months฀or฀less฀are฀
reported฀as฀“Cash฀equivalents.”฀The฀balance฀of฀the฀short-term฀
investments฀is฀reported฀as฀“Marketable฀securities.”฀Short-term฀
investments฀are฀marked-to-market,฀with฀any฀unrealized฀gains฀or฀
losses฀included฀in฀“Other฀comprehensive฀income.”
Inventories฀ Crude฀oil,฀petroleum฀products฀and฀chemicals฀are฀gen-
erally฀stated฀at฀cost,฀using฀a฀Last-In,฀First-Out฀(LIFO)฀method.฀In฀
the฀aggregate,฀these฀costs฀are฀below฀market.฀“Materials,฀supplies฀
and฀other”฀inventories฀generally฀are฀stated฀at฀average฀cost.
Properties,฀Plant฀and฀Equipment฀ The฀successful฀efforts฀method฀
is฀used฀for฀crude฀oil฀and฀natural฀gas฀exploration฀and฀produc-
tion฀activities.฀All฀costs฀for฀development฀wells,฀related฀plant฀and฀
equipment,฀proved฀mineral฀interests฀in฀crude฀oil฀and฀natural฀gas฀
properties,฀and฀related฀asset฀retirement฀obligation฀(ARO)฀assets฀
are฀capitalized.฀Costs฀of฀exploratory฀wells฀are฀capitalized฀pend-
ing฀determination฀of฀whether฀the฀wells฀found฀proved฀reserves.฀
Costs฀of฀wells฀that฀are฀assigned฀proved฀reserves฀remain฀capital-
ized.฀Costs฀are฀also฀capitalized฀for฀wells฀that฀find฀commercially฀
producible฀reserves฀that฀cannot฀be฀classified฀as฀proved,฀pending฀
Notes to the Consolidated Financial Statements
Millions฀of฀dollars,฀except฀per-share฀amounts