Occidental Petroleum 2001 Annual Report Download - page 54

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statement. An offsetting amount is recorded on the balance sheet as unrealized
gains or unrealized losses on trading transactions. When a contract to sell
energy is physically settled, the above entries are reversed and the gross
amount invoiced to the customer is included as net sales in the income
statement. Similarly, when a contract to purchase energy is physically settled,
the purchase price is included as cost of sales in the income statement. Until a
contract is physically settled, the unrealized gain or loss is reclassified to a
receivable or payable account. Other than the positive effect on oil and gas
realized prices, the results of trading activities are not significant.
RECONCILIATION OF FAIR VALUE OF CONTRACTS FROM JANUARY 1, 2001 TO DECEMBER 31,
2001 (in millions)
============================================================================================================== ==========
Fair value of contracts outstanding at January 1, 2001 $ (66)
Contracts realized or otherwise settled during the period gains/(losses) (30)
Changes in fair value attributable to changes in valuation techniques and assumptions --
Other changes in fair values 103
----------
Fair value of contracts outstanding at December 31, 2001 $ 7
==========
Maturity Periods
----------------------------------------------------------------------
2003 2005 2007 and Total
Source of Fair Value 2002 to 2004 to 2006 thereafter Fair Value
================================================== ========== ========== ========== ========== ==========
Prices actively quoted $ (12) $ -- $ -- $ -- $ (12)
Prices provided by other external sources 20 1 -- -- 21
Prices based on models and other valuation methods -- (1) (1) -- (2)
---------- ---------- ---------- ---------- ----------
TOTAL $ 8 $ -- $ (1) $ -- $ 7
================================================== ========== ========== ========== ========== ==========
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
44
natural gas delivery commitment, which is discussed in Note 7. 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.
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.
INTEREST-RATE DERIVATIVES