Chevron 2004 Annual Report Download - page 61

CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 59
income.”฀These฀activities฀are฀reported฀under฀“Operating฀activi-
ties”฀in฀the฀Consolidated฀Statement฀of฀Cash฀Flows.
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฀related฀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฀relating฀to฀a฀portion฀of฀the฀
company’s฀fixed-rate฀debt฀were฀initiated.฀At฀year-end฀2004,฀the฀
interest฀rate฀swaps฀outstanding฀related฀to฀fixed-rate฀debt,฀and฀
their฀weighted฀average฀maturity฀was฀approximately฀three฀years.
Fair฀values฀of฀the฀interest฀rate฀swaps฀are฀reported฀on฀the฀
Consolidated฀Balance฀Sheet฀as฀“Accounts฀and฀notes฀receivable”฀
or฀“Accounts฀payable,”฀with฀gains฀and฀losses฀reported฀directly฀in฀
income฀as฀part฀of฀“Interest฀and฀debt฀expense.”฀These฀activities฀
are฀reported฀under฀“Operating฀activities”฀in฀the฀Consolidated฀
Statement฀of฀Cash฀Flows.
Fair฀Value฀ Fair฀values฀are฀derived฀either฀from฀quoted฀market฀
prices฀or,฀if฀not฀available,฀the฀present฀value฀of฀the฀expected฀
cash฀flows.฀The฀fair฀values฀reflect฀the฀cash฀that฀would฀have฀been฀
received฀or฀paid฀if฀the฀instruments฀were฀settled฀at฀year-end.
Long-term฀debt฀of฀$5,815฀and฀$7,229฀had฀estimated฀fair฀
values฀of฀$6,444฀and฀$7,709฀at฀December฀31,฀2004฀and฀2003,฀
respectively.
For฀interest฀rate฀swaps,฀the฀notional฀principal฀amounts฀
of฀$1,665฀and฀$665฀had฀estimated฀fair฀values฀of฀$36฀and฀$65฀at฀
December฀31,฀2004฀and฀2003,฀respectively.
The฀company฀holds฀cash฀equivalents฀and฀U.S.฀dollar฀mar-
ketable฀securities฀in฀domestic฀and฀offshore฀portfolios.฀Eurodollar฀
bonds,฀floating-rate฀notes,฀time฀deposits฀and฀commercial฀paper฀
are฀the฀primary฀instruments฀held.฀Cash฀equivalents฀and฀market-
able฀securities฀had฀fair฀values฀of฀$8,789฀and฀$3,803฀at฀December฀
31,฀2004฀and฀2003,฀respectively.฀Of฀these฀balances,฀$7,338฀and฀
$2,803฀at฀the฀respective฀year-ends฀were฀classified฀as฀cash฀equiva-
lents฀that฀had฀average฀maturities฀under฀90฀days.฀The฀remainder,฀
classified฀as฀marketable฀securities,฀had฀average฀maturities฀of฀
approximately฀2.3฀years.
For฀the฀financial฀and฀derivative฀instruments฀discussed฀
above,฀there฀was฀not฀a฀material฀change฀in฀market฀risk฀from฀that฀
presented฀in฀2003.
Concentrations฀of฀Credit฀Risk฀ The฀company’s฀financial฀instru-
ments฀that฀are฀exposed฀to฀concentrations฀of฀credit฀risk฀consist฀
primarily฀of฀its฀cash฀equivalents,฀marketable฀securities,฀deriva-
tive฀financial฀instruments฀and฀trade฀receivables.฀The฀company’s฀
short-term฀investments฀are฀placed฀with฀a฀wide฀array฀of฀financial฀
institutions฀with฀high฀credit฀ratings.฀This฀diversified฀investment฀
policy฀limits฀the฀company’s฀exposure฀both฀to฀credit฀risk฀and฀to฀
concentrations฀of฀credit฀risk.฀Similar฀standards฀of฀diversity฀and฀
creditworthiness฀are฀applied฀to฀the฀company’s฀counterparties฀in฀
derivative฀instruments.
The฀trade฀receivable฀balances,฀reflecting฀the฀company’s฀diver-
sified฀sources฀of฀revenue,฀are฀dispersed฀among฀the฀company’s฀
broad฀customer฀base฀worldwide.฀As฀a฀consequence,฀concentrations฀
of฀credit฀risk฀are฀limited.฀The฀company฀routinely฀assesses฀the฀
financial฀strength฀of฀its฀customers.฀When฀the฀financial฀strength฀
160฀million฀shares฀that฀were฀reserved฀for฀issuance฀under฀the฀
ChevronTexaco฀Corporation฀Long-Term฀Incentive฀Plan฀(LTIP),฀as฀
amended฀and฀restated,฀which฀was฀approved฀by฀the฀stockholders฀in฀
2004.฀In฀addition,฀approximately฀622,000฀shares฀remain฀available฀
for฀issuance฀from฀the฀800,000฀shares฀of฀the฀company’s฀common฀
stock฀that฀were฀reserved฀for฀awards฀under฀the฀ChevronTexaco฀
Corporation฀Non-Employee฀Directors’฀Equity฀Compensation฀
and฀Deferral฀Plan฀(Non-Employee฀Directors’฀Plan),฀which฀was฀
approved฀by฀stockholders฀in฀2003.฀Refer฀to฀Note฀3฀on฀page฀57฀for฀a฀
discussion฀of฀the฀company’s฀common฀stock฀split.


Commodity฀Derivative฀Instruments฀ ChevronTexaco฀is฀exposed฀
to฀market฀risks฀related฀to฀price฀volatility฀of฀crude฀oil,฀refined฀
products,฀electricity,฀natural฀gas฀and฀refinery฀feedstock.
The฀company฀uses฀financial฀derivative฀commodity฀instru-
ments฀to฀manage฀this฀exposure฀on฀a฀small฀portion฀of฀its฀activity,฀
including:฀firm฀commitments฀and฀anticipated฀transactions฀for฀
the฀purchase฀or฀sale฀of฀crude฀oil;฀feedstock฀purchases฀for฀com-
pany฀refineries;฀crude฀oil฀and฀refined฀products฀inventories;฀and฀
fixed-price฀contracts฀to฀sell฀natural฀gas฀and฀natural฀gas฀liquids.฀
The฀company฀also฀uses฀financial฀derivative฀commodity฀instru-
ments฀for฀limited฀trading฀purposes.
The฀company฀maintains฀a฀policy฀of฀requiring฀that฀an฀Inter-
national฀Swaps฀and฀Derivatives฀Association฀Agreement฀govern฀
derivative฀contracts฀with฀certain฀counterparties฀to฀mitigate฀credit฀
risk.฀Depending฀on฀the฀nature฀of฀the฀derivative฀transaction,฀
bilateral฀collateral฀arrangements฀may฀also฀be฀required.฀When฀
the฀company฀is฀engaged฀in฀more฀than฀one฀outstanding฀derivative฀
transaction฀with฀the฀same฀counterparty฀and฀also฀has฀a฀legally฀
enforceable฀netting฀agreement฀with฀that฀counterparty,฀the฀“net”฀
marked-to-market฀exposure฀represents฀the฀netting฀of฀the฀positive฀
and฀negative฀exposures฀with฀that฀counterparty฀and฀a฀reasonable฀
measure฀of฀the฀company’s฀credit฀risk.฀It฀is฀the฀company’s฀policy฀
to฀use฀other฀netting฀agreements฀with฀certain฀counterparties฀with฀
which฀it฀conducts฀significant฀transactions.
The฀fair฀values฀of฀the฀outstanding฀contracts฀are฀reported฀on฀
the฀Consolidated฀Balance฀Sheet฀as฀“Accounts฀and฀notes฀receivable,”฀
“Accounts฀payable,”฀“Long-term฀receivables฀–฀net,”฀and฀“Deferred฀
credits฀and฀other฀noncurrent฀obligations.”฀Gains฀and฀losses฀on฀
the฀company’s฀risk฀management฀activities฀are฀reported฀as฀either฀
“Sales฀and฀other฀operating฀revenues”฀or฀“Purchased฀crude฀oil฀and฀
products,”฀whereas฀trading฀gains฀and฀losses฀are฀reported฀as฀“Other฀
income.”฀These฀activities฀are฀reported฀under฀“Operating฀activities”฀
in฀the฀Consolidated฀Statement฀of฀Cash฀Flows.
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฀fair฀values฀of฀the฀outstanding฀contracts฀are฀reported฀on฀
the฀Consolidated฀Balance฀Sheet฀as฀“Accounts฀and฀notes฀receivable”฀
or฀“Accounts฀payable,”฀with฀gains฀and฀losses฀reported฀as฀“Other฀
 STOCKHOLDERS’ EQUITY – Continued