EXHIBIT 13
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FINANCIAL SECTION
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Financial Review
Financial Summary........................................................ F3
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... F4-F7
Consolidated Financial Statements
Balance Sheet............................................................ F8
Statement of Income...................................................... F9
Statement of Shareholders' Equity........................................ F9
Statement of Cash Flows................................................. F10
Report of Independent Accountants.......................................... F11
Notes to Consolidated Financial Statements............................. F11-F20
1.Summary of Accounting Policies....................................... F11
2.Miscellaneous Financial Information.................................. F12
3.Cash Flow Information................................................ F12
4.Additional Working Capital Data...................................... F12
5.Equity Company Information........................................... F13
6.Investments and Advances............................................. F13
7.Investment in Property, Plant and Equipment.......................... F13
8.Incentive Program.................................................... F14
9.Leased Facilities.................................................... F14
10.Interest Rate Swap, Currency Exchange and Commodity Contracts........ F14
11.Fair Value of Financial Instruments.................................. F15
12.Long-Term Debt....................................................... F15
13.Litigation and Other Contingencies................................... F16
14.Annuity Benefits..................................................... F16
15.Other Postretirement Benefits........................................ F18
16.Capital.............................................................. F18
17.Leveraged Employee Stock Ownership Plan (LESOP)...................... F18
18.Income, Excise and Other Taxes....................................... F19
19.Distribution of Earnings and Assets.................................. F20
Quarterly Information...................................................... F21
Supplemental Information on Oil and Gas Exploration and Production
Activities........................................................... F22-F26
Operating Summary.......................................................... F27
F1
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FINANCIAL SUMMARY
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F3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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REVIEW OF 1996 RESULTS
Record net income of $7,510 million in 1996 compared with the previous record of
$6,470 million in 1995. Earnings growth resulted from increased natural gas,
petroleum product and chemical sales, stronger crude oil and natural gas prices,
and continued progress in reducing unit operating expenses. These factors more
than offset weaker industry margins in the chemicals, downstream and minerals
businesses. Results for 1996 included $535 million in non-recurring credits
($410 million in the fourth quarter) as a result of the resolution of
outstanding tax issues with a number of governments, while 1995 included $90
million of non-recurring credits (all in the fourth quarter). This is the sixth
consecutive year in which non-recurring items benefited earnings and cash flow.
Revenue for 1996 totaled $134 billion, up 8 percent from 1995, and the cost
of crude oil and product purchases increased 12 percent. The combined total of
operating costs (including Exxon's share of equity company costs) increased only
1% in 1996 despite higher volumes. Unit operating expenses were reduced in all
operating segments after excluding the effects of higher fuel prices and the
generally stronger U.S. dollar. Interest expense in 1996 declined from the prior
year as impacts of lower debt levels and interest rates more than offset foreign
exchange effects.
Exploration and Production
Worldwide crude oil prices were on average about $3.75 per barrel above the
prior year, and natural gas prices were stronger, particularly in North America.
Liquids production was 1,615 kbd (thousand barrels per day) compared with 1,726
kbd in 1995. Increased production from new developments in the North Sea was
offset by the near-term effect of a revised production sharing agreement in
Malaysia and lower volumes in North America and Australia. Natural gas
production of 6,577 mcfd (million cubic feet per day) was the highest level in
the last 15 years and up 9 percent from 1995, due to colder weather in Europe
and the U.S. and increased sales in Malaysia. Earnings from U.S. exploration and
production operations were $1,781 million, up from $1,061 million in 1995, as a
result of stronger crude oil and natural gas prices and reduced operating
expenses. Outside the U.S., earnings from exploration and production operations
were $3,277 million versus $2,351 million in 1995. Non-U.S. results benefited
from higher gas sales as well as increased crude oil and natural gas prices.
Refining and Marketing
Petroleum product sales of 5,211 kbd were the highest in 17 years and up 3
percent from 1995, on the strength of increased clean product volumes in most
major geographic areas. Refinery throughput was 3,792 kbd, up 4 percent from
1995, and the highest level since 1982. U.S. refining and marketing earnings
were $169 million, compared with $229 million in 1995. Industry refining margins
in the U.S. improved relative to 1995's low level, but were offset by increases
in scheduled refinery maintenance activity and higher costs for fuel consumed.
Refining and marketing operations outside the U.S. earned $716 million, down
from $1,043 million in 1995, and were affected by weak industry conditions in
the U.K. and Japan.
Chemicals
Earnings from chemical operations totaled $1,199 million, down from 1995's
record of $2,018 million. Exxon achieved record prime product sales of 15,712
thousand metric tons in 1996, up 9 percent from the prior year, but industry
product prices were lower and feedstock costs higher than year ago levels.
Other Operations
Earnings from other operating segments were $433 million, down from $479 million
in 1995. Copper and coal production from continuing operations were at record
levels. International coal prices were higher, but copper prices were down
significantly from the prior year.
Corporate and Financing
Corporate and financing expenses of $65 million declined from $711 million in
1995 due to $305 million in non-recurring credits and lower tax-related charges
and interest costs.
REVIEW OF 1995 RESULTS
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 oil and product purchases increased 7 percent.
F4
The combined total of operating costs (including operating, selling, general,
administrative, exploration, depreciation and depletion expenses from the
consolidated statement of income and Exxon's share of similar costs for equity
companies) increased 3 percent in 1995. Excluding the impacts of the weaker U.S.
dollar and volume growth, operating expenses were reduced by about $600 million
from 1994 reflecting ongoing cost reduction efforts. Unit operating costs in
1995 were lower than 1994 in all major operating segments. Interest expense in
1995 was $240 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 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 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, 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 chemical operations totaled $2,018 million, more than double 1994
earnings. Higher product margins and sales volumes produced the earnings
improvement. In 1995 prime product sales of 14,377 thousand metric tons were up
408 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 also up
from 1994.
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.
IMPACT OF INFLATION, CHANGING PRICES AND OTHER
AND OTHER UNCERTAINTIES
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.
Aggregate foreign exchange transaction gains/losses included in net income
are discussed in note 2 to the consolidated financial statements. The
corporation makes limited use of currency exchange contracts to reduce the risk
of adverse foreign currency movements related to certain foreign currency debt
obligations.
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.
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.
F5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Charges made against income for site restoration and environmental
liabilities were $146 million in 1996, $215 million in 1995 and $160 million in
1994. At the end of 1996, accumulated site restoration and environmental
provisions, after reduction for amounts paid, amounted to $2.6 billion. 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 1996, the corporation spent $1,561 million (of which $457 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 $1.6 billion in each year 1997 and
1998 (with capital expenditures representing about 30 percent of the total).
TAXES
Income, excise and all other taxes and duties totaled $43.8 billion in 1996, an
increase of $2.6 billion, or 6 percent. Income tax expense, both current and
deferred, was $4.4 billion compared to $4.0 billion in 1995, reflecting higher
pre-tax income in 1996 and a lower effective tax rate - 39.9 percent in 1996
versus 41.4 percent in 1995. Excise and all other taxes and duties were $2.1
billion higher reflecting increased sales.
Income, excise and all 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 all other taxes and duties were
$3.6 billion higher reflecting increased sales.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, cash provided by operating activities totaled $13.2 billion, down $0.6
billion from 1995. Major sources of funds were net income of $7.5 billion and
non-cash provisions of $5.3 billion for depreciation and depletion.
Cash used in investing activities totaled $6.5 billion, up $0.1 billion from
1995 primarily as a result of higher additions to property, plant and equipment.
Cash used in financing activities was $5.2 billion. Dividend payments on
common shares were increased from $3.00 per share to $3.12 per share and totaled
$3.9 billion, a payout of 52 percent. Total consolidated debt decreased by $0.3
billion to $9.7 billion.
Shareholders' equity increased by $3.1 billion to $43.5 billion. The ratio of
debt to capital decreased to 18 percent in 1996 compared to 19 percent in 1995.
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 in 1995, 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 in 1995. 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
$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 1996 and 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.
As discussed in note 10 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 13 to the consolidated financial statements, a number of
lawsuits, including class actions, were 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. Essentially all of these
lawsuits have now been resolved or are subject to appeal.
On September 24, 1996, the United States District Court for the District of
Alaska entered a judgment in the amount of $5.058 billion in the Exxon Valdez
civil trial that began in May 1994. The District Court awarded approximately
$19.6 million in compensatory damages to fisher plaintiffs, $38 million in
prejudgment interest on the compensatory damages and $5 billion in punitive
damages to a class composed of all persons and entities who asserted claims for
punitive damages from the corporation as a result of the Exxon Valdez grounding.
The District Court also ordered that these awards shall bear interest from and
after entry of the judgment. The District Court stayed execution on the judgment
pending appeal based on a $6.75 billion letter of credit posted by the
corporation. Exxon has appealed the judgment. The corporation continues to
believe that the punitive damages in this case are unwarranted and that the
judgment should be set aside or substantially reduced by the appellate courts.
Since it is impossible to estimate what the ultimate earnings impact will be, no
charge was taken in 1995 or 1996 related to these verdicts.
On January 29, 1997, a settlement agreement was concluded resolving all
remaining matters between Exxon and various insurers arising from the Valdez
accident. Under terms of this settlement, Exxon received $480 million. Income
statement recognition of this settlement will be deferred in view of uncertainty
regarding the ultimate cost to the corporation of the Valdez accident.
F6
The U.S. Tax Court has decided the issue with respect to the pricing of crude
oil purchased from Saudi Arabia for the years 1979-1981 in favor of the
corporation. This decision is subject to appeal. Ultimate resolution of this
issue and several other tax and 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.
CAPITAL AND EXPLORATION EXPENDITURES
Capital and exploration expenditures in 1996 were $9.2 billion compared to $9.0
billion in 1995.
Exploration and production expenditures totaled $4.9 billion in 1996, up 4
percent from $4.7 billion in 1995, reflecting higher spending for exploration
and development drilling and for several projects in the Gulf of Mexico. Capital
investments in refining and marketing totaled $2.0 billion in 1996, essentially
the same as in 1995.
Chemicals capital expenditures were $1.6 billion in 1996, up 49% from $1.1
billion in 1995, on investments to increase plant capacity in the U.S. and
acquisitions in Europe.
Investments in the power segment were $0.4 billion in 1996, down $0.3 billion
from 1995 when the Hong Kong Black Point Power Station construction activities
peaked.
Capital and exploration expenditures in the U.S. totaled $2.4 billion in
1996, an increase of 15 percent from 1995. Spending outside the U.S. of $6.8
billion in 1996 was essentially unchanged from 1995. Total capital and
exploration expenditures in 1997 should be at similar levels to 1996, as
attractive investment opportunities continue to be developed in each of the
major business segments.
Firm commitments related to capital projects underway at year-end 1996
totaled approximately $2.4 billion, with the largest single commitment being
$0.5 billion associated with the Black Point Power project. Similar commitments
were $3.2 billion at the end of 1995. The corporation expects to fund the
majority of these commitments through internally generated funds.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++ +++++++ ++++++ +++++++ ++++++ +++++++
+ + + + + +
+ + + + + +
+ GRAPH #1 + + GRAPH #2 + + GRAPH #3 +
+ + + + + +
+ + + + + +
++++++++++++++++++ ++++++++++++++++++ ++++++++++++++++++
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).
F7
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CONSOLIDATED BALANCE SHEET
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The information on pages F11 through F20 is an integral part of these
statements.
F8
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CONSOLIDATED STATEMENT OF INCOME
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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The information on pages F11 through F20 is an integral part of these
statements.
F9
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CONSOLIDATED STATEMENT OF CASH FLOWS
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The information on pages F11 through F20 is an integral part of these
statements.
F10
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REPORT OF INDEPENDENT ACCOUNTANTS
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Price Waterhouse LLP
Dallas, Texas
February 26, 1997
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, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, 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
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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 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.
Certain costs and other deductions in the consolidated statement of income
for prior years have been reclassified to conform to the 1996 presentation.
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 significant, 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.
F11
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was
implemented in January 1996. This Statement had no impact on the corporation's
1996 results of operations or financial position.
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 $520 million in 1996, $525 million in
1995 and $558 million in 1994.
Net income included aggregate foreign exchange transaction losses of $37
million in 1996, gains of $26 million in 1995, and losses of $30 million in
1994.
In 1996, 1995 and 1994, net income included gains of $14 million, $12
million, and $8 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 $4,151 million
and $2,902 million at December 31, 1996 and 1995, 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: 1996 - $669 million; 1995 - $776 million;
and 1994 - $839 million. Cash payments for income taxes were: 1996 - $3,420
million; 1995 - $2,797 million; and 1994 - $2,548 million.
4. Additional Working Capital Data
On December 31, 1996, unused credit lines for short-term financing totaled
approximately $6.3 billion. Of this total, $4.5 billion support commercial paper
programs under terms negotiated when drawn. The weighted average interest rate
on short-term borrowings outstanding at December 31, 1996 and 1995 was 5.9
percent and 6.2 percent, respectively.
F12
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.
Accumulated depreciation and depletion totaled $59,759 million at the end of
1996 and $56,891 million at the end of 1995. Interest capitalized in 1996, 1995
and 1994 was $520 million, $533 million and $405 million, respectively.
F13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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8. 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 (excluding
shares held by the corporation) 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 thereafter.
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 and have a maximum life of
10 years. Most of the options and SARs thus far granted first become exercisable
after one year of continuous employment following the date of grant. Of the
options outstanding at December 31, 1996 and 1995, 2,497 thousand and 4,310
thousand, respectively, included SARs. Exercise of either a related option or a
related SAR cancels the other to the extent exercised. No SARs have been granted
since 1992.
Shares available for granting at the beginning of 1996 were 16,945 thousand
and 10,782 thousand at the end of 1996. At December 31, 1996 and 1995,
respectively, 208 thousand and 171 thousand shares of restricted common stock
were outstanding.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" was implemented in January 1996. As permitted by the
Standard, Exxon retained its prior method of accounting for stock compensation.
If the accounting provisions of Statement No. 123 had been adopted, the net
impact on 1996 and 1995 income would not have been material.
The effect on net income per common share from the assumed exercise of
stock options outstanding at year-end 1996, 1995 or 1994 would be insignificant.
Changes that occurred in options outstanding in 1996, 1995 and 1994 are
summarized below (shares in thousands):
The following table summarizes information about stock options outstanding at
December 31, 1996 (shares in thousands):
--------------------------------------------------------------------------------
9. Leased Facilities
At December 31, 1996, 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 1996, 1995 and 1994 totaled $1,284 million,
$1,212 million and $1,173 million, respectively, after being reduced by related
rental income of $133 million, $157 million and $147 million, respectively.
Minimum rental expenditures totaled $1,330 million in 1996, $1,280 million in
1995 and $1,239 million in 1994.
10. 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 instru-
F14
ments 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 1997-1999, had an aggregate notional principal amount of
$500 million and $510 million at year-end 1996 and 1995, respectively. Currency
exchange contracts are used to reduce the risk of adverse foreign currency
movements related to certain foreign currency debt obligations. Currency
exchange contracts, maturing 1997-2005, totaled $1,585 million at year-end 1996
and $1,795 million at year-end 1995. These amounts included contracts in which
affiliates held positions which were effectively offsetting totaling $794
million in 1996 and $810 million in 1995. Excluding these, the remaining
currency exchange contracts totaled $791 million and $985 million at year-end
1996 and 1995, 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. The aggregate notional amount
for these contracts at year-end 1996 and 1995 was not material.
11. 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 differs materially from
the recorded book value. The estimated fair value of total long-term debt,
including capitalized lease obligations, at December 31, 1996 and 1995 was $7.8
billion and $8.8 billion, respectively, as compared to recorded book values of
$7.2 billion and $7.8 billion.
12. Long-Term Debt
At December 31, 1996, long-term debt consisted of $6,387 million due in U.S.
dollars and $849 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 $463 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, 1997, in millions of dollars, are: 1998 - $781; 1999 -
$646; 2000 - $224; 2001 - $686. Certain of the borrowings described may from
time to time be assigned to other Exxon affiliates. At December 31, 1996, the
corporation had $858 million in unused long-term credit lines.
In 1996, debt totaling $434 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 1996, the total outstanding balance of
defeased debt at year-end 1996 was $929 million.
Summarized long-term borrowings at year-end 1996 and 1995 were as follows:
*At an average imputed interest rate of 9.3% in 1996 and 9.1% in 1995.
F15
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. Litigation and Other Contingencies
A number of lawsuits, including class actions, were 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.
Essentially all of these lawsuits have now been resolved or are subject to
appeal.
On September 24, 1996, the United States District Court for the District of
Alaska entered a judgment in the amount of $5.058 billion in the Exxon Valdez
civil trial that began in May 1994. The District Court awarded approximately
$19.6 million in compensatory damages to fisher plaintiffs, $38 million in
prejudgment interest on the compensatory damages and $5 billion in punitive
damages to a class composed of all persons and entities who asserted claims for
punitive damages from the corporation as a result of the Exxon Valdez grounding.
The District Court also ordered that these awards shall bear interest from and
after entry of the judgment. The District Court stayed execution on the judgment
pending appeal based on a $6.75 billion letter of credit posted by the
corporation. Exxon has appealed the judgment. The corporation continues to
believe that the punitive damages in this case are unwarranted and that the
judgment should be set aside or substantially reduced by the appellate courts.
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.
On January 29, 1997, a settlement agreement was concluded resolving all
remaining matters between Exxon and various insurers arising from the Valdez
accident. Under terms of this settlement, Exxon received $480 million. Income
statement recognition of this settlement will be deferred in view of uncertainty
regarding the ultimate cost to the corporation of the Valdez accident.
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 amount of gas which can be recovered from this area. Based on
the final reserve determination, the German affiliate has received more gas than
its entitlement. Arbitration proceedings, as provided in the agreements, have
been underway to determine the manner of resolving the issues between the German
and Dutch affiliated companies.
On July 8, 1996, an interim ruling was issued establishing a provisional
compensation payment for the excess gas received. Additional compensation, if
any, remains subject to further arbitration proceedings or negotiation. Other
substantive matters remain outstanding, including recovery of royalties paid on
such excess gas and the taxes payable on the final compensation amount. The net
financial impact on the corporation is not possible to predict at this time
given these outstanding issues. However, the ultimate outcome is not expected to
have a materially adverse effect upon the corporation's consolidated financial
condition or operations.
The U.S. Tax Court has decided the issue with respect to the pricing of crude
oil purchased from Saudi Arabia for the years 1979-1981 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
consolidated financial condition or operations.
The corporation and certain of its consolidated subsidiaries were
contingently liable at December 31, 1996 for $1,293 million, primarily relating
to guarantees for notes, loans and performance under contracts. This includes
$949 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 $1,358 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.
14. 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.
F16
--------------------------------------------------------------------------------
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, 9.75 percent, has
historically been higher than bonds as the majority of pension assets are
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.
F17
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NOTES TO CONSOLIDATED FININCIAL STATEMENTS
--------------------------------------------------------------------------------
15. 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.
16. 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 1996, 1995 and 1994.
Dividends paid per common share were $3.12 in 1996, $3.00 in 1995 and $2.91
in 1994.
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.
17. 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 16, 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 1996, 1995 and 1994,
2.5 million, 1.6 million and 1.8 million shares of preferred stock totaling $151
million, $100 million and $114 million, respectively, were converted to common
stock and allocated. Preferred dividends of $27 million, $38 million and $46
million were paid during 1996, 1995 and 1994, respectively, and covered interest
payments on the notes. The 1996, 1995 and 1994 principal payments were made from
employer contributions and dividends reinvested within the
F18
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 $31 million in 1996, $73
million in 1995 and $80 million in 1994. The LESOP trust held 4.9 million and
7.4 million shares of preferred stock, and 19.7 million and 19.3 million shares
of common stock at the end of 1996 and 1995, respectively.
--------------------------------------------------------------------------------
18. Income, Excise and Other Taxes
--------------------------------------------------------------------------------
All other taxes and duties include taxes reported in operating and selling,
general and administrative expenses. The above provisions for deferred income
taxes include net (charges)/credits for the effect of changes in tax laws and
rates of $26 million in 1996, $(83) million in 1995 and $43 million in 1994.
Income taxes of $(78) million in 1996, $(14) million in 1995 and $(10) million
in 1994, 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 1996, 1995 and 1994, 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 $576 million in 1996, $596 million in 1995 and $487 million in 1994,
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 $6.2 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.
F19
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
19. Distribution of Earnings and Assets
Transfers between business activities or areas are at estimated market prices.
F20
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QUARTERLY INFORMATION
--------------------------------------------------------------------------------
*Gross profit equals sales and other operating revenue less estimated costs
associated with products sold. Certain costs and other deductions for 1995 have
been reclassified to conform to the 1996 presentation.
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 other exchanges in and outside the United
States.
At January 31, 1997, there were 610,416 holders of record of Exxon Common
Stock.
On January 29, 1997, the corporation declared a $0.79 dividend per common
share, payable March 10, 1997.
F21
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SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
--------------------------------------------------------------------------------
* Earnings related to transportation of oil and gas, sale of third party
purchases, oil sands operations and technical services agreements (reduced
by minority interests).
** Certain revenues, costs, and other deductions for prior years have been
reclassified to conform to the 1996 presentation.
*** Natural gas included by conversion to crude oil equivalent; production costs
exclude all taxes.
F22
Oil and Gas Exploration and Production Costs
The amounts shown for net capitalized costs of consolidated subsidiaries are
$3,242 million less at year-end 1996 and $3,116 million less at year-end 1995
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 1996
were $4,443 million, up $126 million from 1995, due primarily to higher
exploration costs. 1995 costs were $4,317 million, up $606 million from 1994,
due primarily to higher development costs.
F23
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SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
--------------------------------------------------------------------------------
Oil and Gas Reserves
The following information describes changes during the years and balances of
proved oil and gas reserves at year-end 1994, 1995 and 1996.
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.
F24
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 1996 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 200 billion cubic feet in
1994, 189 billion cubic feet in 1995 and 236 billion cubic feet in 1996.
F25
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SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
--------------------------------------------------------------------------------
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
F26
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OPERATING SUMMARY
--------------------------------------------------------------------------------
Operating statistics include 100 percent of operations of majority-owned
subsidiaries; for other companies, gas, crude production, petroleum product, and
chemical prime product sales include Exxon's ownership percentage, and refining
throughput includes quantities processed for Exxon. Net production excludes
royalties and quantities due others when produced, whether payment is made in
kind or cash.
F27