Occidental Petroleum 2001 Annual Report Download - page 52

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achieve the best prices for oil and gas, to reduce its exposure to price
volatility and thus mitigate fluctuations in commodity-related cash flows.
Usually Occidental remains unhedged to long-term oil and gas prices. Overall,
Occidental's use of derivatives in hedging activity remains at a relatively low
level. However, current rules require extensive disclosure regarding any level
of derivative use.
42
Effective January 1, 1999, Occidental adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities", which establishes accounting and
reporting standards for certain energy trading contracts. EITF 98-10 requires
that energy trading contracts must be marked to fair value with gains and losses
included in earnings and separately disclosed in the financial statements or
accompanying footnotes. The initial adoption of EITF 98-10 resulted in a first
quarter non-cash after-tax benefit of $2 million, recorded as a cumulative
effect of a change in accounting principle in 1999.
Effective January 1, 2001, Occidental adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138
(collectively SFAS No. 133, as amended). These statements establish accounting
and reporting standards for derivative instruments and hedging activities and
require an entity to recognize all derivatives in the statement of financial
position and measure those instruments at fair value unless the instrument
qualifies as a normal purchase or sale contract. Changes in the derivative
instrument's fair value must be recognized in earnings unless specific hedge
accounting criteria are met. Changes in the fair value of derivative instruments
that meet specific cash-flow hedge accounting criteria are reported in other
comprehensive income (OCI). The gains and losses on cash-flow hedge transactions
that are reported in OCI are reclassified to earnings in the periods in which
earnings are affected by the variability of the cash flows of the hedged item.
Gains and losses from derivatives that qualify for fair-value hedge accounting
are recorded in earnings along with the change in fair value of the hedged item.
The ineffective portions of all hedges are recognized in current period
earnings. Prior to the adoption of SFAS No. 133, gains and losses on commodity
futures contracts that qualified for hedge accounting, essentially those
associated with equity production or purchases, were deferred until recognized
as an adjustment to sales revenue or purchase costs when the related transaction
being hedged was finalized.
Except where a right of setoff exists, gains are recognized as assets and
losses are recognized as liabilities.
FINANCIAL INSTRUMENTS
Occidental values financial instruments as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The carrying amounts of
cash and cash equivalents and short-term notes payable approximate fair value
because of the short maturity of those instruments. The carrying value of other
on-balance sheet financial instruments approximates fair value and the cost, if
any, to terminate off-balance sheet financial instruments is not significant.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the years 2001, 2000 and 1999 included federal,
foreign and state income taxes of approximately $472 million, $686 million and
$105 million, respectively. Interest paid (net of interest capitalized) totaled
approximately $389 million, $516 million and $468 million for the years 2001,
2000 and 1999, respectively. See Note 3 for detail of noncash investing and
financing activities regarding certain acquisitions.
NOTE 2 DERIVATIVE ACTIVITIES INCLUDING FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
Occidental adopted the provisions of SFAS No. 133, as amended, in January
2001. The derivative financial instrument balances included in the consolidated
balance sheets were as follows (in millions):