Chevron 2004 Annual Report Download - page 46

44 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2005,฀the฀company฀expects฀contributions฀to฀be฀approximately฀
$400฀million.฀Actual฀contribution฀amounts฀are฀dependent฀upon฀
investment฀results,฀changes฀in฀pension฀obligations,฀regulatory฀
environments฀and฀other฀economic฀factors.฀Additional฀funding฀
may฀be฀required฀if฀investment฀returns฀are฀insufficient฀to฀offset฀
increases฀in฀plan฀obligations.
Pension฀expense฀is฀recorded฀on฀the฀Consolidated฀State-
ment฀of฀Income฀in฀“Operating฀expenses”฀or฀“Selling,฀general฀and฀
administrative฀expenses”฀and฀applies฀to฀all฀business฀segments.฀
Depending฀upon฀the฀funding฀status฀of฀the฀different฀plans,฀either฀
a฀long-term฀prepaid฀asset฀or฀a฀long-term฀liability฀is฀recorded.฀Any฀
unfunded฀accumulated฀benefit฀obligation฀in฀excess฀of฀recorded฀
liabilities฀is฀recorded฀in฀“Other฀comprehensive฀income.”฀See฀
Note฀22฀to฀the฀Consolidated฀Financial฀Statements฀beginning฀on฀
page฀70฀for฀the฀pension-related฀balance฀sheet฀effects฀at฀the฀end฀
of฀2004฀and฀2003.฀
For฀the฀company’s฀OPEB฀plans,฀expense฀for฀2004฀was฀
$197฀million฀and฀was฀also฀recorded฀as฀“Operating฀expenses”฀or฀
“Selling,฀general฀and฀administrative฀expenses”฀in฀all฀business฀
segments.฀At฀December฀31,฀2004,฀the฀discount฀rate฀applied฀to฀the฀
company’s฀OPEB฀obligations฀was฀5.8฀percent฀–฀the฀same฀discount฀
rate฀used฀for฀U.S.฀pension฀obligations.฀Effective฀January฀1,฀2005,฀
the฀company฀amended฀its฀main฀U.S.฀postretirement฀medical฀plan฀
to฀limit฀future฀increases฀in฀the฀company฀contribution.฀For฀cur-
rent฀retirees,฀the฀increase฀in฀company฀contribution฀is฀capped฀at฀
4฀percent฀each฀year.฀For฀future฀retirees,฀the฀4฀percent฀cap฀will฀be฀
effective฀at฀retirement.฀Before฀retirement,฀the฀assumed฀health฀
care฀cost฀trend฀rates฀start฀with฀10.6฀percent฀in฀2004฀and฀gradu-
ally฀drop฀to฀4.8฀percent฀for฀2010฀and฀beyond.฀Once฀the฀employee฀
elects฀to฀retire,฀the฀trend฀rates฀are฀capped฀at฀4฀percent.฀
As฀an฀indication฀of฀discount฀rate฀sensitivity฀to฀the฀deter-
mination฀of฀OPEB฀expense฀in฀2004,฀a฀1฀percent฀increase฀in฀the฀
discount฀rate฀for฀the฀company’s฀primary฀U.S.฀OPEB฀plan,฀which฀
accounted฀for฀about฀90฀percent฀of฀the฀companywide฀OPEB฀obli-
gation,฀would฀have฀decreased฀OPEB฀expense฀by฀approximately฀
$20฀million.฀
Impairment฀of฀Property,฀Plant฀and฀Equipment฀and฀Invest-
ments฀in฀Affiliates฀ The฀company฀assesses฀its฀property,฀plant฀and฀
equipment฀(PP&E)฀for฀possible฀impairment฀whenever฀events฀or฀
changes฀in฀circumstances฀indicate฀that฀the฀carrying฀value฀of฀the฀
assets฀may฀not฀be฀recoverable.฀Such฀indicators฀include฀changes฀in฀
the฀company’s฀business฀plans,฀changes฀in฀commodity฀prices฀and,฀
for฀crude฀oil฀and฀natural฀gas฀properties,฀significant฀downward฀
revisions฀of฀estimated฀proved฀reserve฀quantities.฀If฀the฀carry-
ing฀value฀of฀an฀asset฀exceeds฀the฀future฀undiscounted฀cash฀flows฀
expected฀from฀the฀asset,฀an฀impairment฀charge฀is฀recorded฀for฀
the฀excess฀of฀carrying฀value฀of฀the฀asset฀over฀its฀fair฀value.
Determination฀as฀to฀whether฀and฀how฀much฀an฀asset฀is฀
impaired฀involves฀management฀estimates฀on฀highly฀uncertain฀
matters,฀such฀as฀future฀commodity฀prices,฀the฀effects฀of฀inflation฀
and฀technology฀improvements฀on฀operating฀expenses,฀production฀
profiles,฀and฀the฀outlook฀for฀global฀or฀regional฀market฀supply฀and฀
demand฀conditions฀for฀crude฀oil,฀natural฀gas,฀commodity฀chemi-
cals฀and฀refined฀products.฀However,฀the฀impairment฀reviews฀and฀
calculations฀are฀based฀on฀assumptions฀that฀are฀consistent฀with฀the฀
company’s฀business฀plans฀and฀long-term฀investment฀decisions.
The฀amount฀and฀income฀statement฀classification฀of฀major฀
impairments฀of฀PP&E฀for฀the฀three฀years฀ending฀December฀31,฀
2004,฀are฀included฀in฀the฀commentary฀on฀the฀business฀segments฀
elsewhere฀in฀this฀discussion,฀as฀well฀as฀in฀Note฀2฀to฀the฀Consoli-
dated฀Financial฀Statements฀beginning฀on฀page฀56.฀An฀estimate฀as฀
to฀the฀sensitivity฀to฀earnings฀for฀these฀periods฀if฀other฀assump-
tions฀had฀been฀used฀in฀the฀impairment฀reviews฀and฀impairment฀
calculations฀is฀not฀practicable,฀given฀the฀broad฀range฀of฀the฀
company’s฀PP&E฀and฀the฀number฀of฀assumptions฀involved฀in฀the฀
estimates.฀That฀is,฀favorable฀changes฀to฀some฀assumptions฀might฀
have฀avoided฀the฀need฀to฀impair฀any฀assets฀in฀these฀periods,฀
whereas฀unfavorable฀changes฀might฀have฀caused฀an฀additional฀
unknown฀number฀of฀other฀assets฀to฀become฀impaired.
Investments฀in฀common฀stock฀of฀affiliates฀that฀are฀accounted฀
for฀under฀the฀equity฀method,฀as฀well฀as฀investments฀in฀other฀
securities฀of฀these฀equity฀investees,฀are฀reviewed฀for฀impairment฀
when฀the฀fair฀value฀of฀the฀investment฀falls฀below฀the฀company’s฀
carrying฀value.฀When฀such฀a฀decline฀is฀deemed฀to฀be฀other฀than฀
temporary,฀an฀impairment฀charge฀is฀recorded฀to฀the฀income฀state-
ment฀for฀the฀difference฀between฀the฀investment’s฀carrying฀value฀
and฀its฀estimated฀fair฀value฀at฀the฀time.฀In฀making฀the฀determina-
tion฀as฀to฀whether฀a฀decline฀is฀other฀than฀temporary,฀the฀company฀
considers฀such฀factors฀as฀the฀duration฀and฀extent฀of฀the฀decline,฀
the฀investee’s฀financial฀performance,฀and฀the฀company’s฀ability฀
and฀intention฀to฀retain฀its฀investment฀for฀a฀period฀that฀will฀be฀suf-
ficient฀to฀allow฀for฀any฀anticipated฀recovery฀in฀the฀investment’s฀
market฀value.฀Differing฀assumptions฀could฀affect฀whether฀an฀
investment฀is฀impaired฀in฀any฀period฀and฀the฀amount฀of฀the฀
impairment฀and฀are฀not฀subject฀to฀sensitivity฀analysis.฀
From฀time฀to฀time,฀the฀company฀performs฀impairment฀
reviews฀and฀determines฀that฀no฀write-down฀in฀the฀carrying฀value฀
of฀an฀asset฀or฀asset฀group฀is฀required.฀For฀example,฀when฀signifi-
cant฀downward฀revisions฀to฀crude฀oil฀and฀natural฀gas฀reserves฀are฀
made฀for฀any฀single฀field฀or฀concession,฀an฀impairment฀review฀is฀
performed฀to฀determine฀if฀the฀carrying฀value฀of฀the฀asset฀remains฀
recoverable.฀Also,฀if฀the฀expectation฀of฀sale฀of฀a฀particular฀asset฀
or฀asset฀group฀in฀any฀period฀has฀been฀deemed฀more฀likely฀than฀
not,฀an฀impairment฀review฀is฀performed,฀and฀if฀the฀estimated฀net฀
proceeds฀exceed฀the฀carrying฀value฀of฀the฀asset฀or฀asset฀group,฀no฀
impairment฀charge฀is฀required.฀Such฀calculations฀are฀reviewed฀
each฀period฀until฀the฀asset฀or฀asset฀group฀is฀disposed฀of.฀Assets฀
that฀are฀not฀impaired฀on฀a฀held-and-used฀basis฀could฀possibly฀
become฀impaired฀if฀a฀decision฀was฀made฀to฀sell฀such฀assets,฀that฀
is,฀the฀asset฀is฀held฀for฀sale฀and฀the฀estimated฀proceeds฀less฀costs฀
to฀sell฀were฀less฀than฀the฀associated฀carrying฀values.
Contingent฀Losses฀ Management฀also฀makes฀judgments฀and฀
estimates฀in฀recording฀liabilities฀for฀claims,฀litigation,฀tax฀matters฀
and฀environmental฀remediation.฀Actual฀costs฀can฀frequently฀vary฀
from฀estimates฀for฀a฀variety฀of฀reasons.฀For฀example,฀the฀costs฀
from฀settlement฀of฀claims฀and฀litigation฀can฀vary฀from฀estimates฀
based฀on฀differing฀interpretations฀of฀laws,฀opinions฀on฀culpability฀
and฀assessments฀on฀the฀amount฀of฀damages.฀Similarly,฀liabilities฀
for฀environmental฀remediation฀are฀subject฀to฀change฀because฀of฀
changes฀in฀laws,฀regulations฀and฀their฀interpretation;฀the฀deter-
mination฀of฀additional฀information฀on฀the฀extent฀and฀nature฀of฀
site฀contamination;฀and฀improvements฀in฀technology.
Under฀the฀accounting฀rules,฀a฀liability฀is฀recorded฀for฀these฀
types฀of฀contingencies฀if฀management฀determines฀the฀loss฀to฀be฀
both฀probable฀and฀estimable.฀The฀company฀generally฀records฀
these฀losses฀as฀“Operating฀expenses”฀or฀“Selling,฀general฀and฀