NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of Chevron Corporation and its subsidiaries (the company) have not been audited by an independent registered public accounting firm. In the opinion of the company’s management, the interim data includes all adjustments necessary for a fair statement of the results for the interim periods. These adjustments were of a normal recurring nature. The results for the
three-month period ended March 31, 2018
, are not necessarily indicative of future financial results. The term “earnings” is defined as net income attributable to Chevron Corporation.
Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the company’s
2017
Annual Report on Form 10-K.
Note 2. Changes in Accumulated Other Comprehensive Losses
The change in Accumulated Other Comprehensive Losses (AOCL) presented on the Consolidated Balance Sheet and the impact of significant amounts reclassified from AOCL on information presented in the Consolidated Statement of Income for the
three months
ending
March 31, 2018
, are reflected in the table below.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Currency Translation Adjustment
|
|
Unrealized Holding Gains (Losses) on Securities
|
|
Derivatives
|
|
Defined Benefit Plans
|
|
Total
|
|
|
(Millions of dollars)
|
Balance at January 1
|
|
$
|
(105
|
)
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
$
|
(3,477
|
)
|
|
$
|
(3,589
|
)
|
Components of Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Before Reclassifications
|
|
10
|
|
|
(1
|
)
|
|
—
|
|
|
5
|
|
|
14
|
|
Reclassifications
(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
116
|
|
Net Other Comprehensive Income (Loss)
|
|
10
|
|
|
(1
|
)
|
|
—
|
|
|
121
|
|
|
130
|
|
Balance at March 31
|
|
$
|
(95
|
)
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
(3,356
|
)
|
|
$
|
(3,459
|
)
|
________________________________
(1)
All amounts are net of tax.
(2)
Refer to Note 10, Employee Benefits for reclassified components totaling
$153 million
that are included in employee benefit costs for the
three months
ending
March 31, 2018
. Related income taxes for the same period, totaling
$37 million
, are reflected in "Income Tax Expense" on the Consolidated Statement of Income. All other reclassified amounts were insignificant.
Note 3. Noncontrolling Interests
Ownership interests in the company’s subsidiaries held by parties other than the parent are presented separately from the parent’s equity on the Consolidated Balance Sheet. The amount of consolidated net income attributable to the parent and the noncontrolling interests are both presented on the face of the Consolidated Statement of Income.
Activity for the equity attributable to noncontrolling interests for the first
three months
of
2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Chevron
Corporation
Stockholders’ Equity
|
|
Non-controlling
Interest
|
|
Total
Equity
|
|
Chevron
Corporation
Stockholders’ Equity
|
|
Non-controlling
Interest
|
|
Total
Equity
|
|
(Millions of dollars)
|
Balance at January 1
|
$
|
148,124
|
|
|
$
|
1,195
|
|
|
$
|
149,319
|
|
|
$
|
145,556
|
|
|
$
|
1,166
|
|
|
$
|
146,722
|
|
Net income
|
3,638
|
|
|
21
|
|
|
3,659
|
|
|
2,682
|
|
|
17
|
|
|
2,699
|
|
Dividends
|
(2,124
|
)
|
|
—
|
|
|
(2,124
|
)
|
|
(2,030
|
)
|
|
—
|
|
|
(2,030
|
)
|
Distributions to noncontrolling interests
|
—
|
|
|
(11
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Treasury shares, net
|
474
|
|
|
—
|
|
|
474
|
|
|
231
|
|
|
—
|
|
|
231
|
|
Other changes, net*
|
244
|
|
|
5
|
|
|
249
|
|
|
153
|
|
|
15
|
|
|
168
|
|
Balance at March 31
|
$
|
150,356
|
|
|
$
|
1,210
|
|
|
$
|
151,566
|
|
|
$
|
146,592
|
|
|
$
|
1,198
|
|
|
$
|
147,790
|
|
__________________________________________
* Includes components of comprehensive income, which are disclosed separately in the Consolidated Statement of Comprehensive Income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Information Relating to the Consolidated Statement of Cash Flows
The “Net increase in operating working capital” was composed of the following operating changes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
(Increase) decrease in accounts and notes receivable
|
$
|
(335
|
)
|
|
$
|
317
|
|
Increase in inventories
|
(543
|
)
|
|
(550
|
)
|
(Increase) decrease in prepaid expenses and other current assets
1
|
(608
|
)
|
|
26
|
|
Decrease in accounts payable and accrued liabilities
1
|
(807
|
)
|
|
(1,090
|
)
|
Increase in income and other taxes payable
|
189
|
|
|
245
|
|
Net increase in operating working capital
1
|
$
|
(2,104
|
)
|
|
$
|
(1,052
|
)
|
____________________
|
|
|
|
1
2017 adjusted to conform to Accounting Standards Update 2016-18.
|
“Net Cash Provided by Operating Activities” included the following cash payments for interest on debt and for income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Interest on debt (net of capitalized interest)
|
$
|
105
|
|
|
$
|
—
|
|
Income taxes
|
843
|
|
|
494
|
|
"Other" includes changes in postretirement benefits obligations and other long-term liabilities.
The “Net (purchases) sales of marketable securities” consisted of the following gross amounts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Marketable securities purchased
|
$
|
(29
|
)
|
|
$
|
—
|
|
Marketable securities sold
|
—
|
|
|
2
|
|
Net (purchases) sales of marketable securities
|
$
|
(29
|
)
|
|
$
|
2
|
|
The “Net repayment (borrowing) of loans by equity affiliates” consisted of the following gross amounts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Borrowing of loans by equity affiliates
|
$
|
—
|
|
|
$
|
(70
|
)
|
Repayment of loans by equity affiliates
|
26
|
|
|
64
|
|
Net repayment (borrowing) of loans by equity affiliates
|
$
|
26
|
|
|
$
|
(6
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The “Net borrowings (repayments) of short-term obligations" consisted of the following gross and net amounts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Repayments of short-term obligations
|
$
|
(1,377
|
)
|
|
$
|
(2,952
|
)
|
Proceeds from issuances of short-term obligations
|
658
|
|
|
3,415
|
|
Net borrowings of short-term obligations with three months or less maturity
|
3,933
|
|
|
(4,391
|
)
|
Net borrowings (repayments) of short-term obligations
|
$
|
3,214
|
|
|
$
|
(3,928
|
)
|
The “
Net sales of treasury shares
” represents the value of shares sold for share-based compensation plans, net of purchases. Purchases totaled
$1 million
for the first
three months
in
2018
and
$1 million
for the first
three months
in
2017
.
No
purchases were made under the company's share repurchase program in the first
three months
of
2018
or
2017
.
The major components of “Capital expenditures” and the reconciliation of this amount to the capital and exploratory expenditures, including equity affiliates, are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Additions to properties, plant and equipment
|
$
|
2,937
|
|
|
$
|
3,305
|
|
Additions to investments
|
15
|
|
|
3
|
|
Current year dry hole expenditures
|
45
|
|
|
7
|
|
Capital expenditures
|
2,997
|
|
|
3,315
|
|
Expensed exploration expenditures
|
113
|
|
|
137
|
|
Assets acquired through capital lease obligations
|
—
|
|
|
1
|
|
Capital and exploratory expenditures, excluding equity affiliates
|
3,110
|
|
|
3,453
|
|
Company’s share of expenditures by equity affiliates
|
1,295
|
|
|
939
|
|
Capital and exploratory expenditures, including equity affiliates
|
$
|
4,405
|
|
|
$
|
4,392
|
|
On January 1, 2018, Chevron adopted Accounting Standards Updates (ASU) 2016-15 and 2016-18, which require retrospective adjustment of prior periods in the Statement of Cash Flows.
In addition to other requirements, ASU 2016-15 specifies new standards for the classification of distributions from equity affiliates. In adopting these new standards, Chevron utilized the cumulative earnings approach to evaluate returns on and returns of investment from equity affiliates. For the first
three months
of
2017
, a total of
$6 million
was reclassified from “Distributions less than income from equity affiliates” to “Proceeds and deposits related to asset sales and returns of investment.”
Adoption of ASU 2016-18 requires the inclusion of restricted cash and associated changes in restricted cash in the Consolidated Statement of Cash Flows. The impact of ASU 2016-18 is captured across several line items in the Statement of Cash Flows, including “Net decrease (increase) in operating working capital,” “Decrease (increase) in other deferred charges,” and “Proceeds and deposits related to asset sales and returns of investment” with associated net changes captured in both “Net Cash Provided by Operating Activities” and “Net Cash Used for Investing Activities.” The line item “Net sales (purchases) of other short-term investments” was removed in conjunction with the adoption of ASU 2016-18.
The table on the next page quantifies the beginning and ending balances of restricted cash and restricted cash equivalents in the Consolidated Balance Sheet:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31
|
|
At December 31
|
|
|
2018
|
|
2017
|
|
2017
|
|
2016
|
|
|
(Millions of dollars)
|
|
(Millions of dollars)
|
Cash and Cash Equivalents
|
|
$
|
6,466
|
|
|
$
|
6,983
|
|
|
$
|
4,813
|
|
|
$
|
6,988
|
|
Restricted cash included in "Prepaid expenses and other current assets"
|
|
316
|
|
|
306
|
|
|
405
|
|
|
488
|
|
Restricted cash included in "Deferred charges and other assets"
|
|
735
|
|
|
784
|
|
|
725
|
|
|
938
|
|
Total Cash, Cash Equivalents and Restricted Cash
|
|
$
|
7,517
|
|
|
$
|
8,073
|
|
|
$
|
5,943
|
|
|
$
|
8,414
|
|
|
|
|
|
|
|
|
|
|
Additional information related to "Restricted Cash" is included on page
22
in Note
15
under the heading "Restricted Cash."
Note 5. New Accounting Standards
Revenue Recognition (Topic 606): Revenue from Contracts with Customers
On January 1, 2018, Chevron adopted ASU 2014-09 and its related amendments using the modified retrospective transition method, which did not require the restatement of prior periods. The impact of the adoption of the standard did not have a material effect on the company’s consolidated financial statements. For additional information on the company’s revenue, refer to Note
17
beginning on page
24
.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
Effective January 1, 2018, Chevron adopted ASU 2016-15 on a retrospective basis. The standard provides clarification on how certain cash receipts and cash payments are presented and classified on the statement of cash flows. The adoption of this ASU did not have a material impact on the company's Consolidated Statement of Cash Flows. For additional information, refer to Note 4 beginning on page
8
.
Statement of Cash Flows (Topic 230): Restricted Cash
Effective January 1, 2018, Chevron adopted ASU 2016-18 on a retrospective basis. The standard requires an entity to explain the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents on the statement of cash flows and to provide a reconciliation to the balance sheet when the cash, cash equivalents, restricted cash and restricted cash equivalents are not separately presented or are presented in more than one line item on the balance sheet. The company’s restricted cash balances are now included in the beginning and ending balances on the Consolidated Statement of Cash Flows. For additional information, refer to Note 4 beginning on page
8
.
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)
On January 1, 2018, the company adopted ASU 2017-05 which provides clarification regarding the guidance on accounting for the derecognition of nonfinancial assets. The adoption of the standard had no impact on the company’s consolidated financial statements.
Compensation - Retirement Benefits (Topic 715
):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Effective January 1, 2018, Chevron adopted ASU 2017-07 on a retrospective basis. The standard requires the disaggregation of the service cost component from the other components of net periodic benefit cost and allows only the service cost component of net benefit cost to be eligible for capitalization. The effects of retrospective adoption on the Consolidated Statement of Income for the period ended March 31, 2017 were to move $
70 million
from "Operating expenses" and $
60 million
from "Selling, general and administrative expenses" to "Other components of net periodic benefits cost."
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02 which becomes effective for the company January 1, 2019. The standard requires that lessees present right-of-use assets and lease liabilities on the balance sheet. The company is evaluating the effect of the standard on its consolidated financial statements.
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, which becomes effective for the company January 1, 2019. The standard permits companies to reclassify the tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings and also requires
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
additional new disclosures. The company is evaluating the effect of the standard on its consolidated financial statements.
Financial Instruments - Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, which becomes effective for the company beginning January 1, 2020. The standard requires companies to use forward-looking information to calculate credit loss estimates. The company is evaluating the effect of the standard on its consolidated financial statements.
Note 6. Operating Segments and Geographic Data
Although each subsidiary of Chevron is responsible for its own affairs, Chevron Corporation manages its investments in these subsidiaries and their affiliates. The investments are grouped into
two
business segments, Upstream and Downstream, representing the company’s “reportable segments” and “operating segments.” Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; liquefaction, transportation and regasification associated with liquefied natural gas (LNG); transporting crude oil by major international oil export pipelines; processing, transporting, storage and marketing of natural gas; and a gas-to-liquids plant. Downstream operations consist primarily of refining of crude oil into petroleum products; marketing of crude oil and refined products; transporting of crude oil and refined products by pipeline, marine vessel, motor equipment and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives. All Other activities of the company include worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities and technology companies.
The company’s segments are managed by “segment managers” who report to the “chief operating decision maker” (CODM). The segments represent components of the company that engage in activities (a) from which revenues are earned and expenses are incurred; (b) whose operating results are regularly reviewed by the CODM, which makes decisions about resources to be allocated to the segments and assesses their performance; and (c) for which discrete financial information is available.
The company’s primary country of operation is the United States of America, its country of domicile. Other components of the company’s operations are reported as “International” (outside the United States).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment Earnings
The company evaluates the performance of its operating segments on an after-tax basis, without considering the effects of debt financing interest expense or investment interest income, both of which are managed by the company on a worldwide basis. Corporate administrative costs and assets are not allocated to the operating segments. However, operating segments are billed for the direct use of corporate services. Nonbillable costs remain at the corporate level in “All Other.” Earnings by major operating area for the
three-month periods ended March 31, 2018
and
2017
, are presented in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
Segment Earnings
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Upstream
|
|
|
|
United States
|
$
|
648
|
|
|
$
|
80
|
|
International
|
2,704
|
|
|
1,437
|
|
Total Upstream
|
3,352
|
|
|
1,517
|
|
Downstream
|
|
|
|
United States
|
442
|
|
|
469
|
|
International
|
286
|
|
|
457
|
|
Total Downstream
|
728
|
|
|
926
|
|
Total Segment Earnings
|
4,080
|
|
|
2,443
|
|
All Other
|
|
|
|
Interest expense
|
(149
|
)
|
|
(43
|
)
|
Interest income
|
19
|
|
|
15
|
|
Other
|
(312
|
)
|
|
267
|
|
Net Income Attributable to Chevron Corporation
|
$
|
3,638
|
|
|
$
|
2,682
|
|
Segment Assets
Segment assets do not include intercompany investments or intercompany receivables. “All Other” assets consist primarily of worldwide cash, cash equivalents, time deposits and marketable securities; real estate; information systems; technology companies; and assets of the corporate administrative functions. Segment assets at
March 31, 2018
, and
December 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
Segment Assets
|
At March 31
2018
|
|
At December 31
2017
|
|
(Millions of dollars)
|
Upstream
|
|
|
|
United States
|
$
|
41,791
|
|
|
$
|
40,770
|
|
International
|
159,071
|
|
|
159,612
|
|
Goodwill
|
4,531
|
|
|
4,531
|
|
Total Upstream
|
205,393
|
|
|
204,913
|
|
Downstream
|
|
|
|
United States
|
23,862
|
|
|
23,202
|
|
International
|
17,200
|
|
|
17,434
|
|
Total Downstream
|
41,062
|
|
|
40,636
|
|
Total Segment Assets
|
246,455
|
|
|
245,549
|
|
All Other
|
|
|
|
United States
|
5,682
|
|
|
4,938
|
|
International
|
4,305
|
|
|
3,319
|
|
Total All Other
|
9,987
|
|
|
8,257
|
|
Total Assets — United States
|
71,335
|
|
|
68,910
|
|
Total Assets — International
|
180,576
|
|
|
180,365
|
|
Goodwill
|
4,531
|
|
|
4,531
|
|
Total Assets
|
$
|
256,442
|
|
|
$
|
253,806
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment Sales and Other Operating Revenues
Segment sales and other operating revenues, including internal transfers, for the
three-month periods ended March 31, 2018
and
2017
, are presented in the following table. Products are transferred between operating segments at internal product values that approximate market prices. Revenues for the upstream segment are derived primarily from the production and sale of crude oil and natural gas, as well as the sale of third-party production of natural gas. Revenues for the downstream segment are derived from the refining and marketing of petroleum products such as gasoline, jet fuel, gas oils, lubricants, residual fuel oils and other products derived from crude oil. This segment also generates revenues from the manufacture and sale of fuel and lubricant additives and the transportation and trading of refined products and crude oil. “All Other” activities include revenues from insurance operations, real estate activities and technology companies.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
Sales and Other Operating Revenues
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Upstream
|
|
|
|
United States
|
$
|
4,577
|
|
|
$
|
3,240
|
|
International
|
8,656
|
|
|
6,581
|
|
Subtotal
|
13,233
|
|
|
9,821
|
|
Intersegment Elimination — United States
|
(2,757
|
)
|
|
(2,241
|
)
|
Intersegment Elimination — International
|
(3,215
|
)
|
|
(2,720
|
)
|
Total Upstream
|
7,261
|
|
|
4,860
|
|
Downstream *
|
|
|
|
United States
|
13,042
|
|
|
12,432
|
|
International
|
15,935
|
|
|
14,513
|
|
Subtotal
|
28,977
|
|
|
26,945
|
|
Intersegment Elimination — United States
|
(3
|
)
|
|
(3
|
)
|
Intersegment Elimination — International
|
(328
|
)
|
|
(330
|
)
|
Total Downstream
|
28,646
|
|
|
26,612
|
|
All Other
|
|
|
|
United States
|
227
|
|
|
235
|
|
International
|
3
|
|
|
5
|
|
Subtotal
|
230
|
|
|
240
|
|
Intersegment Elimination — United States
|
(166
|
)
|
|
(183
|
)
|
Intersegment Elimination — International
|
(3
|
)
|
|
(5
|
)
|
Total All Other
|
61
|
|
|
52
|
|
Sales and Other Operating Revenues
|
|
|
|
United States
|
17,846
|
|
|
15,907
|
|
International
|
24,594
|
|
|
21,099
|
|
Subtotal
|
42,440
|
|
|
37,006
|
|
Intersegment Elimination — United States
|
(2,926
|
)
|
|
(2,427
|
)
|
Intersegment Elimination — International
|
(3,546
|
)
|
|
(3,055
|
)
|
Total Sales and Other Operating Revenues
|
$
|
35,968
|
|
|
$
|
31,524
|
|
_____________________________
|
|
|
|
* 2017 includes excise, value-added and similar taxes of $1,677 million collected on behalf of third parties. Beginning in 2018, these taxes are netted in "Taxes other than on income" in accordance with ASU 2014-09. Refer to Note 17, "Revenue" beginning on page 24.
|
Note 7. Summarized Financial Data — Chevron U.S.A. Inc.
Chevron U.S.A. Inc. (CUSA) is a major subsidiary of Chevron Corporation. CUSA and its subsidiaries manage and operate most of Chevron’s U.S. businesses. Assets include those related to the exploration and production of crude oil, natural gas and natural gas liquids and those associated with refining, marketing, and supply and distribution of products derived from petroleum, excluding most of the regulated pipeline operations of Chevron. CUSA also holds the company’s investment in the Chevron Phillips Chemical Company LLC joint venture, which is accounted for using the equity method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summarized financial information for CUSA and its consolidated subsidiaries is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Sales and other operating revenues
*
|
$
|
28,058
|
|
|
$
|
24,408
|
|
Costs and other deductions
*
|
27,596
|
|
|
24,099
|
|
Net income attributable to CUSA
|
697
|
|
|
421
|
|
_____________________________
|
|
|
|
*
2017 includes excise, value-added and similar taxes collected on behalf of third parties of $1,207 million. Beginning in
2018, these taxes are netted in "Taxes other than on income" in accordance with ASU 2014-09.
|
|
|
|
|
|
|
|
|
|
|
At March 31
2018
|
|
At December 31
2017
|
|
(Millions of dollars)
|
Current assets
|
$
|
13,406
|
|
|
$
|
12,163
|
|
Other assets
|
55,482
|
|
|
54,994
|
|
Current liabilities
|
17,606
|
|
|
17,379
|
|
Other liabilities
|
12,623
|
|
|
12,541
|
|
Total CUSA net equity
|
$
|
38,659
|
|
|
$
|
37,237
|
|
Memo: Total debt
|
$
|
3,050
|
|
|
$
|
3,056
|
|
Note 8. Summarized Financial Data — Tengizchevroil LLP
Chevron has a
50 percent
equity ownership interest in Tengizchevroil LLP (TCO). Summarized financial information for
100 percent
of TCO is presented in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Sales and other operating revenues
|
$
|
4,325
|
|
|
$
|
3,395
|
|
Costs and other deductions
|
1,942
|
|
|
1,754
|
|
Net income attributable to TCO
|
1,679
|
|
|
1,158
|
|
Note 9. Summarized Financial Data — Chevron Phillips Chemical Company LLC
Chevron has a
50 percent
equity ownership interest in Chevron Phillips Chemical Company LLC (CPChem). Summarized financial information for
100 percent
of CPChem is presented in the table below
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Sales and other operating revenues
|
$
|
2,577
|
|
|
$
|
2,445
|
|
Costs and other deductions
|
2,151
|
|
|
2,019
|
|
Net income attributable to CPChem
|
585
|
|
|
503
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10. Employee Benefits
Chevron has defined benefit pension plans for many employees. The company typically prefunds defined benefit plans as required by local regulations or in certain situations where prefunding provides economic advantages. In the United States, all qualified plans are subject to the Employee Retirement Income Security Act minimum funding standard. The company does not typically fund U.S. nonqualified pension plans that are not subject to funding requirements under laws and regulations because contributions to these pension plans may be less economic and investment returns may be less attractive than the company’s other investment alternatives.
The company also sponsors other postretirement employee benefit (OPEB) plans that provide medical and dental benefits, as well as life insurance for some active and qualifying retired employees. The plans are unfunded, and the company and the retirees share the costs. The increase to the pre-Medicare company contribution for retiree medical coverage is limited to no more than
4
percent each year. Certain life insurance benefits are paid by the company.
The components of net periodic benefit costs for
2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
(Millions of dollars)
|
Pension Benefits
|
|
|
|
United States
|
|
|
|
Service cost
|
$
|
120
|
|
|
$
|
122
|
|
Interest cost
|
92
|
|
|
91
|
|
Expected return on plan assets
|
(159
|
)
|
|
(149
|
)
|
Amortization of prior service credits
|
1
|
|
|
(1
|
)
|
Amortization of actuarial losses
|
76
|
|
|
85
|
|
Settlement losses
|
66
|
|
|
78
|
|
Total United States
|
196
|
|
|
226
|
|
International
|
|
|
|
Service cost
|
40
|
|
|
37
|
|
Interest cost
|
46
|
|
|
53
|
|
Expected return on plan assets
|
(66
|
)
|
|
(58
|
)
|
Amortization of prior service costs
|
2
|
|
|
3
|
|
Amortization of actuarial losses
|
11
|
|
|
9
|
|
Settlement losses
|
—
|
|
|
—
|
|
Total International
|
33
|
|
|
44
|
|
Net Periodic Pension Benefit Costs
|
$
|
229
|
|
|
$
|
270
|
|
Other Benefits*
|
|
|
|
Service cost
|
$
|
13
|
|
|
$
|
8
|
|
Interest cost
|
21
|
|
|
23
|
|
Amortization of prior service costs
|
(7
|
)
|
|
(7
|
)
|
Amortization of actuarial losses
|
4
|
|
|
(1
|
)
|
Net Periodic Other Benefit Costs
|
$
|
31
|
|
|
$
|
23
|
|
___________________________________
* Includes costs for U.S. and international OPEB plans. Obligations for plans outside the United States are not significant relative to the company’s total OPEB obligation.
Through
March 31, 2018
, a total of
$149 million
was contributed to employee pension plans (including
$91 million
to the U.S. plans). Total contributions for the full year are currently estimated to be
$950 million
(
$700 million
for the U.S. plans and
$250 million
for the international plans). Actual contribution amounts are dependent upon plan investment returns, changes in pension obligations, regulatory requirements and other economic factors. Additional funding may ultimately be required if investment returns are insufficient to offset increases in plan obligations.
During the first
three months
of
2018
, the company contributed
$45 million
to its OPEB plans. The company anticipates contributing approximately
$129 million
during the remainder of
2018
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11. Income Taxes
The 2018 increase in income tax expense between periods of
$984 million
, from
$430 million
in 2017 to
$1.41 billion
in 2018, is a result of the year-over-year increase in total income before income tax expense, which is primarily due to effects of higher crude oil prices and production. The company’s effective tax rate changed between periods from
14 percent
in 2017 to
28 percent
in 2018. The change in effective tax rate is primarily a consequence of the mix effect resulting from the absolute level of earnings or losses and whether they arose in higher or lower tax rate jurisdictions.
U.S. tax reform resulted in the remeasurement of U.S. deferred tax assets and liabilities in 2017. The final
impact will be determined as the actual 2017 U.S. tax return is prepared and completed later in 2018, and this may result in a change to the provisional amounts that were recognized in 2017.
Tax positions for Chevron and its subsidiaries and affiliates are subject to income tax audits by many tax jurisdictions throughout the world. For the company’s major tax jurisdictions, examinations of tax returns for certain prior tax years had not been completed as of
March 31, 2018
. For these jurisdictions, the latest years for which income tax examinations had been finalized were as follows: United States —
2011
, Nigeria —
2000
, Australia — 2006 and Kazakhstan —
2007
.
The company engages in ongoing discussions with tax authorities regarding the resolution of tax matters in the various jurisdictions. Both the outcomes for these tax matters and the timing of resolution and/or closure of the tax audits are highly uncertain. However, it is reasonably possible that developments regarding tax matters in certain tax jurisdictions may result in significant increases or decreases in the company’s total unrecognized tax benefits within the next
12 months
. Given the number of years that still remain subject to examination and the number of matters being examined in the various tax jurisdictions, the company is unable to estimate the range of possible adjustments to the balance of unrecognized tax benefits.
Note 12. Assets Held For Sale
At
March 31, 2018
, the company classified
$1.20 billion
of net properties, plant and equipment as “Assets held for sale” on the Consolidated Balance Sheet. These assets are primarily associated with upstream and downstream operations that are anticipated to be sold in the next 12 months. The revenues and earnings contributions of these assets in
2017
and the first
three months
of
2018
were not material.
Note 13. Litigation
MTBE
Chevron and many other companies in the petroleum industry have used methyl tertiary butyl ether (MTBE) as a gasoline additive. Chevron is a party to
eight
pending lawsuits and claims, the majority of which involve numerous other petroleum marketers and refiners. Resolution of these lawsuits and claims 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. Additional 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 pending lawsuits and claims is not determinable. The company no longer uses MTBE in the manufacture of gasoline in the United States.
Ecuador
Background
Chevron is a defendant in a civil lawsuit initiated in the Superior Court of Nueva Loja in Lago Agrio, Ecuador, in May 2003 by plaintiffs who claim to be representatives of certain residents of an area where an oil production consortium formerly had operations. The lawsuit alleges damage to the environment from the oil exploration and production operations and seeks unspecified damages to fund environmental remediation and restoration of the alleged environmental harm, plus a health monitoring program. Until 1992, Texaco Petroleum Company (Texpet), a subsidiary of Texaco Inc., was a minority member of this consortium with Petroecuador, the Ecuadorian state-owned oil company, as the majority partner; since 1990, the operations have been conducted solely by Petroecuador. At the conclusion of the consortium and following an independent third-party environmental audit of the concession area, Texpet entered into a formal agreement with the Republic of Ecuador and Petroecuador for Texpet to remediate specific sites assigned by the government in proportion to Texpet’s ownership share of the consortium. Pursuant to that agreement, Texpet conducted a
three
-year remediation program at a cost of
$40 million
. After certifying that the sites were properly remediated, the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
government granted Texpet and all related corporate entities a full release from any and all environmental liability arising from the consortium operations.
Based on the history described above, Chevron believes that this lawsuit lacks legal or factual merit. As to matters of law, the company believes first, that the court lacks jurisdiction over Chevron; second, that the law under which plaintiffs bring the action, enacted in 1999, cannot be applied retroactively; third, that the claims are barred by the statute of limitations in Ecuador; and, fourth, that the lawsuit is also barred by the releases from liability previously given to Texpet by the Republic of Ecuador and Petroecuador and by the pertinent provincial and municipal governments. With regard to the facts, the company believes that the evidence confirms that Texpet’s remediation was properly conducted and that the remaining environmental damage reflects Petroecuador’s failure to timely fulfill its legal obligations and Petroecuador’s further conduct since assuming full control over the operations.
Lago Agrio Judgment
In 2008, a mining engineer appointed by the court to identify and determine the cause of environmental damage, and to specify steps needed to remediate it, issued a report recommending that the court assess
$18.9 billion
, which would, according to the engineer, provide financial compensation for purported damages, including wrongful death claims, and pay for, among other items, environmental remediation, health care systems and additional infrastructure for Petroecuador. The engineer’s report also asserted that an additional
$8.4 billion
could be assessed against Chevron for unjust enrichment. In 2009, following the disclosure by Chevron of evidence that the judge participated in meetings in which businesspeople and individuals holding themselves out as government officials discussed the case and its likely outcome, the judge presiding over the case was recused. In 2010, Chevron moved to strike the mining engineer’s report and to dismiss the case based on evidence obtained through discovery in the United States indicating that the report was prepared by consultants for the plaintiffs before being presented as the mining engineer’s independent and impartial work and showing further evidence of misconduct. In August 2010, the judge issued an order stating that he was not bound by the mining engineer’s report and requiring the parties to provide their positions on damages within
45 days
. Chevron subsequently petitioned for recusal of the judge, claiming that he had disregarded evidence of fraud and misconduct and that he had failed to rule on a number of motions within the statutory time requirement.
In September 2010, Chevron submitted its position on damages, asserting that no amount should be assessed against it. The plaintiffs’ submission, which relied in part on the mining engineer’s report, took the position that damages are between approximately
$16 billion
and
$76 billion
and that unjust enrichment should be assessed in an amount between approximately
$5 billion
and
$38 billion
. The next day, the judge issued an order closing the evidentiary phase of the case and notifying the parties that he had requested the case file so that he could prepare a judgment. Chevron petitioned to have that order declared a nullity in light of Chevron’s prior recusal petition, and because procedural and evidentiary matters remained unresolved. In October 2010, Chevron’s motion to recuse the judge was granted. A new judge took charge of the case and revoked the prior judge’s order closing the evidentiary phase of the case. On December 17, 2010, the judge issued an order closing the evidentiary phase of the case and notifying the parties that he had requested the case file so that he could prepare a judgment.
On February 14, 2011, the provincial court in Lago Agrio rendered an adverse judgment in the case. The court rejected Chevron’s defenses to the extent the court addressed them in its opinion. The judgment assessed approximately
$8.6 billion
in damages and approximately
$900 million
as an award for the plaintiffs’ representatives. It also assessed an additional amount of approximately
$8.6 billion
in punitive damages unless the company issued a public apology within
15 days
of the judgment, which Chevron did not do. On February 17, 2011, the plaintiffs appealed the judgment, seeking increased damages, and on March 11, 2011, Chevron appealed the judgment seeking to have the judgment nullified. On January 3, 2012, an appellate panel in the provincial court affirmed the February 14, 2011 decision and ordered that Chevron pay additional attorneys’ fees in the amount of “
0.10%
of the values that are derived from the decisional act of this judgment.” The plaintiffs filed a petition to clarify and amplify the appellate decision on January 6, 2012, and the court issued a ruling in response on January 13, 2012, purporting to clarify and amplify its January 3, 2012 ruling, which included clarification that the deadline for the company to issue a public apology to avoid the additional amount of approximately
$8.6 billion
in punitive damages was within
15 days
of the clarification ruling, or February 3, 2012. Chevron did not issue an apology because doing so might be mischaracterized as an admission of liability
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and would be contrary to facts and evidence submitted at trial. On January 20, 2012, Chevron appealed (called a petition for cassation) the appellate panel’s decision to Ecuador’s National Court of Justice. As part of the appeal, Chevron requested the suspension of any requirement that Chevron post a bond to prevent enforcement under Ecuadorian law of the judgment during the cassation appeal. On February 17, 2012, the appellate panel of the provincial court admitted Chevron’s cassation appeal in a procedural step necessary for the National Court of Justice to hear the appeal. The provincial court appellate panel denied Chevron’s request for suspension of the requirement that Chevron post a bond and stated that it would not comply with the First and Second Interim Awards of the international arbitration tribunal discussed below. On March 29, 2012, the matter was transferred from the provincial court to the National Court of Justice, and on November 22, 2012, the National Court agreed to hear Chevron's cassation appeal. On August 3, 2012, the provincial court in Lago Agrio approved a court-appointed liquidator’s report on damages that calculated the total judgment in the case to be
$19.1 billion
. On November 13, 2013, the National Court ratified the judgment but nullified the
$8.6 billion
punitive damage assessment, resulting in a judgment of
$9.5 billion
. On December 23, 2013, Chevron appealed the decision to the Ecuador Constitutional Court, Ecuador's highest court. The reporting justice of the Constitutional Court heard oral arguments on the appeal on July 16, 2015.
Lago Agrio Plaintiffs' Enforcement Actions
Chevron has no assets in Ecuador and the Lago Agrio plaintiffs’ lawyers have stated in press releases and through other media that they will seek to enforce the Ecuadorian judgment in various countries and otherwise disrupt Chevron’s operations. On May 30, 2012, the Lago Agrio plaintiffs filed an action against Chevron Corporation, Chevron Canada Limited, and Chevron Canada Finance Limited in the Ontario Superior Court of Justice in Ontario, Canada, seeking to recognize and enforce the Ecuadorian judgment. On May 1, 2013, the Ontario Superior Court of Justice held that the Court has jurisdiction over Chevron and Chevron Canada Limited for purposes of the action, but stayed the action due to the absence of evidence that Chevron Corporation has assets in Ontario. The Lago Agrio plaintiffs appealed that decision and, on December 17, 2013, the Court of Appeals for Ontario affirmed the lower court’s decision on jurisdiction and set aside the stay, allowing the recognition and enforcement action to be heard in the Ontario Superior Court of Justice. Chevron appealed the decision to the Supreme Court of Canada and, on September 4, 2015, the Supreme Court dismissed the appeal and affirmed that the Ontario Superior Court of Justice has jurisdiction over Chevron and Chevron Canada Limited for purposes of the action. The recognition and enforcement proceeding and related preliminary motions are proceeding in the Ontario Superior Court of Justice. On January 20, 2017, the Ontario Superior Court of Justice granted Chevron Canada Limited’s and Chevron Corporation’s motions for summary judgment, concluding that the two companies are separate legal entities with separate rights and obligations. As a result, the Superior Court dismissed the recognition and enforcement claim against Chevron Canada Limited. Chevron Corporation still remains as a defendant in the action. On February 3, 2017, the Lago Agrio plaintiffs appealed the Superior Court's January 20, 2017 decision.
On June 27, 2012, the Lago Agrio plaintiffs filed a complaint against Chevron Corporation in the Superior Court of Justice in Brasilia, Brazil, seeking to recognize and enforce the Ecuadorian judgment. Chevron has answered the complaint. In accordance with Brazilian procedure, the matter was referred to the public prosecutor for a nonbinding opinion of the issues raised in the complaint. On May 13, 2015, the public prosecutor issued its nonbinding opinion and recommended that the Superior Court of Justice reject the plaintiffs’ recognition and enforcement request, finding, among other things, that the Lago Agrio judgment was procured through fraud and corruption and cannot be recognized in Brazil because it violates Brazilian and international public order. On November 29, 2017, the Superior Court of Justice issued a decision dismissing the Lago Agrio plaintiffs’ recognition and enforcement proceeding based on jurisdictional grounds.
On October 15, 2012, the provincial court in Lago Agrio issued an ex parte embargo order that purports to order the seizure of assets belonging to separate Chevron subsidiaries in Ecuador, Argentina and Colombia. On November 6, 2012, at the request of the Lago Agrio plaintiffs, a court in Argentina issued a Freeze Order against Chevron Argentina S.R.L. and another Chevron subsidiary, Ingeniero Norberto Priu, requiring shares of both companies to be "embargoed," requiring third parties to withhold
40 percent
of any payments due to Chevron Argentina S.R.L. and ordering banks to withhold
40 percent
of the funds in Chevron Argentina S.R.L. bank accounts. On December 14, 2012, the Argentinean court rejected a motion to revoke the Freeze Order but modified
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
it by ordering that third parties are not required to withhold funds but must report their payments. The court also clarified that the Freeze Order relating to bank accounts excludes taxes. On January 30, 2013, an appellate court upheld the Freeze Order, but on June 4, 2013, the Supreme Court of Argentina revoked the Freeze Order in its entirety. On December 12, 2013, the Lago Agrio plaintiffs served Chevron with notice of their filing of an enforcement proceeding in the National Court, First Instance, of Argentina. Chevron filed its answer on February 27, 2014 to which the Lago Agrio plaintiffs responded on December 29, 2015. On April 19, 2016, the public prosecutor in Argentina issued a non-binding opinion recommending to the National Court, First Instance, of Argentina that it reject the Lago Agrio plaintiffs' request to recognize the Ecuadorian judgment in Argentina. On February 24, 2017, the public prosecutor in Argentina issued a supplemental opinion reaffirming its previous recommendations. On November 1, 2017, the National Court, First Instance, of Argentina issued a decision dismissing the Lago Agrio plaintiffs' recognition and enforcement proceeding based on jurisdictional grounds. On November 2, 2017, the Lago Agrio plaintiffs appealed this decision to the Federal Civil Court of Appeals.
Chevron continues to believe the provincial court’s judgment is illegitimate and unenforceable in Ecuador, the United States and other countries. The company also believes the judgment is the product of fraud, and contrary to the legitimate scientific evidence. Chevron cannot predict the timing or ultimate outcome of the appeals process in Ecuador or any enforcement action. Chevron expects to continue a vigorous defense of any imposition of liability in the Ecuadorian courts and to contest and defend any and all enforcement actions.
Company's Bilateral Investment Treaty Arbitration Claims
Chevron and Texpet filed an arbitration claim in September 2009 against the Republic of Ecuador before an arbitral tribunal presiding in the Permanent Court of Arbitration in The Hague under the Rules of the United Nations Commission on International Trade Law. The claim alleges violations of the Republic of Ecuador’s obligations under the United States–Ecuador Bilateral Investment Treaty (BIT) and breaches of the settlement and release agreements between the Republic of Ecuador and Texpet (described above), which are investment agreements protected by the BIT. Through the arbitration, Chevron and Texpet are seeking relief against the Republic of Ecuador, including a declaration that any judgment against Chevron in the Lago Agrio litigation constitutes a violation of Ecuador’s obligations under the BIT. On January 25, 2012, the Tribunal issued its First Interim Measures Award requiring the Republic of Ecuador to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against Chevron in the Lago Agrio case pending further order of the Tribunal. On February 16, 2012, the Tribunal issued a Second Interim Award mandating that the Republic of Ecuador take all measures necessary (whether by its judicial, legislative or executive branches) to suspend or cause to be suspended the enforcement and recognition within and without Ecuador of the judgment against Chevron. On February 27, 2012, the Tribunal issued a Third Interim Award confirming its jurisdiction to hear Chevron's arbitration claims. On February 7, 2013, the Tribunal issued its Fourth Interim Award in which it declared that the Republic of Ecuador “has violated the First and Second Interim Awards under the [BIT], the UNCITRAL Rules and international law in regard to the finalization and enforcement subject to execution of the Lago Agrio Judgment within and outside Ecuador, including (but not limited to) Canada, Brazil and Argentina.” The Republic of Ecuador subsequently filed in the District Court of the Hague a request to set aside the Tribunal’s Interim Awards and the First Partial Award (described below), and on January 20, 2016, the District Court denied the Republic's request.
On April 13, 2016, the Republic of Ecuador appealed the decision. On July 18, 2017, the Appeals Court of the Hague denied the Republic's appeal.
On October 18, 2017, the Republic appealed the decision of the Appeals Court of the Hague to the Supreme Court of the Netherlands.
The Tribunal has divided the merits phase of the proceeding into three phases. On September 17, 2013, the Tribunal issued its First Partial Award from Phase One, finding that the settlement agreements between the Republic of Ecuador and Texpet applied to Texpet and Chevron, released Texpet and Chevron from claims based on "collective" or "diffuse" rights arising from Texpet's operations in the former concession area and precluded third parties from asserting collective/diffuse rights environmental claims relating to Texpet's operations in the former concession area but did not preclude individual claims for personal harm. The Tribunal held a hearing on April 29-30, 2014, to address remaining issues relating to Phase One, and on March 12, 2015, it issued a nonbinding decision that the Lago Agrio plaintiffs' complaint, on its face, includes claims not barred by the settlement agreement between the Republic of Ecuador and Texpet. In the same decision, the Tribunal deferred
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to Phase Two remaining issues from Phase One, including whether the Republic of Ecuador breached the 1995 settlement agreement and the remedies that are available to Chevron and Texpet as a result of that breach. Phase Two issues were addressed at a hearing held in April and May 2015. The Tribunal has not set a date for Phase Three, the damages phase of the arbitration.
Company's RICO Action
Through a series of U.S. court proceedings initiated by Chevron to obtain discovery relating to the Lago Agrio litigation and the BIT arbitration, Chevron obtained evidence that it believes shows a pattern of fraud, collusion, corruption, and other misconduct on the part of several lawyers, consultants and others acting for the Lago Agrio plaintiffs. In February 2011, Chevron filed a civil lawsuit in the Federal District Court for the Southern District of New York against the Lago Agrio plaintiffs and several of their lawyers, consultants and supporters, alleging violations of the Racketeer Influenced and Corrupt Organizations Act and other state laws. Through the civil lawsuit, Chevron sought relief that included a declaration that any judgment against Chevron in the Lago Agrio litigation is the result of fraud and other unlawful conduct and is therefore unenforceable. The trial commenced on October 15, 2013 and concluded on November 22, 2013. On March 4, 2014, the Federal District Court entered a judgment in favor of Chevron, prohibiting the defendants from seeking to enforce the Lago Agrio judgment in the United States and further prohibiting them from profiting from their illegal acts. The defendants appealed the Federal District Court's decision, and, on April 20, 2015, a panel of the U.S. Court of Appeals for the Second Circuit heard oral arguments.
On August 8, 2016, the Second Circuit issued a unanimous opinion affirming in full the judgment of the Federal District Court in favor of Chevron. On October 27, 2016, the Second Circuit denied the defendants' petitions for en banc rehearing of the opinion on their appeal. On March 27, 2017
,
two
of the defendants filed a petition for a Writ of Certiorari to the United States Supreme Court. On June 19, 2017, the United States Supreme Court denied the defendants' petition for a Writ of Certiorari.
Management's Assessment
The ultimate outcome of the foregoing matters, including any financial effect on Chevron, remains uncertain. Management does not believe an estimate of a reasonably possible loss (or a range of loss) can be made in this case. Due to the defects associated with the Ecuadorian judgment, the 2008 engineer’s report on alleged damages and the September 2010 plaintiffs’ submission on alleged damages, management does not believe these documents have any utility in calculating a reasonably possible loss (or a range of loss). Moreover, the highly uncertain legal environment surrounding the case provides no basis for management to estimate a reasonably possible loss (or a range of loss).
Note 14. Other Contingencies and Commitments
Income Taxes
The company calculates its income tax expense and liabilities quarterly. These liabilities generally are subject to audit and are not finalized with the individual taxing authorities until several years after the end of the annual period for which income taxes have been calculated. Refer to Note
11
on page
16
for a discussion of the periods for which tax returns have been audited for the company’s major tax jurisdictions.
Settlement of open tax years, as well as other tax issues in countries where the company conducts its businesses, are not expected to have a material effect on the consolidated financial position or liquidity of the company and, in the opinion of management, adequate provision has been made for income taxes for all years under examination or subject to future examination.
Guarantees
The company and its subsidiaries have certain contingent liabilities with respect to guarantees, direct or indirect, of debt of affiliated companies or third parties. Under the terms of the guarantee arrangements, the company would generally be required to perform should the affiliated company or third party fail to fulfill its obligations under the arrangements. In some cases, the guarantee arrangements may have recourse provisions that would enable the company to recover any payments made under the terms of the guarantees from assets provided as collateral.
Indemnifications
In the acquisition of Unocal, the company assumed certain indemnities relating to contingent environmental liabilities associated with assets that were sold in 1997. The acquirer of those assets shared in certain environmental remediation costs up to a maximum obligation of
$200 million
, which had been reached at December 31, 2009. Under the indemnification agreement, after reaching the
$200 million
obligation, Chevron is solely responsible until April 2022, when the indemnification expires. The environmental conditions or events that are subject to these indemnities must have arisen prior to the sale of the assets in 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Although the company has provided for known obligations under this indemnity that are probable and reasonably estimable, the amount of additional future costs may be material to results of operations in the period in which they are recognized. The company does not expect these costs will have a material effect on its consolidated financial position or liquidity.
Off-Balance-Sheet Obligations
The company and its subsidiaries have certain contingent liabilities with respect to long-term unconditional purchase obligations and commitments, including throughput and take-or-pay agreements, some of which relate to suppliers’ financing arrangements. The agreements typically provide goods and services, such as pipeline and storage capacity, drilling rigs, utilities, and petroleum products, to be used or sold in the ordinary course of the company’s business.
Environmental
The company is subject to loss contingencies pursuant to laws, regulations, private claims and legal proceedings related to environmental matters that are subject to legal settlements or 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 various sites, including, but not limited to, federal Superfund sites and analogous sites under state laws, refineries, crude oil fields, service stations, terminals, land development areas, and mining activities, whether operating, closed or divested. These future costs are not fully determinable due to such factors as the unknown magnitude of possible contamination, the unknown timing and extent of the corrective actions that may be required, the determination of the company’s liability in proportion to other responsible parties, and the extent to which such costs are recoverable from third parties.
Although the company has provided for known environmental obligations that are probable and reasonably estimable, the amount of additional future costs may be material to results of operations in the period in which they are recognized. The company does not expect these costs will have a material effect on its consolidated financial position or liquidity. Also, the company does not believe its obligations to make such expenditures have had, or will have, any significant impact on the company’s competitive position relative to other U.S. or international petroleum or chemical companies.
Other Contingencies
Governmental entities in California and other jurisdictions have filed legal proceedings against fossil fuel producing companies, including Chevron, purporting to seek legal and equitable relief to address alleged impacts of climate change. Further such proceedings are likely to be filed by other parties. The unprecedented legal theories set forth in these proceedings entail the possibility of damages liability and injunctions against the production of all fossil fuels that, while we believe remote, could have a material adverse effect on the Company’s results of operations and financial condition. Management believes that these proceedings are legally and factually meritless and detract from constructive efforts to address the important policy issues presented by climate change, and will vigorously defend against such proceedings.
Chevron receives claims from and submits claims to customers; trading partners; joint venture partners; U.S. federal, state and local regulatory bodies; governments; contractors; insurers; suppliers; and individuals. The amounts of these claims, individually and in the aggregate, may be significant and take lengthy periods to resolve, and may result in gains or losses in future periods.
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 significant gains or losses in future periods.
Note 15. Fair Value Measurements
The three levels of the fair value hierarchy of inputs the company uses to measure the fair value of an asset or liability are described as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the company, Level 1 inputs include exchange-traded futures contracts for which the parties are willing to transact at the exchange-quoted price and marketable securities that are actively traded.
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly. For the company, Level 2 inputs include quoted prices for similar assets or liabilities, prices obtained through third-party broker
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
quotes and prices that can be corroborated with other observable inputs for substantially the complete term of a contract.
Level 3: Unobservable inputs. The company does not use Level 3 inputs for any of its recurring fair value measurements. Level 3 inputs may be required for the determination of fair value associated with certain nonrecurring measurements of nonfinancial assets and liabilities.
The fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at
March 31, 2018
, and
December 31, 2017
, is as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
(Millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018
|
|
At December 31, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Marketable Securities
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
—
|
|
Total Assets at Fair Value
|
$
|
45
|
|
|
$
|
38
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
9
|
|
|
$
|
22
|
|
|
$
|
—
|
|
Derivatives
|
95
|
|
|
64
|
|
|
31
|
|
|
—
|
|
|
124
|
|
|
78
|
|
|
46
|
|
|
—
|
|
Total Liabilities at Fair Value
|
$
|
95
|
|
|
$
|
64
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
124
|
|
|
$
|
78
|
|
|
$
|
46
|
|
|
$
|
—
|
|
Marketable Securities
The company calculates fair value for its marketable securities based on quoted market prices for identical assets. The fair values reflect the cash that would have been received if the instruments were sold at
March 31, 2018
.
Derivatives
The company records its derivative instruments — other than any commodity derivative contracts that are designated as normal purchase and normal sale — on the Consolidated Balance Sheet at fair value, with the offsetting amount to the Consolidated Statement of Income. Derivatives classified as Level 1 include futures, swaps and options contracts traded in active markets such as the New York Mercantile Exchange. Derivatives classified as Level 2 include swaps, options and forward contracts principally with financial institutions and other oil and gas companies, the fair values of which are obtained from third-party broker quotes, industry pricing services and exchanges. The company obtains multiple sources of pricing information for the Level 2 instruments. Since this pricing information is generated from observable market data, it has historically been very consistent. The company does not materially adjust this information.
Assets carried at fair value at
March 31, 2018
, and
December 31, 2017
, are as follows:
Cash and Cash Equivalents
The company holds cash equivalents in U.S. and non-U.S. portfolios. The instruments classified as cash equivalents are primarily bank time deposits with maturities of
90
days or less, and money market funds. “Cash and cash equivalents” had carrying/fair values of
$6.5 billion
and
$4.8 billion
at
March 31, 2018
, and
December 31, 2017
, respectively. The fair values of cash and cash equivalents are classified as Level 1 and reflect the cash that would have been received if the instruments were settled at
March 31, 2018
.
Restricted Cash
had a carrying/fair value of
$1.1 billion
and
$1.1 billion
at
March 31, 2018
, and
December 31, 2017
, respectively. At
March 31, 2018
, restricted cash is classified as Level 1 and includes restricted funds related to certain upstream abandonment activities, tax payments and refundable deposits related to pending asset sales, which are reported in "Prepaid expenses and other current assets" and “Deferred charges and other assets” on the Consolidated Balance Sheet.
Long-Term Debt
had a net carrying value, excluding amounts reclassified from short-term, of
$21.1 billion
and
$23.5 billion
at
March 31, 2018
, and
December 31, 2017
, respectively. The fair value of long-term debt at
March 31, 2018
, and
December 31, 2017
was
$21.1 billion
and
$23.9 billion
, respectively. Long-term debt primarily includes corporate issued bonds. The fair value of corporate bonds classified as Level 1 is
$20.4 billion
. The fair value of other long-term debt classified as Level 2 is
$0.7 billion
.
The carrying values of other short-term financial assets and liabilities on the Consolidated Balance Sheet approximate their fair values. Fair value remeasurements of other financial instruments at
March 31, 2018
, and
December 31, 2017
, were not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis at
March 31, 2018
, is as follows:
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
(Millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Before-Tax Loss
|
|
|
|
|
|
|
|
Properties, plant and equipment, net (held and used)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Properties, plant and equipment, net (held for sale)
|
631
|
|
|
—
|
|
|
631
|
|
|
—
|
|
|
163
|
|
|
Investments and advances
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Total Assets at Fair Value
|
$
|
632
|
|
|
$
|
—
|
|
|
$
|
631
|
|
|
$
|
1
|
|
|
$
|
164
|
|
|
Properties, plant and equipment
The company did not have any individually material impairments of long-lived assets measured at fair value on a nonrecurring basis to report in
first quarter
2018
.
Investments and advances
The company did not have any material impairments of investments and advances measured at fair value on a nonrecurring basis to report in
first quarter
2018
.
Note 16. Financial and Derivative Instruments
The company’s derivative instruments principally include crude oil, natural gas and refined product futures, swaps, options, and forward contracts. None of the company’s derivative instruments are designated as hedging instruments, although certain of the company’s affiliates make such a designation. The company’s derivatives are not material to the company’s consolidated financial position, results of operations or liquidity. The company believes it has no material market or credit risks to its operations, financial position or liquidity as a result of its commodities and other derivatives activities.
The company uses derivative commodity instruments traded on the New York Mercantile Exchange and on electronic platforms of the Inter-Continental Exchange and Chicago Mercantile Exchange. In addition, the company enters into swap contracts and option contracts principally with major financial institutions and other oil and gas companies in the “over-the-counter” markets, which are governed by International Swaps and Derivatives Association agreements and other master netting arrangements.
Derivative instruments measured at fair value at
March 31, 2018
, and
December 31, 2017
, and their classification on the Consolidated Balance Sheet and Consolidated Statement of Income are as follows:
Consolidated Balance Sheet: Fair Value of Derivatives Not Designated as Hedging Instruments
(Millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Type of
Contract
|
|
Balance Sheet Classification
|
|
At March 31
2018
|
|
At December 31
2017
|
Commodity
|
|
Accounts and notes receivable, net
|
|
$
|
7
|
|
|
$
|
22
|
|
Commodity
|
|
Long-term receivables, net
|
|
—
|
|
|
—
|
|
Total Assets at Fair Value
|
|
$
|
7
|
|
|
$
|
22
|
|
Commodity
|
|
Accounts payable
|
|
$
|
90
|
|
|
$
|
122
|
|
Commodity
|
|
Deferred credits and other noncurrent obligations
|
|
5
|
|
|
2
|
|
Total Liabilities at Fair Value
|
|
$
|
95
|
|
|
$
|
124
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidated Statement of Income: The Effect of Derivatives Not Designated as Hedging Instruments
(Millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / Gain
Three Months Ended
March 31
|
Type of
Contract
|
|
Statement of Income Classification
|
|
2018
|
|
2017
|
Commodity
|
|
Sales and other operating revenues
|
|
$
|
(12
|
)
|
|
$
|
162
|
|
Commodity
|
|
Purchased crude oil and products
|
|
(9
|
)
|
|
4
|
|
Commodity
|
|
Other income
|
|
—
|
|
|
(2
|
)
|
|
|
|
|
$
|
(21
|
)
|
|
$
|
164
|
|