Ignoring protests from some shareholders who want a complete separation from Dynegy Inc., ChevronTexaco Corp. Tuesday offered its strongest public endorsement to date, writing down a total of $631 million in second-quarter earnings related to its stake in the marketer, and reiterating that all of its U.S. natural gas agreements remain in place and will remain in place for at least the near term. ChevronTexaco’s profits were down 78% compared to the second quarter a year ago, and part of the loss related to a $531 million special-item charge for the company’s investment in Dynegy’s common and preferred stock to its estimated fair value as of June 30, 2002, and $100 million related to its share of Dynegy’s own writedown.

The remaining book value of the company’s investment in Dynegy on June 30, following the second quarter write-down, was approximately $2 billion. An additional charge to third-quarter earnings may be required to the extent the fair value of the Dynegy securities at Sept. 30, 2002, is below the remaining $2 billion carrying value.

“Despite the partial write-down of our Dynegy investment in the second quarter, we are encouraged by Dynegy’s ongoing efforts to improve liquidity, including its announcement yesterday [Monday] to sell Northern Natural Gas Co,” said Chairman Dave O’Reilly. “We support this and other actions Dynegy is undertaking to help restore investor confidence.” O’Reilly also stopped short of saying the oil major would never invest money into Dynegy in the future. He would not speculate, but “we have clear criteria around which we make investments from a strategic and operating standpoint.” Dynegy is a “viable player,” and there is “still a need for the function this sector provides,” he said. He also does not foresee Dynegy going out of business.

“We have many commercial relationships involving Dynegy. in the U.S. that are ongoing,” said O’Reilly, “and like all relationships we have, we do have contingency plans (if a company went out of business). But I don’t see any near-term risk to that, and we manage that as an ongoing part of the business.”

O’Reilly said, “A lot of lessons have been learned over the past six or eight months. It’s clear to me that it was hard to envision what was really a viable business model (for energy marketing) and I’m not sure we understand the sector yet. It has to undergo restructuring and changing. This is not a business that the market is buying into in the current way it is operated. But the real question is what will it look like in the future…that is the big question out there.”

Taking the charges against Dynegy was the “correct action for us to take at this time. As I said…we support the actions Dynegy has taken and consider it a viable player. Clearly, our investment has come under a great deal of scrutiny this year, as has the entire energy sector. However, in 1996, when we combined with NGC (Natural Gas Clearinghouse, which became Dynegy), the future prospects offered opportunity. NGC and then Dynegy were building a good track record up until very late last year, when our investment was net positive. It was a good position to be in with a great deal of potential,” O’Reilly said.

Regarding ChevronTexaco’s decision last November, “based on the facts known at the time, we decided to invest (in Dynegy’s proposed merger with Enron Corp.). As we all know now, the merger was canceled, and the energy markets are in turmoil. We did not foresee the collapse of the entire sector. If we knew then what we know now, we would not have invested more. Having said all that, we were encouraged by Dynegy’s announcement” to sell the Northern Natural Gas Co. pipeline, O’Reilly continued, saying he was “confident” it would “lead to results.”

ChevronTexaco reported preliminary net income of $407 million, or 39 cents a share for the second quarter, compared with $2.109 billion, or $1.99 for the same period of 2001. Excluding net charges for special items and merger-related expenses in both periods, operating earnings were $1.233 billion, or $1.16, down from $2.144 billion, or $2.01 for the same period a year ago.

“Operating earnings were significantly lower than the very strong results we had in last year’s second quarter,” said O’Reilly. “In our upstream business this year, lower natural gas and crude oil prices were the primary factors reducing earnings. In our downstream sector, sharply lower refined product margins in the United States accounted for a large portion of the profit decline.” Downstream profits a year ago also included $208 million associated with assets that were required to be sold as a condition of the October 2001 merger between Chevron and Texaco.

O’Reilly said that in the United States, the average natural gas realization dropped nearly 40% from the year-ago quarter to $3.04/Mcf. The average U.S. crude oil and natural gas liquids realization was down about a dollar to $21.75/bbl. “Overcoming these difficult downstream market conditions, while enhancing upstream profits, are the key challenges to improving our overall operating earnings,” he said. “In this first year after the merger, our employees have successfully integrated all of our businesses, and I am optimistic for the future.”

A highly successful element in this year’s quarter was the earnings contribution from synergies achieved following our merger last October,” O’Reilly said. “We are pleased with the tremendous progress all of our businesses are making towards the $2.2 billion before-tax objective of synergy savings by early 2003.” An example of the integration effort was the company’s oil and gas exploration program. In recent months, ChevronTexaco has announced discoveries in Angola, Nigeria and China, and has performed promising follow-up appraisal drilling at its Tahiti prospect in the Gulf of Mexico.

Second quarter 2002 revenues and other income were $25.3 billion, compared with $29.7 billion in the 2001 second quarter. Revenues and other income for the first six months of 2002 were $46.5 billion, versus $59.1 billion in the comparable 2001 period. Revenues declined in both periods, mainly on lower prices for crude oil, natural gas and refined products.

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