Occidental Petroleum 2003 Annual Report Download - page 43

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---------------------------------------------- -------- --------
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
$1.8 billion of fixed-rate debt to variable-rate debt with maturities ranging
from 2005 to 2009.
29
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 leased by Occidental that was completed in December 2002. The
remaining loss on the hedges through December 2003 was approximately $21 million
after-tax, which is recorded in accumulated OCI and is being 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.
TABULAR PRESENTATION OF INTEREST RATE RISK
In millions of U.S. dollars, except rates
U.S. Dollar U.S. Dollar
Year of Maturity Fixed Rate Variable Rate(a) Grand Total (a)
====================== ============= ============= =============
2005 $ -- $ 157 $ 157
2006 46 450 496
2007 -- 550 550
2008 10 395 405
2009 -- 276 276
Thereafter 1,914 115 2,029
------------- ------------- -------------
TOTAL $ 1,970 $ 1,943 $ 3,913
============= ============= =============
Average interest rate 7.17% 3.21% 5.20%
============= ============= =============
Fair Value $ 2,330 $ 2,160 $ 4,490
====================== ============= ============= =============
(a) Includes fixed-rate debt with fair-value hedges but excludes $87 million of
mark-to-market adjustments related to such hedges and $7 million of
unamortized debt discounts.
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