Chevron 2009 Annual Report Download - page 30

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
28 Chevron Corporation 2009 Annual Report
FS-PB
companywide pension obligation, would have reduced total
pension plan expense for 2009 by approximately $150 million.
An increase in the discount rate would decrease the
pension obligation, thus changing the funded status of
a plan reported on the Consolidated Balance Sheet. The
total pension liability on the Consolidated Balance Sheet
at December 31, 2009, for underfunded plans was approxi-
mately $3.8 billion. As an indication of the sensitivity of
pension liabilities to the discount rate assumption, a 0.25 per-
cent increase in the discount rate applied to the company’s
primary U.S. pension plan would have reduced the plan
obligation by approximately $300 million, which would
have decreased the plan’s underfunded status from approxi-
mately $1.6 billion to $1.3 billion. 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 financial markets.
In 2009, the company’s pension plan contributions were
$1.7 billion (including $1.5 billion to the U.S. plans). In
2010, the company estimates contributions will be approxi-
mately $900 million. Actual contribution amounts are
dependent upon plan-investment results, changes in pension
obligations, regulatory requirements and other economic
factors. Additional funding may be required if investment
returns are insufficient to offset increases in plan obligations.
For the company’s OPEB plans, expense for 2009
was $164 million and the total liability, which reflected
the unfunded status of the plans at the end of 2009, was
$3.1 billion.
As an indication of discount rate sensitivity to the deter-
mination of OPEB expense in 2009, a 1 percent increase in
the discount rate for the company’s primary U.S. OPEB plan,
which accounted for about 69 percent of the companywide
OPEB expense, would have decreased OPEB expense by
approximately $11 million. A 0.25 percent increase in the
discount rate for the same plan, which accounted for about
84 percent of the companywide OPEB liabilities, would
have decreased total OPEB liabilities at the end of 2009 by
approximately $65 million.
For the main U.S. postretirement medical plan, the
annual increase to company contributions is limited to 4 per-
cent per year. 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 7 percent
in 2010 and gradually drop to 5 percent for 2018 and beyond.
As an indication of the health care cost-trend rate sensitivity
to the determination of OPEB expense in 2009, a 1 percent
increase in the rates for the main U.S. OPEB plan, which
accounted for 84 percent of the companywide OPEB liabili-
ties, 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 benefit plan costs in
the year the difference occurs. Instead, the differences are
included in actuarial gain/loss and unamortized amounts
have been reflected in “Accumulated other comprehensive
loss” on the Consolidated Balance Sheet. Refer to Note 21,
beginning on page 59, for information on the $6.7 bil-
lion of before-tax actuarial losses recorded by the company as
of December 31, 2009; a description of the method used to
amortize those costs; and an estimate of the costs to be rec-
ognized in expense during 2010.
Impairment of Properties, Plant and Equipment and
Investments in Affiliates 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, significant downward revisions of estimated
proved-reserve quantities. If the carrying 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 estimated 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 infla-
tion 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 chemicals and refined 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 individual impairments of PP&E and Invest-
ments were recorded for the three years ending December
31, 2009. A sensitivity analysis of the impact on earnings for
these periods if other assumptions had been used in impair-
ment 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 unfa-
vorable changes might have caused an additional unknown
number of other assets to become impaired.