Chevron 2004 Annual Report Download - page 46
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Please find page 46 of the 2004 Chevron annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.44 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2005,thecompanyexpectscontributionstobeapproximately
$400million.Actualcontributionamountsaredependentupon
investmentresults,changesinpensionobligations,regulatory
environmentsandothereconomicfactors.Additionalfunding
mayberequiredifinvestmentreturnsareinsufficienttooffset
increasesinplanobligations.
PensionexpenseisrecordedontheConsolidatedState-
mentofIncomein“Operatingexpenses”or“Selling,generaland
administrativeexpenses”andappliestoallbusinesssegments.
Dependinguponthefundingstatusofthedifferentplans,either
along-termprepaidassetoralong-termliabilityisrecorded.Any
unfundedaccumulatedbenefitobligationinexcessofrecorded
liabilitiesisrecordedin“Othercomprehensiveincome.”See
Note22totheConsolidatedFinancialStatementsbeginningon
page70forthepension-relatedbalancesheeteffectsattheend
of2004and2003.
Forthecompany’sOPEBplans,expensefor2004was
$197millionandwasalsorecordedas“Operatingexpenses”or
“Selling,generalandadministrativeexpenses”inallbusiness
segments.AtDecember31,2004,thediscountrateappliedtothe
company’sOPEBobligationswas5.8percent–thesamediscount
rateusedforU.S.pensionobligations.EffectiveJanuary1,2005,
thecompanyamendeditsmainU.S.postretirementmedicalplan
tolimitfutureincreasesinthecompanycontribution.Forcur-
rentretirees,theincreaseincompanycontributioniscappedat
4percenteachyear.Forfutureretirees,the4percentcapwillbe
effectiveatretirement.Beforeretirement,theassumedhealth
carecosttrendratesstartwith10.6percentin2004andgradu-
allydropto4.8percentfor2010andbeyond.Oncetheemployee
electstoretire,thetrendratesarecappedat4percent.
Asanindicationofdiscountratesensitivitytothedeter-
minationofOPEBexpensein2004,a1percentincreaseinthe
discountrateforthecompany’sprimaryU.S.OPEBplan,which
accountedforabout90percentofthecompanywideOPEBobli-
gation,wouldhavedecreasedOPEBexpensebyapproximately
$20million.
ImpairmentofProperty,PlantandEquipmentandInvest-
mentsinAffiliates Thecompanyassessesitsproperty,plantand
equipment(PP&E)forpossibleimpairmentwhenevereventsor
changesincircumstancesindicatethatthecarryingvalueofthe
assetsmaynotberecoverable.Suchindicatorsincludechangesin
thecompany’sbusinessplans,changesincommoditypricesand,
forcrudeoilandnaturalgasproperties,significantdownward
revisionsofestimatedprovedreservequantities.Ifthecarry-
ingvalueofanassetexceedsthefutureundiscountedcashflows
expectedfromtheasset,animpairmentchargeisrecordedfor
theexcessofcarryingvalueoftheassetoveritsfairvalue.
Determinationastowhetherandhowmuchanassetis
impairedinvolvesmanagementestimatesonhighlyuncertain
matters,suchasfuturecommodityprices,theeffectsofinflation
andtechnologyimprovementsonoperatingexpenses,production
profiles,andtheoutlookforglobalorregionalmarketsupplyand
demandconditionsforcrudeoil,naturalgas,commoditychemi-
calsandrefinedproducts.However,theimpairmentreviewsand
calculationsarebasedonassumptionsthatareconsistentwiththe
company’sbusinessplansandlong-terminvestmentdecisions.
Theamountandincomestatementclassificationofmajor
impairmentsofPP&EforthethreeyearsendingDecember31,
2004,areincludedinthecommentaryonthebusinesssegments
elsewhereinthisdiscussion,aswellasinNote2totheConsoli-
datedFinancialStatementsbeginningonpage56.Anestimateas
tothesensitivitytoearningsfortheseperiodsifotherassump-
tionshadbeenusedintheimpairmentreviewsandimpairment
calculationsisnotpracticable,giventhebroadrangeofthe
company’sPP&Eandthenumberofassumptionsinvolvedinthe
estimates.Thatis,favorablechangestosomeassumptionsmight
haveavoidedtheneedtoimpairanyassetsintheseperiods,
whereasunfavorablechangesmighthavecausedanadditional
unknownnumberofotherassetstobecomeimpaired.
Investmentsincommonstockofaffiliatesthatareaccounted
forundertheequitymethod,aswellasinvestmentsinother
securitiesoftheseequityinvestees,arereviewedforimpairment
whenthefairvalueoftheinvestmentfallsbelowthecompany’s
carryingvalue.Whensuchadeclineisdeemedtobeotherthan
temporary,animpairmentchargeisrecordedtotheincomestate-
mentforthedifferencebetweentheinvestment’scarryingvalue
anditsestimatedfairvalueatthetime.Inmakingthedetermina-
tionastowhetheradeclineisotherthantemporary,thecompany
considerssuchfactorsasthedurationandextentofthedecline,
theinvestee’sfinancialperformance,andthecompany’sability
andintentiontoretainitsinvestmentforaperiodthatwillbesuf-
ficienttoallowforanyanticipatedrecoveryintheinvestment’s
marketvalue.Differingassumptionscouldaffectwhetheran
investmentisimpairedinanyperiodandtheamountofthe
impairmentandarenotsubjecttosensitivityanalysis.
Fromtimetotime,thecompanyperformsimpairment
reviewsanddeterminesthatnowrite-downinthecarryingvalue
ofanassetorassetgroupisrequired.Forexample,whensignifi-
cantdownwardrevisionstocrudeoilandnaturalgasreservesare
madeforanysinglefieldorconcession,animpairmentreviewis
performedtodetermineifthecarryingvalueoftheassetremains
recoverable.Also,iftheexpectationofsaleofaparticularasset
orassetgroupinanyperiodhasbeendeemedmorelikelythan
not,animpairmentreviewisperformed,andiftheestimatednet
proceedsexceedthecarryingvalueoftheassetorassetgroup,no
impairmentchargeisrequired.Suchcalculationsarereviewed
eachperioduntiltheassetorassetgroupisdisposedof.Assets
thatarenotimpairedonaheld-and-usedbasiscouldpossibly
becomeimpairedifadecisionwasmadetosellsuchassets,that
is,theassetisheldforsaleandtheestimatedproceedslesscosts
tosellwerelessthantheassociatedcarryingvalues.
ContingentLosses Managementalsomakesjudgmentsand
estimatesinrecordingliabilitiesforclaims,litigation,taxmatters
andenvironmentalremediation.Actualcostscanfrequentlyvary
fromestimatesforavarietyofreasons.Forexample,thecosts
fromsettlementofclaimsandlitigationcanvaryfromestimates
basedondifferinginterpretationsoflaws,opinionsonculpability
andassessmentsontheamountofdamages.Similarly,liabilities
forenvironmentalremediationaresubjecttochangebecauseof
changesinlaws,regulationsandtheirinterpretation;thedeter-
minationofadditionalinformationontheextentandnatureof
sitecontamination;andimprovementsintechnology.
Undertheaccountingrules,aliabilityisrecordedforthese
typesofcontingenciesifmanagementdeterminesthelosstobe
bothprobableandestimable.Thecompanygenerallyrecords
theselossesas“Operatingexpenses”or“Selling,generaland