Chevron 2006 Annual Report Download - page 47

CHEVRON CORPORATION 2006 ANNUAL REPORT 45
sion liability on the Consolidated Balance Sheet at December
31, 2006, for underfunded plans was approximately $1.7
billion. As an indication of the sensitivity of pension liabili-
ties to the discount rate assumption, a 0.25 percent increase
in the discount rate applied to the company’s primary U.S.
pension plan would have reduced the plan obligation by
approximately $275 million, which would have changed the
plan’s funded status from underfunded to overfunded, result-
ing in a pension asset of about $250 million. Other plans
would be less underfunded as discount rates increase. The
actual rates of return on plan assets and discount rates may
vary signifi cantly from estimates because of unanticipated
changes in the world’s fi nancial markets.
In 2006, the company’s pension plan contributions
were approximately $450 million (approximately $225 mil-
lion to the U.S. plans). In 2007, the company estimates
contributions will be approximately $500 million. Actual
contribution amounts are dependent upon plan-investment
results, changes in pension obligations, regulatory require-
ments and other economic factors. Additional funding may
be required if investment returns are insuffi cient to offset
increases in plan obligations.
For the company’s OPEB plans, expense for 2006 was
about $230 million and the total liability, which refl ected
the underfunded status of the plans at the end of 2006, was
$3.3 billion.
As an indication of discount rate sensitivity to the deter-
mination of OPEB expense in 2006, a 1 percent increase
in the discount rate for the company’s primary U.S. OPEB
plan, which accounted for about 75 percent of the company-
wide OPEB expense, would have decreased OPEB expense
by approximately $25 million. A 0.25 percent increase in the
discount rate for the same plan, which accounted for about
90 percent of the companywide OPEB liabilities, would
have decreased total OPEB liabilities at the end of 2006 by
approximately $70 million.
For the main U.S. postretirement medical plan, the
annual increase to company contributions is limited to 4
percent per year. The cap becomes effective in the year of
retirement for pre–Medicare-eligible employees retiring on
or after January 1, 2005. The cap was effective as of Janu-
ary 1, 2005, for pre–Medicare-eligible employees retiring
before that date and all Medicare-eligible retirees. For active
employees and retirees under age 65 whose claims experiences
are combined for rating purposes, the assumed health care
cost-trend rates start with 9 percent in 2007 and gradually
drop to 5 percent for 2011 and beyond. As an indication of
the health care cost-trend rate sensitivity to the determina-
tion of OPEB expense in 2006, a 1 percent increase in the
rates for the main U.S. postretirement medical plan, which
accounted for about 90 percent of the companywide OPEB
obligations, would have increased OPEB expense $8 million.
Differences between the various assumptions used to
determine expense and the funded status of each plan and
actual experience are not included in benefi t plan costs in
the year the difference occurs. Instead, the differences are
included in actuarial gain/loss and unamortized amounts
have been refl ected in “Accumulated other comprehensive
loss” on the Consolidated Balance Sheet. Refer to Note 21,
beginning on page 72, for information on the $2.6 billion
of actuarial losses recorded by the company as of Decem-
ber 31, 2006; a description of the method used to amortize
those costs; and an estimate of the costs to be recognized in
expense during 2007.
Impairment of Properties, Plant and Equipment and
Investments in Affi liates The company assesses its proper-
ties, 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, signifi cant downward revisions of estimated
proved-reserve quantities. If the carrying value of an asset
exceeds the future undiscounted cash fl ows 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 infl a-
tion and technology improvements on operating expenses,
production profi les, and the outlook for global or regional
market supply and demand conditions for crude oil, natural
gas, commodity chemicals and refi ned products. How-
ever, the impairment reviews and calculations are based on
assumptions that are consistent with the company’s business
plans and long-term investment decisions.
No major impairments of PP&E were recorded for the
three years ending December 31, 2006. An estimate as to the
sensitivity to earnings for these periods if other assumptions
had been used in impairment reviews and impairment calcula-
tions is not practicable, given the broad range of the company’s
PP&E and the number of assumptions involved in the esti-
mates. 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 affi liates that are
accounted for under the equity method, as well as invest-
ments in other securities of these equity investees, are
reviewed for impairment when the fair value of the invest-
ment 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 statement for the difference
between the investment’s carrying value and its estimated fair
value at the time. In making the determination 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 fi nancial performance, and the company’s abil-
ity and intention to retain its investment for a period that
will be suffi cient to allow for any anticipated recovery in
the investment’s market value. Differing assumptions could
affect whether an investment is impaired in any period or
the amount of the impairment and are not subject to sensi-
tivity analysis.
From time to time, the company performs impairment
reviews and determines that no write-down in the carrying