Occidental Petroleum 2002 Annual Report Download - page 61

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million at December 31, 2002 and a net gain of $9 million at December 31, 2001.
Gains and losses are netted in the statement of operations. On the balance
sheets, except where a right of set-off exists, gains are recognized as assets
and losses are recognized as liabilities.
COMMODITY HEDGES
On a limited basis, Occidental uses cash-flow hedges for the sale of crude
oil and natural gas. Occidental's commodity cash-flow-hedging instruments were
highly effective. At December 31, 2002, all of these cash-flow hedges were
settled. No fair value hedges were used for oil and gas production during 2002.
INTEREST RATE RISK
GENERAL
Occidental is exposed to risk resulting from changes in interest rates and
it enters into various derivative financial instruments to manage interest-rate
exposure. Interest-rate swaps, forward locks and futures contracts are entered
into periodically as part of Occidental's overall strategy.
HEDGING ACTIVITIES
Occidental has 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.
Occidental was a party to a series of forward interest-rate locks, which
qualified as cash-flow hedges. The hedges were related to the construction of a
cogeneration plant that was completed in December 2002 and leased by Occidental
concurrently. The associated loss on the hedges through December 2002 is
approximately $21 million after-tax, which is recorded in accumulated OCI and
will be recognized in earnings over the lease term of 26 years on a
straight-line basis.
Certain of Occidental's equity investees have entered into additional
derivative instruments that qualified as cash-flow hedges. Occidental reflects
its proportionate share of these cash-flow hedges in OCI.
CREDIT RISK
Occidental's energy contracts are spread among numerous counterparties.
Creditworthiness is reviewed before doing business with a new counterparty and
on an ongoing basis. Occidental monitors aggregated counterparty exposure
relative to credit limits, and manages credit-enhancement issues. Credit
exposure for each customer is monitored for outstanding balances, current month
activity, and forward mark-to-market exposure.
FOREIGN CURRENCY RISK
Several of Occidental's foreign operations are located in countries whose
currencies generally depreciate against the U.S. dollar on a continuing basis.
Typically, effective currency forward markets do 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. Generally, international crude oil sales are
denominated in U.S. dollars. Additionally, all of Occidental's oil and gas
foreign entities have the U.S. dollar as the functional currency. However, in
one foreign chemical subsidiary where the local currency is the functional
currency, Occidental has exposure on U.S. dollar-denominated debt that is not
material. At December 31, 2002 and 2001, Occidental had not entered into any
foreign currency derivative instruments. The effect of exchange-rate
transactions in foreign currencies is included in periodic income.
DERIVATIVE AND FAIR VALUE DISCLOSURES
The following table shows derivative financial instruments included in the
consolidated balance sheets:
Balance at December 31, (in millions) 2002 2001
======================================================= ========== ==========
Derivative financial instrument assets (a)
Current $ 164 $ 116