Occidental Petroleum 2001 Annual Report Download - page 39

against the U.S. dollar on a continuing basis. Generally, an effective currency
forward market does not exist for these countries. Therefore, Occidental
attempts to manage its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes. Additionally, all of Occidental's oil and gas foreign
entities have the U.S. dollar as the functional currency since the cash flows
are mainly denominated in U.S. dollars. However, in one foreign chemical
subsidiary where the local currency is the functional currency, Occidental has
exposure on debt that is denominated in U.S. dollars that is not material. At
December 31, 2001 and 2000, Occidental had not entered into any foreign currency
derivative instruments. The effect of exchange-rate transactions in foreign
currencies is included in periodic income.
CREDIT RISK
Occidental's derivative contracts are spread among numerous banks and
market leaders in the industry. Creditworthiness is reviewed before doing
business with a new counterparty and on an on-going basis. Occidental monitors
aggregated counter-party exposure relative to credit limits, and manages
credit-enhancement requirements such as collateral, parental guarantees and
letters of credit. Credit limits for all customers (whether financial or
physical) are established and entered into Occidental's risk-management systems,
and these limits are monitored for compliance on an aggregated basis across all
traded commodities. Credit exposure for each customer is monitored for
outstanding balances, current month activity, and forward mark-to-market
exposure. The credit-determination process takes into consideration the
creditworthiness of the counter-party, the counter-party's parent, parental
guarantees, letters of credit, and other credit-enhancing instruments.
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TAXES
Deferred tax liabilities were $989 million at December 31, 2001, net of
deferred tax assets of $768 million. The current portion of the deferred tax
assets of $114 million is included in prepaid expenses and other. The net
deferred tax assets are expected to be realized through future operating income
and reversal of taxable temporary differences.
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
Occidental and certain of its subsidiaries have been named as defendants in
a substantial number of lawsuits, claims and proceedings. They have also been
named as potentially responsible parties (PRPs) in governmental proceedings
under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and corresponding state acts. These governmental proceedings seek
funding, remediation and, in some cases, compensation for alleged property
damage, punitive damages and civil penalties, aggregating substantial amounts.
Occidental is usually one of many companies in these proceedings, and has to
date been successful in sharing response costs with other financially sound
companies. Occidental has accrued reserves at the most likely cost to be
incurred in those proceedings where it is probable that Occidental will incur
remediation costs which can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by
taxing authorities for varying periods in various tax jurisdictions.
It is impossible at this time to determine the ultimate liabilities that
Occidental and its subsidiaries may incur resulting from any lawsuits, claims
and proceedings, audits, commitments, contingencies and related matters. Several
of these matters may involve substantial amounts, and if these were to be
ultimately resolved unfavorably to the full amount of their maximum potential
exposure, an event not currently anticipated, it is possible that such event
could have a material adverse effect upon Occidental's consolidated financial
position or results of operations. However, in management's opinion, after
taking into account reserves, it is unlikely that any of the foregoing matters
will have a material adverse effect upon Occidental's consolidated financial
position or results of operations.
ENVIRONMENTAL EXPENDITURES
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are subject
to environmental-protection laws. Costs associated with environmental compliance