• Financial Highlights
• Management's Discussion and Analysis
• Consolidated Financial Statements
• Notes to the Consolidated Financial Statements
  • Note 1. Summary of Significant Accounting Policies
  • Note 2. Acquisition of Unocal Corporation
  • Note 3. Information Relating to the Consolidated Statement of Cash Flows
  • Note 4. Summarized Financial Data – Chevron U.S.A. Inc.
  • Note 5. Summarized Financial Data – Chevron Transport Corporation Ltd.
  • Note 6. Stockholders’ Equity
  • Note 7. Financial and Derivative Instruments
  • Note 8. Operating Segments and Geographic Data
  • Note 9. Lease Commitments
  • Note 10. Restructuring and Reorganization Costs
  • Note 11. Investments and Advances
  • Note 12. Properties, Plant and Equipment
  • Note 13. Accounting for Buy/Sell Contracts
  • Note 14. Litigation
  • Note 15. Taxes
  • Note 16. Short-Term Debt
  • Note 17. Long-Term Debt
  • Note 18. New Accounting Standards
  • Note 19. Accounting for Suspended Exploratory Wells
  • Note 20. Employee Benefit Plans
  • Note 21. Stock Options and Other Share-Based Compensation
  • Note 22. Other Contingencies and Commitments
  • Note 23. Asset Retirement Obligations
  • Note 24. Other Financial Information
  • Note 25. Earnings Per Share
• Five-Year Operating Summary
• Five-Year Financial Summary
• Supplemental Information on Oil and Gas Producing Activities

Note 22. Other Contingencies and Commitments

Millions of dollars

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 15 for a discussion of the periods for which tax returns have been audited for the company's major tax jurisdictions and a discussion for all tax jurisdictions of the differences between the amount of tax benefits recognized in the financial statements and the amount taken or expected to be taken in a tax return. The company does not expect settlement of income tax liabilities associated with uncertain tax positions will have a material effect on its results of operations, consolidated financial position or liquidity.

Guarantees

The company's guarantee of approximately $600 is associated with certain payments under a terminal use agreement entered into by a company affiliate. The terminal is expected to be operational by 2012. Over the approximate 16-year term of the guarantee, the maximum guarantee amount will reduce over time as certain fees are paid by the affiliate. There are numerous cross-indemnity agreements with the affiliate and the other partners to permit recovery of any amounts paid under the guarantee. Chevron carries no liability for its obligation under this guarantee.

Indemnifications

The company provided certain indemnities of contingent liabilities of Equilon and Motiva to Shell and Saudi Refining, Inc., in connection with the February 2002 sale of the company's interests in those investments. The company would be required to perform if the indemnified liabilities become actual losses. Were that to occur, the company could be required to make future payments up to $300. Through the end of 2007, the company paid $48 under these indemnities and continues to be obligated for possible additional indemnification payments in the future.

The company has also provided indemnities relating to contingent environmental liabilities related to assets originally contributed by Texaco to the Equilon and Motiva joint ventures and environmental conditions that existed prior to the formation of Equilon and Motiva or that occurred during the period of Texaco's ownership interest in the joint ventures. In general, the environmental conditions or events that are subject to these indemnities must have arisen prior to December 2001. Claims must be asserted no later than February 2009 for Equilon indemnities and no later than February 2012 for Motiva indemnities. Under the terms of these indemnities, there is no maximum limit on the amount of potential future payments. The company has not recorded any liabilities for possible claims under these indemnities. The company posts no assets as collateral and has made no payments under the indemnities.

The amounts payable for the indemnities described above are to be net of amounts recovered from insurance carriers and others and net of liabilities recorded by Equilon or Motiva prior to September 30, 2001, for any applicable incident.

In the acquisition of Unocal, the company assumed certain indemnities relating to contingent environmental liabilities associated with assets that were sold in 1997. Under the indemnification agreement, the company's liability is unlimited until April 2022, when the indemnification expires. The acquirer shares in certain environmental remediation costs up to a maximum obligation of $200, which had not been reached as of December 31, 2007.

Securitization

During 2007, the company completed the sale of its U.S. proprietary consumer credit card business and related receivables. This transaction included terminating the qualifying Special Purpose Entity (SPE) that was used to securitize associated retail accounts receivable.

Through the use of another qualifying SPE, the company had $675 of securitized trade accounts receivable related to its downstream business as of December 31, 2007. This arrangement has the effect of accelerating Chevron's collection of the securitized amounts. Chevron's total estimated financial exposure under this securitization at December 31, 2007, was $65. In the event that the SPE experiences major defaults in the collection of receivables, Chevron believes that it would have no additional loss exposure connected with third-party investments in this securitization.

Long-Term Unconditional Purchase Obligations and Commitments, Including Throughput and Take-or-Pay Agreements

The company and its subsidiaries have certain other contingent liabilities relating 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. The aggregate approximate amounts of required payments under these various commitments are: 2008 — $4,700; 2009 — $3,300; 2010 — $3,300; 2011 — $1,900; 2012 — $1,300; 2013 and after — $4,900. A portion of these commitments may ultimately be shared with project partners. Total payments under the agreements were approximately $3,700 in 2007, $3,000 in 2006 and $2,100 in 2005.

Minority Interests

The company has commitments of $204 related to minority interests in subsidiary companies.

Environmental

The company is subject to loss contingencies 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 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 operations, 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.

Chevron's environmental reserve as of December 31, 2007, was $1,539. Included in this balance were remediation activities of 240 sites for which the company had been identified as a potentially responsible party or otherwise involved in the remediation by the U.S. Environmental Protection Agency (EPA) or other regulatory agencies under the provisions of the federal Superfund law or analogous state laws. The company's remediation reserve for these sites at year-end 2007 was $123. The federal Superfund law and analogous state laws provide for joint and several liability for all responsible parties. Any future actions by the EPA or other regulatory agencies to require Chevron to assume other potentially responsible parties' costs at designated hazardous waste sites are not expected to have a material effect on the company's results of operations, consolidated financial position or liquidity.

Of the remaining year-end 2007 environmental reserves balance of $1,416, $864 related to approximately 2,000 sites for the company's U.S. downstream operations, including refineries and other plants, marketing locations (i.e., service stations and terminals) and pipelines. The remaining $552 was associated with various sites in the international downstream ($146), upstream ($267), chemicals ($105) and other ($34). Liabilities at all sites, whether operating, closed or divested, were primarily associated with the company's plans and activities to remediate soil or groundwater contamination or both. These and other activities include one or more of the following: site assessment; soil excavation; offsite disposal of contaminants; onsite containment, remediation and/or extraction of petroleum hydrocarbon liquid and vapor from soil; groundwater extraction and treatment; and monitoring of the natural attenuation of the contaminants.

The company manages environmental liabilities under specific 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 2007 had a recorded liability that was material to the company's results of operations, consolidated financial position or liquidity.

It is likely that the company will continue to incur additional liabilities, beyond those recorded, for environmental remediation relating to past operations. 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.

Refer to Note 23 for a discussion of the company's Asset Retirement Obligations.

Equity Redetermination

For oil and gas producing operations, ownership agreements may provide for periodic reassessments of equity interests in estimated crude oil and natural gas reserves. These activities, individually or together, may result in gains or losses that could be material to earnings in any given period. One such equity redetermination process has been under way since 1996 for Chevron's interests in four producing zones at the Naval Petroleum Reserve at Elk Hills, California, for the time when the remaining interests in these zones were owned by the U.S. Department of Energy. A wide range remains for a possible net settlement amount for the four zones. For this range of settlement, Chevron estimates its maximum possible net before-tax liability at approximately $200, and the possible maximum net amount that could be owed to Chevron is estimated at about $150. The timing of the settlement and the exact amount within this range of estimates are uncertain.

Other Contingencies

Chevron receives claims from and submitsc laims to customers; trading partners; U.S. federal, state and local regulatory bodies; governments; contractors; insurers; and suppliers. The amounts of these claims, individually and in the aggregate, may be significant and 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.