Chevron 2006 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pension Obligations In 2006, the company’s pension
plan contributions totaled approximately $450 million.
Approximately $225 million of the total was contributed to
U.S. plans. In 2007, the company estimates total contributions
will be $500 million. Actual 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. Refer also
to the discussion of pension accounting in “Critical Accounting
Estimates and Assumptions,” beginning on page 44.
FINANCIAL RATIOS
Financial Ratios
At December 31
2006 2005 2004
Current Ratio 1.3 1.4 1.5
Interest Coverage Ratio 53.5 47.5 47.6
Total Debt/Total Debt-Plus-Equity 12.5% 17.0% 19.9%
Current Ratio – current assets divided by current liabilities.
The current ratio in all periods was adversely affected by
the fact that Chevron’s inventories are valued on a Last-In-
First-Out basis. At year-end 2006, the book value of inventory
was lower than replacement costs, based on average acquisition
costs during the year, by approximately $6 billion.
Interest Coverage Ratio – income before income tax
expense, plus interest and debt expense and amortization of
capitalized interest, divided by before-tax interest costs. The
interest coverage ratio was higher in 2006 compared with
2005, primarily due to higher before-tax income and lower
average debt balances. The
company’s interest coverage
ratio was essentially
unchanged between 2005
and 2004.
Debt Ratio – total debt
as a percentage of total debt
plus equity. The decrease
between 2005 and 2006
was due to lower average
debt levels and an increase
in stockholders’ equity.
Although total debt was
slightly higher at the end of
2005 than a year earlier due
to the assumption of debt
associated with the Unocal
acquisition, the debt ratio
declined as a result of higher
stockholders’ equity balances
for retained earnings
and the capital stock that was issued in connection with the
Unocal acquisition.
GUARANTEES, OFF-BALANCE-SHEET
ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS,
AND OTHER CONTINGENCIES
Direct or Indirect Guarantees*
Millions of dollars
Commitment Expiration by Period
2008– After
Total 2007 2010 2011 2011
Guarantees of nonconsolidated
affi liates or
joint-venture obligations $ 296 $ 21 $ 253 $ 9 $ 13
Guarantees of obligations
of third parties 131 4 113 3 11
Guarantees of Equilon debt
and leases 119 14 38 11 56
* The amounts exclude indemnifications of contingencies associated with the sale of the
company’s interest in Equilon and Motiva in 2002, as discussed in the “Indemnifications”
section on page 39.
At December 31, 2006, the company and its subsidiaries
provided guarantees, either directly or indirectly, of
$296 million for notes and other contractual obligations of
affi liated companies and $131 million for third parties, as
described by major category below. There are no amounts
being carried as liabilities for the company’s obligations
under these guarantees.
The $296 million in guarantees provided to affiliates
related to borrowings for capital projects. These guarantees
were undertaken to achieve lower interest rates and generally
cover the construction periods of the capital projects. Included
in these amounts are the company’s guarantees of $214 million
associated with a construction completion guarantee for
the debt financing of the company’s equity interest in the
BTC crude oil pipeline project. Substantially all of the $296
million guaranteed will expire between 2007 and 2011, with
the remaining expiring by the end of 2015. Under the terms
of the guarantees, the company would be required to fulfill
the guarantee should an affiliate be in default of its loan
terms, generally for the full amounts disclosed.
The $131 million in guarantees provided on behalf of
third parties relate to construction loans to governments of
certain of the company’s international upstream operations.
Substantially all of the $131 million in guarantees expire by
2011, with the remainder expiring by 2015. The company
would be required to perform under the terms of the guarantees
should an entity be in default of its loan or contract
terms, generally for the full amounts disclosed.
At December 31, 2006, Chevron also had outstanding
guarantees for about $120 million of Equilon debt and leases.
Following the February 2002 disposition of its interest in
Equilon, the company received an indemnification from Shell
for any claims arising from the guarantees. The company has
38 CHEVRON CORPORATION 2006 ANNUAL REPORT