Occidental Petroleum 2006 Annual Report Download - page 65
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Fair Value of Marketing and Trading Derivative Contracts
The following tables reconcile the changes in the net fair value of Occidental’s marketing and trading contracts, a portion of which are hedges,
during 2006 and 2005 and segregate the open contracts at December 31, 2006 by maturity periods.
General
Occidental’s exposure to changes in interest rates relates primarily to its long-term debt obligations.
In 2005, Occidental terminated all of its interest-rate swaps that were accounted for as fair-value hedges. These hedges had effectively
converted approximately $1.7 billion of fixed-rate debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of
approximately $20 million, which was recorded into income when the debt was paid in 2005 and 2006. The amount of interest expense recorded in
the income statement was lower, as a result of the swaps and recognition of the gain, by approximately $13 million, $21 million and $56 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
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 unamortized loss on the hedges at December
31, 2006 was approximately $18 million after-tax, which is recorded in AOCI and is being recognized in earnings over the lease term of 26 years
on a straight-line basis.
Occidental’s energy contracts are spread among several 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. Credit exposure for each
customer is monitored for outstanding balances, current month activity, and forward mark-to-market exposure. Losses associated with credit risk
have been immaterial for all years presented.
A few of Occidental’s foreign operations have currency risk. Occidental manages its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for operating purposes. Most international crude oil sales are denominated in
U.S. dollars. Additionally, all of Occidental’s consolidated foreign oil and gas subsidiaries have the U.S. dollar as the functional currency. At
December 31, 2006 and 2005, Occidental had not entered into any foreign currency derivative instruments. The effect of exchange-rate
transactions in foreign currencies is included in periodic income and is immaterial.
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