EXHIBIT 13
FINANCIAL SECTION F1
FINANCIAL SUMMARY F3
F4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVIEW OF 1995 RESULTS
Record net income of $6,470 million in 1995 compared with $5,100 million in
1994. Production and sales volumes increased in all business segments and
progress continued in reducing operating costs. Upstream earnings benefited from
stronger worldwide crude prices, but downstream margins were depressed
throughout the year. Chemicals earnings were more than double those achieved in
1994, and earnings from the coal, minerals and power businesses were up
significantly. Results in 1995 included $90 million of credits for settlement of
outstanding natural gas contract claims (all in the fourth quarter), while 1994
included $489 million of credits from asset sales and tax related items ($423
million for the fourth quarter).
Revenue for 1995 totaled $124 billion, up 9 percent from 1994, and the cost
of crude and product purchases increased 7 percent.
The combined total of operating costs (including operating, selling,
general, administrative, exploration, depreciation and depletion expenses)
increased 2.5 percent in 1995. Excluding the impact of the weaker U.S. dollar
and volume growth, operating expenses were reduced by about $600 million from
1994 reflecting ongoing cost reduction efforts. Worldwide unit operating costs
in 1995 were lower than 1994 in all major operating segments. Interest expense
in 1995 was $202 million lower than in 1994 as lower debt levels and foreign
exchange effects offset the impact of higher interest rates.
Exploration and Production
Worldwide crude prices during 1995 were on average about $1.25 per barrel above
the prior year. Liquids production of 1,726 kbd (thousand barrels per day) was
the highest level achieved since 1989, and was up from 1,709 kbd in 1994,
principally as a result of increased production from new developments in the
U.S. and North Sea. Natural gas production of 6,013 mcfd (million cubic feet per
day) increased from 5,978 mcfd in 1994 and was the highest level since 1981.
Increased production in the Asia-Pacific region and the U.S. was partially
offset by lower demand in Europe, as a result of unseasonably warm temperatures
during the first half of 1995. Excluding special items, earnings from U.S.
exploration and production operations were $971 million, up from $852 million in
1994. Outside the U.S., earnings from exploration and production operations were
$2,351 million versus $1,864 million in 1994, after excluding special items.
Refining and Marketing
Refining and marketing earnings were lower in 1995 than in 1994 due to much
weaker industry refining margins. However, worldwide petroleum product sales of
5,076 kbd were the highest since 1979 and up from 5,028 kbd in 1994, with most
of the growth in the Asia-Pacific region. U.S. refining and marketing earnings
were $229 million compared with $243 million in the prior year. The impact of
weaker product margins was offset by increased motor gasoline sales and lower
refinery maintenance expense in 1995. Earnings from refining and marketing
operations outside the U.S. were $1,043 million, down from $1,146 million in
1994, due principally to extremely weak refining margins in Europe.
Chemicals
Earnings from worldwide chemical operations totaled $2,018 million, a record
level and more than double 1994 earnings. Higher product margins and sales
volumes produced the earnings improvement. In 1995, Exxon achieved record prime
product sales of 13,481 thousand metric tons, up 289 thousand metric tons versus
the prior year.
Other Operations
Earnings from other operating segments were $479 million, up from $302 million
in 1994 after excluding gains on asset sales. Prices for both copper and coal
were higher, and copper and coal production from ongoing operations were at
record levels.
Corporate and Financing
Corporate and financing expenses in 1995 of $711 million were down $39 million
from the prior year, after excluding non-recurring credits in 1994. Lower debt
levels offset the impact of higher interest rates.
REVIEW OF 1994 RESULTS
Net income of $5,100 million in 1994 compared with $5,280 million in 1993.
Liquids production, refinery throughput and sales of natural gas, petroleum
products, chemicals, coal and copper were all above levels achieved in 1993.
Chemicals earnings more than doubled from 1993 and minerals moved into a
substantial net profit position. Results in 1994 included $489 million from
asset sales and tax related special credits ($423 million for the fourth
quarter), while 1993 included $676 million of such credits ($113 million for the
fourth quarter).
Revenue for 1994 totaled $114 billion, up 2 percent from 1993, and the cost
of crude and product purchases increased 1 percent.
F5
The combined total of operating costs (including operating, selling,
general, administrative, exploration, depreciation and depletion expenses) was 2
percent higher than 1993 as a result of growth in production and sales volumes
and a general weakening of the U.S. dollar. Worldwide unit operating costs in
1994 were lower. Interest expense in 1994 was 14 percent higher than in 1993
reflecting higher interest rates.
Exploration and Production
As a result of a decline in worldwide crude prices in 1994, Exxon's average
crude realization was down by more than $1.30 per barrel from 1993. Worldwide
liquids production of 1,709 kbd was up from 1,667 kbd in 1993, principally as a
result of record production from the North Sea and increased production from new
developments in the U.S. Despite unseasonably warm temperatures in both the U.S.
and Europe during the fourth quarter, worldwide natural gas production in 1994
of 5,978 mcfd rose by 153 mcfd versus 1993, with the growth coming mainly from
new developments in the U.S. and Malaysia. Earnings from U.S. exploration and
production operations were $852 million, compared with $935 million in 1993.
Outside the U.S., earnings from exploration and production operations were
$1,930 million, versus $2,378 million in 1993. This reduction was due primarily
to lower crude prices, lower European gas sales, foreign exchange effects and
lower special credits from asset sales and tax rate changes.
Refining and Marketing
Refining and marketing earnings were lower in 1994 than in 1993 due to much
weaker industry refining margins and a significant increase in scheduled
refining maintenance activities. However, Exxon's worldwide petroleum product
sales of 5,028 kbd were up from 4,925 kbd in 1993, with increases in clean
product sales in most major markets. Also, earnings benefited from record sales
and earnings in the lubes and specialties product lines. U.S. refining and
marketing earnings were $243 million, compared with $465 million in 1993.
Earnings from refining and marketing operations outside the U.S. were $1,146
million, versus $1,550 million in 1993.
Chemicals
Earnings from worldwide chemical operations in 1994 totaled $954 million, more
than double the earnings level of 1993, as the recovery in the worldwide
chemical industry gained momentum throughout the year. Industry margins, driven
by increased demand and tight industry supplies, were up sharply. In 1994, Exxon
achieved record sales volumes of 13,192 thousand metric tons, up 5 percent
versus the prior year.
Other Operations
Earnings from other operating segments in 1994 totaled $409 million, up from
$138 million in 1993. Power earnings increased reflecting returns on a higher
asset base. Coal production increased, copper production was at a record level
and copper prices were much improved. Results also included significant credits
from asset sales.
Corporate and Financing
Corporate and financing charges of $434 million in 1994 compared with $597
million in 1993 as tax related credits in 1994 exceeded similar credits in 1993.
IMPACT OF INFLATION AND CHANGING PRICES
The general rate of inflation in most major countries of operation has been
relatively low in recent years, and the associated impact on operating costs has
been countered by cost reductions from efficiency and productivity improvements.
In the past, crude oil and product prices have fluctuated widely in
response to changing market forces. The impacts of these price fluctuations on
earnings from exploration and production operations, refining and marketing
operations and chemical operations have been varied, tending at times to
be offsetting.
SITE RESTORATION AND OTHER ENVIRONMENTAL COSTS
Over the years the corporation has accrued provisions for estimated site
restoration costs to be incurred at the end of the operating life of certain of
its facilities and properties. In addition, the corporation accrues provisions
for environmental liabilities in the many countries in which it does business
when it is probable that obligations have been incurred and the amounts can be
reasonably estimated. This policy applies to assets or businesses currently
owned or previously disposed. The corporation has accrued provisions for
probable environmental remediation obligations at various sites, including
multi-party sites where Exxon has been identified as one of the potentially
responsible parties by the U.S. Environmental Protection Agency. The involvement
of other financially responsible companies at these multi-party sites mitigates
Exxon's actual joint and several liability exposure. At present, no individual
site is expected to have losses material to Exxon's operations, financial
condition or liquidity.
F6
At the end of 1995, accumulated site restoration and environmental
provisions amounted to $2.6 billion, including charges made against income of
$215 million in 1995, $160 million in 1994 and $331 million in 1993. Exxon
believes that any cost in excess of the amounts already provided for in the
financial statements would not have a materially adverse effect upon the
corporation's operations, financial condition or liquidity.
In 1995, the corporation spent $1,753 million (of which $565 million were
capital expenditures) on environmental conservation projects and expenses
worldwide, mostly dealing with air and water conservation. Total expenditures
for such activities are expected to be about $1.7 billion in 1996 and 1997 (with
capital expenditures in each year representing about 30 percent of the total).
TAXES
Income, excise and other taxes and duties totaled $41.2 billion in 1995, an
increase of $4.9 billion, or 13 percent. Income tax expense, both current and
deferred, was $4.0 billion compared to $2.7 billion in 1994, reflecting higher
pre-tax income in 1995 and a higher effective tax rate - 41.4 percent in 1995
versus 38.5 percent in 1994. Excise taxes and other taxes and duties were $3.6
billion higher reflecting increased sales and the impact of the weaker U.S.
dollar during 1995.
Income, excise and other taxes and duties totaled $36.3 billion in 1994, an
increase of $2.1 billion, or 6 percent. Income tax expense, both current and
deferred, was $2.7 billion compared to $2.8 billion in 1993, reflecting lower
pre-tax income in 1994. The effective income tax rate stayed the same at 38.5
percent. Excise taxes and other taxes and duties were $2.2 billion higher
reflecting increased sales and higher tax rates during 1994.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, cash provided by operating activities totaled $13.8 billion, up $4.0
billion from 1994. Major sources of funds were net income of $6.5 billion and
non-cash provisions of $5.4 billion for depreciation and depletion.
Cash used in investing activities totaled $6.4 billion, up from $5.4
billion in 1994, primarily as a result of higher additions to property, plant
and equipment and lower asset sales.
Cash used in financing activities was $7.1 billion. Dividend payments on
common shares were increased from $2.91 per share to $3.00 per share and totaled
$3.7 billion, a payout of 58 percent. Total consolidated debt decreased by $2.7
billion to $10.0 billion.
Shareholders' equity increased by $3.0 billion to $40.4 billion. The ratio
of debt to capital decreased to 19 percent in 1995 compared to 24 percent in
1994.
In 1994, cash provided by operating activities totaled $9.9 billion, down
$1.7 billion from 1993. Major sources of funds were net income of $5.1 billion
and non-cash provisions of $5.0 billion for depreciation and depletion.
Cash used in investing activities totaled $5.4 billion in 1994, down from
$6.1 billion in 1993 as a result of lower additions to property, plant and
equipment and increased proceeds from asset dispositions.
Cash used in financing activities was $4.2 billion in 1994. Dividend
payments on common shares were increased from $2.88 per share to $2.91 per share
and totaled $3.6 billion, a payout of 71 percent. Total consolidated debt
increased $0.1 billion to $12.7 billion.
Shareholders' equity increased by $2.6 billion to $37.4 billion, resulting
in a decline in the ratio of debt to capital to 24 percent in 1994 compared to
25 percent in 1993.
As discussed in note 11 to the consolidated financial statements, the
corporation's financial derivative activities are limited to simple risk
management strategies. The corporation does not trade in financial derivatives
nor does it use financial derivatives with leveraged features. The corporation
maintains a system of controls that includes a policy covering the
authorization, reporting and monitoring of derivative activity. The
corporation's derivative activities pose no material credit or market risks to
Exxon's operations, financial condition or liquidity.
As discussed in note 14 to the consolidated financial statements, a number
of lawsuits, including class actions, have been brought in various courts
against Exxon Corporation and certain of its subsidiaries relating to the
accidental release of crude oil from the grounding of the tanker Exxon Valdez in
1989. During 1994, a Federal District Court jury in Anchorage, Alaska returned
compensatory and punitive damage verdicts in the civil litigation resulting from
the grounding. The District Court has denied motions by the corporation to
overturn or reduce the punitive verdict, and the corporation plans to appeal
this verdict following entry of a final judgment by the District Court. The
corporation believes that the $5 billion punitive damages verdict is unjustified
and should be set aside or substantially reduced by appellate courts. The
compensatory award is subject to a number of adjustments by the District Court,
and is subject to appeal. Since it is impossible to estimate what the ultimate
earnings impact will be, no charge was taken in 1994 or 1995 related to these
verdicts.
F7
The U.S. Tax Court has decided the issue with respect to the pricing of
crude oil purchased from Saudi Arabia for the years 1979 to 1981 in favor of the
corporation. This decision is subject to appeal. Ultimate resolution of this tax
issue and several other legal issues, notably a settlement of gas lifting
imbalances in the common border area between the Netherlands and Germany, is not
expected to have a materially adverse effect upon the corporation's operations,
financial condition or liquidity.
There are no events or uncertainties known to management beyond those
already included in reported financial information that would indicate a
material change in future operating results or future financial condition.
In 1995, the corporation strengthened its financial position and
flexibility to meet future financial needs. Although the corporation issues
long-term debt from time to time and maintains a revolving commercial paper
program, internally generated funds cover the majority of its financial
requirements.
CAPITAL AND EXPLORATION EXPENDITURES
Capital and exploration expenditures in 1995 were $9.0 billion compared to $7.8
billion in 1994.
Exploration and production spending totaled $4.7 billion in 1995, up 18
percent from $4.0 billion in 1994, reflecting increased spending for gas
distribution and storage facilities in Europe and developments in the North Sea.
Investments in refining and marketing totaled $2.1 billion in 1995, essentially
the same as in 1994.
Chemicals capital expenditures were $1.1 billion in 1995, up nearly $500
million from $0.6 billion in 1994, with the increase about equally split between
investments in the U.S. and Asia-Pacific area.
Investments in Hong Kong Power increased 18 percent in 1995 to $0.7
billion, as construction activity continued at the Black Point power station
project.
Capital and exploration expenditures in the U.S. totaled $2.1 billion in
1995. Spending outside the U.S. increased 17 percent to $6.9 billion primarily
in Europe and the Asia-Pacific area. Total capital and exploration expenditures
in 1996 should exceed the 1995 level as Exxon maintains its focus on profitable
growth opportunities in each of the major operating segments.
Firm commitments related to capital projects underway at year-end 1995
totaled approximately $3.2 billion, with the largest single commitment being
$0.7 billion associated with the Hong Kong Power Black Point project. Similar
commitments were $2.4 billion at the end of 1994. The corporation expects to
fund the majority of these commitments through internally generated funds.
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+ + + + + +
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+ GRAPH #1 + + GRAPH #2 + + GRAPH #3 +
+ + + + + +
+ + + + + +
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GRAPH #1 - FUNCTIONAL EARNINGS. Five-year history of earnings by function
(Exploration & Production, Refining & Marketing, Chemicals and
Other) and net income.
GRAPH #2 - SOURCES AND USES OF CASH. Five-year history of cash sources (Cash
from Operations and Asset Sales) compared to cash uses (Plant
Additions and Dividends/Changes in Debt/Other).
GRAPH #3 - CAPITAL AND EXPLORATION EXPENDITURES. Five-year history of capital
and exploration expenditures by function (Exploration & Production,
Refining & Marketing, Chemicals and Other).
F8
CONSOLIDATED BALANCE SHEET
The information on pages F11 through F20 is an integral part of these
statements.
F9
CONSOLIDATED STATEMENT OF INCOME
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The information on pages F11 through F20 is an integral part of these
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS F10
The information on pages F11 through F20 is an integral part of these
statements.
F11
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Dallas, Texas
February 28, 1996
To the Shareholders of Exxon Corporation
In our opinion, the consolidated financial statements appearing on pages F8
through F20 present fairly, in all material respects, the financial position of
Exxon Corporation and its subsidiary companies at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/S/ Price Waterhouse LLP
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company's principal business is energy involving the worldwide
exploration, production, transportation and sale of crude oil and natural gas
and the manufacture, transportation and sale of petroleum products. The company
is also a major worldwide manufacturer and marketer of petrochemicals, and
participates in coal and minerals mining and electric power generation.
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
The accompanying consolidated financial statements and the supporting
and supplemental material are the responsibility of the management of Exxon
Corporation.
1. Summary of Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of those significant subsidiaries owned directly or indirectly
more than 50 percent.
Amounts representing the corporation's percentage interest in the
underlying net assets of less than majority-owned companies in which a
significant equity ownership interest is held are included in "Investments and
advances." The corporation's share of the net income of these companies is
included in the consolidated statement of income caption "Earnings from equity
interests and other revenue."
Investments in all other companies, none of which is signifi-
cant, are included in "Investments and advances" at cost or less. Dividends
from these companies are included in income as received.
Financial Instruments. Interest rate swap agreements are used to modify the
interest rates on certain debt obligations. The interest differentials to be
paid or received under such swaps are recognized over the life of the
agreements as adjustments to interest expense. Currency exchange contracts are
used to reduce the risk of adverse foreign currency movements related to
certain foreign currency debt obligations. The gains or losses arising from
currency exchange contracts offset foreign exchange gains or losses on the
underlying assets or liabilities and are recognized as offsetting adjustments
to the carrying amounts. Commodity swap and futures contracts are used to
mitigate the risk of unfavorable price movements on certain crude and petroleum
product purchases and sales. Gains or losses on these contracts are recognized
as adjustments to purchase costs or to sales revenue. Related amounts payable
to or receivable from counterparties are included in current assets and
liabilities.
Investments in marketable debt securities are expected to be held to
maturity and are stated at amortized cost.
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate.
Inventories. Crude oil, products and merchandise inventories are carried at
the lower of current market value or cost (generally determined under the
last-in, first-out method-LIFO). Costs include applicable purchase costs and
operating expenses, but not general and administrative expenses or research and
development costs. Inventories of materials and supplies are valued at cost or
less.
F12
Property, Plant and Equipment. Depreciation, depletion and amortization,
based on cost less estimated salvage value of the asset, are primarily
determined under either the unit of production method or the straight-line
method. Unit of production rates are based on oil, gas and other mineral
reserves estimated to be recoverable from existing facilities. The
straight-line method of depreciation is based on estimated asset service life
taking obsolescence into consideration.
Maintenance and repairs are expensed as incurred. Major renewals and
improvements are capitalized, and the assets replaced are retired.
The corporation's exploration and production activities are accounted
for under the "successful efforts" method. Under this method, costs of
productive wells and development dry holes, both tangible and intangible, as
well as productive acreage are capitalized and amortized on the unit of
production method. Costs of that portion of undeveloped acreage likely to be
unproductive, based largely on historical experience, are amortized over the
period of exploration. Other exploratory expenditures, including geophysical
costs, other dry hole costs and annual lease rentals, are expensed as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement had no impact on the corporation's
results of operations or financial position upon adoption in January 1996.
Environmental Conservation and Site Restoration Costs. Liabilities for
environmental conservation are recorded when it is probable that obligations
have been incurred and the amounts can be reasonably estimated. These
liabilities are not reduced by possible recoveries from third parties, and
projected cash expenditures are not discounted.
Site restoration costs that may be incurred by the corporation at the
end of the operating life of certain of its facilities and properties are
reserved ratably over the asset's productive life.
Foreign Currency Translation. The "functional currency" for translating the
accounts of the majority of refining, marketing and chemical operations outside
the U.S. is the local currency. Local currency is also used for exploration and
production operations that are relatively self-contained and integrated within
a particular country, such as in Australia, Canada, the United Kingdom, Norway
and Continental Europe. The U.S. dollar is used for operations in highly
inflationary economies and for some exploration and production operations,
primarily in Malaysia and the Middle East.
2. Miscellaneous Financial Information
Research and development costs totaled $525 million in 1995, $558 million in
1994 and $593 million in 1993.
Net income included aggregate foreign exchange transaction gains of $26
million in 1995, losses of $30 million in 1994 and gains of $61 million in 1993.
In 1995, 1994 and 1993, net income included gains of $12 million, $8
million and $86 million, respectively, attributable to the combined effects of
LIFO inventory accumulations and draw-downs. The aggregate replacement cost of
inventories was estimated to exceed their LIFO carrying values by $2,902
million and $2,430 million at December 31, 1995 and 1994, respectively.
3. Cash Flow Information
The consolidated statement of cash flows provides information about changes
in cash and cash equivalents. All short-term marketable securities, with
original maturities of three months or less, that are readily convertible to
known amounts of cash and are so near maturity that they present insignificant
risk of changes in value because of changes in interest rates, are classified
as cash equivalents.
Cash payments for interest were: 1995 - $776 million; 1994 - $839
million; 1993 - $742 million. Cash payments for income taxes were: 1995 - $2,797
million; 1994 - $2,548 million; 1993 - $2,470 million.
4. Additional Working Capital Data
On December 31, 1995, unused credit lines for short-term financing totaled
approximately $6.5 billion. Of this total, $4.7 billion support commercial
paper programs under terms negotiated when drawn. The weighted average interest
rate on short-term borrowings outstanding at December 31, 1995 and 1994 was 6.2
percent and 6.3 percent, respectively.
F13
5. Equity Company Information
The summarized financial information below includes those less than
majority-owned companies for which Exxon's share of net income is included in
consolidated net income (see note 1). These companies are primarily engaged in
natural gas production and distribution in the Netherlands and Germany,
refining and marketing operations in Japan and several chemical operations.
6. Investments and Advances
7. Investment in Property, Plant and Equipment
Accumulated depreciation and depletion totaled $56,891 million at the end of
1995 and $52,901 million at the end of 1994. Interest capitalized in 1995, 1994
and 1993 was $533 million, $405 million and $374 million, respectively.
F14
8. Leased Facilities
At December 31, 1995, the corporation and its consolidated subsidiaries held
non-cancelable operating charters and leases covering drilling equipment,
tankers, service stations and other properties with minimum lease commitments
as follows:
Net rental expenditures for 1995, 1994 and 1993 totaled $1,212 million,
$1,173 million and $1,130 million, respectively, after being reduced by related
rental income of $157 million, $147 million and $134 million, respectively.
Minimum rental expenditures totaled $1,280 million in 1995, $1,239 million in
1994 and $1,184 million in 1993.
9. Capital
In 1989, the corporation sold 16.3 million shares of a new issue of
convertible Class A Preferred Stock to its leveraged employee stock ownership
plan (LESOP) trust for $61.50 per share. The proceeds of the issuance were used
by the corporation for general corporate purposes. The corporation recorded a
"Guaranteed LESOP Obligation" of $1,000 million as debt and as a reduction in
shareholders' equity, representing company-guaranteed borrowings by the LESOP
trust to purchase the preferred stock. As the debt is repaid, the Guaranteed
LESOP Obligation will be extinguished. The stock can be converted into common
stock at the lower of common stock market value or $61.50. Dividends are
cumulative and payable in an amount per share equal to $4.68 per annum.
Dividends paid per preferred share were $4.68 in 1995, 1994 and 1993.
Dividends paid per common share were $3.00 in 1995, $2.91 in 1994 and
$2.88 in 1993.
Earnings per common share are based on net income less preferred stock
dividends and the weighted average number of outstanding common shares during
each year, adjusted for stock splits.
10. Leveraged Employee Stock Ownership Plan (LESOP)
In 1989, the corporation's employee stock ownership plan trustee borrowed
$1,000 million under the terms of notes guaranteed by the corporation maturing
between 1990 and 1999. The principal due on the notes increases from $75
million in 1990 to $125 million in 1999. As further described in note 9, the
LESOP trustee used the proceeds of the borrowing to purchase shares of
convertible Class A Preferred Stock.
Employees eligible to participate in the corporation's thrift plan may
elect to participate in the LESOP. Corporation contributions to the plan, plus
dividends, are used to make principal and interest payments on the notes. As
contributions and dividends are credited, shares of preferred stock are
proportionately converted into common stock, with no cash flow impact to the
corporation, and allocated to participants' accounts. In 1995, 1994 and 1993,
1.6 million, 1.8 million and 1.7 million shares of preferred stock totaling
$100 million, $114 million and $102 million, respectively, were converted to
common stock and allocated. Preferred dividends of $38 million, $46 million and
$54 million were paid during 1995, 1994 and 1993, respectively, and covered
interest payments on the notes. The 1995, 1994 and 1993 principal payments were
made from employer contributions and dividends reinvested within the LESOP
trust and payments, if any, by Exxon as guarantor.
Accounting for the plan follows the principles which were in effect in
1989 when the plan was established. The amount of compensation expense recorded
by the corporation for contributions to the plan was $73 million in 1995, $80
million in 1994 and $70 million in 1993. The LESOP trust held 7.4 million and
9.0 million shares of preferred stock, and 19.3 million and 18.3 million shares
of common stock at the end of 1995 and 1994, respectively.
11. Interest Rate Swap, Currency Exchange and Commodity Contracts
The corporation limits its use of financial derivative instruments to simple
risk management activities. The corporation does not hold or issue financial
derivative instruments for trading purposes nor does it use financial
derivatives with leveraged features. Derivative instruments are matched to
existing assets, liabilities or transactions with the objective of mitigating
the impact of adverse movements in interest rates, currency exchange rates or
commodity prices. These instruments normally equal the amount of the underlying
assets, liabilities or transactions and are held to maturity. Instruments are
either traded over authorized exchanges or with counterparties of high credit
standing. As a result of the above factors, the corporation's exposure to
market and credit risks from financial derivative instruments is considered to
be negligible.
Interest rate swap agreements are used to adjust the ratio of fixed and
floating rates in the corporation's debt portfolio. Interest rate swap
agreements, maturing 1996-1999, had an aggregate notional principal amount of
$510 million and $604 million at year-end 1995 and 1994, respectively. Currency
exchange contracts are used to reduce the risk of adverse foreign currency
movements related to certain foreign currency debt
F15
obligations. Currency exchange contracts, maturing 1996-2005, totaled $1,795
million at year-end 1995 and $2,998 million at year-end 1994. These amounts
included contracts in which affiliates held positions which were effectively
offsetting totaling $810 million in 1995 and $2,209 million in 1994. Excluding
these, the remaining currency exchange contracts totaled $985 million and $789
million at year-end 1995 and 1994, respectively.
The corporation makes limited use of commodity swap and futures
contracts of short duration to mitigate the risk of unfavorable price movements
on certain crude and petroleum product purchases and sales. These contracts had
an aggregate notional amount of $4 million at year-end 1995, maturing in 1996,
and $37 million at year-end 1994.
12. Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Long-term
debt is the only category of financial instruments whose fair value has
differed materially from the recorded book value. The estimated fair value of
total long-term debt, including capitalized lease obligations, at December 31,
1995 and 1994 was $8.8 billion and $8.9 billion, respectively, as compared to
recorded book values of $7.8 billion and $8.8 billion.
13. Long-Term Debt
At December 31, 1995, long-term debt consisted of $6,761 million due in U.S.
dollars and $1,017 million representing the U.S. dollar equivalent at year-end
exchange rates of amounts payable in foreign currencies. These amounts exclude
that portion of long-term debt, totaling $495 million, which matures within one
year and is included in current liabilities. The amounts of long-term debt
maturing, together with sinking fund payments required, in each of the four
years after December 31, 1996, in millions of dollars, are: 1997 - $452; 1998 -
$626; 1999 - $655; 2000 - $210. Certain of the borrowings described may from
time to time be assigned to other Exxon affiliates. At December 31, 1995, the
corporation had $1.3 billion in unused long-term credit lines.
In 1995, debt totaling $442 million was removed from the balance sheet
as a result of the deposit of U.S. government securities in irrevocable trusts.
Together with amounts defeased prior to 1995, the total outstanding balance of
defeased debt at year-end 1995 was $490 million.
Summarized long-term borrowings at year-end 1995 and 1994 were as
follows:
*At an average imputed interest rate of 9.1% in 1995 and 9.8% in 1994.
**Assigned from Exxon Capital Corporation to Exxon Funding B.V. in 1995.
F16
14. Litigation and Other Contingencies
A number of lawsuits, including class actions, have been brought in various
courts against Exxon Corporation and certain of its subsidiaries relating to
the accidental release of crude oil from the tanker Exxon Valdez in 1989. Most
of these lawsuits seek unspecified compensatory and punitive damages. Several
lawsuits seek damages in varying specified amounts.
A civil trial in the United States District Court for the District of
Alaska commenced on May 2, 1994 on punitive damage claims made by a class
composed of all persons and entities seeking punitive damages from the
corporation as a result of the Exxon Valdez grounding. On September 16, 1994,
the jury returned a verdict awarding the class punitive damages of $5 billion.
The verdict is not final. The corporation plans to appeal this verdict
following entry of a final judgment by the District Court. The corporation
believes that this verdict is unjustified and should be set aside or
substantially reduced by the District Court or appellate courts.
Many of the claims of individuals have been dismissed by the courts but
have been appealed. A number of claims have been settled. With respect to the
remaining compensatory damage claims against the corporation arising from the
grounding, many of these claims have been or will be addressed in the same
federal civil trial proceeding, which is still ongoing. On August 11, 1994, the
jury returned a verdict finding that fisher plaintiffs were damaged in the
amount of $286.8 million. On August 31, 1995, the District Court issued an
order that reduced this verdict to about $70 million to reflect payments
already made to the plaintiffs by the corporation and others. The corporation
expects this lesser amount to be further reduced. Additional claims for
compensatory damages, scheduled for determination in the final phase of the
trial, have been settled. The remaining class action claims are included in a
$3.5 million settlement of this final phase. The class settlement is subject to
approval by the court. The total amount of the settlement will be satisfied by
recognition of prior payments made to the plaintiffs by the corporation and
others. If the settlement is approved, the federal trial will be concluded.
There are a number of additional cases pending in state court in Alaska where
the compensatory damages claimed have not been fully specified.
The ultimate cost to the corporation from the lawsuits arising from the
Exxon Valdez grounding is not possible to predict and may not be resolved for a
number of years.
German and Dutch affiliated companies are the concessionaires of a
natural gas field subject to a treaty between the governments of Germany and the
Netherlands under which the gas reserves in an undefined border or common area
are to be shared equally. Entitlement to the reserves is determined by
calculating the amounts of gas which can be recovered from this area. Based on
the final reserve determination, the German affiliate has lifted more gas than
its entitlement. Arbitration proceedings, as provided in the agreements, have
commenced to determine the manner of resolving the imbalance in liftings between
the German and Dutch affiliated companies. Financial effects to the corporation
related to resolution of this imbalance would be influenced by different tax
regimes and ownership interests. The net impact of the ultimate outcome is not
expected to have a materially adverse effect upon the corporation's operations
or financial condition.
The U.S. Tax Court has decided the issue with respect to the pricing of
crude oil purchased from Saudi Arabia for the years 1979 to 1981 in favor of
the corporation. This decision is subject to appeal. Certain other issues for
the years 1979-1982 remain pending before the Tax Court. The ultimate
resolution of these issues is not expected to have a materially adverse effect
upon the corporation's operations or financial condition.
Claims for substantial amounts have been made against Exxon and certain
of its consolidated subsidiaries in other pending lawsuits, the outcome of which
is not expected to have a materially adverse effect upon the corporation's
operations or financial condition.
The corporation and certain of its consolidated subsidiaries were
contingently liable at December 31, 1995 for $1,463 million, primarily relating
to guarantees for notes, loans and performance under contracts. This includes
$1,109 million representing guarantees of non-U.S. excise taxes and customs
duties of other companies, entered into as a normal business practice, under
reciprocal arrangements. Not included in this figure are guarantees by
consolidated affiliates of $1,175 million, representing Exxon's share of
obligations of certain equity companies.
Additionally, the corporation and its affiliates have numerous long-term
sales and purchase commitments in their various business activities, all of
which are expected to be fulfilled with no adverse consequences material to the
corporation's operations or financial condition.
The operations and earnings of the corporation and its affiliates
throughout the world have been, and may in the future be, affected from time to
time in varying degree by political developments and laws and regulations, such
as forced divestiture of assets; restrictions on production, imports and
exports; price controls; tax increases and retroactive tax claims;
expropriation of property; cancellation of contract rights and environmental
regulations. Both the likelihood of such occurrences and their overall effect
upon the corporation vary greatly from country to country and are not
predictable.
15. Annuity Benefits
Exxon and most of its affiliates have defined benefit retirement plans which
cover substantially all of their employees. Plan benefits are generally based
on years of service and employees' compensation during their last years of
employment.
Assets are contributed to trustees and insurance companies to provide
benefits for many of Exxon's retirement plans and are primarily invested in
equity and fixed income securities. All funded U.S. plans meet the full funding
requirements of the Department of Labor and the Internal Revenue Service as
detailed in the table at the end of this note. Certain smaller U.S. plans, and
a number of non-U.S. plans, are not funded because of local tax conventions and
regulatory practices which do not encourage funding in these plans. Book
reserves have been established for these plans to provide for future benefit
payments.
F17
Pension data, as shown above, is reported as required by current
accounting standards which specify use of a discount rate at which pension
liabilities could be effectively settled. The discount rate stipulated for use
in calculating year-end pension liabilities is based on the year-end rate of
interest on high quality bonds. For determining the funding requirements of U.S.
pension plans in accordance with applicable federal government regulations,
Exxon has elected to use the expected long-term rate of return of the pension
fund's actual portfolio as the discount rate. This rate, approximately 10
percent, has historically been higher than bonds as the majority of pension
assets is invested in equities. On this basis, all of Exxon's U.S. funded plans
meet the full funding requirements of the government as shown below. In fact,
the actual rate earned over the past decade has been 12 percent.
F18
16. Other Postretirement Benefits
The corporation and several of its affiliates make contributions toward the
cost of providing certain health care and life insurance benefits to retirees,
their beneficiaries and covered dependents. The corporation determines the
level of its contributions to these plans annually; no commitments have been
made regarding the level of such contributions in the future.
The accumulated postretirement benefit obligation is based on the
existing level of the corporation's contribution toward these plans. Plan assets
include investments in equity and fixed income securities.
17. Incentive Program
The 1993 Incentive Program provides for grants of stock options, stock
appreciation rights (SARs), restricted stock and other forms of award. Awards
may be granted over the 10-year period ending April 28, 2003 to eligible
employees of the corporation and those affiliates at least 50 percent owned.
The number of shares of stock which may be awarded each year under the 1993
Incentive Program may not exceed seven tenths of one percent (0.7%) of the
total number of shares of common stock of the corporation outstanding on
December 31 of the preceding year. If the total number of shares effectively
granted in any year is less than the maximum number of shares allowable, the
balance may be carried over to the following year. Outstanding awards are
subject to certain forfeiture provisions contained in the program or award
instrument.
As under earlier programs, options and SARs may be granted at prices not
less than 100 percent of market value on the date of grant. Options and SARs
thus far granted are exercisable after one year of continuous employment
following the date of grant. Options for 37,754,909 and 39,035,102 common
shares were outstanding at December 31, 1995 and 1994, respectively. Of those
options, 4,310,381 and 7,306,949 at December 31, 1995 and 1994, respectively,
included SARs. In anticipation of settlement of SARs at market value of the
shares covered by the options to which they are attached, $1 million, $4
million and $23 million was credited to earnings in 1995, 1994 and 1993,
respectively. Exercise of either a related option or a related SAR cancels the
other to the extent exercised. No SARs were granted in 1995.
Changes that occurred during 1995 in options outstanding are summarized
below:
F19
Shares available for granting at the beginning of 1995 were 14,293,467
and 8,252,456 at the end of 1995. The weighted average option price per common
share of the options outstanding at December 31, 1995 under the 1993 Incentive
Program and earlier programs was $59.40.
The effect on net income per common share from the assumed exercise of
stock options outstanding at year-end 1995, 1994 or 1993 would be insignificant.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." As permitted by
the Statement, Exxon plans to retain its current method of accounting for stock
compensation upon adoption of this Statement in 1996.
At December 31, 1995 and 1994, respectively, 170,500 and 164,500 shares
of restricted common stock were outstanding.
The above provisions for deferred income taxes include net (charges)/credits
for the effect of changes in tax laws and rates of $(83) million in 1995, $43
million in 1994 and $146 million in 1993. Income taxes of $(14) million in
1995, $(10) million in 1994 and $109 million in 1993, were (charged)/credited
directly to shareholders' equity.
--------------------------------------------------------------------------------
The reconciliation between income tax expense and a theoretical U.S. tax
computed by applying a rate of 35 percent for 1995, 1994 and 1993, is as
follows:
The effective income tax rate includes state income taxes and the
corporation's share of income taxes of equity companies. Equity company taxes
totaled $596 million in 1995, $487 million in 1994 and $528 million in 1993,
essentially all outside the U.S.
Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
The corporation had $8.5 billion of indefinitely reinvested,
undistributed earnings from subsidiary companies outside the U.S. Unrecognized
deferred taxes on remittance of these funds are not expected to be material.
F20
19. Distribution of Earnings and Assets
Transfers between business activities or areas are at estimated market
prices.
F21
QUARTERLY INFORMATION
*Gross profit equals sales and other operating revenue less estimated costs
associated with products sold.
The price range of Exxon Common Stock is based on the composite tape of the
several U.S. exchanges where Exxon Common Stock is traded. The principal market
where Exxon Common Stock (XON) is traded is the New York Stock Exchange,
although the stock is traded on most major exchanges in the United States, as
well as on the London, Tokyo and other foreign exchanges.
At January 31, 1996, there were 603,207 holders of record of Exxon Common
Stock.
On January 31, 1996, the corporation declared a $0.75 dividend per common
share, payable March 11, 1996.
F22
*Earnings related to transportation of oil and gas, sale of third party
purchases, oil sands operations and technical services agreements, and reduced
by minority interests.
**Natural gas included by conversion to crude oil equivalent; production costs
exclude all taxes.
F23
Oil and Gas Exploration and Production Costs
The amounts shown for net capitalized costs of consolidated subsidiaries are
$3,116 million less at year-end 1995 and $3,223 million less at year-end 1994
than the amounts reported as investments in property, plant and equipment for
exploration and production in note 7, page F13. This is due to the exclusion
from capitalized costs of certain transportation and research assets and assets
relating to the oil sands operations, and to inclusion of accumulated provisions
for site restoration costs, all as required in Statement of Financial Accounting
Standards No. 19.
The amounts reported as costs incurred include both capitalized costs and
costs charged to expense during the year. Total worldwide costs incurred in 1995
were $4,317 million, up $606 million from 1994, due primarily to higher
development costs. 1994 costs were $3,711 million, down $412 million from 1993,
due primarily to lower development costs.
F24
Oil and Gas Reserves
The following information describes changes during the years and balances of
proved oil and gas reserves at year-end 1993, 1994 and 1995.
The definitions used are in accordance with applicable Securities and
Exchange Commission regulations.
Proved reserves are the estimated quantities of oil and gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. In some cases, substantial new investments in additional
wells and related facilities will be required to recover these proved reserves.
Proved reserves include 100 percent of each majority-owned affiliate's
participation in proved reserves and Exxon's ownership percentage of the proved
reserves of equity companies, but exclude royalties and quantities due others
when produced. Gas reserves exclude the gaseous equivalent of liquids expected
to be removed from the gas on leases, at field facilities and at gas processing
plants. These liquids are included in net proved reserves of crude oil and
natural gas liquids.
F25
Net proved developed reserves are those volumes which are expected to be
recovered through existing wells with existing equipment and operating methods.
Undeveloped reserves are those volumes which are expected to be recovered as a
result of future investments to drill new wells, to recomplete existing wells
and/or to install facilities to collect and deliver the production from existing
and future wells.
Reserves attributable to certain oil and gas discoveries were not
considered proved as of year-end 1995 due to geological, technological or
economic uncertainties and therefore are not included in the tabulation.
Crude oil and natural gas liquids and natural gas production quantities
shown are the net volumes withdrawn from Exxon's oil and gas reserves. The
natural gas quantities differ from the quantities of gas delivered for sale by
the producing function as reported on page F27 due to volumes consumed or flared
and inventory changes. Such quantities amounted to approximately 213 billion
cubic feet in 1993, 200 billion cubic feet in 1994 and 189 billion cubic feet in
1995.
F26
Standardized Measure of Discounted Future Cash Flows
As required by the Financial Accounting Standards Board, the standardized
measure of discounted future net cash flows is computed by applying year-end
prices and costs and a discount factor of 10 percent to net proved reserves. The
corporation believes that the standardized measure is not meaningful and may be
misleading.
Change in Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Gas Reserves
F27
OPERATING SUMMARY
Operating statistics include 100 percent of operations of majority-owned
subsidiaries; for other companies, gas, crude production and petroleum product
sales include Exxon's ownership percentage, and crude runs include quantities
processed for Exxon. Net production excludes royalties and quantities due others
when produced, whether payment is made in kind or cash.