Occidental Petroleum 2003 Annual Report Download - page 59

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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.
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 qualify 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. 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, 2003 and 2002, Occidental had not entered into any foreign currency
derivative instruments. The effect of exchange-rate transactions in foreign
currencies is included in periodic income.
44
DERIVATIVE AND FAIR VALUE DISCLOSURES
The following table shows derivative financial instruments included in the
consolidated balance sheets:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
Derivative financial instrument assets (a)
Current $ 138 $ 164
Non-current 118 157
---------- ----------
$ 256 $ 321
========== ==========
Derivative financial instrument liabilities (a)
Current $ 85 $ 115
Non-current 23 23
---------- ----------
$ 108 $ 138
================================================================================ ========== ==========
(a) Amounts include energy-trading contracts
As a result of fair-value hedges, the amount of interest expense recorded
in the income statement was lower by approximately $58 million and $45 million
for the years ended December 31, 2003 and 2002, respectively.