Operating Cash Flow
Our operating cash flow has increased approximately 16% since 2005, reaching a total of $6.2 billion in 2007. We expect operating cash flow to continue to be our primary source of liquidity. Our operating cash flow is sensitive to many variables, the most volatile of which is pricing of the oil, natural gas and NGLs we produce. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.
We periodically deem it appropriate to mitigate some of the risk inherent in oil and natural gas prices. Accordingly, we have utilized price collars to set minimum and maximum prices on a portion of our production. We have also utilized various price swap contracts and fixed-price physical delivery contracts to fix the price to be received for a portion of future oil and natural gas production. Based on contracts in place as of February 15, 2008, in 2008 approximately 64% of our estimated natural gas production and 12% of our estimated oil production are subject to either price collars, swaps or fixed-price contracts. The key terms of these contracts are summarized in the Quantitative and Qualitative Disclosures about Market Risk section of this book.
Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price increases, as experienced in recent years, can lead to an increase in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also increase, causing a negative impact on our cash flow.
Credit Availability
We have two revolving lines of credit and a commercial paper program, which we can access to provide liquidity. At December 31, 2007, our total available borrowing capacity was $1.3 billion.
Our $2.5 billion five-year, syndicated, unsecured revolving line of credit (the "Senior Credit Facility") matures on April 7, 2012, and all amounts outstanding will be due and payable at that time unless the maturity is extended. Prior to each April 7 anniversary date, we have the option to extend the maturity of the Senior Credit Facility for one year, subject to the approval of the lenders.
The Senior Credit Facility includes a five-year revolving Canadian subfacility in a maximum amount of U.S. $500 million. Amounts borrowed under the Senior Credit Facility may, at our election, bear interest at various fixed rate options for periods of up to twelve months. Such rates are generally less than the prime rate. However, we may elect to borrow at the prime rate. As of December 31, 2007, there were $1.4 billion of borrowings under the Senior Credit Facility at an average rate of 5.27%.
On August 7, 2007, we established a new $1.5 billion 364-day, syndicated, unsecured revolving senior credit facility (the "Short-Term Facility"). This facility provides us with provisional interim liquidity until we receive the proceeds from divestitures of assets in West Africa. The Short-Term Facility was also used to support an increase in our commercial paper program from $2 billion to $3.5 billion.
The Short-Term Facility matures on August 5, 2008. At that time, all amounts outstanding will be due and payable unless the maturity is extended. Prior to August 5, 2008, we have the option to convert any outstanding principal amount of loans under the Short-Term Facility to a term loan, which will be repayable in a single payment on August 4, 2009.
Amounts borrowed under the Short-Term Facility bear interest at various fixed rate options for periods of up to 12 months. Such rates are generally less than the prime rate. We may also elect to borrow at the prime rate. As of December 31, 2007, there were no borrowings under the Short-Term Facility.
We also have access to short-term credit under our commercial paper program. Total borrowings under the commercial paper program may not exceed $3.5 billion. Also, any borrowings under the commercial paper program reduce available capacity under the Senior Credit Facility or the Short-Term Facility on a dollar-for-dollar basis. Commercial paper debt generally has a maturity of between one and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2007, we had $1.0 billion of commercial paper debt outstanding at an average rate of 5.07%.
The Senior Credit Facility and Short-Term Facility contain only one material financial covenant. This covenant requires our ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in our consolidated financial statements. As defined in the agreement, total funded debt excludes the debentures that are exchangeable into shares of Chevron Corporation common stock. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of December 31, 2007, we were in compliance with this covenant. Our debt-to-capitalization ratio at December 31, 2007, as calculated pursuant to the terms of the agreement, was 23.8%.
Our access to funds from the Senior Credit Facility and Short-Term Facility is not restricted under any "material adverse effect" clauses. It is not uncommon for credit agreements to include such clauses. These clauses can remove the obligation of the banks to fund the credit line if any condition or event would reasonably be expected to have a material and adverse effect on the borrower's financial condition, operations, properties or business considered as a whole, the borrower's ability to make timely debt payments, or the enforceability of material terms of the credit agreement. While our credit facilities include covenants that require us to report a condition or event having a material adverse effect, the obligation of the banks to fund the credit facilities is not conditioned on the absence of a material adverse effect.
Debt Ratings
We receive debt ratings from the major ratings agencies in the United States. In determining our debt ratings, the agencies consider a number of items including, but not limited to, debt levels, planned asset sales, near-term and long-term production growth opportunities and capital allocation challenges. Liquidity, asset quality, cost structure, reserve mix, and commodity pricing levels are also considered by the rating agencies. Our current debt ratings are BBB with a positive outlook by Standard & Poor's, Baa1 with a stable outlook by Moody's and BBB with a positive outlook by Fitch.
There are no "rating triggers" in any of our contractual obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. Our cost of borrowing under our Senior Credit Facility and Short-Term Facility is predicated on our corporate debt rating. Therefore, even though a ratings downgrade would not accelerate scheduled maturities, it would adversely impact the interest rate on any borrowings under our credit facilities. Under the terms of the Senior Credit Facility and the Short-Term Facility, a one-notch downgrade would increase the fully-drawn borrowing costs for the credit facilities from LIBOR plus 35 basis points to a new rate of LIBOR plus 45 basis points. A ratings downgrade could also adversely impact our ability to economically access debt markets in the future. As of December 31, 2007, we were not aware of any potential ratings downgrades being contemplated by the rating agencies.
Capital Expenditures
In February 2008, we provided guidance for our 2008 capital expenditures, which are expected to range from $6.6 billion to $7.0 billion. This represents the largest planned use of our 2008 operating cash flow, with the high end of the range being 13% higher than our 2007 capital expenditures. To a certain degree, the ultimate timing of these capital expenditures is within our control. Therefore, if oil and natural gas prices fluctuate from current estimates, we could choose to defer a portion of these planned 2008 capital expenditures until later periods, or accelerate capital expenditures planned for periods beyond 2008 to achieve the desired balance between sources and uses of liquidity. Based upon current oil and natural gas price expectations for 2008 and the commodity price collars, swaps and fixed-price contracts we have in place, we anticipate having adequate capital resources to fund our 2008 capital expenditures.
Common Stock Repurchase Programs
We have an ongoing, annual stock repurchase program to minimize dilution resulting from restricted stock issued to, and options exercised by, employees. In 2008, the repurchase program authorizes the repurchase of up to 4.8 million shares or a cost of $422 million, whichever amount is reached first.
In anticipation of the completion of our West African divestitures, our Board of Directors has approved a separate program to repurchase up to 50 million shares. This program expires on December 31, 2009.
Exchangeable Debentures
As of December 31, 2007, our outstanding debt included debentures that are exchangeable for Chevron common stock. These debentures have a scheduled maturity date of August 15, 2008. Although these debentures are now due within one year, we continue to classify this debt as long-term because we have the intent and ability to refinance these debentures on a long-term basis with the available capacity under our existing credit facilities or other long-term financing arrangements.
Canadian Royalties
On October 25, 2007, the Alberta government proposed increases to the royalty rates on oil and natural gas production beginning in 2009. We believe this proposal would reduce future earnings and cash flows from our oil and gas properties located in Alberta. Additionally, assuming all other factors are equal, higher royalty rates would likely result in lower levels of capital investment in Alberta relative to our other areas of operation. However, the magnitude of the potential impact, which will depend on the final form of enacted legislation and other factors that impact the relative expected economic returns of capital projects, cannot be reasonably estimated at this time.
Contractual Obligations
A summary of our contractual obligations as of December 31, 2007, is provided in the following table.
| Payments Due by Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less Than 1 Year |
1-3 Years | 3-5 Years | More Than 5 Years |
|||||||||||
| (In millions) | |||||||||||||||
| Long-term debt (1) | $ | 7,908 | 1,004 | 177 | 4,202 | 2,525 | |||||||||
| Interest expense (2) | 5,412 | 508 | 708 | 545 | 3,651 | ||||||||||
| Drilling and facility obligations (3) | 3,935 | 983 | 1,254 | 747 | 951 | ||||||||||
| Asset retirement obligations (4) | 1,362 | 91 | 138 | 128 | 1,005 | ||||||||||
| Firm transportation agreements (5) | 1,040 | 170 | 329 | 234 | 307 | ||||||||||
| Lease obligations (6) | 578 | 104 | 166 | 125 | 183 | ||||||||||
| Other | 134 | 71 | 59 | 4 | — | ||||||||||
| Total | $ | 20,369 | 2,931 | 2,831 | 5,985 | 8,622 | |||||||||
(1) Except for our debentures exchangeable into Chevron common stock, long-term debt amounts represent scheduled maturities of our debt obligations at December 31, 2007, excluding $20 million of net
premiums included in the carrying value of debt. Although the maturity date of the exchangeable debentures is August 2008, we have the ability and intent to refinance these borrowings under our credit
facilities or other long-term arrangements. Therefore, the $652 million face value of outstanding exchangeable debentures is included in the "3-5 Years" amount. As of December 31, 2007, we owned
approximately 14.2 million shares of Chevron common stock. The majority of these shares are held for possible exchange when holders elect to exchange their debentures.
The "Less than 1 Year" amount represents our short-term commercial paper borrowings. The "3-5 Years" amount includes $1.4 billion of borrowings against our Senior Credit Facility. We intend to use the
proceeds from the sales of West African assets to repay our outstanding commercial paper and credit facility borrowings. Also, $198 million of letters of credit that have been issued by commercial banks
on our behalf are excluded from the table. The majority of these letters of credit, if funded, would become borrowings under our credit facilities. Most of these letters of credit have been granted by
financial institutions to support our international and Canadian drilling commitments.
(2) Interest expense amounts represent the scheduled fixed-rate and variable-rate cash payments related to our debt. Interest on our variable-rate debt was estimated based upon expected future interest rates as of December 31, 2007.
(3) Drilling and facility obligations represent contractual agreements with third party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.9 billion total is $2.4 billion that relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $2.4 billion represents the gross commitment under these contracts. Our ultimate payment for these commitments will be reduced by the amounts billed to our working interest partners. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties. Also included in the $3.9 billion total is $144 million of drilling and facility obligations related to our discontinued operations.
(4) Asset retirement obligations represent estimated discounted costs for future dismantlement, abandonment and rehabilitation costs. These obligations are recorded as liabilities on our December 31, 2007 balance sheet. Included in the $1.4 billion total is $44 million of asset retirement obligations related to our discontinued operations.
(5) Firm transportation agreements represent "ship or pay" arrangements whereby we have committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. We have entered into these agreements to aid the movement of our production to market. We expect to have sufficient production to utilize the majority of these transportation services.
(6) Lease obligations consist of operating leases for office space and equipment, an offshore platform spar and FPSO's. Office and equipment leases represent non-cancelable leases for office space and
equipment used in our daily operations.
We have an offshore platform spar that is being used in the development of the Nansen field in the Gulf of Mexico. This spar is subject to a 20-year lease and contains various options whereby we may
purchase the lessors' interests in the spars. We have guaranteed that the spar will have a residual value at the end of the term equal to at least 10% of the fair value of the spar at the inception of the
lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreements. In 2005, we sold our interests in the Boomvang field in the Gulf
of Mexico, which has a spar lease with terms similar to those of the Nansen lease. As a result of the sale, we are subleasing the Boomvang Spar. The table above does not include any amounts related to
the Boomvang spar lease. However, if the sublessee were to default on its obligation, we would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end
of the term.
We also lease two FPSO's that are being used in the Panyu project offshore China and the Polvo project offshore Brazil. The Panyu FPSO lease term expires in September 2009. The Polvo FPSO lease term
expires in 2014.
Pension Funding and Estimates
Funded Status. As compared to the "projected benefit obligation," our qualified and nonqualified defined benefit plans were underfunded by $230 million and $178 million at December 31, 2007 and 2006, respectively. A detailed reconciliation of the 2007 changes to our underfunded status is included in Note 6 to the accompanying consolidated financial statements. Of the $230 million underfunded status at the end of 2007, $198 million is attributable to various nonqualified defined benefit plans that have no plan assets. However, we have established certain trusts to fund the benefit obligations of such nonqualified plans. As of December 31, 2007, these trusts had investments with a fair value of $59 million. The value of these trusts is included in noncurrent other assets in our accompanying consolidated balance sheets.
As compared to the "accumulated benefit obligation," our qualified defined benefit plans were overfunded by $62 million at December 31, 2007. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. Our current intentions are to provide sufficient funding in future years to ensure the accumulated benefit obligation remains fully funded. The actual amount of contributions required during this period will depend on investment returns from the plan assets and payments made to participants. Required contributions also depend upon changes in actuarial assumptions made during the same period, particularly the discount rate used to calculate the present value of the accumulated benefit obligation. For 2008, we anticipate the accumulated benefit obligation will remain fully funded without contributing to our qualified defined benefit plans. Therefore, we don't expect to contribute to the plans during 2008.
Pension Estimate Assumptions. Our pension expense is recognized on an accrual basis over employees' approximate service periods and is generally calculated independent of funding decisions or requirements. We recognized expense for our defined benefit pension plans of $41 million, $31 million and $26 million in 2007, 2006 and 2005, respectively. We estimate that our pension expense will approximate $61 million in 2008.