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EX-32.2 - EXHIBIT 32.2 - CHEVRON CORPa09302018ex322cfo-sox906.htm
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EX-31.2 - EXHIBIT 31.2 - CHEVRON CORPa09302018ex312cfo-sox302.htm
EX-31.1 - EXHIBIT 31.1 - CHEVRON CORPa09302018ex311ceo-sox302.htm



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  
Commission file number 001-00368
Chevron Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
94-0890210
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
6001 Bollinger Canyon Road,
San Ramon, California
 
94583-2324
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: (925) 842-1000
NONE
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ        No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o       No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding as of September 30, 2018
Common stock, $.75 par value
 
1,910,774,369
 



TABLE OF CONTENTS
 
 
 
Page No.
 
FINANCIAL INFORMATION
 
 
 
 
 
 
7-25
26-39
OTHER INFORMATION

1


CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION
FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This quarterly report on Form 10-Q of Chevron Corporation contains forward-looking statements relating to Chevron’s operations that are based on management’s current expectations, estimates and projections about the petroleum, chemicals and other energy-related industries. Words or phrases such as “anticipates,” “expects,” “intends,” “plans,” “targets,” “forecasts,” “projects,” “believes,” “seeks,” “schedules,” “estimates,” “positions,” “pursues,” “may,” “could,” “should,” “will,” “budgets,” “outlook,” “trends,” “guidance,” “focus,” “on schedule,” “on track,” “is slated,” “goals,” “objectives,” “strategies,” “opportunities” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, many of which are beyond the company’s control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Chevron undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are: changing crude oil and natural gas prices; changing refining, marketing and chemicals margins; the company's ability to realize anticipated cost savings and expenditure reductions; actions of competitors or regulators; timing of exploration expenses; timing of crude oil liftings; the competitiveness of alternate-energy sources or product substitutes; technological developments; the results of operations and financial condition of the company's suppliers, vendors, partners and equity affiliates, particularly during extended periods of low prices for crude oil and natural gas; the inability or failure of the company’s joint-venture partners to fund their share of operations and development activities; the potential failure to achieve expected net production from existing and future crude oil and natural gas development projects; potential delays in the development, construction or start-up of planned projects; the potential disruption or interruption of the company’s operations due to war, accidents, political events, civil unrest, severe weather, cyber threats and terrorist acts, crude oil production quotas or other actions that might be imposed by the Organization of Petroleum Exporting Countries, or other natural or human causes beyond the company's control; changing economic, regulatory and political environments in the various countries in which the company operates; general domestic and international economic and political conditions; the potential liability for remedial actions or assessments under existing or future environmental regulations and litigation; significant operational, investment or product changes required by existing or future environmental statutes and regulations, including international agreements and national or regional legislation and regulatory measures to limit or reduce greenhouse gas emissions; the potential liability resulting from other pending or future litigation; the company’s future acquisition or disposition of assets or shares or the delay or failure of such transactions to close based on required closing conditions; the potential for gains and losses from asset dispositions or impairments; government-mandated sales, divestitures, recapitalizations, industry-specific taxes, tariffs, changes in fiscal terms or restrictions on scope of company operations; foreign currency movements compared with the U.S. dollar; material reductions in corporate liquidity and access to debt markets; the impact of the 2017 U.S. tax legislation on the company's future results; the effects of changed accounting rules under generally accepted accounting principles promulgated by rule-setting bodies; the company's ability to identify and mitigate the risks and hazards inherent in operating in the global energy industry; and the factors set forth under the heading “Risk Factors” on pages 19 through 22 of the company’s 2017 Annual Report on Form 10-K. Other unpredictable or unknown factors not discussed in this report could also have material adverse effects on forward-looking statements.

2


PART I.
FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements
CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2018
 
2017
 
2018
 
2017
 
(Millions of dollars, except per-share amounts)
Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues1
$
42,105

 
$
33,892

 
$
118,564

 
$
98,293

Income from equity affiliates
1,555

 
1,036

 
4,685

 
3,502

Other income
327

 
1,277

 
738

 
2,311

Total Revenues and Other Income
43,987

 
36,205

 
123,987

 
104,106

Costs and Other Deductions
 
 
 
 
 
 
 
Purchased crude oil and products
24,681

 
18,776

 
70,658

 
54,607

Operating expenses2
4,985

 
4,849

 
14,899

 
14,021

Selling, general and administrative expenses2
1,018

 
1,107

 
2,758

 
2,848

Exploration expenses
625

 
239

 
960

 
508

Depreciation, depletion and amortization
5,380

 
5,109

 
14,167

 
14,614

Taxes other than on income1
1,259

 
3,213

 
3,966

 
9,149

Interest and debt expense
182

 
35

 
558

 
134

Other components of net periodic benefit costs2
158

 
219

 
344

 
485

Total Costs and Other Deductions
38,288

 
33,547

 
108,310

 
96,366

Income Before Income Tax Expense
5,699

 
2,658

 
15,677

 
7,740

Income Tax Expense
1,643

 
672

 
4,540

 
1,589

Net Income
4,056

 
1,986

 
11,137

 
6,151

Less: Net income attributable to noncontrolling interests
9

 
34

 
43

 
67

Net Income Attributable to Chevron Corporation
$
4,047

 
$
1,952

 
$
11,094

 
$
6,084

Per Share of Common Stock:
 
 
 
 
 
 
 
Net Income Attributable to Chevron Corporation
 
 
 
 
 
 
 
— Basic
$
2.13

 
$
1.03

 
$
5.84

 
$
3.23

— Diluted
$
2.11

 
$
1.03

 
$
5.79

 
$
3.21

Weighted Average Number of Shares Outstanding (000s)
 
 
 
 
 
 
 
— Basic
1,900,717

 
1,882,650

 
1,899,044

 
1,881,026

— Diluted
1,917,474

 
1,895,879

 
1,916,562

 
1,894,764

_________________________
 
 
 
 
 
 
 
1   The three-month and nine-month comparative periods ended September 30, 2017, include excise, value-added and similar taxes of $1,867 million and $5,315 million, respectively, 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.
2   2017 adjusted to conform to ASU 2017-07. Refer to Note 5, "New Accounting Standards" beginning on page 10.
 
 

See accompanying notes to consolidated financial statements.

3



CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2018
 
2017
 
2018
 
2017
 
(Millions of dollars)
Net Income
$
4,056

 
$
1,986

 
$
11,137

 
$
6,151

Currency translation adjustment
(2
)
 
13

 
(12
)
 
37

Unrealized holding gain (loss) on securities:
 
 
 
 
 
 
 
Net gain (loss) arising during period
1

 
(2
)
 
(6
)
 
(7
)
Defined benefit plans:
 
 
 
 
 
 
 
Actuarial gain (loss):
 
 
 
 
 
 
 
Amortization to net income of net actuarial and settlement losses
214

 
264

 
522

 
609

Actuarial gain (loss) arising during period
(92
)
 
3

 
(94
)
 
(11
)
Prior service cost:
 
 
 
 
 
 
 
Amortization to net income of net prior service costs (credits)
(2
)
 
(5
)
 
(9
)
 
(15
)
Defined benefit plans sponsored by equity affiliates
5

 
5

 
18

 
15

Income tax expense on defined benefit plans
(21
)
 
(96
)
 
(95
)
 
(207
)
Total
104

 
171

 
342

 
391

Other Comprehensive Gain, Net of Tax
103

 
182

 
324

 
421

Comprehensive Income
4,159

 
2,168

 
11,461

 
6,572

Comprehensive income attributable to noncontrolling interests
(9
)
 
(34
)
 
(43
)
 
(67
)
Comprehensive Income Attributable to Chevron Corporation
$
4,150

 
$
2,134

 
$
11,418

 
$
6,505


See accompanying notes to consolidated financial statements.

4



CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
 
At September 30
2018
 
At December 31
2017
 
 
(Millions of dollars)
ASSETS
Cash and cash equivalents
 
$
9,686

 
$
4,813

Marketable securities
 
60

 
9

Accounts and notes receivable, net
 
16,788

 
15,353

Inventories
 
 
 
 
Crude oil and petroleum products
 
3,618

 
3,142

Chemicals
 
495

 
476

Materials, supplies and other
 
1,916

 
1,967

Total inventories
 
6,029

 
5,585

Prepaid expenses and other current assets 
 
3,020

 
2,800

Total Current Assets
 
35,583

 
28,560

Long-term receivables, net
 
2,460

 
2,849

Investments and advances
 
34,672

 
32,497

Properties, plant and equipment, at cost
 
344,949

 
344,485

Less: Accumulated depreciation, depletion and amortization
 
173,304

 
166,773

Properties, plant and equipment, net
 
171,645

 
177,712

Deferred charges and other assets 
 
6,745

 
7,017

Goodwill
 
4,518

 
4,531

Assets held for sale
 
983

 
640

Total Assets
 
$
256,606

 
$
253,806

LIABILITIES AND EQUITY
Short-term debt 
 
$
6,121

 
$
5,192

Accounts payable
 
15,335

 
14,565

Accrued liabilities
 
5,029

 
5,267

Federal and other taxes on income 
 
1,797

 
1,600

Other taxes payable
 
901

 
1,113

Total Current Liabilities
 
29,183

 
27,737

Long-term debt 
 
29,854

 
33,477

Capital lease obligations
 
135

 
94

Deferred credits and other noncurrent obligations
 
20,414

 
21,106

Noncurrent deferred income taxes 
 
15,624

 
14,652

Noncurrent employee benefit plans
 
6,723

 
7,421

Total Liabilities*
 
101,933

 
104,487

Preferred stock (authorized 100,000,000 shares, $1.00 par value, none issued)
 

 

Common stock (authorized 6,000,000,000 shares; $0.75 par value; 2,442,676,580 shares issued at September 30, 2018, and December 31, 2017)
 
1,832

 
1,832

Capital in excess of par value
 
17,080

 
16,848

Retained earnings
 
178,816

 
174,106

Accumulated other comprehensive loss
 
(3,265
)
 
(3,589
)
Deferred compensation and benefit plan trust
 
(240
)
 
(240
)
Treasury stock, at cost (531,902,211 and 537,974,695 shares at September 30, 2018, and December 31, 2017, respectively)
 
(40,648
)
 
(40,833
)
Total Chevron Corporation Stockholders’ Equity
 
153,575

 
148,124

Noncontrolling interests
 
1,098

 
1,195

Total Equity
 
154,673

 
149,319

Total Liabilities and Equity
 
$
256,606

 
$
253,806

___________________________
 
 
 
 
* Refer to Note 14, "Other Contingencies and Commitments" beginning on page 20.

See accompanying notes to consolidated financial statements.

5



CHEVRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Operating Activities
 
 
 
Net Income
$
11,137

 
$
6,151

Adjustments
 
 
 
Depreciation, depletion and amortization
14,167

 
14,614

Dry hole expense
596

 
140

Distributions less than income from equity affiliates 1
(2,526
)
 
(2,284
)
Net before-tax gains on asset retirements and sales
(560
)
 
(2,139
)
Net foreign currency effects
330

 
145

Deferred income tax provision
806

 
(464
)
Net decrease (increase) in operating working capital 2
(1,882
)
 
(548
)
Decrease (increase) in long-term receivables
363

 
(537
)
Net decrease (increase) in other deferred charges 2
(60
)
 
(82
)
Cash contributions to employee pension plans
(941
)
 
(825
)
Other
37

 
74

Net Cash Provided by Operating Activities 1, 2
21,467

 
14,245

Investing Activities
 
 
 
Capital expenditures
(9,801
)
 
(9,763
)
Proceeds and deposits related to asset sales and returns of investment 1, 2
2,116

 
4,765

Net sales (purchases) of marketable securities
(51
)
 

Net repayment (borrowing) of loans by equity affiliates
78

 
(36
)
Net Cash Used for Investing Activities 1, 2
(7,658
)
 
(5,034
)
Financing Activities
 
 
 
Net borrowings (repayments) of short-term obligations
2,199

 
(7,185
)
Proceeds from issuance of long-term debt
217

 
3,991

Repayments of long-term debt and other financing obligations
(5,227
)
 
(1,028
)
Cash dividends — common stock
(6,382
)
 
(6,093
)
Distributions to noncontrolling interests
(87
)
 
(66
)
Net sales of treasury shares
337

 
649

Net Cash Used for Financing Activities
(8,943
)
 
(9,732
)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash 2
(68
)
 
62

Net Change in Cash, Cash Equivalents and Restricted Cash 2
4,798

 
(459
)
Cash, Cash Equivalents and Restricted Cash at January 1 2
5,943

 
8,414

Cash, Cash Equivalents and Restricted Cash at September 30 2
$
10,741

 
$
7,955

_________________________
 
 
 
1   2017 adjusted to conform to Accounting Standards Update 2016-15. Refer to Note 4, "Information Relating to the Consolidated Statement of Cash Flows" beginning on page 8.
2   2017 adjusted to conform to Accounting Standards Update 2016-18. Refer to Note 4, "Information Relating to the Consolidated Statement of Cash Flows" beginning on page 8.


See accompanying notes to consolidated financial statements.

6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Interim Financial Statements
The accompanying consolidated financial statements of Chevron Corporation and its subsidiaries (together, Chevron or 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- and nine-month periods ended September 30, 2018, are not necessarily indicative of future financial results. The term “earnings” is defined as net income attributable to Chevron.
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 nine months ended September 30, 2018, are reflected in the table below.
Changes in Accumulated Other Comprehensive Income (Loss) by Component (1) 
 
 
Nine Months Ended September 30, 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
 
(12
)
 
(6
)
 

 
(53
)
 
(71
)
Reclassifications (2)
 

 

 

 
395

 
395

Net Other Comprehensive Income (Loss)
 
(12
)
 
(6
)
 

 
342

 
324

Balance at September 30
 
$
(117
)
 
$
(11
)
 
$
(2
)
 
$
(3,135
)
 
$
(3,265
)
________________________________
(1) All amounts are net of tax.
(2) Refer to Note 11, Employee Benefits for reclassified components totaling $513 million that are included in employee benefit costs for the nine months ended September 30, 2018. Related income taxes for the same period, totaling $118 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 nine 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
11,094

 
43

 
11,137

 
6,084

 
67

 
6,151

Dividends
(6,384
)
 

 
(6,384
)
 
(6,095
)
 

 
(6,095
)
Distributions to noncontrolling interests

 
(87
)
 
(87
)
 

 
(66
)
 
(66
)
Treasury shares, net
185

 

 
185

 
597

 

 
597

Other changes, net*
556

 
(53
)
 
503

 
571

 
31

 
602

Balance at September 30
$
153,575

 
$
1,098

 
$
154,673

 
$
146,713

 
$
1,198

 
$
147,911

 __________________________________________
* Includes components of comprehensive income, which are disclosed separately in the Consolidated Statement of Comprehensive Income.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 4. Information Relating to the Consolidated Statement of Cash Flows
The “Net decrease (increase) in operating working capital” was composed of the following operating changes:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Decrease (increase) in accounts and notes receivable
$
(1,741
)
 
$
265

Decrease (increase) in inventories
(749
)
 
(436
)
Decrease (increase) in prepaid expenses and other current assets 1
(310
)
 
235

Increase (decrease) in accounts payable and accrued liabilities 1
887

 
(621
)
Increase (decrease) in income and other taxes payable
31

 
9

Net decrease (increase) in operating working capital 1
$
(1,882
)
 
$
(548
)
_____________________
 
 
 
1   2017 amount 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:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Interest on debt (net of capitalized interest)
$
502

 
$
30

Income taxes
3,526

 
2,203

"Other" includes changes in postretirement benefits obligations and other long-term liabilities.
The “Net sales (purchases) of marketable securities” consisted of the following gross amounts:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Marketable securities purchased
$
(51
)
 
$
(3
)
Marketable securities sold

 
3

Net sales (purchases) of marketable securities
$
(51
)
 
$

The “Net repayment (borrowing) of loans by equity affiliates” consisted of the following gross amounts:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Borrowing of loans by equity affiliates
$

 
$
(142
)
Repayment of loans by equity affiliates
78

 
106

Net repayment (borrowing) of loans by equity affiliates
$
78

 
$
(36
)
The “Net borrowings (repayments) of short-term obligations" consisted of the following gross and net amounts:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Repayments of short-term obligations
$
(3,379
)
 
$
(8,403
)
Proceeds from issuances of short-term obligations
2,452

 
3,415

Net borrowings (repayments) of short-term obligations with three months or less maturity
3,126

 
(2,197
)
Net borrowings (repayments) of short-term obligations
$
2,199

 
$
(7,185
)

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The “Net sales of treasury shares” represents the value of shares sold for share-based compensation plans, net of purchases. Purchases totaled $751 million for the first nine months in 2018 and $1 million for the first nine months in 2017. During the first nine months in 2018, the company purchased 6.3 million shares under its share repurchase program for $750 million. No purchases were made under the company's share repurchase program in the first nine months of 2017.
The company paid dividends of $1.12 per share of common stock in third quarter 2018 and $3.36 per share in the first nine months of 2018. This compares to dividends of $1.08 and $3.24 per share paid in the corresponding year-ago periods.
The major components of “Capital expenditures” and the reconciliation of this amount to the capital and exploratory expenditures, including equity affiliates, are as follows:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Additions to properties, plant and equipment
$
9,489

 
$
9,615

Additions to investments
36

 
16

Current year dry hole expenditures
276

 
131

Payments for other liabilities and assets, net

 
1

 Capital expenditures
9,801

 
9,763

Expensed exploration expenditures
364

 
368

Assets acquired through capital lease obligations
65

 
3

 Capital and exploratory expenditures, excluding equity affiliates
10,230

 
10,134

Company’s share of expenditures by equity affiliates
4,115

 
3,252

 Capital and exploratory expenditures, including equity affiliates
$
14,345

 
$
13,386

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 nine months of 2017, a total of $162 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 below quantifies the beginning and ending balances of restricted cash and restricted cash equivalents in the Consolidated Balance Sheet:
 
 
At September 30
 
At December 31
 
 
2018
 
2017
 
2017
 
2016
 
 
(Millions of dollars)
 
(Millions of dollars)
Cash and Cash Equivalents
 
$
9,686

 
$
6,641

 
$
4,813

 
$
6,988

Restricted cash included in "Prepaid expenses and other current assets"
 
277

 
523

 
405

 
488

Restricted cash included in "Deferred charges and other assets"
 
778

 
791

 
725

 
938

Total Cash, Cash Equivalents and Restricted Cash
 
$
10,741

 
$
7,955

 
$
5,943

 
$
8,414

 
 
 
 
 
 
 
 
 

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Additional information related to "Restricted Cash" is included on page 23 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 Consolidated 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 Consolidated Statement of Cash Flows and to provide a reconciliation to the Consolidated 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 Consolidated 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 nine-month period ended September 30, 2017 were to move $234 million from "Operating expenses" and $251 million from "Selling, general and administrative expenses" to "Other components of net periodic benefits cost."
Leases (Topic 842) In February 2016, the Financial Accounting Standards Board (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 plans to elect the short-term lease exception provided for in the standard and therefore will only recognize right-of-use assets and lease liabilities for leases with a term greater than one year. The company further intends to elect the option to apply the transition provisions of the new standard at the adoption date instead of the earliest comparative period presented in the financial statements. The company continues to focus its implementation efforts on accounting policy and disclosure updates and system implementation necessary to meet the standard's requirements. The company is continuing its review of contracts which may result in certain contracts, currently not classified as leases, being classified as operating leases under the new standard. The company does not expect the adoption of the ASU to have a material impact on finance leases, which are currently referred to as capital leases. The company estimates the operating lease right-of-use assets and lease liabilities to be recognized by the company on January 1, 2019 will be approximately $3 to $4 billion. The operating lease balance could change as contracts are executed, modified, renewed, or expired. The estimate could also be impacted by changes to interest and foreign exchange rates. The company expects the implementation of the standard will have a minimal impact on the Consolidated Statement of Income and Consolidated Statement of Cash Flows.


10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 residual tax effects in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings and also requires 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. Assets Held For Sale
At September 30, 2018, the company classified $983 million of net properties, plant and equipment as “Assets held for sale” on the Consolidated Balance Sheet. These assets are primarily associated with upstream 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 nine months of 2018 were not material.
Note 7. 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).

11

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- and nine-month periods ended September 30, 2018 and 2017, are presented in the following table:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
Segment Earnings
2018
 
2017
 
2018
 
2017
 
(Millions of dollars)
Upstream
 
 
 
 
 
 
 
United States
$
828

 
$
(26
)
 
$
2,314

 
$
(48
)
International
2,551

 
515

 
7,712

 
2,907

Total Upstream
3,379

 
489

 
10,026

 
2,859

Downstream
 
 
 
 
 
 
 
United States
748

 
640

 
1,847

 
1,743

International
625

 
1,174

 
1,092

 
2,192

Total Downstream
1,373

 
1,814

 
2,939

 
3,935

Total Segment Earnings
4,752

 
2,303

 
12,965

 
6,794

All Other
 
 
 
 
 
 
 
Interest expense
(171
)
 
(30
)
 
(524
)
 
(115
)
Interest income
37

 
13

 
84

 
42

Other
(571
)
 
(334
)
 
(1,431
)
 
(637
)
Net Income Attributable to Chevron Corporation
$
4,047

 
$
1,952

 
$
11,094

 
$
6,084

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 September 30, 2018, and December 31, 2017, are as follows: 
Segment Assets
At September 30
2018
 
At December 31
2017
 
(Millions of dollars)
Upstream
 
 
 
United States
$
42,126

 
$
40,770

International
155,396

 
159,612

Goodwill
4,518

 
4,531

Total Upstream
202,040

 
204,913

Downstream
 
 
 
United States
24,141

 
23,202

International
17,628

 
17,434

Total Downstream
41,769

 
40,636

Total Segment Assets
243,809

 
245,549

All Other
 
 
 
United States
5,353

 
4,938

International
7,444

 
3,319

Total All Other
12,797

 
8,257

Total Assets — United States
71,620

 
68,910

Total Assets — International
180,468

 
180,365

Goodwill
4,518

 
4,531

Total Assets
$
256,606

 
$
253,806


12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Segment Sales and Other Operating Revenues Segment sales and other operating revenues, including internal transfers, for the three- and nine-month periods ended September 30, 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
September 30
 
Nine Months Ended
September 30
 Sales and Other Operating Revenues
2018
 
2017
 
2018
 
2017
 
(Millions of dollars)
Upstream
 
 
 
 
 
 
 
United States
$
6,784

 
$
3,245

 
$
16,405

 
$
9,620

International
10,312

 
7,191

 
27,848

 
20,624

Subtotal
17,096

 
10,436

 
44,253

 
30,244

Intersegment Elimination — United States
(4,277
)
 
(2,298
)
 
(10,219
)
 
(6,737
)
Intersegment Elimination — International
(4,045
)
 
(2,828
)
 
(10,681
)
 
(8,256
)
Total Upstream
8,774

 
5,310

 
23,353

 
15,251

Downstream *
 
 
 
 
 
 
 
United States
16,405

 
13,452

 
45,137

 
39,206

International
18,568

 
15,298

 
52,571

 
44,512

Subtotal
34,973

 
28,750

 
97,708

 
83,718

Intersegment Elimination — United States
(1,360
)
 
(5
)
 
(1,804
)
 
(11
)
Intersegment Elimination — International
(339
)
 
(216
)
 
(869
)
 
(818
)
Total Downstream
33,274

 
28,529

 
95,035

 
82,889

All Other
 
 
 
 
 
 
 
United States
264

 
260

 
759

 
773

International
6

 
6

 
16

 
19

Subtotal
270

 
266

 
775

 
792

Intersegment Elimination — United States
(207
)
 
(207
)
 
(583
)
 
(621
)
Intersegment Elimination — International
(6
)
 
(6
)
 
(16
)
 
(18
)
Total All Other
57

 
53

 
176

 
153

Sales and Other Operating Revenues
 
 
 
 
 
 
 
United States
23,454

 
16,957

 
62,302

 
49,599

International
28,885

 
22,495

 
80,434

 
65,155

Subtotal
52,339

 
39,452

 
142,736

 
114,754

Intersegment Elimination — United States
(5,844
)
 
(2,510
)
 
(12,606
)
 
(7,369
)
Intersegment Elimination — International
(4,390
)
 
(3,050
)
 
(11,566
)
 
(9,092
)
Total Sales and Other Operating Revenues
$
42,105

 
$
33,892

 
$
118,564

 
$
98,293

_____________________________
 
 
 
 
 
 
 
* The three-month and nine-month comparative periods ended September 30, 2017, include excise, value-added and similar taxes of $1,867 million and $5,315 million, respectively, 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 8. 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.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The summarized financial information for CUSA and its consolidated subsidiaries is as follows:

Nine Months Ended
September 30

2018
 
2017
 
(Millions of dollars)
Sales and other operating revenues*
$
93,434

 
$
75,759

Costs and other deductions*
90,912

 
75,403

Net income attributable to CUSA
2,929

 
1,315

_____________________________
 
 
 
* 2017 includes excise, value-added and similar taxes collected on behalf of third parties of $3,268 million. Beginning in
  2018, these taxes are netted in "Taxes other than on income" in accordance with ASU 2014-09.
 
At September 30
2018
 
At December 31
2017
 
(Millions of dollars)
Current assets
$
15,036

 
$
12,163

Other assets
55,209

 
54,994

Current liabilities
18,329

 
17,379

Other liabilities
13,049

 
12,541

Total CUSA net equity
$
38,867

 
$
37,237

Memo: Total debt
$
3,049

 
$
3,056

Note 9. 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:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Sales and other operating revenues
$
13,255

 
$
9,619

Costs and other deductions
5,780

 
4,806

Net income attributable to TCO
5,265

 
3,402

Note 10. 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:
 
Nine Months Ended
September 30
 
2018
 
2017
 
(Millions of dollars)
Sales and other operating revenues
$
8,773

 
$
6,816

Costs and other deductions
7,475

 
5,732

Net income attributable to CPChem
1,766

 
1,424

Note 11. 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. For the company’s main U.S. medical plan, the increase to the

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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
September 30
 
Nine Months Ended
September 30
 
2018
 
2017
 
2018
 
2017
 
(Millions of dollars)
Pension Benefits
 
 
 
 
 
 
 
United States
 
 
 
 
 
 
 
Service cost
$
120

 
$
122

 
$
360

 
$
366

Interest cost
93

 
91

 
278

 
274

Expected return on plan assets
(159
)
 
(149
)
 
(477
)
 
(447
)
Amortization of prior service costs (credits)

 
(1
)
 
1

 
(3
)
Amortization of actuarial losses (gains)
76

 
85

 
228

 
255

Settlement losses
128

 
169

 
260

 
325

Total United States
258

 
317

 
650

 
770

International
 
 
 
 
 
 
 
Service cost
36

 
38

 
109

 
114

Interest cost
49

 
54

 
155

 
164

Expected return on plan assets
(62
)
 
(61
)
 
(193
)
 
(178
)
Amortization of prior service costs (credits)
2

 
3

 
8

 
9

Amortization of actuarial losses (gains)
6

 
11

 
23

 
33

Curtailment losses
3

 

 
3

 

Total International
34

 
45

 
105

 
142

Net Periodic Pension Benefit Costs
$
292

 
$
362

 
$
755

 
$
912

Other Benefits*
 
 
 
 
 
 
 
Service cost
$
10

 
$
8

 
$
31

 
$
24

Interest cost
24

 
23

 
72

 
71

Amortization of prior service costs (credits)
(7
)
 
(7
)
 
(21
)
 
(21
)
Amortization of actuarial losses (gains)
4

 
(1
)
 
11

 
(4
)
Net Periodic Other Benefit Costs
$
31

 
$
23

 
$
93

 
$
70

_ ___________________________________
* 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 September 30, 2018, a total of $941 million was contributed to employee pension plans (including $788 million to the U.S. plans). Total contributions for the full year are currently estimated to be $1.05 billion ($800 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 nine months of 2018, the company contributed $125 million to its OPEB plans. The company anticipates contributing approximately $50 million during fourth quarter 2018.
Note 12. Income Taxes
The increase in income tax expense between quarterly periods of $971 million, from $672 million in 2017 to $1.64 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 higher production. The company’s effective tax rate changed between periods from 25 percent in 2017 to 29 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.
The increase in income tax expense for the nine months of $2.95 billion, from $1.59 billion in 2017 to $4.54 billion in 2018, is a result of the year-over-year increase in total income before income tax expense, which is

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


primarily due to effects of higher crude oil prices and higher production. The company’s effective tax rate changed between periods from 21 percent in 2017 to 29 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 company's U.S. tax return was prepared and filed in the quarter ended September 30, 2018, and did not result in any material change to the provisional amounts that were recognized in 2017. Further proposed regulations are expected to be issued later in 2018 which 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 September 30, 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 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 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

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 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

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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. On July 10, 2018, Ecuador's Constitutional Court released a decision rejecting Chevron's appeal, which sought to nullify the National Court of Justice's judgment against Chevron. No further appeals are available.
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 Appeal 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 May 24, 2018, the Court of Appeal for Ontario upheld the Superior Court’s grant of Chevron Canada Limited’s and Chevron Corporation’s motions for summary judgment based on corporate separateness grounds and the dismissal of Chevron Canada Limited from the case. On June 22, 2018, the Lago Agrio plaintiffs filed leave to appeal the decision of the Court of Appeal for Ontario to the Supreme Court of Canada.
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 June 15, 2018, this decision became a final judgment in Brazil. No further appeals are available.
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

18

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. On July 3, 2018, the Federal Civil Court of Appeals affirmed the National Court, First Instance’s, dismissal of the Lago Agrio plaintiffs’ recognition and enforcement action based on jurisdictional grounds. On October 5, 2018, the Federal Civil Court of Appeals granted, in part, the admissibility of the Lago Agrio Plaintiffs’ appeal to the Supreme Court of Argentina.
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 any enforcement action. Chevron expects to continue a vigorous defense of any imposition of liability 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 outside of 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 outside of 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

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 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.
On August 30, 2018, the Tribunal issued its Phase Two award in favor of Chevron and Texpet. The Tribunal unanimously held that the Ecuadorian judgment was procured through fraud, bribery and corruption and was based on claims that the Republic of Ecuador had settled and released in the mid-1990s, concluding that the Ecuadorian judgment “violates international public policy” and “should not be recognized or enforced by the courts of other States.” Specifically, the Tribunal found that (i) the Republic of Ecuador breached its obligations under the 1995 and 1998 settlement agreements releasing Texpet and its affiliates from public environmental claims (the same claims on which the Ecuadorian judgment was exclusively based) and (ii) the Republic of Ecuador committed a denial of justice under customary international law and under the fair and equitable treatment provision of the BIT due to the fraud and corruption in the Lago Agrio litigation. Among other things, the Tribunal ordered the Republic of Ecuador to: (a) take immediate steps to remove the status of enforceability from the Ecuadorian judgment; (b) promptly advise in writing any State where the Lago Agrio Plaintiffs may be seeking the enforcement or recognition of the Ecuadorian judgment of the Tribunal’s declarations, orders and awards; (c) take measures to “wipe out all the consequences” of Ecuador's "internationally wrongful acts in regard to the Ecuadorian judgment;" and (d) compensate Chevron for any injuries resulting from the Ecuadorian judgment. The Tribunal has not set a date for Phase Three, the third and final phase of the arbitration, at which damages for Chevron's injuries will be determined.
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).



20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 12 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.
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, drill ships, 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 factors such 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

21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 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 September 30, 2018, and December 31, 2017, is as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
(Millions of dollars)
 
At September 30, 2018
 
At December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Marketable Securities
$
60

 
$
60

 
$

 
$

 
$
9

 
$
9

 
$

 
$

Derivatives
16

 
1

 
15

 

 
22

 

 
22

 

Total Assets at Fair Value
$
76

 
$
61

 
$
15

 
$

 
$
31

 
$
9

 
$
22

 
$

Derivatives
84

 
52

 
32

 

 
124

 
78

 
46

 

Total Liabilities at Fair Value
$
84

 
$
52

 
$
32

 
$

 
$
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 September 30, 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.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 September 30, 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 $9.7 billion and $4.8 billion at September 30, 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 September 30, 2018.
Restricted Cash had a carrying/fair value of $1.1 billion and $1.1 billion at September 30, 2018, and December 31, 2017, respectively. At September 30, 2018, restricted cash is classified as Level 1 and includes restricted funds related to certain upstream abandonment activities and a financing program, 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 $19.9 billion and $23.5 billion at September 30, 2018, and December 31, 2017, respectively. The fair value of long-term debt at September 30, 2018, and December 31, 2017 was $19.8 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 $19.0 billion. The fair value of other long-term debt classified as Level 2 is $0.8 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 September 30, 2018, and December 31, 2017, were not material.
The fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2018, is as follows:
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
(Millions of dollars)
 
At September 30, 2018
 
 
 
 
 
 
 
 
 
Before-Tax Loss
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Three
Months
Ended
 
Nine
Months
Ended
 
 
 
 
 
 
 Properties, plant and equipment, net (held and used)
$

 
$

 
$

 
$

 
$

 
$

 Properties, plant and equipment, net (held for sale)
212

 

 

 
212

 
290

 
586

 Investments and advances
56

 

 

 
56

 
43

 
44

 Total Assets at Fair Value
$
268

 
$

 
$

 
$
268

 
$
333

 
$
630

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 third 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 third 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

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 September 30, 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 September 30
2018
 
At December 31
2017
Commodity
 
Accounts and notes receivable, net
 
$
15

 
$
22

Commodity
 
Long-term receivables, net
 
1

 

Total Assets at Fair Value
 
$
16

 
$
22

Commodity
 
Accounts payable
 
$
76

 
$
122

Commodity
 
Deferred credits and other noncurrent obligations
 
8

 
2

Total Liabilities at Fair Value
 
$
84

 
$
124

Consolidated Statement of Income: The Effect of Derivatives Not Designated as Hedging Instruments
(Millions of dollars)
 
 
 
 
Gain / (Loss)
Three Months Ended
September 30
 
Gain / (Loss)
Nine Months Ended
September 30
Type of
Contract
 
Statement of Income Classification
 
2018
 
2017
 
2018
 
2017
Commodity
 
Sales and other operating revenues
 
$
(80
)
 
$
(196
)
 
$
(257
)
 
$
82

Commodity
 
Purchased crude oil and products
 
(10
)
 
(7
)
 
(36
)
 
3

Commodity
 
Other income
 
1

 
1

 
1

 
(2
)
 
 
 
 
$
(89
)
 
$
(202
)
 
$
(292
)
 
$
83

The table below represents gross and net derivative assets and liabilities subject to netting agreements on the Consolidated Balance Sheet at September 30, 2018, and December 31, 2017.
Consolidated Balance Sheet: The Effect of Netting Derivative Assets and Liabilities
(Millions of dollars)
 
 
Gross Amount Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
 Gross Amounts Not Offset
 
Net Amount
At September 30, 2018
 
 
 
 
 
Derivative Assets
 
$
3,399

 
$
3,383

 
$
16

 
$
9

 
$
7

Derivative Liabilities
 
$
3,467

 
$
3,383

 
$
84

 
$
9

 
$
75

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
$
1,169

 
$
1,147

 
$
22

 
$

 
$
22

Derivative Liabilities
 
$
1,271

 
$
1,147

 
$
124

 
$

 
$
124

Derivative assets and liabilities are classified on the Consolidated Balance Sheet as accounts and notes receivable, long-term receivables, accounts payable, and deferred credits and other noncurrent obligations. Amounts not offset on the Consolidated Balance Sheet represent positions that do not meet all the conditions for "a right of offset."
Note 17. Revenue
On January 1, 2018, Chevron adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), and its related amendments using the modified retrospective transition method, which did not require the restatement of prior periods. The adoption did not result in a material change in the company’s accounting or have a material effect on the company’s financial position, including the measurement of revenue, the timing of revenue recognition and the recognition of contract assets, liabilities and related costs.

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The most significant change is the presentation of excise, value-added and similar taxes collected on behalf of third parties, which are no longer presented within “Sales and other operating revenue” on the Consolidated Statement of Income starting in 2018. These taxes, which totaled $5.9 billion in the nine months ended September 30, 2018, are now netted in “Taxes other than on income” in the Consolidated Statement of Income. This change to presentation had no impact on earnings. In the nine months ended September 30, 2017, these taxes totaled $5.3 billion.
Under the new standard, the company accounts for commodity delivery orders as separate performance obligations. Revenue is recognized when the performance obligation is satisfied, which continues to typically occur at the point in time when control of the product transfers to the customer. Payment is generally due within 30 days from delivery. The company has elected to account for delivery transportation as a fulfillment cost, not a separate performance obligation. These costs continue to be recognized as an operating expense in the period when revenue for the related commodity is recognized.
Revenue is measured as the amount the company expects to receive in exchange for transferring commodities to the customer. The company’s commodity sales are typically based on prevailing market-based prices and may include discounts and allowances. Until market prices become known under terms of the company’s contracts, the transaction price included in revenue is based on the company’s estimate of the most likely outcome.
Discounts and allowances are estimated using a combination of historical and recent data trends. When deliveries contain multiple products, an observable standalone selling price is generally used to measure revenue for each product. The company includes estimates in the transaction price only to the extent that a significant reversal of revenue is not probable in subsequent periods.
The company applied the optional exemption to not report any unfulfilled performance obligations related to contracts that have terms of less than one year. The amount of future revenue for unfulfilled performance obligations under long-term contracts with fixed components was insignificant for the nine months ended September 30, 2018.
Revenue from contracts with customers is presented in “Sales and other operating revenue” along with some activity that is accounted for outside the scope of ASC 606, which is not material to this line, on the Consolidated Statement of Income. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell arrangements) are combined and recorded on a net basis and reported in “purchased crude oil and products” on the Consolidated Statement of Income. Refer to Note 7 beginning on page 11 for additional information on the company’s segmentation of revenue.
Receivables related to revenue from contracts with customers are included in “Accounts and notes receivable, net” on the Consolidated Balance Sheet, net of the allowance for doubtful accounts. The net balance of these receivables was $9.8 billion and $11.9 billion at January 1, 2018 and September 30, 2018, respectively. Other items included in “Accounts and notes receivable, net” represent amounts due from partners for their share of joint venture operating and project costs and amounts due from others, primarily related to derivatives, leases, buy/sell arrangements and product exchanges, which are accounted for outside the scope of ASC 606, Revenue from Contracts with Customers.
Contract assets and related costs are reflected in “Prepaid expenses and other current assets” and contract liabilities are reflected in “Accrued liabilities” and “Deferred credits and other noncurrent obligations” on the Consolidated Balance Sheet. Amounts for these items are not material to the company’s financial position.
Note 18. Accounting for Suspended Exploratory Wells
The capitalized cost of suspended wells at September 30, 2018, was $3.6 billion, a net decrease of $124 million from year-end 2017. The decrease was primarily due to well write-offs, partially offset by drilling activities. During the nine months ended September 30, 2018, $313 million of exploratory well costs previously capitalized for greater than one year at December 31, 2017, were charged to expense.



25


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Third Quarter 2018 Compared with Third Quarter 2017
and Nine Months 2018 Compared with Nine Months 2017

Key Financial Results
Earnings by Business Segment
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2018
 
2017
 
2018
 
2017
 
(Millions of dollars)
Upstream
 
 
 
 
 
 
 
United States
$
828

 
$
(26
)
 
$
2,314

 
$
(48
)
International
2,551

 
515

 
7,712

 
2,907

Total Upstream
3,379

 
489

 
10,026

 
2,859

Downstream
 
 
 
 
 
 
 
United States
748

 
640

 
1,847

 
1,743

International
625

 
1,174

 
1,092

 
2,192

Total Downstream
1,373

 
1,814