Occidental Petroleum 2001 Annual Report Download - page 38

Download and view the complete annual report

Please find page 38 of the 2001 Occidental Petroleum 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.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

entered into a natural gas price swap based on identical volumes of natural gas
and a delivery schedule that corresponds to the natural gas delivery commitment.
Under the terms of the swap, Occidental will pay an average fixed price of $2.27
per MMBtu of gas and will receive a floating price that will approximate market,
which essentially eliminates Occidental's exposure to commodity price
fluctuations that could affect this transaction. At December 31, 2001, the fair
value of this price swap is an $84 million gain, which is offset by an $84
million loss applicable to the related physical positions.
28
ACTIVITIES PRIOR TO SFAS 133 IMPLEMENTATION
At December 31, 2000, Occidental was a party to commodity-exchange and
over-the-counter forward obligations. The instruments held for purposes other
than trading expire during the period from January 2001 to December 2003, and
relate to the hedging of natural gas and crude oil prices. The fair value of
these instruments at December 31, 2000 was $511 million. Offsetting the value of
these instruments were related physical positions with a $528 million loss. The
principal components of these instruments and related physical positions are the
related natural gas price swap and the natural gas delivery commitment, which is
discussed above. At December 31, 2000, the difference between the carrying value
and the fair value of these obligations was an unrealized loss of approximately
$17 million. The instruments held or issued for trading purposes mostly expired
in 2001, with the exception of a long-term sales contract that expires in 2010.
The fair value of these instruments at December 31, 2000 was $31 million.
Offsetting the value of these instruments were related physical positions with a
$12 million loss. The net gain of approximately $19 million was reflected in the
income statement. The majority of the gain was from the mark-to-market
adjustment under EITF Issue No. 98-10 of a long-term sales contract.
INTEREST-RATE DERIVATIVES
FAIR-VALUE HEDGES
Interest-rate swaps, forward locks and futures contracts are entered into
as part of Occidental's overall strategy to manage interest-rate exposure.
During 2001, Occidental entered into several interest-rate swaps that qualified
for fair-value hedge accounting. These derivatives effectively convert
approximately $1.3 billion of fixed-rate debt to variable-rate debt with
maturities ranging from 2005 to 2008. In 2000 and 1999, Occidental also had
interest-rate swaps converting fixed-rate debt to floating-rate debt that
matured in November 2000. Net interest expense was impacted by $6.6 million of
income in 2001, $1.0 million of expense in 2000 and income of almost $1.0
million in 1999 to reflect the effects of the fair-value hedges.
CASH-FLOW HEDGES
Occidental is a party to a series of forward interest-rate locks, which
qualified as a cash-flow hedge, that are required to be settled on or prior to
December 31, 2002. These financial instruments relate to debt raised by a third
party to construct a cogeneration plant that will be subject to a long-term
operating lease to OxyChem. As the lease payments will be directly related to
the amount of interest paid on the underlying debt, the forward rate locks were
put in place to hedge the future lease payments. The lease payments are expected
to commence on or before January 15, 2003. The fair value of these financial
instruments at December 31, 2001 was an unrealized loss of $28 million, that
would be offset by potentially lower lease payments due to the lower
interest-rate environment.
Occidental and its equity investees have also entered into additional
derivative instruments that qualified as cash-flow hedges. The amounts related
to these hedges are included below.
For the year ended 2001, a $4 million gain was reclassified from OCI to
income due to the expiration of cash-flow hedges and a $3 million loss was
recorded to OCI relating to changes in current cash-flow hedges. During the next
twelve months, Occidental expects that less than about $0.1 million of net
derivative losses included in OCI, based on their valuation at December 31,
2001, will be reclassified into earnings. Hedge ineffectiveness did not have a
significant impact on earnings for the year.
FOREIGN CURRENCY DERIVATIVES
Many of Occidental's foreign oil and gas operations and foreign chemical
operations are located in countries whose currencies generally depreciate