UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) [ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 1-9210
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization Delaware
I.R.S. Employer Identification No. 95-4035997
Address of principal executive offices 10889 Wilshire Blvd., Los Angeles, CA
Zip Code 90024
Registrant's telephone number, including area code (310) 208-8800
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
10 1/8% Senior Debentures due 2009 New York Stock Exchange
9 1/4% Senior Debentures due 2019 New York Stock Exchange
Oxy Capital Trust I 8.16% Trust Originated Preferred Securities New York Stock Exchange
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] YES [ ] NO
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $11.3 billion, computed by reference to the closing
price on the New York Stock Exchange composite tape of $29.99 per share of
Common Stock on June 28, 2002. Shares of Common Stock held by each executive
officer and director have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not a conclusive determination for other purposes.
At January 31, 2003, there were approximately 377,933,436 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, filed in connection
with its April 25, 2003, Annual Meeting of Stockholders, are incorporated by
reference into Part III.
TABLE OF CONTENTS
PAGE
PART I
ITEMS 1 AND 2 Business and Properties...................................................................... 3
General...................................................................................... 3
Developments................................................................................. 3
Oil and Gas Operations....................................................................... 3
Chemical Operations.......................................................................... 4
Capital Expenditures......................................................................... 5
Employees.................................................................................... 5
Environmental Regulation..................................................................... 5
Available Information........................................................................ 5
ITEM 3 Legal Proceedings............................................................................ 5
ITEM 4 Submission of Matters to a Vote of Security Holders.......................................... 6
Executive Officers of the Registrant......................................................... 6
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters........................ 7
ITEM 6 Selected Financial Data...................................................................... 8
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) (Incorporating Item 7A).................................................... 8
2002 Business Environment............................................................... 8
Strategic Overview and Review of Business Results - 2000 - 2002......................... 9
2003 Outlook............................................................................ 13
Income Summary.......................................................................... 14
Segment Operations...................................................................... 14
Significant Items Affecting Earnings.................................................... 15
Consolidated Operations................................................................. 16
Liquidity and Capital Resources......................................................... 17
Analysis of Financial Position.......................................................... 20
Acquisitions, Dispositions and Commitments.............................................. 21
Derivative Activities and Market Risk................................................... 22
Taxes................................................................................... 25
Lawsuits, Claims, Commitments, Contingencies and Related Matters........................ 26
Environmental Expenditures.............................................................. 26
Foreign Investments..................................................................... 28
Critical Accounting Policies............................................................ 28
Additional Accounting Changes........................................................... 31
Safe Harbor Statement Regarding Outlook and Other Forward-Looking Data.................. 33
Report of Management.................................................................... 33
ITEM 8 Financial Statements and Supplementary Data.................................................. 34
Report of Independent Auditors.......................................................... 34
Consolidated Statements of Operations................................................... 35
Consolidated Balance Sheets............................................................. 36
Consolidated Statements of Stockholders' Equity......................................... 38
Consolidated Statements of Comprehensive Income......................................... 38
Consolidated Statements of Cash Flows................................................... 39
Notes to Consolidated Financial Statements.............................................. 40
Quarterly Financial Data (Unaudited).................................................... 73
Supplemental Oil and Gas Information (Unaudited)........................................ 75
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................... 82
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 83
PART III
ITEM 10 Directors and Executive Officers of the Registrant........................................... 83
ITEM 11 Executive Compensation....................................................................... 83
ITEM 12 Security Ownership of Certain Beneficial Owners and Management............................... 83
ITEM 13 Certain Relationships and Related Transactions............................................... 83
ITEM 14 Controls and Procedures...................................................................... 83
PART IV
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 83
PART I
ITEMS 1 AND 2 BUSINESS AND PROPERTIES
In this report, "Occidental" refers to Occidental Petroleum Corporation, a
Delaware corporation, and/or one or more entities in which it owns a majority
voting interest (subsidiaries). Occidental's executive offices are located at
10889 Wilshire Boulevard, Los Angeles, California 90024; telephone (310)
208-8800.
GENERAL
Occidental's principal businesses constitute two industry segments. The oil
and gas segment explores for, develops, produces and markets crude oil and
natural gas. The chemicals segment manufactures and markets basic chemicals,
vinyls, and performance chemicals. For financial information about these
segments, see Note 15 to the Consolidated Financial Statements of Occidental
(Consolidated Financial Statements).
DEVELOPMENTS
Significant developments during 2002 included:
>> The oil and gas segment's acquisition of a 24.5-percent interest in the
Dolphin natural gas project involving the United Arab Emirates and Qatar;
and
>> The chemicals segment's sale of its interest in Equistar Chemicals, L.P.
(Equistar) and its purchase of a 21-percent equity interest in Lyondell
Chemical Company (Lyondell).
For information regarding these and other developments, see the information
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" (MD&A) section of this report.
OIL AND GAS OPERATIONS
GENERAL
Occidental's oil and gas operations are located in California, Kansas,
Oklahoma, New Mexico and Texas domestically and in Colombia, Ecuador, Oman,
Pakistan, Qatar, Russia, United Arab Emirates, and Yemen internationally.
Occidental also has interests in several other countries.
RESERVES, PRODUCTION AND PROPERTIES
The table below shows Occidental's total reserves and production in 2002,
2001 and 2000. In 2002, including the effect of acquisitions, Occidental
replaced 140 percent of 2002 worldwide combined oil and natural gas production
of 188 million barrels, on a barrels of oil equivalent (BOE) basis. See the MD&A
section of this report, Note 16 to the Consolidated Financial Statements and the
information under the caption "Supplemental Oil and Gas Information" in Item 8
of this report for certain details regarding Occidental's oil and gas reserves,
the estimation process and production by country. On April 23, 2002, Occidental
reported to the U.S. Department of Energy on Form EIA-28 proved oil and gas
reserves at December 31, 2001. The amounts reported were the same as the amounts
reported in Occidental's 2001 Annual Report.
COMPARATIVE OIL AND GAS RESERVES AND PRODUCTION
Oil in millions of barrels; natural gas in billions of cubic feet
2002 2001 2000
======================== ============================= ============================= =============================
OIL (b) GAS TOTAL (c) Oil (b) Gas Total (c) Oil (b) Gas Total (c)
------- ------- ------- ------- ------- ------- ------- ------- -------
U.S. Reserves 1,452 1,821 1,755 1,371 1,962 1,698 1,346 2,094 1,695
International Reserves 518 228 556 526 106 543 457 116 476
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 1,970 2,049 2,311(a) 1,897 2,068 2,241(a) 1,803 2,210 2,171(a)
======= ======= ======= ======= ======= ======= ======= ======= =======
U.S. Production 85 206 119 78 223 115 63 241 104
International Production 65 23 69 55 18 59 62 18 65
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 150 229 188 133 241 174 125 259 169
======================== ======= ======= ======= ======= ======= ======= ======= ======= =======
(a) Stated on a net basis and after applicable royalties. Includes reserves
related to production-sharing contracts, other economic arrangements and
Occidental's share of reserves from equity investees. Proved reserves from
production-sharing contracts in the Middle East and Other Eastern
Hemisphere and from other economic arrangements in the U.S. were 324
million barrels of oil equivalent (MMBOE) and 94 MMBOE in 2002, 321 MMBOE
and 99 MMBOE in 2001 and 258 MMBOE and 87 MMBOE in 2000, respectively.
(b) Includes natural gas liquids and condensate.
(c) Natural gas volumes have been converted to equivalent barrels based on
energy content of 6,000 cubic feet (one thousand cubic feet is referred to
as an "Mcf") of gas to one barrel of oil.
3
COMPETITION
As a producer of crude oil and natural gas, Occidental competes with
numerous other producers. Crude oil and natural gas are commodities that are
sensitive to prevailing conditions of supply and demand and are sold at "spot",
contract prices or on futures markets. Occidental competes by developing and
producing its worldwide oil and gas reserves cost-effectively and acquiring
contracts to explore in areas with known oil and gas deposits. Occidental also
competes by increasing production through enhanced oil recovery projects and
making strategic acquisitions. Occidental focuses in its core areas of the
United States, the Middle East and Latin America.
CHEMICAL OPERATIONS
GENERAL
Occidental manufactures and markets basic chemicals, vinyls and performance
chemicals directly and through various affiliates (collectively, OxyChem).
OxyChem's operations are affected by cyclical economic factors and by specific
chemical-industry conditions. For additional information regarding Occidental's
chemical segment, see the information under the caption "Business Review -
Chemical" in the MD&A section of this report.
PRODUCTS AND PROPERTIES
OxyChem, which is headquartered in Dallas, Texas, operates chemical
manufacturing plants at 26 sites in the United States. Many of the larger
facilities are located in the Gulf Coast region of Texas and Louisiana. In
addition, OxyChem operates two chemical-manufacturing plants in Canada, and one
in Chile. All of OxyChem's manufacturing plants are owned, except for a portion
of the LaPorte, Texas vinyl chloride monomer (VCM) plant, which is leased. A
number of additional facilities process, blend and store products. OxyChem owns
and leases an extensive fleet of railcars.
BASIC CHEMICALS
OxyChem's basic chemicals primarily consist of chlorine, caustic soda,
potassium chemicals and their derivatives.
Chlorine is used for chemical manufacturing in the chlorovinyl chain and
for water treatment. OxyChem produces chlorine in Alabama, Delaware, Louisiana,
New York, Texas, Brazil and Chile. Estimated annual capacity, including one
temporarily idled plant, at December 31, 2002, was 3.3 million tons in the
United States (includes the 0.9 million-ton annual capacity of the OxyVinyls
partnership, owned 76 percent by Occidental and 24 percent by PolyOne
Corporation) and 0.3 million tons in Brazil and Chile. (Includes gross annual
capacity for a Brazilian corporation, 50-percent owned by Occidental).
Caustic soda is co-produced with chlorine and is used for pulp and paper
production, alumina production and other chemical manufacturing. OxyChem
produces caustic soda in Delaware, Louisiana, New York, Texas, Brazil and Chile.
Estimated annual capacity, including one temporarily idled plant, at December
31, 2002, was 3.5 million tons in the United States (includes the 1 million-ton
annual capacity of the OxyVinyls partnership) and 0.4 million tons in Brazil and
Chile. (Includes gross annual capacity for a Brazilian corporation, 50-percent
owned by Occidental).
Potassium chemicals are used in glass, fertilizer, cleaning products and
rubber. OxyChem produces potassium chemicals in Alabama and Delaware. Estimated
annual capacity at December 31, 2002, was 429,000 tons.
Ethylene dichloride (EDC), a chlorine derivative, is a raw material for
VCM. OxyChem produces EDC in Louisiana, Texas and Brazil. Estimated annual
capacity, including one temporarily idled plant, at December 31, 2002, was 3.0
billion pounds in the United States and 0.3 billion pounds in a Brazilian
corporation, 50-percent owned by Occidental.
VINYLS
The OxyVinyls partnership is OxyChem's principal producer of vinyls.
OxyChem's vinyls products include VCM and polyvinyl chloride (PVC) resins.
OxyChem produces VCM, which is used as a raw material for PVC, in Texas. At
December 31, 2002, estimated annual capacity was 6.1 billion pounds (includes
the 2.4 billion-pound annual capacity of OxyMar, which is 67-percent owned by
Occidental).
PVC resins are used in piping and electrical insulation, external
construction materials, flooring, medical and automotive products and packaging.
OxyChem produces PVC resins in Kentucky, New Jersey, Pennsylvania, Texas, and
Canada. At December 31, 2002, estimated annual capacity was 4.7 billion pounds.
PERFORMANCE CHEMICALS
OxyChem's performance chemicals include chlorinated isocyanurates
(estimated capacity of 131 million pounds produced in Illinois and Louisiana),
resorcinol (estimated capacity of 52 million pounds produced in Pennsylvania),
antimony oxide (estimated capacity of 33 million pounds produced in Texas),
mercaptans (estimated capacity of 18 million pounds produced in Texas) and
sodium silicates (estimated capacity of 753,000 tons produced in Georgia, Ohio,
Illinois, New Jersey, Texas and Alabama). Information regarding production
capacity reflects estimated annual capacity at December 31, 2002.
RAW MATERIALS
Nearly all raw materials used in OxyChem's operations are readily available
from a variety of sources. Most of OxyChem's key raw-materials purchases are
made through contractual relationships, rather than on the spot market. OxyChem
is not dependent on any single nonaffiliated supplier for a material amount of
its raw-material or energy requirements. Operations have not been curtailed as a
result of any supply interruptions.
4
PATENTS, TRADEMARKS AND PROCESSES
OxyChem's operations use a large number of patents, trademarks and
processes, some of which are proprietary and some of which are licensed. OxyChem
does not regard its business as being materially dependent on any single patent,
trademark or process.
SALES AND MARKETING
OxyChem's products are sold to industrial users or distributors located in
the United States, largely by its own sales force. OxyChem sells its products at
current market or market-related prices through short- and long-term sales
agreements.
No significant portion of OxyChem's business is dependent on a single
third-party customer. However, OxyChem has entered into significant sales
arrangements with certain of its affiliates and partners. In 2002, PolyOne
purchased from OxyVinyls raw materials pursuant to PVC resin and VCM sale
contracts at market-related prices valued at approximately $179 million. Also,
OxyMar sold VCM resin at market-related prices valued at approximately $309
million to OxyChem affiliates in 2002. OxyChem generally does not manufacture
its products against a backlog of firm orders.
COMPETITION
Occidental's chemical business competes with numerous producers. Since most
of OxyChem's products are commodity in nature, they compete primarily on the
basis of price. Because OxyChem's products generally do not occupy proprietary
positions, OxyChem endeavors to be an efficient, low-cost producer.
CAPITAL EXPENDITURES
For information on capital expenditures, see the information under the
heading "Capital Expenditures" in the MD&A section of this report.
EMPLOYEES
Occidental employed 7,244 people at December 31, 2002, 5,878 of whom were
located in the United States. Occidental employed 2,827 people in oil and gas
operations and 3,370 people in chemical operations. An additional 1,047 people
were employed in administrative and headquarters functions. Approximately 666
U.S.-based employees are represented by labor unions.
Occidental has a long-standing policy to ensure that fair and equal
employment opportunities are extended to all people without regard to race,
color, religion, ethnicity, gender, national origin, disability, age, sexual
orientation, veteran status or any other legally impermissible factor.
Occidental maintains diversity and outreach programs.
ENVIRONMENTAL REGULATION
For environmental-regulation information, including associated costs, see
the information under the heading "Environmental Expenditures" in the MD&A
section of this report.
AVAILABLE INFORMATION
Occidental makes the following information available free of charge through
its website at www.oxy.com:
>> Forms 10-K, 10-Q, 8-K and amendments to these forms as soon as reasonably
practicable after they are filed electronically with the SEC;
>> Other SEC filings, including Forms 3, 4 and 5; and
>> Corporate-governance information, including its corporate-governance
guidelines, board-committee charters and Code of Business Conduct.
ITEM 3 LEGAL PROCEEDINGS
For information regarding lawsuits, claims, commitments, contingencies and
related matters, see the information in Note 9 to the Consolidated Financial
Statements.
In April 1998, a civil action was filed on behalf of the United States
Environmental Protection Agency (EPA) against OxyChem relating to the Centre
County Kepone Superfund Site at State College, Pennsylvania. The lawsuit sought
approximately $12 million in penalties and governmental response costs, a
declaratory judgment that OxyChem is a liable party under the Comprehensive
Environmental Response, Compensation, and Liability Act, and an order requiring
OxyChem to carry out the remedy that is being performed by the site owner. In
October 2002, the U.S. District Court for the Middle District of Pennsylvania
approved a Consent Decree between OxyChem and the United States. Pursuant to the
decree, OxyChem agreed to pay to the United States and the site owner a total of
$886,000, which included payment of a $21,000 penalty to the United States and
an obligation to fund a supplemental environmental project to acquire an
environmental easement for up to $84,000, in exchange for, among other things, a
release of all past and future response costs associated with the site and
dismissal of the United States' lawsuit, with prejudice. In November 2002, all
payments required under the Consent Decree were made, except the amount for the
supplemental environmental project, the terms of which remain under negotiation
between the EPA and the affected landowner.
5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Occidental's security holders during
the fourth quarter of 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
February 28,
Name 2003 Positions with Occidental and Subsidiaries and Five-Year Employment History
- ----------------------- ------------ ---------------------------------------------------------------------------
Dr. Ray R. Irani 68 Chairman of the Board of Directors and Chief Executive Officer since 1990;
President from 1984 to 1996; Chief Operating Officer from 1984-1990;
Director since 1984; member of Executive Committee.
Dr. Dale R. Laurance 57 President since 1996; Chairman and Chief Executive Officer of Occidental
Oil and Gas Corporation (OOGC) since 1999; Director since 1990; member of
Executive Committee.
Stephen I. Chazen 56 Chief Financial Officer and Executive Vice President - Corporate
Development since 1999; 1994-1999, Executive Vice President - Corporate
Development.
Donald P. de Brier 62 Executive Vice President, General Counsel and Secretary since 1993.
Richard W. Hallock 58 Executive Vice President - Human Resources since 1994.
J. Roger Hirl 71 Executive Vice President since 1984; 1988-2002, Director; President and
Chief Executive Officer of Occidental Chemical Corporation from 1991
through 2001.
John W. Morgan 49 Executive Vice President since 2001; Executive Vice President - Worldwide
Production of OOGC since 2001; 1998-2001, Executive Vice President -
Operations; 1991-1998, Vice President - Operations.
Samuel P. Dominick, Jr. 62 Vice President and Controller since 1991.
James R. Havert 61 Vice President and Treasurer since 1998; 1992-1998, Senior Assistant
Treasurer.
Kenneth J. Huffman 58 Vice President - Investor Relations since 1991.
Anthony R. Leach 63 Vice President Finance since 1999; 1991-1999, Executive Vice President and
Chief Financial Officer.
Robert M. McGee 56 Vice President since 1994; President of Occidental International
Corporation since 1991.
Lawrence P. Meriage 60 Vice President - Communications and Public Affairs since 2000; 1995-2000,
Vice President - Executive Services and Public Affairs of OOGC.
Donald L. Moore, Jr. 54 Vice President and Chief Information Officer since 2002; 2000-2002, Vice
President Information Technology of Oxy Services, Inc.; 1999-2000, Vice
President and Chief Information Officer of KN Energy, Inc.; 1997-1999, Vice
President Information Technology of MidCon Corp.
R. Casey Olson 49 Vice President since 2001; President - Middle East since 2002; 2001-2002,
President of Occidental Middle East Development Company; Executive Vice
President of OOGC since 2000; 1998-2000, Senior Vice President - Business
Development of OOGC;
Richard A. Swan 55 Vice President - Health, Environment and Safety since 1995.
Aurmond A. Watkins, Jr. 60 Vice President - Tax since 1991.
The current term of office of each Executive Officer will expire at the April
25, 2003, organizational meeting of the Occidental Board of Directors or when
his successor is elected.
6
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TRADING PRICE RANGE AND DIVIDENDS
This section incorporates by reference the quarterly financial data
appearing under the caption "Quarterly Financial Data" and the information
appearing under the caption "Liquidity and Capital Resources" in the MD&A
section of this report. Occidental's common stock was held by approximately
56,367 stockholders of record at December 31, 2002, with an estimated 146,377
additional stockholders whose shares were held for them in street name or
nominee accounts. The common stock is listed and traded principally on the New
York Stock Exchange and also is listed on certain foreign exchanges. The
quarterly financial data on pages 73 and 74 of this report set forth the range
of trading prices for the common stock as reported on the composite tape of the
New York Stock Exchange and quarterly dividend information.
In 2002, the quarterly dividend rate for the common stock was $.25 per
share. On December 10, 2002, a dividend of $.26 per share was declared on the
common stock, payable on April 15, 2003 to stockholders of record on March 10,
2003. The declaration of future cash dividends is a business decision made by
the Board of Directors from time to time, and will depend on Occidental's
financial condition and other factors deemed relevant by the Board.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Occidental has three equity compensation plans for its employees that were
approved by the stockholders, pursuant to which options, rights or warrants may
be granted and one equity compensation plan for its nonemployee directors that
was approved by the stockholders. See Note 11 to the Consolidated Financial
Statements for further information on the material terms of these plans.
Occidental has no other equity compensation plans pursuant to which options,
rights or warrants could be granted.
The following is a summary of the shares reserved for issuance as of
December 31, 2002, pursuant to outstanding options, rights or warrants granted
under Occidental's equity compensation plans:
(a) Number of (b) Weighted- (c) Number of securities
securities to be average remaining available
issued, upon exercise price for future issuance
exercise of out- of outstanding under equity
standing options, options, compensation plans,
warrants and warrants and excluding securities in
rights rights column (a)
- ---------------------- ------------------- -------------------------
26,971,625 $24.2191 8,202,122 *
* Includes, with respect to the 1995 Incentive Stock Plan, 2,231,700 shares
at maximum target level (1,115,850 at target level) reserved for issuance
pursuant to outstanding performance stock awards, including 855,372 shares
at maximum target level (427,686 at target level) eligible for
certification in February 2003, and 313,276 deferred performance and
restricted stock awards and, with respect to the 2001 Incentive
Compensation Plan, 623,094 shares at maximum target level (311,547 at
target level) reserved for issuance pursuant to outstanding performance
stock awards, 923,224 shares reserved for issuance pursuant to restricted
stock awards and 2,025 shares reserved for issuance as dividend equivalents
under the 2001 Incentive Compensation Plan. Of the remaining 4,108,803
shares, 4,049,638 shares are available under the 2001 Incentive
Compensation Plan, all of which may be issued or reserved for issuance for
options, rights and warrants as well as performance stock awards,
restricted stock awards, stock bonuses and dividend equivalents and 59,165
shares are available for issuance under the Restricted Stock Plan for
nonemployee directors.
7
ITEM 6 SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Dollar amounts in millions, except per-share amounts
For the years ended December 31, 2002 2001 2000 1999 1998
============================================================== ========== ========== ========== ========== ==========
RESULTS OF OPERATIONS(a)
Net sales $ 7,338 $ 8,102 $ 8,504 $ 5,594 $ 5,015
Income from continuing operations $ 1,163 $ 1,179 $ 1,557 $ 461 $ 327
Net income $ 989 $ 1,154 $ 1,570 $ 448 $ 363
Earnings applicable to common stock $ 989 $ 1,154 $ 1,571 $ 442 $ 346
Basic earnings per common share from
continuing operations $ 3.09 $ 3.16 $ 4.22 $ 1.28 $ 0.89
Basic earnings per common share $ 2.63 $ 3.10 $ 4.26 $ 1.24 $ 0.99
Diluted earnings per common share $ 2.61 $ 3.09 $ 4.26 $ 1.24 $ 0.99
Core earnings(b) $ 999 $ 1,246 $ 1,349 $ 37 $ 9
FINANCIAL POSITION(a)
Total assets $ 16,548 $ 17,850 $ 19,414 $ 14,125 $ 15,252
Long-term debt, net $ 3,997 $ 4,065 $ 5,185 $ 4,368 $ 5,367
Trust Preferred Securities and preferred stock $ 455 $ 463 $ 473 $ 486 $ 243
Common stockholders' equity $ 6,318 $ 5,634 $ 4,774 $ 3,523 $ 3,120
CASH FLOW
Cash provided (used) by operating activities $ 2,100 $ 2,566 $ 2,348 $ 1,004 $ (2)
Capital expenditures $ (1,236) $ (1,308) $ (892) $ (557) $ (982)
Cash (used) provided by all other investing activities, net $ (460) $ 657 $ (2,152) $ 2,189 $ (153)
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
BASIC SHARES OUTSTANDING (thousands) 376,190 372,119 368,750 355,073 349,931
- -------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(a) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Notes to Consolidated Financial Statements"
for information regarding accounting changes, asset acquisitions and
dispositions, discontinued operations, and charges for asset write-downs,
litigation matters, environmental remediation and other costs and other
items affecting comparability.
(b) Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and
unpredictably in timing, nature and amount. Therefore, management uses a
measure called "core earnings", which excludes those items. This non-GAAP
measure is not meant to disassociate those items from management's
performance, but rather is meant to provide useful information to investors
interested in comparing Occidental's earnings performance between periods.
Reported earnings are considered representative of management's performance
over the long term. Core earnings is not considered to be an alternative to
operating income in accordance with generally accepted accounting
principles.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A) (INCORPORATING ITEM 7A)
In this report, the term "Occidental" refers to Occidental Petroleum
Corporation and/or one or more entities in which it owns a majority voting
interest (subsidiaries). Occidental is divided into two segments: oil and gas
and chemical.
2002 BUSINESS ENVIRONMENT
OIL AND NATURAL GAS INDUSTRY
Oil and gas prices are the key variables that drive the industry's
financial performance. Prices can vary even on a short-term basis. The average
West Texas Intermediate (WTI) market price for 2002 was $26.08/barrel (bbl)
compared with $25.97/bbl in 2001. From a low point of less than $20.00/bbl in
2001, prices have improved to a fourth quarter of 2002 average price of
$28.15/bbl, which was the strongest quarter for oil prices since the first
quarter of 2001.
NYMEX domestic natural gas prices began 2002 at approximately $2.50 per
thousand cubic feet (Mcf), but increased during the year. For the fourth quarter
of 2002, gas prices averaged $3.57/Mcf compared with $2.55/Mcf for the fourth
quarter of 2001.
CHEMICAL INDUSTRY
The chemical industry continued to struggle throughout the year due to poor
economic conditions. However, several commodity chemical product prices improved
moderately due to the resilient building and construction industry and marginal
improvement in demand for general durable goods.
8
Domestic chlorine demand improved slightly in 2002, compared to 2001 due to
the modest growth across all markets other than vinyl chloride monomer (VCM).
Despite modest growth in chlorine demand, prices remained strong and improved
significantly through the year. Strong chlorine prices resulted from a 5 percent
overall decrease in industry capacity and unplanned production outages. Caustic
soda prices declined through the second quarter due to a slow rebound in
downstream product demand, but improved in the fourth quarter as supply became
tighter. Polyvinyl chloride (PVC) prices improved reflecting the ability to pass
through price increases in feedstock costs as well as strong demand in building
and construction markets, resulting in some margin improvement.
STRATEGIC OVERVIEW AND REVIEW OF BUSINESS RESULTS - 2000 - 2002
STRATEGY
Occidental's overall corporate strategy aims to generate competitive total
returns to stockholders and consists of three basic elements:
>> Focus on large, long-lived oil and gas assets with growth potential.
>> Maintain financial discipline and strengthen the balance sheet.
>> Harvest cash from chemicals.
Large, long-lived "legacy" oil and gas assets like those in California, the
Permian Basin in Texas and Qatar tend to have moderate decline rates, enhanced
secondary and tertiary recovery opportunities and economies of scale that lead
to cost-effective production. These assets are expected to contribute strong
earnings and cash flow and serve as a strong foundation for new growth
initiatives.
At Occidental, maintaining financial discipline means prudently investing
capital in projects that are expected to generate above-cost-of-capital returns
from these investments throughout the business cycle. During periods of high
commodity prices, Occidental will use the bulk of its cash flow after capital
and dividends to reduce the volatility of its earnings either through debt
reduction or, to a lesser extent, by acquiring additional properties with
low-risk characteristics. Occidental may also sell properties to reduce debt and
to fund other higher-return acquisitions, while strengthening the balance sheet
to reduce risk and increase earnings.
The chemicals business provides free cash flow. From 1995 through 2002,
cash flow, after subtracting capital expenditures, from the chemicals business
totaled $3.0 billion. This does not include asset sales, net of acquisitions,
which provided an additional $1.0 billion.
SPECIFIC ACTIONS
OIL AND GAS
The oil and gas business strategy has three parts that, together, are
focused on adding new oil and natural gas reserves at a pace well ahead of
production, while simultaneously keeping finding and development costs among the
lowest in the industry:
>> Continue to add commercial reserves in and around Occidental's core areas,
which are the U.S., Middle East and Latin America, through a combination of
focused exploration and development programs.
>> Pursue commercial opportunities with host governments in core areas to
enhance the development of mature fields with large volumes of remaining
oil in place by applying appropriate technology and innovative
reservoir-management practices.
>> Maintain a disciplined approach in buying and selling assets at attractive
prices.
Occidental's oil and gas operations are located in California, Kansas,
Oklahoma, New Mexico and Texas domestically and in Colombia, Ecuador, Oman,
Pakistan, Qatar, Russia, United Arab Emirates and Yemen internationally.
Occidental also has interests in several other countries.
The asset mix within each of the core areas has been strengthened.
Occidental has sold properties with low or no current return and invested in
assets with higher performance potential. The results of these changes are
discussed below in "Business Review - Oil and Gas."
CHEMICAL
Occidental manufactures and markets basic chemicals, vinyls and performance
chemicals directly and through various affiliates (collectively, OxyChem).
OxyChem focuses on the chlorovinyls chain where it begins with chlorine, which
is co-produced with caustic soda, and then converts chlorine and ethylene,
through a series of intermediate products, into PVC.
In August 2002, Occidental and Lyondell Chemical Company completed an
agreement for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase a 21-percent equity interest in Lyondell. Occidental entered
into these transactions to diversify its petrochemicals interest. These
transactions reduced Occidental's direct exposure to petrochemicals volatility,
yet allowed it to maintain a presence and preserve, through its Lyondell
investment, an economic upside when the petrochemicals industry recovers.
9
CORPORATE
In July 2001, Occidental sold its interests in a subsidiary that owned a
Texas intrastate pipeline system and its interest in a liquefied natural gas
(LNG) project in Indonesia. After-tax proceeds of approximately $750 million
from these transactions were used to reduce debt.
In April 2000, Occidental sold its interest in Canadian Occidental
Petroleum Ltd., renamed Nexen Inc. (CanadianOxy or Nexen). After-tax proceeds,
together with tax benefits from the disposition of oil-producing properties in
Peru at the same time, totaling $700 million were used to reduce debt following
the Altura acquisition.
DEBT STRUCTURE
The components of Occidental's total debt are shown in the table below
(amounts in millions):
Other
Occidental Recourse Total
Date Debt Debt (a) Debt (a)
==================== ========== ========== ==========
12/31/98 $ 5,382 $ 776 $ 6,158
12/31/99 $ 4,380 $ 1,047 $ 5,427
12/31/00 $ 5,441 $ 913 $ 6,354
12/31/01 $ 4,119 $ 771 $ 4,890
12/31/02 $ 4,203 $ 556 $ 4,759
- -------------------- ---------- ---------- ----------
(a) Includes Trust Preferred Securities, natural gas delivery commitment (which
was terminated in 2002), corporate and subsidiary preferred stock and
capital lease obligations.
Occidental's year-end 2002 total debt-to-capitalization ratio has declined
to approximately 43 percent from the 66-percent level that existed at the end of
1998, as shown in the table below. The debt-to-capitalization ratio is computed
by dividing total debt by total capitalization.
Total Debt/Capitalization Ratio (%)
-----------------------------------
Date Total Debt/Capitalization Ratio
==================== ===============================
12/31/98 66%
12/31/99 61%
12/31/00 57%
12/31/01 46%
12/31/02 43%
- -------------------- -------------------------------
BUSINESS REVIEW - OIL AND GAS
Occidental's overall performance during the past several years reflects the
successful implementation of its oil and gas business strategy, beginning with
the 1998 $3.5 billion acquisition of the Elk Hills oil and gas field in
California. The Elk Hills acquisition was followed in April 2000 by the
purchases of both Altura Energy in Texas for $3.6 billion and the THUMS property
in Long Beach, California for $68 million.
At the end of 2002, these three assets made up 69 percent of Occidental's
worldwide proven oil reserves and 55 percent of its proven gas reserves. On a
barrel of oil equivalent (BOE) basis, they accounted for 67 percent of
Occidental's worldwide reserves. In 2002, the combined production from these
assets averaged approximately 290,000 BOE per day, which represents 56 percent
of Occidental's total worldwide production. These businesses also contributed
approximately 60 percent of oil and gas segment earnings and 85 percent of oil
and gas segment free cash flow.
ELK HILLS
Occidental operates the Elk Hills oil and gas field in the southern portion
of California's San Joaquin Valley with an approximate 78-percent interest. The
field reserves are among the top ten in the lower 48 United States and the field
is the largest producer of gas in California. Production increased in 2002 to
approximately 101,000 BOE per day from approximately 99,000 BOE per day in 2001.
Elk Hills has generated total net cash flow, after subtracting $696 million of
capital expenditures, of approximately $2.8 billion since Occidental acquired
the asset in early 1998.
Since the date of acquisition, Occidental has replaced 109 percent of its
total Elk Hills oil and gas production of 173 million BOE. At the end of 2002,
the property still had an estimated 440 million BOE of proved reserves, compared
to the 425 million BOE that were recorded at the time of the acquisition.
PERMIAN BASIN
Occidental integrated the Altura properties with its previously existing
Permian Basin properties in Southwest Texas and Southeast New Mexico. Since the
acquisition, the former Altura properties have generated more than $1.8 billion
in total net cash flow, after subtracting capital expenditures of approximately
$400 million.
One element of Occidental's strategy in the Permian Basin is to acquire
producing properties at attractive prices that offer synergies with its existing
operations. In 2002, Occidental made a number of small acquisitions in the
Permian Basin for a total purchase price of $73 million. These acquisitions
accounted for total proven reserve additions of 53.3 million BOE for an average
cost of $1.36 per BOE.
Total Permian oil and gas production averaged 164,000 BOE per day in 2002
compared to 162,000 BOE per day in 2001. Net Permian oil production averaged
142,000 barrels per day in 2002 compared to 137,000 barrels per day in 2001.
Occidental is the largest oil producer in Texas.
Approximately 50 percent of Occidental's Permian Basin production is
reliant upon the application of carbon dioxide (CO2) flood technology, an
enhanced oil recovery technique, a portion of which is supplied by the Bravo
Dome CO2 unit. This involves injecting CO2 into oil reservoirs where it acts as
a solvent, causing the oil to flow more freely so it can be pumped to the
surface. The size of these CO2 flood operations makes Occidental a world leader
in the development and application of this technology. In 2002, Occidental
implemented two large CO2 projects, one in the Cogdell field in West Texas and
the other in Hobbs, New Mexico. When these two projects become fully
operational, they are expected to add approximately 10,000 BOE per day to
Occidental's production.
10
THUMS
Occidental purchased THUMS, the field contractor of the Long Beach Unit, an
oil and gas production unit offshore Long Beach, California, in 2000. It is part
of the Wilmington field, which is the fourth largest oil field in the
continental U.S. At year-end 2002, net production from the THUMS oil property
was averaging 26,000 barrels per day.
Occidental completed construction of a 45-megawatt gas-fired power plant
and began generating electricity in December 2002. Previously, the oil field's
operations depended on the local utility for power to operate electric pumps
critical to production. The electricity supply from the utility was
interruptible, meaning that when power was in short supply, service could be
temporarily discontinued. Electricity is the largest component of operating
costs for this field and by securing a reliable source of electricity, it will
be possible to reduce overall field production costs.
GULF OF MEXICO
In July 2000, Occidental completed agreements with respect to two
transactions involving its interests on the Continental Shelf in the Gulf of
Mexico (GOM) and the proceeds were used to reduce debt.
Occidental has a one-third interest in the deep water Horn Mountain oil
field, which is its primary asset in the GOM. BP p.l.c. (BP) is the operator.
The discovery well, which was drilled to a depth of nearly 14,000 feet, is
located about 60 miles off the Louisiana-Mississippi coast in 5,400 feet of
water.
Development work was completed on time and under budget and the field began
production in November 2002, with a year-end exit rate of approximately 9,000
net BOE per day. Net proved reserves are approximately 36 million BOE.
HUGOTON
Occidental owns a large concentration of gas reserves, production interests
and royalty interests in the Hugoton area of Kansas and Oklahoma. The Hugoton
field is the largest natural gas field discovered to date in North America.
Occidental's Hugoton operations produced 148,000 Mcf of natural gas and 3,000
barrels of oil per day in 2002.
MIDDLE EAST
DOLPHIN PROJECT
In 2002, Occidental purchased a 24.5-percent interest in Dolphin Energy
Limited (DEL), the operator of the Dolphin Project. The Dolphin Project, which
is expected to cost its owners $3.5 billion in total, consists of two parts: (1)
a development and production sharing agreement with Qatar to develop and produce
natural gas and condensate in Qatar's North Field; and (2) the rights for DEL to
build, own and operate a 260-mile-long, 48-inch export pipeline to transport 2
billion cubic feet per day of dry natural gas from Qatar to markets in the UAE
for a period of 25 years. The pipeline will have capacity to transport up to 3.2
billion cubic feet per day, which will allow for additional business development
projects. DEL is currently negotiating contracts to market the gas with users in
the UAE. Construction on the upstream production and processing facilities and
the pipeline is expected to begin in 2003 and production is scheduled to begin
in early 2006. The Dolphin partners anticipate securing project financing.
Occidental has not recorded any revenue or production costs for this project and
no oil and gas reserves have been included in its 2002 proved oil and gas
reserves.
OMAN
Occidental's Oman business centers on its 300-million barrel discovery in
Block 9, in which it has a 65-percent working interest. Occidental has produced
more than 150 million gross barrels from the Block, most of it from the Safah
field.
Net production to Occidental averaged 13,000 barrels of oil per day in the
fourth quarter.
Occidental uses multi-lateral horizontal wells to increase production and
recovery rates and to minimize the number of wells needed. Today, 60 percent of
Occidental's production in Oman relies on horizontal wells. A new waterflood
program is currently under way at Safah that will enhance production and improve
the ultimate recovery of reserves from the field.
Occidental recently entered into an agreement, which is awaiting government
approval, to sell an estimated 120 - 130 million cubic feet of natural gas per
day from Block 9 operations to the Omani government, beginning in early 2004 and
extending through 2007. The Occidental-Omani agreement is expected to open up a
market for previously stranded gas that is associated with oil production from
the Safah field. Occidental also continues its exploration program in the
adjacent Block 27.
YEMEN
In Yemen, Occidental owns direct working interests in the Masila field in
Block 14 (38 percent) and the East Shabwa field in Block 10 (28.6 percent). In
addition, Occidental has interests in seven exploration blocks encompassing
nearly 15 million acres. Of these, Occidental is the operator of Blocks 44 and
20, with working interests of 75 percent and 50 percent, respectively, and has a
40-percent working interest in each of five blocks -- Blocks 11, 12, 36, 54 and
59 -- on the border with Saudi Arabia. Occidental's net production averaged
38,000 barrels of oil per day in 2002, with 32,000 coming from the Masila field
and the remainder from East Shabwa. A series of step-out wells at Masila in 2002
added 5 million barrels of new reserves.
Occidental drilled and completed two exploratory wells in Block 20 in late
2002 and completed a 2-D seismic program in the third quarter of 2002 in Block
44.
QATAR
In Qatar, Occidental successfully reversed 25 years of declining production
in the Idd El Shargi North Dome (ISND) field. By introducing advanced drilling
systems and by applying new waterflooding and reservoir characterization
techniques, Occidental is increasing production and recoverable reserves from
the field's 4 billion barrels of remaining oil in place.
11
Occidental is moving forward under a new agreement with a second phase in
the development of ISND. The new phase is targeting the development and recovery
of 145 million gross barrels of additional reserves from ISND.
Occidental is also engaged in full-field development of the Idd El Shargi
South Dome (ISSD) field which, as a satellite to the North Dome, reduces the
overall capital requirement of the two projects.
Combined production from the two fields averaged 42,000 barrels per day,
net to Occidental, in 2002.
When the second phase of ISND and the full-field development of ISSD are
fully completed, Occidental expects its total net production from Qatar to
increase to approximately 76,000 barrels per day in 2006. Reserves, net to
Occidental, related to these projects are expected to total 94 million barrels.
Also, see the Dolphin Project discussed above.
SAUDI ARABIA
In Saudi Arabia, Occidental has a 20-percent interest in the Core Venture
Two consortium, which is proposing to invest in the Red Sea area to help the
Kingdom identify and develop new natural gas reserves for the domestic market.
An initial agreement was signed with the Kingdom on June 3, 2001.
OTHER EASTERN HEMISPHERE
PAKISTAN
Occidental holds oil and gas working interests, that vary from 25 to 50
percent, in four Badin Blocks in Pakistan. BP is the operator. In 2002,
Occidental purchased additional interests in two of these blocks from the
government of Pakistan for approximately $72 million. Current gross production
is 65,000 BOE per day, while Occidental's net share is approximately 25,000 BOE
per day.
Current plans call for drilling 13 to 15 wells per year to develop new and
existing fields. Additionally, Occidental continues to evaluate various
exploration opportunities.
RUSSIA
In Russia, Occidental owns 50 percent of a joint venture company,
Vanyoganneft, that operates in the western Siberian oil basin. Production for
2002 was approximately 27,000 BOE per day, net to Occidental.
LATIN AMERICA
COLOMBIA
Occidental has a 35-percent net share of production and is operator of the
Cano Limon oil field in Colombia. Colombia's national oil company, Ecopetrol,
operates the Cano Limon-Covenas oil pipeline and marine-export terminal. The
pipeline transports oil produced from the Cano Limon field for export to
international markets. In addition, Occidental has an 88-percent working
interest in two exploration blocks encompassing 6,647 square miles in the
Central Llanos Basin.
In 2002, production from Occidental's Cano Limon operations in Colombia
increased substantially from 2001 due to improved security along the export
pipeline that reduced the number of attacks by local terrorist groups. The
pipeline was subjected to a record number of attacks in 2001. Occidental's net
share of 2002 production averaged 35,000 barrels of oil per day compared to
18,000 barrels per day in 2001. This operation accounts for less than one
percent of Occidental's worldwide assets, only two percent of total worldwide
reserves and less than seven percent of average worldwide oil and gas production
in 2002. Occidental presently anticipates that it will recover the proved
reserves attributable to its contract.
ECUADOR
Gross production in Block 15 in 2002, which Occidental operates with a
60-percent working interest, averaged approximately 13,000 barrels of oil per
day net to Occidental.
Full field development of the Eden Yuturi oil field in the southeastern
corner of Block 15 is complete. Full-scale production is scheduled to coincide
with the anticipated completion, in the second half of 2003, of the Oleoducto de
Crudos Pesados (OCP) Ltd. oil export pipeline, in which Occidental has a
12-percent interest. In addition, work continues in the producing areas in the
western portion of the block. The combined effect of these projects is expected
to add total net incremental production of 30,000 barrels per day to
Occidental's production profile in 2004.
In addition, Occidental is expanding its exploration activities in Block 15
with aggressive 3-D seismic and drilling programs.
In 2000, Occidental farmed out a 40-percent economic interest in Block 15
in Ecuador to Alberta Energy Company Ltd. (AEC), now EnCana. As a result of this
transaction, EnCana agreed to fund a significant portion of the capital program.
Foreign oil companies, including Occidental, have been paying Value Added
Tax (VAT), generally calculated on the basis of 10-12 percent of expenditures
for goods and services used in the production of oil for export. Until 2001, oil
companies, like other companies producing products for export, filed for and
received reimbursement of VAT. In 2001, the Ecuador tax authority announced that
the oil companies' VAT payments did not qualify for reimbursement. In response,
the affected oil companies filed actions in the Ecuador Tax Court to seek a
judicial determination that the expenditures are subject to reimbursement. In
November 2002, Occidental initiated an international arbitration proceeding
against the Ecuadorian Government under the United States-Ecuador bilateral
investment treaty based on Occidental's belief that the Ecuadorian Government is
arbitrarily and discriminatorily refusing to refund the VAT to Occidental.
Occidental believes that it has a valid claim for reimbursement under applicable
Ecuador tax law and the treaty. In the event of an unfavorable outcome, the
potential income statement effect would not be significant.
12
PRODUCTION-SHARING CONTRACTS
Occidental conducts its operations in Qatar, Oman and Yemen under
production-sharing contracts. Occidental receives a share of production from
production-sharing contracts to recover its costs and an additional share for
profit. Occidental's share of production from these contracts decreases when oil
prices improve and increases when oil prices decline. Overall, Occidental's net
economic benefit from these contracts is greater at higher oil prices.
BUSINESS REVIEW - CHEMICAL
CHLOR-ALKALI
2002 saw increased demand for chlorine in all major market segments,
particularly VCM, propylene oxide and epichlorohydrin. Domestic demand for
co-product caustic soda was flat year over year and exports from the U.S.
declined.
The chlor-alkali industry entered 2002 coming off the lowest operating rate
since 1985. As a result of increased demand, coupled with a full year of
capacity reductions in 2002, industry-operating rates increased from 81 percent
in the fourth quarter of 2001 to a peak of 93 percent in the third quarter of
2002. Annual operating rates increased from 85 percent for 2001 to 89 percent
for 2002.
Prices for chlorine followed the demand curve and increased steadily
throughout the year. Declining total demand for caustic soda coupled with
increased electrochemical unit (ECU) production led to falling caustic soda
prices through the third quarter.
Although markets have improved steadily in 2002, OxyChem has maintained its
Deer Park chlor-alkali production facility in Houston, Texas in a standby mode
pending further strengthening in overall economic conditions and improved demand
for caustic soda.
OxyChem successfully began commercial operation of a 778-megawatt
cogeneration facility in Taft, Louisiana in the fourth quarter of 2002. This
facility provides all of the steam and electric power requirements for the Taft,
Louisiana chlor-alkali plant at a lower cost than if the plant were to generate
its own steam and purchase electricity from a public utility. It sells excess
power in the merchant market.
VINYLS
2002 saw improvement in North American PVC resin demand following a
strengthening trend which began in early 2001. For the year, North American PVC
resin demand grew at a rate of approximately 5 percent. The 2002 market
exhibited strong growth through July, with more moderate growth in the third
quarter, followed by seasonal contraction in the fourth quarter.
As a result of higher demand, together with lower inventory levels, in much
of the chain, industry-operating rates climbed from the low 80 percent levels of
the second half of 2001 to above 90 percent for the second and third quarters of
2002. Although PVC resin capacity remains in oversupply, tightness in VCM and
chlorine feedstocks have constrained vinyls production levels throughout the
year.
Vinyls prices reflected this tightness by rising 14 cents/lb in the first
seven months of 2002. Prices to vinyls export markets peaked somewhat earlier in
the year then retreated during the third quarter, due primarily to a sharp
reduction in Chinese imports. Prices posted improvements in late fourth quarter
as spot buyers anticipated supply constraints for 2003 coupled with an overall
improvement in demand in Southeast Asia.
2003 OUTLOOK
OIL AND GAS
The petroleum industry is highly competitive and subject to significant
volatility due to numerous market forces. Crude oil and natural gas prices are
affected by market fundamentals such as weather, inventory levels, competing
fuel prices, overall demand and the availability of supply.
In the last half of 2002, worldwide oil prices strengthened due to
increasing political and economic turmoil in Venezuela and the growing threat of
conflict with Iraq. Venezuela alone accounts for approximately 13 percent of
total U.S. oil imports. These uncertainties raised concerns about the security
and availability of ample supplies to meet growing demand. In 2003, continued
unrest in Venezuela and the Middle East portend significant volatility for
short-term crude oil prices and continued price uncertainty over the long-term.
If the turmoil continues well into 2003, the result could be a continued
tightening of crude oil supplies and correspondingly higher prices. Conversely,
a lessening of the uncertainties could result in greater crude oil supply and
lower prices.
Sustained high oil prices will significantly impact profitability and
returns for Occidental and other upstream producers. However, the industry has
historically experienced wide fluctuations within price cycles. For example, the
average price of WTI crude oil in the first quarter of 2002 was $21.64/bbl
compared to $28.15 in the fourth quarter. Although oil prices cannot be
predicted with any certainty, WTI price has averaged approximately $21.25/barrel
over the past ten years.
While supply-demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, which make it
difficult to predict prices with any degree of confidence.
Over the long-term, volatile prices, sharp production decline rates and the
uncertain timing of new gas supplies, in response to new gas-related drilling,
place constraints on the domestic gas supply industry. Record high gas-related
drilling rates in the first half of 2001 added very little new domestic
production capacity, increasing uncertainty about the 2003 gas supply outlook,
particularly as drilling declined in the wake of falling prices in the first
half of 2002.
The early onset of severe winter weather for the 2002-2003 heating season
contributed to an increase in gas prices in the second half of 2002. However,
this did not spark a corresponding increase in gas-driven drilling activity,
giving rise to expectations of steeper production decline rates in 2003. Robust
prices in 2003 could lead to a new upsurge in gas-related drilling to address
longer-term supply uncertainties.
13
CHEMICAL
The performance of the chemical business is difficult to forecast, but this
business is capable of contributing significant earnings and cash flow when
demand is strong. The major factors that have an impact on the performance of
the chemicals business are general economic conditions, energy and feedstock
costs, and the effect of changes in productive capacity.
CHLOR-ALKALI
Further improvement in ECU operating rates is expected as domestic demand
for both chlorine and caustic soda are forecasted to increase over 2 percent in
2003 and industry capacity is expected to decline further. PVC, and other
derivatives not manufactured by Occidental, are leading the growth in demand for
chlorine. Growth in demand for caustic soda is expected to track overall
manufacturing activity.
With increasing demand and increased capacity utilization, pricing for
chlorine is expected to improve slightly over the fourth quarter 2002 levels.
Caustic soda prices are expected to show a marked improvement over 2002 as
contracts reflect previously announced price increases and overall supply and
demand become more balanced.
Energy costs for 2003 are expected to increase over 2002 levels.
VINYLS
Occidental expects North American PVC resin demand to grow 4 - 5 percent
for 2003, based on annual U.S. and global GDP growth expectations of
approximately 2.5 percent. North American PVC operating rates are expected to
continue to move upward in 2003, averaging 1 - 2 percent higher than 2002 rates.
Chlorovinyls supply constraints, together with spiking energy costs, have
created conditions for vinyls price increases early in 2003. In addition, VCM
intermediates will be in shorter supply than PVC because of industry capacity
rationalizations and maintenance requirements. Operating rates for North
American VCM producers are expected to average well above 90 percent.
Energy and raw material price escalation will limit margin growth in 2003.
Tightness in chlorine supply for vinyls production will remain a concern in
2003.
INCOME SUMMARY
Occidental reported net income of $1.0 billion ($2.63 per share) in 2002,
on net sales of $7.3 billion, compared with net income of $1.2 billion ($3.10
per share) in 2001, on net sales of $8.1 billion. Core earnings were $1.0
billion in 2002 and $1.2 billion in 2001.
SEGMENT OPERATIONS
The following discussion of Occidental's two operating segments and
corporate items should be read in conjunction with Note 15 to the Consolidated
Financial Statements.
Segment earnings exclude interest income, interest expense, unallocated
corporate expenses, discontinued operations and cumulative effect of changes in
accounting principles, but include gains and losses from dispositions of segment
assets and results from equity investments.
Foreign income and other taxes and certain state taxes are included in
segment earnings based on their operating results. U.S. federal income taxes are
not allocated to segments except for amounts in lieu thereof that represent the
tax effect of operating charges resulting from purchase accounting adjustments,
and the tax effects resulting from major, infrequently occurring transactions,
such as asset dispositions and legal settlements that relate to segment results.
The following table sets forth the sales and earnings of each operating
segment and corporate items:
SEGMENT OPERATIONS
In millions
For the years ended December 31, 2002 2001 2000
================================ ======== ======== ========
SALES
Oil and Gas $ 4,634 $ 5,134 $ 4,875
Chemical 2,704 2,968 3,629
-------- -------- --------
$ 7,338 $ 8,102 $ 8,504
================================ ======== ======== ========
EARNINGS(LOSS)
Oil and Gas (a) $ 1,707 $ 2,845 $ 2,417
Chemical (a) 275 (399) 141
-------- -------- --------
1,982 2,446 2,558
Unallocated corporate items
Interest expense, net (b) (253) (272) (372)
Income taxes (c) (364) (359) (853)
Trust preferred distributions
and other (47) (56) (67)
Other (c, d) (155) (580) 291
-------- -------- --------
Income from continuing
operations 1,163 1,179 1,557
Discontinued operations, net (79) (1) 13
Cumulative effect of changes in
accounting principles, net (95) (24) --
-------- -------- --------
Net Income $ 989 $ 1,154 $ 1,570
================================ ======== ======== ========
(a) Segment earnings in 2002 were affected by $402 million of net credits
allocated, comprising $1 million of charges and $403 million of credits in
oil and gas and chemical, respectively. The chemical amount includes a $392
million credit for the sale of the Equistar investment. Segment earnings in
2001 were affected by $14 million of net charges allocated, comprising $56
million of charges and $42 million of credits in oil and gas and chemical,
respectively. The oil and gas amount includes a charge for the sale of the
Indonesian Tangguh LNG project. The chemical amount includes credits for
the sale of certain chemical operations. Segment earnings in 2000 were
affected by $25 million from net charges allocated, comprising $32 million
of charges and $7 million in credits in oil and gas and chemical,
respectively. The oil and gas amount includes a charge for the GOM
Continental Shelf transactions. The chemical amount includes a net charge
for the sale of certain chemical operations.
(b) The 2002, 2001 and 2000 amounts are net of $21 million, $102 million and
$106 million, respectively, of interest income on notes receivable from
Altura partners.
(c) The 2001 tax amount excludes the income tax benefit of $188 million
attributed to the sale of the entity that owns a Texas intrastate pipeline
system. The tax benefit is included in Other.
(d) The 2002 amount includes $22 million of preferred distributions to the
Altura partners. The 2001 amount includes the after-tax loss of $272
million related to the sale of the entity that owns a Texas intrastate
pipeline system, a $109 million charge for environmental remediation
expenses and $104 million of preferred distributions to the Altura
partners. The 2000 amount includes the pre-tax gain on the sale of the
CanadianOxy investment of $493 million, partially offset by preferred
distributions to the Altura partners of $107 million. The preferred
distributions are essentially offset by the interest income discussed in
(b) above.
14
OIL AND GAS
In millions, except as indicated 2002 2001 2000
========================================= ======== ======== ========
SEGMENT SALES $ 4,634 $ 5,134 $ 4,875
SEGMENT EARNINGS $ 1,707 $ 2,845 $ 2,417
CORE EARNINGS (a) $ 1,707 $ 2,446 $ 2,417
NET PRODUCTION PER DAY
UNITED STATES
Crude oil and liquids (MBBL)
California 86 76 70
Permian 142 137 101
U.S. Other 4 -- 1
-------- -------- --------
Total 232 213 172
Natural Gas (MMCF)
California 286 303 306
Hugoton 148 159 168
Permian 130 148 119
U.S. Other -- -- 66
-------- -------- --------
Total 564 610 659
LATIN AMERICA
Crude oil & condensate (MBBL)
Colombia 40 21 37
Ecuador 13 13 17
-------- -------- --------
Total 53 34 54
MIDDLE EAST AND
OTHER EASTERN HEMISPHERE
Crude oil & condensate (MBBL)
Oman 13 12 9
Pakistan 10 7 6
Qatar 42 43 49
Yemen 37 33 32
-------- -------- --------
Total 102 95 96
Natural Gas (MMCF)
Pakistan 63 50 49
-------- -------- --------
Total 63 50 49
CONSOLIDATED SUBSIDIARIES (MBOE) 492 452 440
Less: Colombia-minority interest (5) (3) (5)
Add: Russia-Occidental net interest 27 27 26
Add: Yemen-Occidental net interest 1 -- --
-------- -------- --------
TOTAL WORLDWIDE PRODUCTION 515 476 461
======== ======== ========
AVERAGE SALES PRICES
CRUDE OIL PRICES ($ per barrel)
U.S. $ 23.47 $ 21.74 $ 26.66
Latin America $ 23.14 $ 20.10 $ 26.07
Middle East and
Other Eastern Hemisphere (e) $ 24.01 $ 22.97 $ 26.92
Total consolidated subsidiaries $ 23.56 $ 21.91 $ 26.62
Other interests $ 14.80 $ 15.57 $ 18.60
Total worldwide $ 22.91 $ 21.41 $ 25.99
GAS PRICES ($ per thousand cubic feet)
U.S. $ 2.89 $ 6.40 $ 3.66
Middle East and
Other Eastern Hemisphere $ 2.08 $ 2.29 $ 1.99
Total worldwide $ 2.81 $ 6.09 $ 3.53
EXPENSED EXPLORATION (b) $ 176 $ 184 $ 94
CAPITAL EXPENDITURES
Development $ 897 $ 918 $ 582
Exploration $ 55 $ 86 $ 79
Acquisitions and other (c, d) $ 86 $ 134 $ 77
- ----------------------------------------- -------- -------- --------
(a) Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and
unpredictably in nature, timing and amount. Therefore, management uses a
measure called "core earnings", which excludes those items. This non-GAAP
measure is not meant to disassociate those items from management's
performance, but rather is meant to provide useful information to investors
interested in comparing Occidental's earnings performance between periods.
Core earnings is not considered to be an alternative to operating income in
accordance with generally accepted accounting principles.
(b) The 2002 amount includes a $33 million write-off for Lost Hills leases and
a $25 million write-off of the Thunderball well, both in California, and
the 2001 amount includes a $66 million write-off of the Gibraltar well in
Colombia.
(c) Includes mineral acquisitions but excludes significant acquisitions
individually discussed in this report.
(d) Includes capitalized portion of injected CO2 of $42 million, $48 million
and $44 million in 2002, 2001 and 2000, respectively.
(e) These amounts exclude implied taxes.
Occidental explores for and produces oil and natural gas, domestically and
internationally. Occidental seeks long-term growth and improvement in
profitability and cash flow through a combination of increased operating
efficiencies in core assets, enhanced oil recovery projects, focused exploration
opportunities and complementary property acquisitions.
Core earnings in 2002 were $1.7 billion compared with $2.4 billion in 2001.
The decrease in core earnings primarily reflects the impact of lower natural gas
prices and production volumes, partially offset by higher crude oil prices and
production volumes.
CHEMICAL
In millions, except as indicated 2002 2001 2000
========================================== ======== ======== ========
SEGMENT SALES $ 2,704 $ 2,968 $ 3,629
SEGMENT EARNINGS (LOSS) $ 275 $ (399) $ 141
CORE EARNINGS (a) $ 111 $ 13 $ 281
KEY PRODUCT INDEXES (1987 through
1990 average price = 1.0)
Chlorine 1.01 0.74 1.58
Caustic soda 0.71 1.33 0.69
Ethylene Dichloride 1.01 0.61 1.37
PVC commodity resins (b) 0.73 0.68 0.95
KEY PRODUCT VOLUMES
Chlorine (thousands of tons) (c) 2,807 2,847 2,977
Caustic soda (thousands of tons) 2,717 2,857 3,168
Ethylene Dichloride (thousands of tons) 573 735 979
PVC commodity resins
(millions of pounds) 4,132 3,950 3,902
CAPITAL EXPENDITURES
Basic chemicals $ 50 $ 37 $ 49
Vinyls $ 40 $ 55 $ 61
Specialty businesses $ 16 $ 19 $ 37
Other $ 3 $ 1 $ 1
- ------------------------------------------ -------- -------- --------
(a) Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and
unpredictably in nature, timing and amount. Therefore, management uses a
measure called "core earnings", which excludes those items. This non-GAAP
measure is not meant to disassociate those items from management's
performance, but rather is meant to provide useful information to investors
interested in comparing Occidental's earnings performance between periods.
Core earnings is not considered to be an alternative to operating income in
accordance with generally accepted accounting principles.
(b) Product volumes produced at former PolyOne facilities, now part of
OxyVinyls, are excluded from the product indexes.
(c) Product volumes include products produced and consumed internally.
Core earnings were $111 million in 2002, compared with $13 million in 2001.
The increase in core earnings reflects the impact of higher average prices for
chlorine, EDC and PVC resins and lower raw material costs, partially offset by
lower prices for caustic soda and overall lower volumes.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and unpredictably in
nature, timing and amount. Therefore, management uses a measure called "core
earnings", which excludes those items. This non-GAAP measure is not meant to
disassociate those items from management's performance, but rather is meant to
provide useful information to investors interested in comparing Occidental's
earnings performance between periods. Reported earnings are considered
representative of management's performance over the long term. Core
15
earnings is not considered to be an alternative to operating income in
accordance with generally accepted accounting principles.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Benefit (Charge) In millions 2002 2001 2000
========================================= ======== ======== ========
TOTAL REPORTED EARNINGS $ 989 $ 1,154 $ 1,570
========================================= ======== ======== ========
OIL AND GAS
Segment Earnings $ 1,707 $ 2,845 $ 2,417
Less:
Gain on sale of interest in the
Indonesian Tangguh LNG Project (a) -- 399 --
-------- -------- --------
Segment Core Earnings $ 1,707 $ 2,446 $ 2,417
- ----------------------------------------- -------- -------- --------
CHEMICAL
Segment Results $ 275 $ (399) $ 141
Less:
Gain on sale of Equistar investment (a) 164 -- --
Equistar writedown -- (412) --
Writedown of intermediates -- -- (140)
-------- -------- --------
Segment Core Earnings $ 111 $ 13 $ 281
- ----------------------------------------- -------- -------- --------
CORPORATE
Results $ (993) $ (1,292) $ (988)
Less:
Loss on sale of pipeline-owning
entity (a) -- (272) --
Settlement of state tax issue -- 70 --
Gain on sale of CanadianOxy
investment -- -- 493
Changes in accounting principles,
net (a) (95) (24) --
Discontinued operations, net (a) (79) (1) 13
Tax effect of pre-tax adjustments -- 148 (145)
- ----------------------------------------- -------- -------- --------
TOTAL CORE EARNINGS $ 999 $ 1,246 $ 1,349
========================================= ======== ======== ========
(a) These amounts are shown after-tax.
CONSOLIDATED OPERATIONS
SELECTED REVENUE ITEMS
In millions 2002 2001 2000
======================================== ======== ======== ========
Net sales $ 7,338 $ 8,102 $ 8,504
Interest, dividends and other income $ 143 $ 223 $ 263
Gains on disposition of assets, net $ 10 $ 10 $ 639
- ---------------------------------------- -------- -------- --------
The decrease in sales in 2002, compared to 2001, primarily reflects lower
natural gas and chemical prices and lower natural gas and chemical volumes,
partially offset by higher crude oil prices and higher crude oil production.
The decrease in sales in 2001, compared to 2000, primarily reflects lower
crude oil and chemical prices, partially offset by higher natural gas prices.
Interest, dividends and other income in 2002, 2001 and 2000 includes
interest income on the notes receivable from the Altura partners of $21 million,
$102 million and $106 million, respectively. Occidental exercised an option in
May 2002 to redeem the sellers' remaining partnership interests in exchange for
the notes receivable.
Gains on disposition of assets in 2001 includes the pre-tax gain of $454
million on the sale of the interest in the Tangguh LNG project and the pre-tax
loss of $459 million on the sale of its interests in a subsidiary that owned a
Texas intrastate pipeline system. Gains on disposition of assets in 2000
includes the pre-tax gain of $493 million on the sale of the CanadianOxy
investment, the pre-tax gain of $61 million on the partial sale of the Gulf of
Mexico assets, the pre-tax gain of $63 million on the receipt of contingency
payments related to a prior-year sale of a Dutch North Sea subsidiary and the
pre-tax gain of $34 million on the sale of the Durez business.
SELECTED EXPENSE ITEMS
In millions 2002 2001 2000
===================================== ======== ======== ========
Cost of sales $ 3,385 $ 3,626 $ 3,933
Selling, general and administrative
and other operating expenses $ 635 $ 665 $ 686
Write-down of assets $ 42 $ 3 $ 180
Exploration expense $ 176 $ 184 $ 94
Interest and debt expense, net $ 295 $ 401 $ 510
- ------------------------------------- -------- -------- --------
Cost of sales decreased in 2002, compared to 2001, and 2001 compared to
2000, due mainly to lower chemical raw material costs.
Selling, general and administrative and other operating expenses decreased
in 2002, compared to 2001, due mainly to 2001 severance and other charges.
Selling, general and administrative and other operating expenses decreased in
2001, compared to 2000, due mainly to a decrease in chemical selling costs.
The 2002 write-down of assets amount includes write-downs for certain
chemical assets. The 2000 amount includes the write-down of certain oil and gas
investments and the chemical intermediate businesses.
Exploration expense in 2002 includes a $33 million write-off for Lost Hills
leases and a $25 million write-off for the Thunderball deep gas well, both in
California. Exploration expense in 2001 includes expensing higher-cost
exploration wells, primarily the Gibraltar well in Colombia of $66 million.
The decrease in interest and debt expense in 2002, compared to 2001, and
2001 compared to 2000, reflects lower outstanding debt levels and lower interest
rates.
OTHER ITEMS
In millions 2002 2001 2000
===================================== ======== ======== ========
Provision for income taxes $ 422 $ 556 $ 1,434
Minority interest $ 77 $ 143 $ 185
Loss (income) from equity investments $ 261 $ 504 $ (67)
- ------------------------------------- -------- -------- --------
The 2002 provision for income taxes includes an income tax benefit of $406
million for the sale of the Equistar investment. The 2001 provision includes
income tax benefits of $172 million resulting from the write-down of the
Equistar investment, $188 million from the sale of the entity that owns a Texas
intrastate pipeline system, and a $70 million settlement of a state-tax issue.
The 2000 provision includes an income tax charge for the gain on the sale of the
CanadianOxy investment.
The decrease in minority interest in 2002, compared to 2001, was due to an
$84 million decrease in preferred distributions to the Altura partners. The
remaining Altura partnership interests were redeemed in May 2002. The decrease
in minority interest in 2001, compared to 2000, was due to a $38 million
decrease in the minority interest attributable to PolyOne, the minority interest
partner in OxyVinyls.
16
The 2002 loss from equity investments includes a pre-tax loss of $242
million from the sale of the Equistar investment in August 2002. The loss from
equity investments in 2001 includes a $412 million pre-tax write-down of
Equistar and a loss of $89 million from the Equistar equity investment.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
In millions 2002 2001 2000
======== ======== ========
NET CASH PROVIDED $ 2,100 $ 2,566 $ 2,348
The lower operating cash flow in 2002, compared with 2001, results from
lower core earnings and higher working capital usage.
The higher operating cash flow in 2001, compared with 2000, results from
lower core earnings and higher working capital usage more than offset by
additional significant non-cash items.
Other non-cash charges in 2002 include environmental remediation accruals
and the asset writedown for two chemical facilities. Other non-cash charges in
2001 include environmental remediation accruals. Other non-cash charges in 2000
include the write-down of the chemical intermediate businesses and other
miscellaneous items. Each of the three years also includes charges for employee
benefit plans and other items.
INVESTING ACTIVITIES
In millions 2002 2001 2000
======== ======== ========
NET CASH USED $ (1,696) $ (651) $ (3,044)
The 2002 amount includes approximately $349 million for a 24.5-percent
interest in DEL, the operator of the Dolphin Project.
The 2001 amount includes the gross proceeds of $863 million from the sale
of the entity that owns a Texas intrastate pipeline system and the sale of
Occidental's interest in the Tangguh LNG project in Indonesia.
The 2000 amount includes the gross proceeds of approximately $800 million
from the sale of the CanadianOxy investment, gross proceeds of $150 million from
the sale of the Durez business and approximately $342 million from the GOM asset
transactions. The 2000 amount also includes approximately $3.7 billion for the
purchases of Altura and THUMS.
CAPITAL EXPENDITURES
In millions 2002 2001 2000
========================== ======== ======== ========
Oil and Gas $ 1,038 $ 1,138 $ 738
Chemical 109 112 148
Corporate and other 89 58 6
-------- -------- --------
TOTAL $ 1,236 $ 1,308 $ 892
========================== ======== ======== ========
Occidental's capital spending estimate for 2003 is $1.3 billion. Of the
total, approximately $1.2 billion will be allocated to oil and gas, with Qatar,
Elk Hills and the Permian Basin receiving the highest priority.
FINANCING ACTIVITIES
In millions 2002 2001 2000
======== ======== ========
NET CASH (USED)PROVIDED $ (456) $ (1,814) $ 579
The 2002 amount reflects the net $179 million buyout of the natural gas
delivery commitment and $72 million of net proceeds from the issuance of a
subsidiary's preferred stock.
The 2001 amount reflects the repayment of $2.3 billion of long-term and
non-recourse debt, partially offset by proceeds of $861 million from new
long-term debt.
The 2000 amount reflects the proceeds from the $2.4 billion non-recourse
debt, partially offset by repayments of $1.4 billion on the long-term and
non-recourse debt. The 2000 amount also includes the first year of purchases
made to satisfy delivery commitments under the natural gas delivery commitment
that was signed in 1998.
Occidental paid common stock dividends of $375 million in 2002, $372
million in 2001 and $369 million in 2000.
Occidental has a centralized cash-management system that funds the working
capital and capital expenditure requirements of its various subsidiaries. There
are no provisions under existing debt agreements that significantly restrict
Occidental's ability to move funds among operating entities.
ADDITIONAL CONSIDERATIONS REGARDING FUNDING AND LIQUIDITY
In the course of its business activities, Occidental pursues a number of
projects and transactions to meet its core business objectives. The accounting
and financial statement treatment of these transactions is a result of the
varying methods of funding employed. Occidental also makes commitments on behalf
of unconsolidated entities. These transactions, or groups of transactions, are
recorded in compliance with generally accepted accounting principles and, unless
otherwise noted, are not reflected on Occidental's balance sheets. The following
is a description of the business purpose and nature of these transactions.
* OIL AND GAS TRANSACTIONS
ECUADOR
In Ecuador, Occidental has a 12-percent interest in a company currently
constructing an oil export pipeline, which is expected to be completed in 2003.
Construction of the pipeline has made it feasible for Occidental to develop the
Eden Yuturi field it discovered several years ago in the southeastern corner of
Block 15. The development of Eden Yuturi, together with ongoing work in the
western portion of the block that is currently in production, is expected to add
net incremental production of 30,000 barrels per day in 2004, all of which is
expected to be transported through the new pipeline. Occidental has committed to
make capital contributions up to its share (currently estimated to be
approximately $64 million) of the estimated total project capital requirements.
As of December 31, 2002, Occidental has
17
contributed $9 million to the project. Occidental reports this investment in its
consolidated statements using the equity method of accounting.
The project is being funded in part by senior project debt. The senior
project debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including construction risk,
operating risk and force-majeure risk. Occidental would be required to make an
advance tariff payment in the event of termination of the agreement authorizing
the pipeline company to build the pipeline, prolonged delay in project
completion, prolonged force majeure, upstream expropriation events, bankruptcy
of the pipeline company or its parent company, abandonment of the project,
termination of an investment guarantee agreement with Ecuador, or certain
defaults by Occidental. This advance tariff would be used by the pipeline
company to service or prepay project debt. Occidental's obligation relating to
the pipeline company's senior project debt totaled $101 million, and the
completion bonds and other bonds totaled $17 million at December 31, 2002. As
Occidental ships product using the pipeline, its overall obligations will
decrease with the reduction of the pipeline company's senior project debt.
ELK HILLS POWER
Occidental and Sempra Energy (Sempra) each has a 50-percent interest in Elk
Hills Power LLC, a limited liability company that is currently constructing a
gas-fired, power-generation plant in California. Occidental accounts for this
investment using the equity method. In January 2002, Elk Hills Power LLC entered
into a $400 million construction loan facility. Occidental guarantees $200
million (50 percent) of the loan facility. At December 31, 2002, approximately
$162 million of debt guaranteed by Occidental was outstanding.
* CHEMICAL TRANSACTIONS
TAFT COGENERATION FACILITY
Occidental is leasing a cogeneration facility which was completed in 2002.
This facility supplies all the steam and electric power requirements for
Occidental's Taft chlor-alkali plant at a lower cost than if the plant were to
generate its own steam and purchase electricity from a public utility. An owner
trust with investors as participating beneficiaries owns the project. The equity
participants in the owner trust funded the owner trust with equity during
construction in the amount of three percent of the cumulative project costs
throughout the period and in an amount in excess of 14 percent of the final
project costs upon the commencement of the lease term. In connection with the
completion of construction and satisfaction of certain other conditions, the
26-year term of the operating lease commenced in December 2002. At December 31,
2002, Occidental estimates the present value of the remaining lease payments to
be $455 million.
LEASES
Occidental has entered into various operating lease agreements, mainly for
railcars, power plants, manufacturing facilities and office space. The leased
assets are used in Occidental's operations where leasing offers advantages of
greater operating flexibility and generally costs less than alternative methods
of funding that were available at the time financing decisions were made. Lease
payments are charged to Occidental's operations, mainly as cost of sales.
The accounting treatment for the leases described above, including the Taft
lease, is dictated by Statement of Financial Accounting Standards (SFAS) No. 13
and other related pronouncements issued by the Financial Accounting Standards
Board (FASB). These leases have been classified as operating leases in
accordance with the operating lease criteria. As discussed under "Additional
Accounting Changes" (below), FASB Interpretation (FIN) No. 46 is expected to
result in the consolidation of certain variable interest entities that are
owners of plant and equipment Occidental leases from them. The probable
consolidation would affect the LaPorte, Texas VCM plant lease. If consolidation
were to take place, there would be no significant effect on Occidental's
financial condition; however, consolidation would result in an increase in
assets of approximately $132 million and liabilities of $154 million, with an
after-tax charge of approximately $22 million in the third quarter of 2003 that
would be recorded as a cumulative effect of a change in accounting principles.
Annual expense for depreciation would increase by approximately $12 million
pre-tax. If Occidental chose to terminate the leases prior to adoption, there
would be no cumulative effect of a change in accounting principles.
OXYMAR
Occidental has a 78.6-percent ownership interest (before minority interest)
in OxyMar. Occidental owns 28.6 percent of OxyMar directly and the OxyVinyls
partnership, which is 76-percent owned by Occidental, owns 50 percent.
Therefore, after minority interest, Occidental's effective ownership interest is
67 percent. Marubeni Corporation (Marubeni) owns the remaining 21.4 percent of
OxyMar, but has a 50-percent voting interest. The OxyMar VCM plant is a modern,
efficient manufacturing facility. Occidental's chlorovinyls business derives
significant economic benefit from OxyMar's operations as the supplier of certain
products to OxyMar. OxyMar, in turn, supplies VCM required by Occidental to
manufacture PVC. This investment in OxyMar is recorded as an equity investment
on the consolidated balance sheet. Occidental guarantees 50 percent of OxyMar's
$165 million private placement bonds due 2016 and 100 percent of a $220 million
revolving line of credit which matures in 2005, under which $105 million was
outstanding at December 31, 2002. These amounts are reflected as debt on
OxyMar's balance sheet. Marubeni has a right to put its interest in OxyMar to
Occidental in 2004 by paying approximately $25 million to Occidental and, in
connection with this
18
transfer, require Occidental to assume Marubeni's guarantee of OxyMar's debt.
Occidental determined that Marubeni's strike price was equal to fair value as of
the issue date and assigned a fair value of zero to the option. Therefore,
Occidental did not record an asset or liability associated with this put option
in the consolidated financial statements. Since the put price was negotiated on
arms'-length terms and has no predetermined conditions that would require
exercise of the option, Occidental cannot determine whether Marubeni will
exercise its option. Occidental does not expect to record a loss if the option
is exercised. If OxyMar were to be consolidated at December 31, 2002, assets
would increase by $172 million and liabilities would increase by $163 million on
Occidental's consolidated balance sheets. As of December 31, 2002, Occidental
had advanced $95 million to OxyMar and had a net equity investment of $30
million. As discussed under "Additional Accounting Changes" (below), FIN No. 46
is expected to result in the consolidation of OxyMar in the third quarter of
2003. This consolidation is not expected to have a significant effect on
Occidental's financial condition and will not change Occidental's results of
operations.
INGLESIDE
Occidental and ConocoPhillips (Conoco) each has a 50-percent interest in
Ingleside Cogeneration Limited Partnership, a limited partnership (Ingleside
LP), which operates a cogeneration plant in Texas. The cogeneration facility
supplies all of the steam and electric power requirements to Occidental's
Ingleside chlor-alkali plant and OxyMar's VCM plant at less cost than if these
facilities were to produce their own steam and purchase electric power from a
public utility. At December 31, 2002, Ingleside LP had approximately $171
million in debt, which is secured by its assets. Occidental has not guaranteed
this debt; however, Occidental and Conoco currently each guarantee half of a
debt service reserve amount of approximately $8 million. Occidental accounts for
this investment using the equity method.
* OTHER TRANSACTIONS
RECEIVABLES SALE PROGRAM
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of trade receivables. This
program is used by Occidental as a low-cost source of working capital funding.
The balance of receivables sold at December 31, 2002 and 2001 was $360 million.
This amount is not included in the debt and related trade receivables accounts,
respectively, on Occidental's consolidated balance sheets. Receivables must meet
certain criteria to qualify for the program.
Under this program, Occidental serves as the collection agent with respect
to the receivables sold. An interest in new receivables is sold as collections
are made from customers. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. The fair value
of any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2002, 2001 and
2000.
The program terminates upon certain events, including Occidental's senior
debt rating falling below investment grade. In such an event, alternative
funding would have to be arranged, which could result in an increase in debt
recorded on the consolidated balance sheet, with a corresponding increase in the
accounts receivable balance. The consolidated income statement effect of such an
event would not be significant.
* CONTRACTUAL OBLIGATIONS
The table below summarizes and cross-references certain contractual
obligations that are reflected in the Consolidated Balance Sheets and/or
disclosed in the accompanying Notes.
In millions Payments Due by Year
------------------------------------------------------------------
2004 2006 2008
Contractual to to and
Obligations Total 2003 2005 2007 thereafter
======================== ========== ========== ========== ========== ==========
CONSOLIDATED
BALANCE SHEETS
Long-Term Debt
(Note 6) (a) $ 4,105 $ 206 $ 480 $ 1,346 $ 2,073
Capital Leases
(Note 7) 26 1 1 1 23
Trust Preferred
Securities
(Note 12) 455 -- -- -- 455
FOOTNOTE DISCLOSURES
Operating Leases
(Note 7) (b) 1,347 88 167 134 958
Fixed and
Determinable
Purchase Obligations
(Note 9) (c) 94 21 35 25 13
Receivable Sale
Program (Note 1) (d) 360 -- -- 360 --
---------- ---------- ---------- ---------- ----------
TOTAL $ 6,387 $ 316 $ 683 $ 1,866 $ 3,522
======================== ========== ========== ========== ========== ==========
(a) Includes principal payments only. Excludes unamortized discounts and
mark-to-market adjustments related to fair-value hedges.
(b) Offset by sublease rental income.
(c) Excludes capital commitments.
(d) The $360 million receivable sale amount is reflected in the 2006-2007 year
column since Occidental could finance the amount with its committed credit
line, which becomes due in 2006, if the program is terminated.
COMMITMENTS
At December 31, 2002, commitments for major capital expenditures during
2003 and thereafter were approximately $158 million.
19
ANALYSIS OF FINANCIAL POSITION
The changes in the following components of Occidental's balance sheet are
discussed below:
SELECTED BALANCE SHEET COMPONENTS
In millions 2002 2001
================================================ ======== ========
Trade receivables, net $ 608 $ 360
Receivables from joint ventures, partnerships
and other $ 321 $ 266
Inventories $ 491 $ 414
Income tax receivable $ 150 $ 35
Long-term receivables, net $ 275 $ 2,185
Investments in unconsolidated subsidiaries $ 1,056 $ 993
Property, plant and equipment, net $ 13,036 $ 12,791
Current maturities of long-term debt and capital
lease liabilities $ 206 $ --
Accounts payable $ 785 $ 715
Accrued liabilities $ 914 $ 849
Dividends payable $ 193 $ 94
Current obligation under natural gas delivery
commitment $ -- $ 137
Long-term debt, net $ 3,997 $ 4,065
Long-term obligation under natural gas delivery
commitment $ -- $ 145
Other deferred credits and liabilities $ 2,228 $ 2,322
Minority interest $ 333 $ 2,224
Trust Preferred Securities $ 455 $ 463
Stockholders' equity $ 6,318 $ 5,634
- ----------------------------------------------- -------- --------
The higher balance in trade receivables at December 31, 2002, compared with
December 31, 2001, reflects higher product prices during the fourth quarter of
2002 versus 2001. The increase in receivables from joint ventures, partnerships
and other is due to higher mark-to-market adjustments on derivative financial
instruments in the marketing and trading group. The increase in inventories was
primarily the result of higher gas trading inventory. The increase in income tax
receivable was due to a tax receivable from the Equistar sale. The decrease in
the long-term receivables, net, account is due to the redemption of the notes
from the Altura partners. The higher balance in investments in unconsolidated
subsidiaries primarily reflects the Dolphin Project and Lyondell acquisitions,
partially offset by the sale of the Equistar investment. The increase in the net
balance in property, plant and equipment reflects capital spending, partially
offset by depreciation, depletion and amortization.
The increase in current maturities of long-term debt reflects a
reclassification of the current portion of long-term debt. The increase in
accounts payable is due to higher payable balances in the oil and gas marketing
and trading operations. The increase in accrued liabilities is due to the timing
of interest accruals on debt. The increase in dividends payable is due to an
early declaration of the first quarter 2003 dividend payable in April 2003. The
decrease in long-term debt primarily reflects the reclassification of long-term
debt to current maturities, partially offset by mark-to-market adjustments
related to fair value hedges on a portion of the debt. In accordance with hedge
accounting, applicable debt balances are also marked to fair value, which
offsets the change in fair value of the derivative. The current and long-term
portions of the obligations under the natural gas delivery commitment were
eliminated since this commitment was terminated in 2002. Other deferred credits
and liabilities include deferred compensation, other post-retirement benefits,
environmental remediation reserves, contract advances, deferred revenue and
other deferred items. The decrease in minority interest is due to the redemption
of the remaining Altura interests in May 2002. The 2002 minority interest
balance also includes $75 million of preferred stock issued to a financial
institution by a subsidiary of Occidental in December 2002. The increase in
stockholders' equity primarily reflects net income, partially offset by
dividends on common stock.
FINANCING ACTIVITY
In 2003, Occidental expects to record a pre-tax interest charge of $50 -
$70 million to repay a $450 million 6.4-percent senior notes issue that has ten
years of remaining life, but is subject to remarketing on April 1, 2003.
Occidental intends to refinance part of this issue on a long-term basis.
In February 2002, Occidental filed a shelf registration statement for up to
$1 billion of its senior debt securities, subordinated debt securities,
preferred stock, common stock, depositary shares, warrants, stock purchase
contracts, stock purchase units, preferred securities of two subsidiary trusts
and Occidental's guarantees of such preferred securities. In November 2002,
Occidental issued $175 million of 4-percent Medium-Term Senior Notes, Series C,
and $75 million of 4.101-percent Medium-Term Senior Notes, Series C, due 2007
for net combined proceeds of approximately $249 million. The net proceeds were
used for general corporate purposes. Occidental may issue the remaining $750
million under its medium-term notes program, which includes its Medium-Term
Senior Notes, Series C and its Medium-Term Subordinated Notes, Series A.
On November 15, 2002, Occidental repaid $163 million of 6.75-percent senior
notes. During 2002, Occidental also redeemed approximately $35 million of
medium-term notes with a weighted-average coupon rate of approximately 7.66
percent.
In December 2002, a subsidiary of Occidental issued $75 million of
preferred stock to a financial institution. Occidental retains all common shares
of the subsidiary and elects the majority of the directors. The subsidiary is
the holding company for a number of international subsidiaries of Occidental. In
the event that the subsidiary fails to pay preferred dividends for two
consecutive quarters or upon the occurrence of certain other events, the holder
of the preferred stock could gain control of the subsidiary's board of
directors.
In December 2001, Occidental issued $300 million of 5.875-percent senior
notes due 2007 and $500 million of 6.750-percent senior notes due 2012 for net
combined proceeds of approximately $794 million. Approximately $700 million of
the net proceeds were used to extinguish the Altura non-recourse debt. The
remaining proceeds were used for general corporate purposes.
On March 5, 2001, Occidental retired $20.5 million of 7.8-percent pollution
control revenue bonds due on December 1, 2005.
At January 2, 2003, Occidental had approximately $1.8 billion of committed
credit lines, which are all available and are utilized, as needed, for daily
operating
20
and other purposes. These lines of credit are primarily used to back up the
issuance of commercial paper.
Occidental expects to have sufficient cash in 2003 from operations, and
from proceeds from existing credit facilities, as necessary, for its operating
needs, capital expenditure requirements, dividend payments, mandatory debt
repayments and other commitments. In the event of fluctuations in operating cash
flow, Occidental has the ability to vary its discretionary cash outflow, such as
capital expenditures.
ACQUISITIONS, DISPOSITIONS AND COMMITMENTS
2002
DOLPHIN PROJECT INVESTMENT
In November 2002, Occidental closed a transaction with the United Arab
Emirates' (UAE) Offsets Group in which Occidental acquired a 24.5 percent
interest in DEL, the operator of the Dolphin Project, for a total of $342
million. DEL is a company that also includes as shareholders the UAE Offsets
Group (51 percent interest) and TotalFinaElf (24.5 percent interest). The amount
has been allocated, on a preliminary basis, primarily to investment in
unconsolidated entities. Occidental will also be responsible for its 24.5
percent share of costs on an ongoing basis.
LYONDELL-EQUISTAR TRANSACTION
In August 2002, Occidental and Lyondell Chemical Company completed an
agreement for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase a 21-percent equity interest in Lyondell. Occidental entered
into these transactions to diversify its petrochemicals interests. These
transactions also reduced Occidental's direct exposure to petrochemicals
volatility, yet allowed it to preserve, through its Lyondell investment, an
economic upside when the petrochemicals industry recovers. In connection with
these transactions, Occidental wrote down its investment in the Equistar
partnership to fair value by recording a $412 million pre-tax charge as of
December 2001. After the write-down, the net book value of Occidental's
investment in Equistar at December 31, 2001, after considering tax effects,
approximated the fair value of the Lyondell shares Occidental expected to
receive, less transaction costs. Occidental recorded an after-tax gain of $164
million in the third quarter of 2002, as a result of closing these transactions
on August 22, 2002. Occidental's initial carrying value of the Lyondell
investment was $489 million, which represented the fair value of Lyondell's
shares at closing.
PAKISTAN ACQUISITION
In 2002, Occidental increased its ownership in Badin Block 1 and 2R by
purchasing additional interests in these two blocks from the government of
Pakistan for approximately $72 million.
DISPOSITION OF CHROME AND VULCAN
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its calendering operations
(Vulcan) for a $6 million note receivable. In the third quarter of 2002,
Occidental recorded an after-tax impairment charge of $69 million and classified
both of these businesses as discontinued operations. The fair value of these
businesses was determined by the expected sales proceeds from third party
buyers. When these transactions closed, no significant gain or loss was
recorded.
2001
SALE OF INTRASTATE PIPELINE
On August 31, 2001, Occidental sold its interest in a subsidiary that owned
a Texas intrastate pipeline system. The entity was sold to Kinder Morgan Energy
Partners, L.P. for $360 million. Occidental recorded an after-tax loss of
approximately $272 million in connection with this transaction.
SALE OF INDONESIA GAS PROPERTIES
On July 10, 2001, Occidental completed the sale of its interest in the
Tangguh LNG project in Indonesia to Mitsubishi Corporation of Japan for proceeds
of $503 million. Occidental recorded an after-tax gain of approximately $399
million for this transaction.
2000
MILNE POINT ASSET SWAP
On December 4, 2000, Occidental completed an agreement with BP to obtain
BP's interest in a carbon dioxide field in New Mexico and related pipelines in
exchange for Occidental's interest in the Milne Point oil field in Alaska,
together with additional cash consideration. The BP properties acquired had a
book value of $51 million, and Occidental paid $14 million as additional
consideration. The gain on this transaction was immaterial.
OXYMAR PURCHASE
On November 29, 2000, OxyChem purchased a 28.6-percent interest in OxyMar,
a Texas general partnership that owns the Ingleside, Texas VCM facility operated
by OxyChem. The interest was purchased from U.S. VCM Corporation, an affiliate
of Marubeni Corporation, which continues to own a 21.4-percent interest and
remains a 50-percent partner for corporate-governance purposes. Occidental
received approximately $37 million relating to the purchase and, as a result,
agreed to guarantee an additional $110 million of OxyMar's debt. The $37 million
was recorded as a reduction to Occidental's investment in OxyMar. OxyVinyls owns
the remaining 50-percent interest. No gain or loss was recognized on this
transaction.
ECUADOR FARM OUT
On November 1, 2000, Occidental agreed to farm out a partial economic
interest in its Block 15 operations in Ecuador to AEC, now EnCana, for $68
million. EnCana earns a 40-percent interest in the block and will reimburse
Occidental for certain capital costs through 2004 estimated at $110 million.
Occidental remains the operator of Block 15. The gain on this transaction was
not significant.
21
SALE OF DUREZ
On November 1, 2000, Occidental completed the sale of its Durez phenolic
resins and compounding businesses and assets to Sumitomo Bakelite Co., Ltd. for
gross proceeds of approximately $150 million. There was a $13 million after-tax
gain on this transaction.
GULF OF MEXICO TRANSACTIONS
On August 15, 2000, Occidental completed agreements with respect to two
transactions with Apache Corporation involving Occidental's interests in the
Continental Shelf of the Gulf of Mexico (GOM).
Occidental entered into a volumetric production payment (VPP) transaction
to deliver, over 36 months, a substantial portion of its share of the proved
developed producing gas reserves from these GOM interests to Apache amounting to
86 Bcf, for approximately $280 million. The value attributed to the production
payment was based on price curves existing at the time the transaction was
entered into. The $280 million, which represented the initial fair value of
Occidental's obligation to deliver future gas production, was deferred and is
being recognized in income as the gas is delivered. Occidental retained
ownership of the first 2.7 million barrels of oil, which is being used to pay
for the VPP production costs. Occidental believes this amount is sufficient to
cover these costs. The remaining amount of this retained interest at December
31, 2002 was 0.4 million barrels, or approximately $12 million.
Occidental also agreed to sell a 60 percent interest in the subsidiary that
holds a residual interest, post-VPP, in the GOM assets for approximately $62
million. As a result of this sale and the consequent elimination of a portion of
Occidental's responsibility for abandonment liabilities, Occidental recorded an
after-tax gain of $39 million. Approximately 70 percent of the gain was the
result of the elimination of the abandonment liability.
As part of these transactions, Apache was granted four annual call options,
each of which gives them the right to purchase for $11 million an additional 10
percent of the entity holding the residual interest in the GOM assets.
Occidental also was granted four annual put options with generally similar
provisions. Nominal value was attributed to the call and put options. Apache
exercised the call options that became available in 2001 and 2002. Gains
resulting from each exercise of the options were not material.
SALE OF PERU PROPERTIES
On May 8, 2000, Occidental completed an agreement to sell its producing
properties in Peru to Pluspetrol for $30 million. In connection with this
transaction, Occidental recorded an after-tax charge of approximately $29
million in December 1999 to write-down the properties to their fair values.
THUMS ACQUISITION
On April 24, 2000, Occidental completed the acquisition of THUMS, the field
contractor of the Long Beach Unit, an oil and gas production unit, for
approximately $68 million.
ALTURA ACQUISITION
On April 19, 2000, Occidental completed its acquisition of all of the
common interest in Altura, the largest oil producer in Texas. The acquisition
was valued at approximately $3.6 billion. Occidental paid approximately $1.2
billion to the sellers, affiliates of BP and Royal Dutch/Shell Group (Shell), to
acquire the common limited partnership interest and control of the general
partner, which manages, operates and controls 100 percent of the Altura assets.
The partnership borrowed approximately $2.4 billion, which had recourse only to
the Altura assets. The $2.4 billion loan had been completely repaid by the end
of 2001. The partnership also loaned approximately $2.0 billion to affiliates of
the sellers, evidenced by two notes, which provide credit support to the
partnership. The sellers retained a preferred limited partnership interest of
approximately $2.0 billion and were entitled to certain distributions from the
partnership. Occidental exercised an option in May 2002 to redeem the remaining
partnership interests of $2.0 billion held by affiliates of BP and Shell in
exchange for the notes receivable of $2.0 billion to the partnership.
SALE OF CANADIANOXY INVESTMENT
On April 18, 2000, Occidental completed the sale of its 29.2-percent stake
in CanadianOxy for gross proceeds of approximately $1.2 billion Canadian. This
sale resulted in a net pre-tax gain of approximately $493 million. In addition,
Occidental and CanadianOxy exchanged their respective 15-percent interests in
joint businesses of approximately equal value, resulting in Occidental owning
100 percent of an oil and gas operation in Ecuador and CanadianOxy owning 100
percent of sodium chlorate operations in Canada and Louisiana.
CAPITAL EXPENDITURES
Commitments at December 31, 2002 for major capital expenditures during 2003
and thereafter were approximately $158 million. Total capital expenditures for
2003 are estimated to be approximately $1.3 billion. Occidental will fund these
commitments and capital expenditures with cash from operations and proceeds from
existing credit facilities as necessary.
DERIVATIVE ACTIVITIES AND MARKET RISK
GENERAL
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
22
ACCOUNTING FOR DERIVATIVES AND DEFINITIONS
Occidental accounts for its derivatives under the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS No. 137 and SFAS No. 138 (collectively SFAS No. 133). Under SFAS No.
133, recognition of the gain or loss that results from recording and adjusting a
derivative to fair market value depends on the purpose for issuing or holding
the derivative. Gains and losses from derivatives that are not designated as
hedges are recognized immediately in earnings. A hedge is considered effective
if changes in its value are offset exactly by changes in the value of the item
being hedged. A hedge is ineffective to the extent changes in its value are not
matched by offsetting changes in value for the item being hedged. If a
derivative is used to hedge the fair value of an asset or liability (fair value
hedge), the gains or losses from adjusting the derivative to its market value
are recognized in earnings immediately and to the extent the hedge is effective,
offset the concurrent recognition in earnings of changes in the fair value of
the hedged item. Gains or losses from derivatives used to hedge future cash
flows (cash flow hedges) are recorded on the balance sheet in accumulated other
comprehensive income (OCI), a component of stockholders' equity, until the
transaction that is hedged is recognized in earnings. However, to the extent the
value of the derivative differs from the value of the anticipated cash flows of
the hedged transaction, the hedge is considered partly ineffective and the
resulting gains or losses are recognized immediately in earnings.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices. Based on current levels of production, if oil prices vary overall by
$1 per barrel, it would have approximately a $110 million annual effect on
income, before U.S. income tax. If natural gas prices vary by $0.10 per million
Btu (MMBtu), it would have approximately a $19 million annual effect on income,
before U.S. income tax. If production levels change in the future, the
sensitivity of Occidental's results to oil and gas prices also would change.
Occidental's results are also sensitive to fluctuations in chemical prices.
If chlorine or caustic soda prices vary by $10/ton, it would have approximately
a $10 million and $26 million, respectively, annual effect on income before U.S.
income taxes. If PVC prices vary by $.01/lb, it would have approximately a $35
million annual effect on income, before U.S. income taxes. If EDC prices vary by
$10/ton, it would have approximately a $6 million annual effect on income,
before U.S. income taxes. According to Chemical Market Associates, Inc.,
December 2002 average contract prices were: chlorine - $215/ton, caustic soda -
$148/ton, PVC - $0.37/lb and EDC - $220/ton.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Overall, Occidental usually remains unhedged to long-term oil and gas prices and
its use of derivatives in hedging activity remains at a low level.
In September 2002, Occidental unwound its natural gas delivery commitment
and corresponding natural gas price swap which were entered into in November
1998. Occidental recognized a pre-tax loss of $3 million related to these
transactions.
RISK MANAGEMENT
Occidental conducts its risk management activities for energy commodities
(which include buying, selling, marketing, trading, and hedging activities)
under the controls and governance of the Risk Management Policy. The Chief
Financial Officer and Risk Management Committee oversee these controls, which
are implemented and enforced by the Trading Control Officer. The Trading Control
Officer provides an independent and separate check on results of marketing and
trading activities. Controls for energy commodities include limits on credit,
limits on trading, segregation of duties, delegation of authority and a number
of other policy and procedural controls.
FAIR VALUE OF CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2002 and 2001 and segregate
the open contracts at December 31, 2002 by maturity periods.
in millions 2002 2001
=========================================================== ======== ========
Fair value of contracts outstanding at beginning of year $ 7 $ (66)
Gains on contracts realized or otherwise settled during the
year (1) (30)
Changes in fair value attributable to changes in valuation
techniques and assumptions -- --
Other changes in fair values 28 103
-------- --------
Fair value of contracts outstanding at end of year $ 34 $ 7
=========================================================== ======== ========
Maturity Periods
------------------------------------------------------------------
2004 2006 2008 Total
Source of to to and Fair
Fair Value 2003 2005 2007 thereafter Value
================ ========== ========== ========== ========== ==========
Prices actively
quoted $ (12) $ 6 $ 2 $ 2 $ (2)
Prices provided
by other
external
sources 35 7 (8) 2 36
Prices based on
models and
other valuation
methods (5) 5 -- -- --
---------- ---------- ---------- ---------- ----------
TOTAL $ 18 $ 18 $ (6) $ 4 $ 34
================ ========== ========== ========== ========== ==========
23
The tables above include the fair value of physical positions and the fair
value of the related financial instruments for trading and marketing operations.
At December 31, 2002 and 2001, the physical positions were a net gain of $42
million and a net loss of $2 million, respectively. The value of the derivative
financial instruments that offset these physical positions are a net loss of $8
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. Crude oil cash-flow hedges were executed for approximately
20 percent and 29 percent of total U.S. oil production in 2002 and 2001,
respectively. Natural gas cash-flow hedges were executed for approximately 7
percent of total U.S. 2002 gas production. 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.
QUANTITATIVE INFORMATION
Occidental uses value at risk to estimate the potential effects of changes
in fair values of derivatives and commodity contracts used in trading
activities. This method determines the maximum potential negative short-term
change in fair value with a 95 percent level of confidence. For non-trading
activities, there were no material amounts outstanding at December 31, 2002.
The value at risk for both oil and natural gas is summarized below:
MARKETING AND TRADING VALUE AT RISK
For the years ended December 31 (in millions) 2002 2001
============================================= ======== ========
Value at Risk - Oil
High during the year $ 1 $ 1
Low during the year -- --
Average for the year 1 1
Value at Risk - Natural Gas
High during the year $ 1 $ 1
Low during the year -- --
Average for the year 1 1
- --------------------------------------------- -------- --------
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 Other
Comprehensive Income (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.
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,b)
========================= =============== =============== ===============
2004 $ 323 $ -- $ 323
2005 -- 157 157
2006 346 450 796
2007 250 300 550
2008 10 395 405
Thereafter 1,553 115 1,668
--------------- --------------- ---------------
TOTAL $ 2,482 $ 1,417 $ 3,899
=============== =============== ===============
Average interest rate 7.44% 3.01% 5.83%
=============== =============== ===============
Fair Value $ 2,953 $ 1,581 $ 4,534
========================= =============== =============== ===============
(a) Includes fixed-rate debt with fair-value hedges but excludes $106 million
of mark-to- market adjustments related to such hedges.
(b) Excludes $8 million of unamortized 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
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,
24
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
Non-current 157 120
-------- --------
$ 321 $ 236
================================================== ======== ========
Derivative financial instrument liabilities (a)
Current $ 115 $ 102
Non-current 23 119
-------- --------
$ 138 $ 221
================================================== ======== ========
(a) Amounts include energy-trading contracts.
As a result of fair-value swaps, the amount of interest expense recorded in
the income statement is lower by approximately $45 million and $7 million for
the years ended December 31, 2002 and 2001, respectively.
The following table summarizes after-tax derivative activity recorded in
OCI:
For the years ended December 31 (in millions) 2002 2001
==================================================== ======== ========
Beginning Balance $ (20) $ --
Cumulative effect of change in accounting principle -- (27)
(Losses) gains from changes in current cash flow
hedges (14) 11
Amount reclassified to income 8 (4)
-------- --------
Ending Balance $ (26) $ (20)
==================================================== ======== ========
During the years ended December 31, 2002 and 2001, an $8 million after-tax
loss and a $4 million after-tax gain, respectively, were reclassified from OCI
into earnings, resulting from the expiration of cash-flow hedges when the hedged
transactions closed. During the years ended December 31, 2002 and 2001, a net
unrealized after-tax loss of $14 million and a net unrealized after-tax gain of
$11 million, respectively, were recorded to OCI relating to changes in current
cash-flow hedges. During the next twelve months, Occidental expects that $3
million of net derivative after-tax losses included in OCI, based on their
valuation at December 31, 2002, will be reclassified into earnings when the
hedged transactions close. Hedge ineffectiveness did not have a significant
impact on earnings for the years ended December 31, 2002 and 2001.
ACCOUNTING FOR ENERGY-TRADING ACTIVITIES
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Contracts under Issue No. 98-10." These provisions prescribe significant
changes in how revenue from energy trading is recorded. Occidental has two major
types of oil and gas revenues: (1) Revenues from its equity production; and (2)
revenues from the sale of oil and gas produced by other companies, but purchased
and resold by Occidental, referred to as revenue from trading activities. Both
types of sales involve physical deliveries and had been historically recorded on
a gross basis in accordance with generally accepted accounting principles. With
the adoption of EITF Issue No. 02-3, Occidental now reflects the revenue from
trading activities on a net basis. There were no changes in gross margins, net
income, cash flow or earnings per share for any period as a result of adopting
this requirement. However, net sales and cost of sales were reduced by equal and
offsetting amounts to reflect the adoption of this requirement. Occidental has
not engaged in any of the round-trip trading activities that were the focus of
the FERC's energy-industry investigation activity in 2002. For the years ended
December 31, 2002, 2001 and 2000, net sales and cost of sales were reduced from
amounts previously reported by approximately $2.2 billion (representing amounts
for the first two quarters of 2002), $5.8 billion and $4.9 billion,
respectively, to conform to the current presentation.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required
that all energy-trading contracts must be marked to fair value with gains and
losses included in earnings, whether the contracts were derivatives or not. In
October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
will adopt this accounting change in the first quarter of 2003 and expects to
record a cumulative effect of a change in accounting principles charge of
approximately $19 million, after tax. Starting January 1, 2003, Occidental no
longer records energy-trading contracts that are not derivatives on a
mark-to-market basis.
TAXES
Deferred tax liabilities were $868 million at December 31, 2002, net of
deferred tax assets of $733 million. The current portion of the deferred tax
assets of $114 million is included in prepaid expenses and other. The net
deferred tax assets are expected to be realized through future operating income
and reversal of taxable temporary differences.
25
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
Occidental Petroleum Corporation (OPC) and certain of its subsidiaries have
been named in a substantial number of lawsuits, claims and other legal
proceedings. These actions seek, among other things, compensation for alleged
personal injury, breach of contract, property damage, punitive damages, civil
penalties or other losses; or injunctive or declaratory relief. OPC and certain
of its subsidiaries also have been named in proceedings under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and similar
federal, state and local environmental laws. These environmental proceedings
seek funding or performance of remediation and, in some cases, compensation for
alleged property damage, punitive damages and civil penalties; however,
Occidental is usually one of many companies in these proceedings and has to date
been successful in sharing response costs with other financially-sound
companies. With respect to all such lawsuits, claims and proceedings, including
environmental proceedings, Occidental accrues reserves when it is probable a
liability has been incurred and the amount of loss can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1996 are closed for U.S. federal income
tax purposes. Taxable years 1996 through 2000 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law.
At December 31, 2002, commitments for major capital expenditures during
2003 and thereafter were approximately $158 million.
Occidental has entered into agreements providing for future payments to
secure terminal and pipeline capacity, drilling services, electrical power,
steam and certain chemical raw materials. At December 31, 2002, the net present
value of the fixed and determinable portion of the obligations under these
agreements, which were used to collateralize financings of the respective
suppliers, aggregated $94 million, which was payable as follows (in millions):
2003--$21, 2004--$19, 2005--$16, 2006--$14, 2007--$11 and 2008 through
2019--$13. Fixed payments under these agreements were $27 million in 2002, $20
million in 2001 and $42 million in 2000.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.3 billion capital expenditures estimated for 2003.
As discussed under "Additional Accounting Changes" (below), FIN No. 45
requires the disclosure in Occidental's financial statements of information
relating to guarantees issued by Occidental and outstanding at December 31,
2002.
These guarantees encompass performance bonds, letters of credit,
indemnities, commitments and other forms of guarantees provided by Occidental to
third parties, mainly to provide assurance that Occidental and/or its
subsidiaries and affiliates will meet their various obligations ("guarantees").
At December 31, 2002, the notional amount of the guarantees was
approximately $1 billion. Of this amount, approximately $700 million relates to
Occidental's guarantee of equity investees' debt and other commitments. An
additional $200 million relates to the LaPorte, Texas VCM plant operating lease
and other equipment leases. The foregoing items have also been discussed above
in the "Additional Considerations Regarding Funding and Liquidity" section,
specifically, the debt guarantees relating to OxyMar and Elk Hills Power, the
guarantees on debt and other commitments relating to the Ecuador pipeline and
the residual value guarantee of the LaPorte, Texas VCM plant operating lease.
The remaining $100 million relates to various indemnities and guarantees
provided to third parties.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2002, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect upon
Occidental's consolidated financial position or results of operations. However,
after taking into account reserves, management does not expect the ultimate
resolution of any of these matters to have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
ENVIRONMENTAL EXPENDITURES
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are subject
to environmental-protection laws. Costs associated with environmental compliance
have increased over time and are generally expected to rise in the future.
Environmental expenditures related to current operations are factored into the
overall business planning process. These expenditures are mainly considered an
integral part of production in manufacturing quality products responsive to
market demand.
ENVIRONMENTAL REMEDIATION
The laws which require or address environmental remediation may apply
retroactively to past waste disposal practices and releases. In many cases, the
laws apply regardless of fault, legality of the original activities or current
ownership or control of sites.
26
OPC or certain of its subsidiaries are currently participating in environmental
assessments and cleanups under these laws at federal Superfund sites, comparable
state sites and other remediation sites, including Occidental facilities and
previously owned sites. Also, OPC and certain of its subsidiaries have been
involved in a substantial number of governmental and private proceedings
involving historical practices at various sites including, in some instances,
having been named in proceedings under CERCLA and similar federal, state and
local environmental laws. These proceedings seek funding or performance of
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc. (GSH), which reports its results
directly to Occidental's corporate management.
The following table presents Occidental's environmental remediation
reserves at December 31, 2002, 2001 and 2000 grouped by three categories of
environmental remediation sites:
($ amounts in millions) 2002 2001 2000
======================= =============== =============== ===============
# of # of # of
Sites Reserve Sites Reserve Sites Reserve
----- ------- ----- ------- ----- -------
CERCLA &
Equivalent Sites 124 $ 284 126 $ 320 127 $ 263
Active Facilities 14 46 14 59 14 66
Closed or Sold
Facilities 44 63 47 75 49 73
----- ------- ----- ------- ----- -------
TOTAL 182 $ 393 187 $ 454 190 $ 402
======================= ===== ======= ===== ======= ===== =======
In determining the environmental remediation reserves, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. Occidental expects that it will continue to incur additional
liabilities beyond those recorded for environmental remediation at these and
other sites. The range of reasonably possible loss for existing environmental
remediation matters could be up to $400 million beyond the amount accrued. Many
factors could result in changes to Occidental's environmental reserves and
reasonably possible range of loss. The most significant are:
>> The original cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Remediation technology might improve to decrease the cost of remediation.
In particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bio-remediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
For Management's opinion, refer to the "Lawsuits, Claims, Commitments,
Contingencies and Related Matters" section of this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CERCLA AND EQUIVALENT SITES
At December 31, 2002, OPC or certain of its subsidiaries have been named in
124 CERCLA or state equivalent proceedings, as shown below.
Number Reserve
Description ($ amounts in millions) of Sites Balance
===================================== ========== ==========
Minimal/No Exposure (a) 102 $ 7
Reserves between $1-10 MM 14 54
Reserves over $10 MM 8 223
---------- ----------
TOTAL 124 $ 284
===================================== ========== ==========
(a) Includes 33 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has denied
liability without challenge, 48 sites where Occidental's reserves are less
than $50,000 each, and 14 sites where reserves are between $50,000 and $1
million each.
The eight sites with individual reserves over $10 million in 2002 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three former chemical
plants (Western New York, Montague, Michigan and Tacoma, Washington),
replacement of a municipal drinking water treatment plant in Western New York,
and various sediment clean-up actions in Washington.
27
ACTIVE FACILITIES
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 14 active facilities. Three facilities -- certain oil
and gas properties in the southwestern United States, a chemical plant in
Louisiana, and a phosphorous recovery operation in Tennessee -- account for 62
percent of the reserves associated with these facilities.
CLOSED OR SOLD FACILITIES
There are 44 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements. Three sites
account for 66 percent of the reserves associated with this group. The three
sites are: an active refinery in Louisiana where Occidental indemnifies the
current owner and operator for certain remedial actions, a water treatment
facility at a former coal mine in Pennsylvania, and a former chemical plant in
West Virginia.
ENVIRONMENTAL COSTS
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations, are shown below for each
segment:
In millions 2002 2001 2000
============================= ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 32 $ 22 $ 17
Chemical 46 47 51
-------- -------- --------
$ 78 $ 69 $ 68
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 70 $ 60 $ 27
Chemical 16 19 20
-------- -------- --------
$ 86 $ 79 $ 47
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 23 $ 109 $ --
======== ======== ========
ENVIRONMENTAL RESERVES
Corporate $ 393 $ 454 $ 402
============================= ======== ======== ========
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
Eight counties in the Houston-Galveston area are subject to a federal
Environmental Protection Agency (EPA) mandate to adopt a plan for implementing
certain requirements of the federal Clean Air Act, known as a State
Implementation Plan. In October 2001, the EPA approved a State Implementation
Plan for the Houston-Galveston area (the Plan). In December 2002, the Texas
Commission on Environmental Quality revised the regulations associated with the
Plan. The revised Plan contains provisions requiring the reduction of 80 percent
of current nitrogen oxide (NOx) emissions and 60 percent of the volatile organic
compound (VOC) emissions in the Houston-Galveston area by November 2007.
Occidental operates six facilities that will be subject to the Plan's NOx and
VOC-reduction requirements. Occidental estimates that over the next several
years its capital expenditures will increase by a total of $70 - $120 million
for environmental control and monitoring equipment necessary to comply with the
Plan, depending on the amount of emissions reduction that is ultimately
required. Occidental began expending the capital necessary to comply with the
Plan in 2001 and expects expenditures to end in 2007, although the timing of the
expenditures will vary by facility.
Occidental presently estimates that capital expenditures for environmental
compliance (including the Plan discussed above) will be approximately $72
million for 2003 and $95 million for 2004.
FOREIGN INVESTMENTS
Portions of Occidental's assets outside North America are exposed to
political and economic risks. Occidental conducts its financial affairs so as to
mitigate its exposure against those risks. At December 31, 2002, the carrying
value of Occidental's assets in countries outside North America aggregated
approximately $2.8 billion, or approximately 17 percent of Occidental's total
assets at that date. Of such assets, approximately $1.9 billion are located in
the Middle East, approximately $628 million are located in Latin America, and
substantially all of the remainder are located in Pakistan.
CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements in accordance with GAAP
requires the management of Occidental to make estimates and judgments regarding
certain items and transactions. It is possible that materially different amounts
could be recorded if these estimates and judgments change or if the actual
results differ from these estimates and judgments. Occidental considers the
following to be its most critical accounting policies which involve the judgment
of Occidental's management.
OIL AND GAS PROPERTIES
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized.
Annual lease rentals, exploration costs, geological, geophysical and seismic
costs and exploratory dry-hole costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids (NGLs) that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions considering
future production and development costs. There are several factors which could
change Occidental's recorded oil and gas reserves. Significantly higher or lower
product prices could lead to changes in the amount of reserves due to economic
limits or the effects of production-sharing contracts. Occidental receives a
share of production from production-sharing contracts to recover its costs and
an additional share for
28
profit. Occidental's share of production from these contracts decreases when oil
prices improve and increases when oil prices decline. Overall, Occidental's net
economic benefit from these contracts is greater at higher oil prices. In other
contractual arrangements, sustained lower product prices may lead to a situation
where production of reserves becomes uneconomical. This, in turn, could lead to
a reduction in the quantity of recorded reserves. An additional factor that
could result in a change of recorded reserves is the reservoir decline rates
being different than those assumed when the reserves were initially recorded.
Estimation of future production and development costs is also subject to change
partially due to factors beyond Occidental's control, such as energy costs and
inflation or deflation of oil field service costs. Overall, Occidental's
revisions to recorded proved reserves were positive for 2002, 2001 and 2000 and
amounted to less than 1 percent, 1 percent and 7 percent, respectively.
Additionally, Occidental is required to perform impairment tests pursuant to
SFAS No. 144 when prices decline and/or reserve estimates change significantly.
There have been no impairments over the past three years.
Depreciation and depletion of oil and gas producing properties is
determined by the unit-of-production method and could change with revisions to
estimated proved recoverable reserves. The change in the depreciation and
depletion rate over the past three years due to revisions of previous reserve
estimates has been immaterial.
If Occidental's oil and gas reserves were to change based on the factors
mentioned above, the most significant impact would be on the depreciation and
depletion rate. A 5 percent increase in the amount of oil and gas reserves would
change the rate from $4.27/barrel to $4.06/barrel, which would increase net
income by $26 million annually. A 5 percent decrease in the oil and gas reserves
would change the rate from $4.27/barrel to $4.48/barrel and would result in a
decrease in net income of $26 million annually.
A portion of the carrying value of Occidental's oil and gas properties are
attributable to unproved properties. At December 31, 2002, the costs
attributable to unproved properties were approximately $1.3 billion. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs of the properties will be subject to depreciation and depletion. If the
development work were to be unsuccessful, the capitalized costs of the
properties related to this unsuccessful work would be expensed in the year in
which the determination was made. The timing of any writedowns of these unproven
properties, if warranted, depends upon the nature, timing and extent of future
exploration and development activities and their results. Occidental believes
its exploration and development efforts will allow it to fully realize the
unproved property balance.
CHEMICAL ASSETS
The most critical accounting policy affecting Occidental's chemical assets
is the determination of the estimated useful lives of its property, plant and
equipment. The estimated useful lives of Occidental's chemical assets, which
range from 3 years to 50 years, are used to compute depreciation expense and are
also used for impairment tests. The estimated useful lives used for the chemical
facilities were based on the assumption that Occidental would provide an
appropriate level of annual capital expenditures while the plants are still in
operation. Without these continued capital expenditures, the useful lives of
these plants could significantly decrease. Other factors which could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental is required to perform impairment tests on its assets whenever
events or changes in circumstances lead to a reduction in the estimated useful
lives or estimated future cash flows that would indicate that the carrying
amount may not be recoverable, or when management's plans change with respect to
those assets. Under the provisions of SFAS No. 144, Occidental must compare the
undiscounted future cash flows of an asset to its carrying value. The key
factors that could significantly affect future cash flows are future product
prices, feedstock costs, energy costs and remaining estimated useful life.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an EDC plant in June 2001, and a chlor-alkali plant in
December 2001. These facilities will remain idle until market conditions
improve. Management expects that both of these plants will become operational in
the future. The net book value of these two plants was $150 million at December
31, 2002. These facilities were tested for impairment at the time they were
temporarily idled and, based on the results, no impairment was deemed necessary
for these two facilities. Occidental continues to depreciate these facilities
based on their remaining estimated useful lives.
Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities. The change in the depreciation rate over the prior three
years has been immaterial.
If the estimated useful lives of Occidental's chemical plants were to
decrease based on the factors mentioned above, the most significant impact would
be on depreciation expense. If the estimated remaining useful lives were to
decrease by 10 percent, the annual depreciation charge would increase from $164
million to $182 million.
29
ENVIRONMENTAL COSTS AND CONTINGENCIES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental refers to currently available information, including
relevant past experience, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. For the years ended December 31, 2002 and 2001, Occidental has not
accrued any reimbursements or recoveries as assets. Recoveries and
reimbursements are recorded in income when receipt is probable. Environmental
reserves are recorded on a discounted basis only when a reserve is initially
established and the aggregate amount of the estimated costs for a specific site
and the timing of cash payments are reliably determinable. The reserve
methodology for a specific site is not modified once it has been established.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating the company's ultimate share of
liability. Occidental believes that it will not be required to assume a share of
liability of other potentially responsible parties, with whom it is alleged to
be jointly liable, in an amount that would have a material effect on
Occidental's consolidated financial position or liquidity or results of
operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: CERCLA or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
The following table shows environmental reserve activity for the past three
reporting periods:
In millions 2002 2001 2000
===================================== ======== ======== ========
Balance - Beginning of Year $ 454 $ 402 $ 454
Increases to provision including
interest accretion 25 111 2
Changes from
acquisitions/dispositions -- 5 23
Payments (84) (75) (85)
Other (2) 11 8
-------- -------- --------
Balance - End of Year $ 393 $ 454 $ 402
===================================== ======== ======== ========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years.
If the environmental reserve balance were to either increase or decrease
based on the factors mentioned above, the amount of the increase or decrease
would be immediately recognized in earnings. If the reserve balance were to
decrease by 10 percent, the company would record a pre-tax gain of $39 million.
If the reserve balance were to increase by 10 percent, the company would record
an additional pre-tax remediation expense of $39 million.
OTHER LOSS CONTINGENCIES
Occidental is involved with numerous lawsuits, claims, proceedings and
audits in the normal course of its operations. Occidental records a loss
contingency for these matters when it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. In addition, Occidental discloses, in aggregate, its
exposure to loss in excess of the amount recorded on the balance sheet for these
matters if it is reasonably possible that an additional material loss may be
incurred. In order to assess its loss contingencies, Occidental reviews its loss
contingencies on an on-going basis so that they are adequately reserved on the
balance sheet.
These reserves are based on judgments made by management with respect to
the likely outcome of these matters and are adjusted as appropriate.
Management's judgments could change based on new information, changes in laws or
regulations, changes in management's plans or intentions, the outcome of legal
proceedings, settlements or other factors.
30
ADDITIONAL ACCOUNTING CHANGES
Listed below are additional changes in accounting principles applicable to
Occidental.
FIN NO. 46
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 requires a company to consolidate a variable
interest entity if it is designated as the primary beneficiary of that entity
even if the company does not have a majority of voting interests. A variable
interest entity is generally defined as an entity where its equity is unable to
finance its activities or where the owners of the entity lack the risk and
rewards of ownership. The provisions of this statement apply at inception for
any entity created after January 31, 2003. For an entity created before February
1, 2003, the provisions of this Interpretation must be applied at the beginning
of the first interim or annual period beginning after June 15, 2003. Occidental
will adopt the provisions of FIN No. 46 in the third quarter of 2003 for
existing entities that are within the scope of this interpretation. The
statement also has disclosure requirements, some of which are required to be
disclosed for financial statements issued after January 31, 2003. On a
preliminary basis, Occidental believes that its OxyMar investment and its
LaPorte, Texas VCM plant lease will be consolidated under the provisions of this
statement. (See further discussion in "Additional Considerations Regarding
Funding and Liquidity" in the MD&A).
FIN NO. 45
In January 2003, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires a company to recognize a liability
for the obligations it has undertaken in issuing a guarantee. This liability
would be recorded at the inception of a guarantee and would be measured at fair
value. The measurement provisions of this statement apply prospectively to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of the statement apply to financial statements for periods ending after December
15, 2002. (See further discussion in "Lawsuits, Claims, Commitments,
Contingencies and Related Matters" in the MD&A). Occidental will adopt the
measurement provisions of this statement in the first quarter of 2003. The
adoption of the statement is not expected to have a material effect on the
financial statements when adopted.
SFAS NO. 148
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 permits two additional
transition methods for companies that elect to adopt the fair-value-based method
of accounting for stock-based employee compensation. The statement also expands
the disclosure requirements for stock-based compensation. The provisions of this
statement apply to financial statements for fiscal years ending after December
15, 2002. The statement is not expected to have a material impact on the
financial statements when adopted.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental will adopt SFAS No. 146 in the first quarter of 2003 and it is
not expected to have a material impact on its financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,
there was no effect on the 2002 presentation. The effects of the statement on
prior years include the reclassification of an extraordinary loss to net income
from continuing operations of $8 million ($0.02 per share) in 2001 and of $1
million (no per share effect) in 2000. There was no effect on net income or
basic earnings per common share upon adoption.
SFAS NO. 144
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
broadens the presentation of discontinued operations for long-lived assets. The
provisions of this statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. Occidental adopted this
statement in the first quarter of 2002 and it did not have an impact on the
financial statements when adopted.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Occidental's current policy
for dismantlement, restoration and reclamation costs is to accrue the estimated
future abandonment and removal costs of offshore production platforms, net of
salvage value, over their operating lives. For onshore oil and gas production,
Occidental estimates that the salvage value of the oil and
31
gas properties generally will approximate the dismantlement, restoration and
reclamation costs or that the net cost will not be material; therefore, no
accrual is recorded. Occidental makes capital renewal expenditures for its
chemical plants on a continual basis while an asset is in operation. Thus,
retirement obligations are provided for when a decision is made to dispose of a
property or when operations have been curtailed on other than a temporary basis.
Under SFAS No. 143, companies are required to recognize the fair value of a
liability for an asset retirement obligation in the period in which the
liability is incurred if there is a legal obligation to dismantle the asset and
reclaim or remediate the property at the end of the useful life. Occidental will
adopt SFAS No. 143 in the first quarter of 2003. The initial adoption is
expected to result in an after-tax charge of $50 - $60 million, which will be
recorded as a cumulative effect of a change in accounting principles. The
adoption is also expected to increase net property, plant and equipment by $59
million, increase asset retirement obligation by $150 million and decrease
deferred tax liabilities by $33 million. In addition, Occidental will record a
pre-tax charge to income of approximately $17 million a year to reflect the
accretion of the liability and higher depreciation expense beginning in 2003.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement must
be applied starting with fiscal years beginning after December 15, 2001. At
December 31, 2001, the balance sheet included approximately $108 million of
goodwill and intangible assets with annual amortization expense of approximately
$6 million recorded in each of the years' income statements for the three-year
period ended December 31, 2001. As a result, elimination of goodwill
amortization would not have had a material impact on net income or earnings per
share of any of the years presented and, as a result, the transitional
disclosures of adjusted net income excluding goodwill amortization described by
SFAS No. 142 have not been presented. Upon implementation of SFAS No. 142 in the
first quarter of 2002, three separate specialty chemical businesses were
identified as separate reporting units and tested for goodwill impairment. All
three of these businesses are components of the chemical segment and were the
only reporting units having any goodwill on the balance sheet. The fair value of
each of the three reporting units was determined through third party appraisals.
The appraisals determined fair value to be the price that the assets could be
sold for in a current transaction between willing parties. As a result of the
impairment testing, Occidental recorded a "cumulative effect of changes in
accounting principles" after-tax reduction in net income of approximately $95
million due to the impairment of all the goodwill attributed to these reporting
units. Occidental now has no remaining goodwill on its financial statements.
SFAS NO. 141
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 establishes new standards for accounting and reporting business
combinations including eliminating the pooling method of accounting. The
standard applies to all business combinations initiated after June 30, 2001.
Occidental implemented the provisions of SFAS No. 141, which had no impact on
the financial statements.
SFAS NO. 133
On January 1, 2001, Occidental adopted SFAS No. 133, as amended. These
statements established accounting and reporting standards for derivative
instruments and hedging activities and required an entity to recognize all
derivatives in the statement of financial position and measure those instruments
at fair value. Changes in the derivative instrument's fair value must be
recognized in earnings unless specific hedge accounting criteria are met.
Adoption of these new accounting standards resulted in cumulative after-tax
reductions in net income of approximately $24 million and OCI of approximately
$27 million in the first quarter of 2001. The adoption also increased total
assets by $588 million and total liabilities by $639 million as of January 1,
2001.
EITF ISSUE NO. 00-10
In the fourth quarter of 2000, Occidental adopted the provisions of EITF
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs", which
establishes accounting and reporting standards for the treatment of shipping and
handling costs. Among its provisions, EITF Issue No. 00-10 requires that
transportation costs that had been accounted for as deductions from revenues
should now be recorded as an expense. The implementation of EITF Issue No. 00-10
had no effect on net income. All prior-year balances have been adjusted to
reflect this accounting change. The transportation costs that have been removed
as deductions from revenues and included in cost of sales on Occidental's
Statements of Operations totaled $245 million in 2000.
SFAS NO. 140
In the fourth quarter of 2000, Occidental adopted the disclosure provisions
of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB Statement No. 125", which
revises disclosure standards for asset securitizations and other financial asset
transfers. SFAS No. 140 also contains provisions which revise certain criteria
for accounting for securitizations, financial-asset transfers and collateral.
These accounting provisions were adopted by Occidental on April 1, 2001. The
implementation of the provisions of SFAS No. 140 did not have an impact on
Occidental's consolidated financial position or results of operations.
See "Derivative Activities and Market Risk" above for other accounting
changes.
32
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA
Portions of this report, including Items 1 and 2 and the information
appearing under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including the information under the
sub-caption "2003 Outlook," contain forward-looking statements and involve risks
and uncertainties that could significantly affect expected results of
operations, liquidity, cash flows and business prospects. Factors that could
cause results to differ materially include, but are not limited to: global
commodity pricing fluctuations; competitive pricing pressures; higher than
expected costs including feedstocks; crude oil and natural gas prices; chemical
prices; potential liability for remedial actions under existing or future
environmental regulations and litigation; potential liability resulting from
pending or future litigation; general domestic and international political
conditions; potential disruption or interruption of Occidental's production or
manufacturing facilities due to accidents, political events or insurgent
activity; potential failure to achieve expected production from existing and
future oil and gas development projects; the supply/demand considerations for
Occidental's products; any general economic recession or slowdown domestically
or internationally; regulatory uncertainties; and not successfully completing,
or any material delay of, any development of new fields, expansion, capital
expenditure, efficiency improvement project, acquisition or disposition.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "will", "anticipate", "plan", "intend",
"believe", "expect" or similar expressions that convey the uncertainty of future
events or outcomes. Occidental expressly disclaims any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed might not occur.
REPORT OF MANAGEMENT
The management of Occidental Petroleum Corporation is responsible for the
integrity of the financial data reported by Occidental and its subsidiaries.
Fulfilling this responsibility requires the preparation and presentation of
consolidated financial statements in accordance with generally accepted
accounting principles. Management uses internal accounting controls,
corporate-wide policies and procedures and judgment so that such statements
reflect fairly Occidental's consolidated financial position, results of
operations and cash flows.
33
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders, Occidental Petroleum
Corporation:
We have audited the consolidated balance sheets of Occidental Petroleum
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2002. In connection with our audits of the consolidated financial
statements, we also have audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Occidental
Petroleum Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As explained in Note 4 to the financial statements, effective January 1,
2002, the Company changed its method of accounting for the impairment of
goodwill and other intangibles. Effective January 1, 2001, the Company changed
its method of accounting for derivative instruments and hedging activities.
/s/ KPMG LLP
Los Angeles, California
February 7, 2003
34
CONSOLIDATED STATEMENTS OF OPERATIONS Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
For the years ended December 31, 2002 2001 2000
====================================================================== ========== ========== ==========
REVENUES
Net sales $ 7,338 $ 8,102 $ 8,504
Interest, dividends and other income 143 223 263
Gains on disposition of assets, net 10 10 639
---------- ---------- ----------
7,491 8,335 9,406
---------- ---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales 3,385 3,626 3,933
Selling, general and administrative and other operating expenses 635 665 686
Write-down of assets 42 3 180
Depreciation, depletion and amortization of assets 1,012 965 894
Environmental remediation 23 109 --
Exploration expense 176 184 94
Interest and debt expense, net 295 401 510
---------- ---------- ----------
5,568 5,953 6,297
---------- ---------- ----------
INCOME BEFORE TAXES AND OTHER ITEMS 1,923 2,382 3,109
Provision for domestic and foreign income and other taxes 422 556 1,434
Minority interest 77 143 185
Loss (income) from equity investments 261 504 (67)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 1,163 1,179 1,557
Discontinued operations, net (79) (1) 13
Cumulative effect of changes in accounting principles, net (95) (24) --
---------- ---------- ----------
NET INCOME 989 1,154 1,570
Effect of repurchase of Trust Preferred Securities -- -- 1
---------- ---------- ----------
EARNINGS APPLICABLE TO COMMON STOCK $ 989 $ 1,154 $ 1,571
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 3.09 $ 3.16 $ 4.22
Discontinued operations, net (0.21) -- 0.04
Cumulative effect of changes in accounting principles, net (0.25) (0.06 ) --
---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE $ 2.63 $ 3.10 $ 4.26
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 3.07 $ 3.15 $ 4.22
Discontinued operations, net (0.21) -- 0.04
Cumulative effect of changes in accounting principles, net (0.25) (0.06) --
---------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 2.61 $ 3.09 $ 4.26
====================================================================== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
35
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions, except share amounts and Subsidiaries
Assets at December 31, 2002 2001
================================================================================ ========== ==========
CURRENT ASSETS
Cash and cash equivalents $ 146 $ 198
Trade receivables, net of reserves of $28 in 2002 and $35 in 2001 608 360
Receivables from joint ventures, partnerships and other 321 266
Inventories 491 414
Assets held for sale -- 131
Income tax receivable 150 35
Prepaid expenses and other 157 153
---------- ----------
TOTAL CURRENT ASSETS 1,873 1,557
---------- ----------
LONG-TERM RECEIVABLES, NET 275 2,185
---------- ----------
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
1,056 993
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas segment, successful efforts method 15,440 14,414
Chemical segment 3,689 3,757
Corporate and other 302 273
---------- ----------
19,431 18,444
Accumulated depreciation, depletion and amortization (6,395) (5,653)
---------- ----------
13,036 12,791
OTHER ASSETS 308 324
---------- ----------
$ 16,548 $ 17,850
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
36
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions, except share amounts and Subsidiaries
Liabilities and Equity at December 31, 2002 2001
================================================================================ ========== ==========
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ 206 $ --
Notes payable -- 54
Accounts payable 785 715
Accrued liabilities 914 849
Dividends payable 193 94
Obligation under natural gas delivery commitment -- 137
Liabilities held for sale -- 18
Domestic and foreign income taxes 137 27
---------- ----------
TOTAL CURRENT LIABILITIES 2,235 1,894
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES AND UNAMORTIZED DISCOUNT 3,997 4,065
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 982 1,103
Obligation under natural gas delivery commitment -- 145
Other 2,228 2,322
---------- ----------
3,210 3,570
---------- ----------
CONTINGENT LIABILITIES AND COMMITMENTS
MINORITY INTEREST 333 2,224
---------- ----------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 455 463
---------- ----------
STOCKHOLDERS' EQUITY
Nonredeemable preferred stock; $1.00 par value, authorized 50 million shares;
outstanding shares: 2002 and 2001--none -- --
Common stock, $.20 par value; authorized 500 million shares;
outstanding shares: 2002--377,860,191 and 2001--374,125,825 75 75
Additional paid-in capital 3,967 3,857
Retained earnings 2,303 1,788
Accumulated other comprehensive income (27) (86)
---------- ----------
6,318 5,634
---------- ----------
$ 16,548 $ 17,850
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Occidental Petroleum Corporation
In millions and Subsidiaries
Accumulated
Additional Retained Other
Common Paid-in Earnings Comprehensive
Stock Capital (Deficit) Income
===================================================== ============= ============= ============= =============
BALANCE, DECEMBER 31, 1999 $ 73 $ 3,787 $ (286) $ (51)
Net income -- -- 1,570 --
Other comprehensive income, net of tax -- -- -- 1
Dividends on common stock -- (92) (277) --
Issuance of common stock 1 40 -- --
Exercises of options and other, net -- 8 -- --
- ----------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 $ 74 $ 3,743 $ 1,007 $ (50)
Net income -- -- 1,154 --
Other comprehensive income, net of tax -- -- -- (36)
Dividends on common stock -- -- (373) --
Issuance of common stock -- 19 -- --
Exercises of options and other, net 1 95 -- --
- ----------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 $ 75 $ 3,857 $ 1,788 $ (86)
Net income -- -- 989 --
Other comprehensive income, net of tax -- -- -- 59
Dividends on common stock -- -- (474) --
Issuance of common stock -- 22 -- --
Exercises of options and other, net -- 88 -- --
- ----------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 $ 75 $ 3,967 $ 2,303 $ (27)
===================================================== ============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In millions
For the years ended December 31, 2002 2001 2000
================================================================= ========== ========== ==========
Net income $ 989 $ 1,154 $ 1,570
Other comprehensive income items:
Foreign currency translation adjustments 5 (12) 2
Derivative mark-to-market adjustments (6) (20) --
Minimum pension liability adjustments (5) (6) 2
Unrealized gains(losses) on securities 65 2 (3)
---------- ---------- ----------
Other comprehensive income, net of tax 59 (36) 1
---------- ---------- ----------
Comprehensive income $ 1,048 $ 1,118 $ 1,571
================================================================= ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS Occidental Petroleum Corporation
In millions and Subsidiaries
For the years ended December 31, 2002 2001 2000
================================================================================ ========== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,163 $ 1,179 $ 1,557
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 1,012 965 894
Amortization of debt discount and deferred financing costs 7 5 7
Deferred income tax (benefit) provision (141) (183) 413
Other noncash charges to income 62 106 169
Gains on disposition of assets, net and litigation settlement (10) (10) (639)
Loss (income) from equity investments 261 504 (67)
Dry hole and impairment expense 96 99 41
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes receivable (342) 1,085 (201)
Decrease (increase) in inventories (73) 37 (39)
Decrease (increase) in prepaid expenses and other assets (39) 72 34
Increase (decrease) in accounts payable and accrued liabilities 172 (1,150) 367
Increase (decrease) in current domestic and foreign income taxes 115 4 (53)
Other operating, net (174) (152) (155)
---------- ---------- ----------
Operating cash flow from continuing operations 2,109 2,561 2,328
Operating cash flow from discontinued operations (9) 5 20
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,100 2,566 2,348
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,236) (1,308) (892)
Sale of businesses and disposal of property, plant and equipment, net 41 852 1,488
Purchase of businesses, net (492) (46) (3,715)
Equity investments and other, net (5) (141) 82
---------- ---------- ----------
Investing cash flow from continuing operations (1,692) (643) (3,037)
Investing cash flow from discontinued operations (4) (8) (7)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (1,696) (651) (3,044)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt and non-recourse debt 248 861 2,447
Payments of long-term debt, non-recourse debt and capital lease liabilities (199) (2,258) (1,389)
Proceeds from issuance of common stock 22 18 41
Repurchase of Trust Preferred Securities (9) (11) (12)
Purchases for natural gas delivery commitment (95) (121) (115)
Buyout of natural gas commitment, net (179) -- --
Payments of notes payable, net -- (2) (6)
Proceeds from subsidiary preferred stock issuance 72 -- --
Cash dividends paid (375) (372) (369)
Stock options exercised 60 72 2
Other financing, net (1) (1) (1)
---------- ---------- ----------
Financing cash flow from continuing operations (456) (1,814) 598
Financing cash flow from discontinued operations -- -- (19)
---------- ---------- ----------
NET CASH (USED)PROVIDED BY FINANCING ACTIVITIES (456) (1,814) 579
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (52) 101 (117)
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 198 97 214
---------- ---------- ----------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 146 $ 198 $ 97
================================================================================ ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Occidental Petroleum Corporation
and Subsidiaries
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Occidental
Petroleum Corporation, entities where it owns a majority voting interest and its
undivided interests in oil and gas exploration and production ventures. In these
Notes, the term "Occidental" or "the Company" refers to Occidental Petroleum
Corporation and/or one or more entities where it owns a majority voting interest
and ventures. The Company's proportionate share of oil and gas exploration and
production ventures is accounted for using the pro-rata method of consolidation.
Proportionate shares of assets, liabilities, revenues and costs are reported
within the relevant lines of the balance sheets, income statements and cash flow
statements. Occidental's oil and gas ventures accounted for in this manner are
held in joint ventures, partnerships, limited liability companies or comparable
legal forms that are direct working interests. Amounts representing Occidental's
percentage interest in the underlying net assets of other affiliates in which it
does not have a majority voting interest, but as to which it exercises
significant influence, are accounted for under the equity method. Investments in
which Occidental does not exercise significant influence are accounted for under
the cost method. All material intercompany accounts and transactions have been
eliminated (see Note 15).
In addition, certain financial statements, notes and supplementary data for
prior years have been changed to conform to the 2002 presentation.
REVENUE RECOGNITION
For oil and gas, title passes to the customer when product is shipped.
Revenue is recognized after title has passed to the customer. Prices are either
fixed or based on a market index. For marketing and trading activities, revenue
is recognized on settled transactions upon completion of contract terms, and for
physical deliveries, upon title transfer. For unsettled transactions, contracts
that meet specified accounting criteria are marked to market. (See "Accounting
Changes" in Note 4).
Revenue from chemical product sales is recognized after the product is
shipped and title has passed to the customer. Prices are fixed at the time of
shipment. Customer incentive programs provide for payments or credits to be made
to customers based on the volume of product purchased over a defined period.
Total customer incentive payments over a given period are estimated and recorded
as a reduction to revenue ratably over the contract period. Such estimates are
evaluated and revised as warranted.
NATURE OF OPERATIONS
Occidental is a multinational organization whose principal business
segments are oil and gas exploration, production and marketing and chemicals
production and marketing. In oil and gas, Occidental has active exploration and
production in the United States and in ten other countries. Occidental has
interests in basic chemicals (principally chlorine and caustic soda), vinyls and
performance chemicals.
RISKS AND UNCERTAINTIES
The process of preparing consolidated financial statements in conformity
with generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the consolidated financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts, generally not by
material amounts. Management believes that these estimates and assumptions
provide a reasonable basis for the fair presentation of Occidental's financial
position and results of operations.
The carrying value of Occidental's property, plant and equipment (PP&E) is
based on the historical cost incurred to acquire the PP&E, net of accumulated
depreciation and net of any impairment charges. Occidental is required to
perform impairment tests on its assets whenever events or changes in
circumstances lead to a reduction in the estimated useful lives or estimated
future cash flows that would indicate that the carrying amount may not be
recoverable, or when management's plans change with respect to those assets.
Under the provisions of Statement of Financial Accounting Standards (SFAS) No.
144, Occidental must compare the undiscounted future cash flows of an asset to
its carrying value.
Included in the accompanying consolidated balance sheet are deferred tax
assets of $733 million as of December 31, 2002, the noncurrent portion of which
is netted against deferred income tax liabilities. Realization of these assets
is dependent upon Occidental generating sufficient future taxable income.
Occidental expects to realize the recorded deferred tax assets through future
operating income and reversal of taxable temporary differences.
The accompanying consolidated balance sheet includes assets of
approximately $2.8 billion as of December 31, 2002, relating to Occidental's
operations in countries outside North America. Some of these countries may be
considered politically and economically unstable. These assets and the related
operations are subject to the risk of actions by governmental authorities and
insurgent groups. Occidental attempts to conduct its financial affairs so as to
mitigate its exposure against such risks and would expect to receive
compensation in the event of nationalization.
Since Occidental's major products are commodities, significant changes in
the prices of oil and gas and chemical products would have a significant impact
on Occidental's results of operations for any particular year.
40
FOREIGN CURRENCY TRANSLATION
The functional currency applicable to all of Occidental's foreign oil and
gas operations is the U.S. dollar since cash flows are denominated principally
in U.S. dollars. Occidental's chemical operations in Brazil use the Real as the
functional currency. The effect of exchange-rate changes on transactions
denominated in nonfunctional currencies generated a loss of $26 million in 2002
and a gain of less than $1 million in both 2001 and 2000. The 2002 amount
related to the writedown and sale of Occidental's Vulcan subsidiary.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid money-market mutual funds and
bank deposits with initial maturities of three months or less. Cash equivalents
totaled approximately $116 million and $139 million at December 31, 2002 and
2001, respectively.
TRADE RECEIVABLES
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of trade receivables. This
program is used by Occidental as a low-cost source of working capital funding.
The balance of receivables sold at December 31, 2002 and 2001 was $360 million.
This amount is not included in the debt and related trade receivables accounts,
respectively, on Occidental's consolidated balance sheets. Receivables must meet
certain criteria to qualify for the program.
Under this program, Occidental serves as the collection agent with respect
to the receivables sold. An interest in new receivables is sold as collections
are made from customers. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. During the
years ended December 31, 2002, 2001 and 2000, the cost of this program amounted
to approximately 2.1 percent, 4.5 percent and 6.7 percent, respectively, of the
weighted average amount of the receivables sold in each year. The fair value of
any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2002, 2001 and
2000.
The program terminates upon certain events, including Occidental's senior
debt rating falling below investment grade. In such an event, alternative
funding would have to be arranged, which could result in an increase in debt
recorded on the consolidated balance sheet, with a corresponding increase in the
accounts receivable balance. The consolidated income statement effect of such an
event would not be significant.
INVENTORIES
For the oil and gas segment, materials and supplies are valued at the lower
of average cost or market. Inventories are reviewed periodically (at least
annually) for obsolescence. Oil and natural gas liquids (NGLs) inventories,
which typically represent the last few days of production at the end of each
period, are valued at the lower of cost or market. Natural gas trading inventory
is valued at market. (See "Accounting Changes" in Note 4).
For the chemical segment, in countries where allowable, Occidental values
its inventories using the last-in, first-out (LIFO) method as it better matches
current costs and current revenue. Accordingly, Occidental accounts for domestic
inventories in its chemical business, other than materials and supplies, on the
LIFO method. For other countries, Occidental uses the first-in, first-out (FIFO)
method (if the costs of goods are specifically identifiable) or the average-cost
method (if the costs of goods are not specifically identifiable). Materials and
supplies are accounted for using a weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property additions and major renewals and improvements are capitalized at
cost. Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets (see Note 16).
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized.
Annual lease rentals, exploration costs, geological, geophysical and seismic
costs and exploratory dry-hole costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and NGLs that geological and engineering data demonstrate with
reasonable certainty can be recovered in future years from known reservoirs
under existing economic and operating conditions considering future production
and development costs. Depreciation and depletion of oil and gas producing
properties is determined by the unit-of-production method.
A portion of the carrying value of Occidental's oil and gas properties are
attributable to unproved properties. At December 31, 2002, the costs
attributable to unproved properties were approximately $1.3 billion. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs of the properties will be subject to depreciation and depletion. If the
development work were to be unsuccessful, the capitalized costs of the
properties related to this unsuccessful work would be expensed in the year in
which the determination was made. The timing of any writedowns of these unproven
properties, if
41
warranted, depends upon the nature, timing and extent of future exploration and
development activities and their results. Occidental believes its exploration
and development efforts will allow it to fully realize the unproved property
balance.
The estimated useful lives of Occidental's chemical assets, which range
from 3 years to 50 years, are used to compute depreciation expense and are also
used for impairment tests. The estimated useful lives used for the chemical
facilities were based on the assumption that Occidental would provide an
appropriate level of annual capital expenditures while the plants are still in
operation. Without these continued capital expenditures, the useful lives of
these plants could significantly decrease. Other factors which could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental is required to perform impairment tests on its chemical assets
whenever events or changes in circumstances lead to a reduction in the estimated
useful lives or estimated future cash flows that would indicate that its
carrying amount may not be recoverable, or when management's plans change with
respect to those assets. Under the provisions of SFAS No. 144, Occidental must
compare the undiscounted future cash flows of an asset to its carrying value.
The key factors which could significantly affect future cash flows are future
product prices, feedstock costs, energy costs and remaining estimated useful
life.
Due to a temporary decrease in demand for some of its products, Occidental
has temporarily idled an EDC plant in June 2001, and a chlor-alkali plant in
December 2001. These facilities will remain idle until market conditions
improve. Management expects that both of these plants will become operational in
the future. The net book value of these two plants was $150 million at December
31, 2002. These facilities were tested for impairment at the time they were
temporarily idled and, based on the results, no impairment was deemed necessary
for these two facilities. Occidental continues to depreciate these facilities
based on their remaining estimated useful lives.
Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities.
OTHER ASSETS
Other assets include tangible and intangible assets, certain of which are
amortized over the estimated periods to be benefited.
NOTES PAYABLE
Notes payable at December 31, 2001 consisted of short-term notes due to
financial institutions and other corporations. The weighted average interest
rate on short-term borrowings outstanding as of 2001 was 2.9 percent.
ACCRUED LIABILITIES--CURRENT
Accrued liabilities include the following (in millions):
Balance at December 31, 2002 2001
================================================================= ========== ==========
Accrued payroll, commissions and related expenses $ 159 $ 143
Accrued environmental reserves $ 84 $ 96
Derivative financial instruments $ 115 $ 102
- ----------------------------------------------------------------- ---------- ----------
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental refers to currently available information, including
relevant past experience, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. For the years ended December 31, 2002 and 2001, Occidental has not
accrued any reimbursements or recoveries as assets. Recoveries and
reimbursements are recorded in income when receipt is probable. Environmental
reserves are recorded on a discounted basis only when a reserve is initially
established and the aggregate amount of the estimated costs for a specific site
and the timing of cash payments are reliably determinable. The reserve
methodology for a specific site is not modified once it has been established.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating the company's ultimate share of
liability. Occidental believes that it will not be required to assume a share of
liability of other potentially responsible parties with whom it is alleged to be
jointly liable in an amount that would have a material effect on Occidental's
consolidated financial position or liquidity or results of operations.
42
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
The following shows environmental reserve activity for the past three
reporting periods:
12 Months 12 Months 12 Months
Ended Ended Ended
(In millions) 12/31/02 12/31/01 12/31/00
============================================================ ========== ========== ==========
Balance - Beginning of Year $ 454 $ 402 $ 454
Increases to provision including interest accretion 25 111 2
Changes from acquisitions/dispositions -- 5 23
Payments (84) (75) (85)
Other (2) 11 8
---------- ---------- ----------
Balance - End of Year $ 393 $ 454 $ 402
============================================================ ========== ========== ==========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years.
DISMANTLEMENT, RESTORATION AND RECLAMATION COSTS
For offshore production, the estimated future abandonment costs of oil and
gas properties and removal costs for platforms, net of salvage value, are
accrued over their operating lives. Such costs are calculated at
unit-of-production rates based upon estimated proved recoverable reserves and
are taken into account in determining depreciation, depletion and amortization.
For onshore production, Occidental assumes that the salvage value of the oil and
gas property will equal the dismantlement restoration and reclamation costs so
no accrual is necessary. For the chemical segment, appropriate reserves are
provided when a decision is made to dispose of a property, since Occidental
makes capital renewal expenditures on a continual basis while an asset is in
operation. Reserves for dismantlement, restoration and reclamation costs are
included in accrued liabilities and in other noncurrent liabilities and amounted
to $0 million and $14 million, respectively, at December 31, 2002, and amounted
to $1 million and $21 million, respectively, at December 31, 2001. (See
"Accounting Changes" in Note 4.)
DERIVATIVE INSTRUMENTS
Occidental accounts for its derivatives under the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS No. 137 and SFAS No. 138 (collectively SFAS No. 133). Under SFAS No.
133, recognition of the gain or loss that results from recording and adjusting a
derivative to fair market value depends on the purpose for issuing or holding
the derivative. Gains and losses from derivatives that are not designated as
hedges are recognized immediately in earnings. A hedge is considered effective
if changes in its value are offset exactly by changes in the value of the item
being hedged. A hedge is ineffective to the extent changes in its value are not
matched by offsetting changes in value for the item being hedged. If a
derivative is used to hedge the fair value of an asset or liability (fair value
hedge), the gains or losses from adjusting the derivative to its market value
are recognized in earnings immediately and to the extent the hedge is effective,
offset the concurrent recognition in earnings of changes in the fair value of
the hedged item. Gains or losses from derivatives used to hedge future cash
flows are recorded on the balance sheet in accumulated other comprehensive
income (OCI), a component of stockholders' equity, until the transaction that is
hedged is recognized in earnings. However, to the extent the value of the
derivative differs from the value of the anticipated cash flows of the hedged
transaction, the hedge is considered partly ineffective and the resulting gains
or losses are recognized immediately in earnings.
43
FINANCIAL INSTRUMENTS
Occidental values financial instruments as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The carrying amounts of
cash and cash equivalents and short-term notes payable approximate fair value
because of the short maturity of those instruments. The carrying value of other
on-balance sheet financial instruments other than debt approximates fair value
and the cost, if any, to terminate off-balance sheet financial instruments is
not significant.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments, net of refunds, during the years 2002, 2001 and 2000
included federal, foreign and state income taxes of approximately $111 million,
$408 million and $682 million, respectively. Interest paid (net of interest
capitalized) totaled approximately $250 million, $389 million and $516 million
for the years 2002, 2001 and 2000, respectively. (See Note 3 for detail of
noncash investing and financing activities regarding certain acquisitions).
NOTE 2 DERIVATIVE ACTIVITIES INCLUDING FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
COMMODITY PRICE DERIVATIVES
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Overall, Occidental usually remains unhedged to long-term oil and gas prices and
its use of derivatives in hedging activity remains at a low level.
In September 2002, Occidental unwound its natural gas delivery commitment
and corresponding natural gas price swap, which were entered into in November
1998. Occidental recognized a pre-tax loss of $3 million related to these
transactions.
FAIR VALUE OF CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2002 and 2001 and segregate
the open contracts at December 31, 2002 by maturity periods.
(in millions) 2002 2001
========================================================================================== ========== ==========
Fair value of contracts outstanding at beginning of year $ 7 $ (66)
Gains on contracts realized or otherwise settled during the year (1) (30)
Changes in fair value attributable to changes in valuation techniques and assumptions -- --
Other changes in fair values 28 103
---------- ----------
Fair value of contracts outstanding at end of year $ 34 $ 7
========================================================================================== ========== ==========
Maturity Periods
-------------------------------------------------
2004 2006 2008 and Total
Source of Fair Value 2003 to 2005 to 2007 thereafter Fair Value
======================================================= ========== ========== ========== ========== ==========
Prices actively quoted $ (12) $ 6 $ 2 $ 2 $ (2)
Prices provided by other external sources 35 7 (8) 2 36
Prices based on models and other valuation methods (5) 5 -- -- --
---------- ---------- ---------- ---------- ----------
TOTAL $ 18 $ 18 $ (6) $ 4 $ 34
======================================================= ========== ========== ========== ========== ==========
44
The tables above include the fair value of physical positions and the fair
value of the related financial instruments for trading and marketing operations.
At December 31, 2002 and 2001, the physical positions were a net gain of $42
million and a net loss of $2 million, respectively. The value of the derivative
financial instruments that offset these physical positions are a net loss of $8
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
Non-current 157 120
---------- ----------
$ 321 $ 236
======================================================= ========== ==========
Derivative financial instrument liabilities (a)
Current $ 115 $ 102
Non-current 23 119
---------- ----------
$ 138 $ 221
======================================================= ========== ==========
(a) Amounts include energy-trading contracts
45
As a result of fair-value swaps, the amount of interest expense recorded in
the income statement is lower by approximately $45 million and $7 million for
the years ended December 31, 2002 and 2001, respectively.
The following table summarizes after-tax derivative activity recorded in
OCI (in millions):
Balance at December 31, 2002 2001
================================================================= ========== ==========
Beginning Balance $ (20) $ --
Cumulative effect of change in accounting principle -- (27)
(Losses) gains from changes in current cash flow hedges (14) 11
Amount reclassified to income 8 (4)
---------- ----------
Ending Balance $ (26) $ (20)
================================================================= ========== ==========
During the years ended December 31, 2002 and 2001, an $8 million after-tax
loss and a $4 million after-tax gain, respectively, were reclassified from OCI
into earnings, resulting from the expiration of cash-flow hedges when the hedged
transactions closed. During the years ended December 31, 2002 and 2001, a net
unrealized after-tax loss of $14 million and a net unrealized after-tax gain of
$11 million, respectively, were recorded to OCI relating to changes in current
cash-flow hedges. During the next twelve months, Occidental expects that $3
million of net derivative after-tax losses included in OCI, based on their
valuation at December 31, 2002, will be reclassified into earnings when the
hedged transactions close. Hedge ineffectiveness did not have a significant
impact on earnings for the years ended December 31, 2002 and 2001.
NOTE 3 BUSINESS COMBINATIONS AND ASSET ACQUISITIONS AND DISPOSITIONS
- --------------------------------------------------------------------------------
2002
In November 2002, Occidental closed a transaction with the United Arab
Emirates' (UAE) Offsets Group in which Occidental acquired a 24.5 percent
interest in Dolphin Energy Limited (DEL), the operator of the Dolphin Project,
for a total of $342 million. DEL is a company that also includes as shareholders
the UAE Offsets Group (51 percent interest) and TotalFinaElf (24.5 percent
interest). The amount has been allocated, on a preliminary basis, primarily to
investment in unconsolidated entities. Occidental will also be responsible for
its 24.5 percent share of costs on an ongoing basis. The Dolphin Project, which
is expected to cost its owners $3.5 billion in total, consists of two parts: (1)
a development and production sharing agreement with Qatar to develop and produce
natural gas and condensate in Qatar's North Field; and (2) the rights for DEL to
build, own and operate a 260-mile-long, 48-inch export pipeline to transport 2
billion cubic feet per day of dry natural gas from Qatar to markets in the UAE
for a period of 25 years. The pipeline will have capacity to transport up to 3.2
billion cubic feet per day, which will allow for additional business development
projects. DEL is currently negotiating contracts to market the gas with users in
the UAE. Construction on the upstream production and processing facilities and
the pipeline is expected to begin in 2003 and production is scheduled to begin
in early 2006. The Dolphin partners anticipate securing project financing.
Occidental has not recorded any revenue or production costs for this project and
no oil and gas reserves have been included in its 2002 proved oil and gas
reserves.
In August 2002, Occidental and Lyondell Chemical Company completed an
agreement for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase a 21-percent equity interest in Lyondell. Occidental entered
into these transactions to diversify its petrochemicals interests. These
transactions also reduced Occidental's direct exposure to petrochemicals
volatility, yet allowed it to preserve, through its Lyondell investment, an
economic upside when the petrochemicals industry recovers. In connection with
these transactions, Occidental wrote down its investment in the Equistar
partnership to fair value by recording a $412 million pre-tax charge as of
December 2001. After the write-down, the net book value of Occidental's
investment in Equistar at December 31, 2001, after considering tax effects,
approximated the fair value of the Lyondell shares Occidental expected to
receive, less transaction costs. Occidental recorded an after-tax gain of $164
million in the third quarter of 2002, as a result of closing these transactions
on August 22, 2002. Occidental's initial carrying value of the Lyondell
investment was $489 million, which represented the fair value of Lyondell's
shares at closing.
In 2002, Occidental increased its ownership in Badin Block 1 and 2R by
purchasing additional interests in these two blocks from the government of
Pakistan for approximately $72 million.
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its calendering operations
(Vulcan) for a $6 million note receivable. In the third quarter of 2002,
Occidental recorded an after-tax impairment charge of $69 million and classified
both of these businesses as discontinued operations. The fair value of these
businesses was determined by the expected sales proceeds from third party
buyers. When these transactions closed, no significant gain or loss was
recorded. For the years ended December 31, 2002, 2001 and 2000, the discontinued
operations had revenues of $91 million, $124 million and $166 million,
respectively, and pre-tax income (loss) of $(98) million, $2 million and $22
million, respectively.
46
2001
On August 31, 2001, Occidental sold its interest in a subsidiary that owned
a Texas intrastate pipeline system. The entity was sold to Kinder Morgan Energy
Partners, L.P. for $360 million. Occidental recorded an after-tax loss of
approximately $272 million in connection with this transaction.
On July 10, 2001, Occidental completed the sale of its interest in the
Tangguh LNG project in Indonesia to Mitsubishi Corporation of Japan for proceeds
of $503 million. Occidental recorded an after-tax gain of approximately $399
million for this transaction.
2000
On December 4, 2000, Occidental completed an agreement with BP to obtain
BP's interest in a carbon dioxide field in New Mexico and related pipelines in
exchange for Occidental's interest in the Milne Point oil field in Alaska,
together with additional cash consideration. The BP properties acquired had a
book value of $51 million, and Occidental paid $14 million as additional
consideration. The gain on this transaction was immaterial.
On November 29, 2000, OxyChem purchased a 28.6-percent interest in OxyMar,
a Texas general partnership that owns the Ingleside, Texas VCM facility operated
by OxyChem. The interest was purchased from U.S. VCM Corporation, an affiliate
of Marubeni Corporation, which continues to own a 21.4-percent interest and
remains a 50-percent partner for corporate-governance purposes. Occidental
received approximately $37 million relating to the purchase and, as a result,
agreed to guarantee an additional $110 million of OxyMar's debt. The $37 million
was recorded as a reduction to Occidental's investment in OxyMar. OxyVinyls owns
the remaining 50-percent interest. No gain or loss was recognized on this
transaction.
On November 1, 2000, Occidental agreed to farm out a partial economic
interest in its Block 15 operations in Ecuador to AEC, now EnCana, for $68
million. EnCana earns a 40-percent interest in the block and will reimburse
Occidental for certain capital costs through 2004 estimated at $110 million.
Occidental remains the operator of Block 15. The gain on this transaction was
not significant.
On November 1, 2000, Occidental completed the sale of its Durez phenolic
resins and compounding businesses and assets to Sumitomo Bakelite Co., Ltd. for
gross proceeds of approximately $150 million. There was a $13 million after-tax
gain on this transaction.
On August 15, 2000, Occidental completed agreements with respect to two
transactions with Apache Corporation involving Occidental's interests in the
Continental Shelf of the Gulf of Mexico (GOM). Occidental entered into a
volumetric production payment (VPP) transaction to deliver, over 36 months, a
substantial portion of its share of the proved developed producing gas reserves
from these GOM interests to Apache amounting to 86 Bcf, for approximately $280
million. The value attributed to the production payment was based on price
curves existing at the time the transaction was entered into. The $280 million,
which represented the initial fair value of Occidental's obligation to deliver
future gas production, was deferred and is being recognized in income as the gas
is delivered. Occidental retained ownership of the first 2.7 million barrels of
oil, which is being used to pay for the VPP production costs. Occidental
believes this amount is sufficient to cover these costs. The remaining amount of
this retained interest at December 31, 2002 was 0.4 million barrels, or
approximately $12 million. Occidental also agreed to sell a 60 percent interest
in the subsidiary that holds a residual interest, post-VPP, in the GOM assets
for approximately $62 million. As a result of this sale and the consequent
elimination of a portion of Occidental's responsibility for abandonment
liabilities, Occidental recorded an after-tax gain of $39 million. Approximately
70 percent of the gain was the result of the elimination of the abandonment
liability. As part of these transactions, Apache was granted four annual call
options, each of which gives them the right to purchase for $11 million an
additional 10 percent of the entity holding the residual interest in the GOM
assets. Occidental also was granted four annual put options with generally
similar provisions. Nominal value was attributed to the call and put options.
Apache exercised the call options that became available in 2001 and 2002. Gains
resulting from each exercise of the options were not material.
On May 8, 2000, Occidental completed an agreement to sell its producing
properties in Peru to Pluspetrol for $30 million. In connection with this
transaction, Occidental recorded an after-tax charge of approximately $29
million in December 1999 to write-down the properties to their fair values.
On April 24, 2000, Occidental completed the acquisition of THUMS, the field
contractor of the Long Beach Unit, an oil and gas production unit, for
approximately $68 million.
On April 19, 2000, Occidental completed its acquisition of all of the
common interest in Altura, the largest oil producer in Texas. The acquisition
was valued at approximately $3.6 billion. Occidental paid approximately $1.2
billion to the sellers, affiliates of BP and Royal Dutch/Shell Group (Shell), to
acquire the common limited partnership interest and control of the general
partner, which manages, operates and controls 100 percent of the Altura assets.
The partnership borrowed approximately $2.4 billion, which had recourse only to
the Altura assets. The $2.4 billion loan had been completely repaid by the end
of 2001. The partnership also loaned approximately $2.0 billion to affiliates of
the sellers, evidenced by two notes, which provide credit support to the
partnership. The sellers retained a preferred limited partnership interest of
approximately $2.0 billion and were entitled to certain distributions from the
partnership. Occidental exercised an option in May 2002 to redeem the remaining
partnership interests of $2.0 billion held by affiliates of BP and Shell in
exchange for the notes receivable of $2.0 billion to the partnership.
Occidental's results of operations include the operations of the Altura assets
from the date of acquisition. Pro-forma net income for the year ended December
31, 2000, including historical Altura's results as if the acquisition had
occurred on January 1, 2000, would have been $1.6
47
billion ($4.47 earnings per share). Pro-forma revenues would have been $9.8
billion for the year ended December 31, 2000. The pro-forma calculations were
made with historical operating results from Altura prior to ownership by
Occidental and give effect to certain adjustments, including increased
depreciation, depletion and amortization to reflect the value assigned to the
Altura property, plant and equipment, increased interest expense, and income tax
effects. The pro-forma results are not necessarily indicative of the results of
operations that would have occurred if the acquisition had been made at the
beginning of the periods presented or that may be obtained in the future. Also,
the pro-forma calculations do not reflect anticipated cost savings, synergies,
changes in realized prices or production rates and certain other adjustments
that are expected to result from the acquisition and operation of Altura.
On April 18, 2000, Occidental completed the sale of its 29.2-percent stake
in CanadianOxy for gross proceeds of approximately $1.2 billion Canadian. This
sale resulted in a net pre-tax gain of approximately $493 million. In addition,
Occidental and CanadianOxy exchanged their respective 15-percent interests in
joint businesses of approximately equal value, resulting in Occidental owning
100 percent of an oil and gas operation in Ecuador and CanadianOxy owning 100
percent of sodium chlorate operations in Canada and Louisiana.
NOTE 4 ASSET WRITE-DOWNS AND ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
ASSET WRITE-DOWNS
The 2002 results included pre-tax chemical asset write-downs of $25 million
for a polyvinyl chloride (PVC) dispersion resin plant and $17 million for
production assets at a chlor-alkali facility. The fair value of these assets,
which are classified as held for use, was determined by internal valuation
methodologies. The write-downs were the result of continued depressed market
conditions and regulatory requirements.
The 2000 results included pre-tax charges of $120 million for the
write-down of the chemical intermediate businesses to net realizable value, $53
million for the write-down of various oil and gas assets and investments and $15
million for the write-down of various chemical assets.
The write-down of the chemical intermediate businesses was based on
management's decision to exit this business through a sale or shutdown. The
write-down was for costs associated with plant shutdown, employee severance,
pension and retiree medical costs, inventory write-downs, decommissioning
equipment, loss contract obligations and PP&E write-downs. The fair value of
these assets, which were classified as held for sale, was determined by
estimated sales proceeds from interested third party buyers.
In July 2000, Occidental received an investment bankers' report for Premcor
(formerly Clark) that reviewed public market options if Premcor were to decide
to make an initial public offering of its common stock. Occidental accounts for
its investment in Premcor on the cost method of accounting. Based on the study,
Occidental believed its investment was impaired on an other-than-temporary
basis. Occidental assumed the mid point of the range in the study, of
approximately $60 million, to be a reasonable estimate of the implied fair value
of its Premcor investment. Therefore, to reflect the impairment in value of its
investment, Occidental recorded a writedown in the third quarter of 2000 of $35
million.
ACCOUNTING CHANGES
FIN NO. 46
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities."
FIN No. 46 requires a company to consolidate a variable interest entity if it is
designated as the primary beneficiary of that entity even if the company does
not have a majority of voting interests. A variable interest entity is generally
defined as an entity where its equity is unable to finance its activities or
where the owners of the entity lack the risk and rewards of ownership. The
provisions of this statement apply at inception for any entity created after
January 31, 2003. For an entity created before February 1, 2003, the provisions
of this Interpretation must be applied at the beginning of the first interim or
annual period beginning after June 15, 2003. Occidental will adopt the
provisions of FIN No. 46 in the third quarter of 2003 for existing entities that
are within the scope of this interpretation. The statement also has disclosure
requirements, some of which are required to be disclosed for financial
statements issued after January 31, 2003. On a preliminary basis, Occidental
believes that its OxyMar investment and its LaPorte, Texas VCM plant lease will
be consolidated under the provisions of this statement. (See further discussion
in Notes 7 and 14).
FIN NO. 45
In January 2003, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires a company to recognize a liability
for the obligations it has undertaken in issuing a guarantee. This liability
would be recorded at the inception of a guarantee and would be measured at fair
value. The measurement provisions of this statement apply prospectively to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of the statement apply to financial statements for periods ending after December
15, 2002. (See further discussion in Note 9). Occidental will adopt the
measurement provisions of this statement in the first quarter of 2003. The
adoption of the statement is not expected to have a material effect on the
financial statements when adopted.
48
SFAS NO. 148
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 permits two additional
transition methods for companies that elect to adopt the fair-value-based method
of accounting for stock-based employee compensation. The statement also expands
the disclosure requirements for stock-based compensation. The provisions of this
statement apply to financial statements for fiscal years ending after December
15, 2002. The statement is not expected to have a material impact on the
financial statements when adopted.
EITF ISSUE NO. 02-3
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Contracts under Issue No. 98-10." These provisions prescribed significant
changes in how revenue from energy trading is recorded. Occidental has two major
types of oil and gas revenues: (1) Revenues from its equity production; and (2)
revenues from the sale of oil and gas produced by other companies, but purchased
and resold by Occidental, referred to as revenue from trading activities. Both
types of sales involve physical deliveries and had been historically recorded on
a gross basis in accordance with generally accepted accounting principles. With
the adoption of EITF Issue No. 02-3, Occidental now reflects the revenue from
trading activities on a net basis. There were no changes in gross margins, net
income, cash flow or earnings per share for any period as a result of adopting
this requirement. However, net sales and cost of sales were reduced by equal and
offsetting amounts to reflect the adoption of this requirement. Occidental has
not engaged in any of the round-trip trading activities that were the focus of
the FERC's energy-industry investigation activity in 2002. For the years ended
December 31, 2002, 2001 and 2000, net sales and cost of sales were reduced from
amounts previously reported by approximately $2.2 billion (representing amounts
for the first two quarters of 2002), $5.8 billion and $4.9 billion,
respectively, to conform to the current presentation.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required
that all energy-trading contracts must be marked to fair value with gains and
losses included in earnings, whether the contracts were derivatives or not. In
October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
will adopt this accounting change in the first quarter of 2003 and expects to
record a cumulative effect of a change in accounting principles charge of
approximately $19 million, after tax. Starting January 1, 2003, Occidental no
longer records energy-trading contracts that are not derivatives on a
mark-to-market basis.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental will adopt SFAS No. 146 in the first quarter of 2003 and it is
not expected to have a material impact on its financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,
there was no effect on the 2002 presentation. The effects of the statement on
prior years include the reclassification of an extraordinary loss to net income
from continuing operations of $8 million ($0.02 per share) in 2001 and of $1
million (no per share effect) in 2000. There was no effect on net income or
basic earnings per common share upon adoption.
SFAS NO. 144
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
broadens the presentation of discontinued operations for long-lived assets. The
provisions of this statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. Occidental adopted this
statement in the first quarter of 2002 and it did not have an impact on the
financial statements when adopted.
49
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Occidental's current policy
for dismantlement, restoration and reclamation costs is to accrue the estimated
future abandonment and removal costs of offshore production platforms, net of
salvage value, over their operating lives. For onshore oil and gas production,
Occidental estimates that the salvage value of the oil and gas properties
generally will approximate the dismantlement, restoration and reclamation costs
or that the net cost will not be material; therefore, no accrual is recorded.
Occidental makes capital renewal expenditures for its chemical plants on a
continual basis while an asset is in operation. Thus, retirement obligations are
provided for when a decision is made to dispose of a property or when operations
have been curtailed on other than a temporary basis. Under SFAS No. 143,
companies are required to recognize the fair value of a liability for an asset
retirement obligation in the period in which the liability is incurred if there
is a legal obligation to dismantle the asset and reclaim or remediate the
property at the end of the useful life. Occidental will adopt SFAS No. 143 in
the first quarter of 2003. The initial adoption is expected to result in an
after-tax charge of $50 - $60 million, which will be recorded as a cumulative
effect of a change in accounting principles. The adoption is also expected to
increase net property, plant and equipment by $59 million, increase asset
retirement obligation by $150 million and decrease deferred tax liabilities by
$33 million. In addition, Occidental will record a pre-tax charge to income of
approximately $17 million a year to reflect the accretion of the liability and
higher depreciation expense beginning in 2003.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement must
be applied starting with fiscal years beginning after December 15, 2001. At
December 31, 2001, the balance sheet included approximately $108 million of
goodwill and intangible assets with annual amortization expense of approximately
$6 million recorded in each of the years' income statements for the three-year
period ended December 31, 2001. As a result, elimination of goodwill
amortization would not have had a material impact on net income or earnings per
share of any of the years presented and, as a result, the transitional
disclosures of adjusted net income excluding goodwill amortization described by
SFAS No. 142 have not been presented. Upon implementation of SFAS No. 142 in the
first quarter of 2002, three separate specialty chemical businesses were
identified as separate reporting units and tested for goodwill impairment. All
three of these businesses are components of the chemical segment and were the
only reporting units having any goodwill on the balance sheet. The fair value of
each of the three reporting units was determined through third party appraisals.
The appraisals determined fair value to be the price that the assets could be
sold for in a current transaction between willing parties. As a result of the
impairment testing, Occidental recorded a cumulative effect of changes in
accounting principles after-tax reduction in net income of approximately $95
million due to the impairment of all the goodwill attributed to these reporting
units. Occidental now has no remaining goodwill on its financial statements.
SFAS NO. 141
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 establishes new standards for accounting and reporting business
combinations including eliminating the pooling method of accounting. The
standard applies to all business combinations initiated after June 30, 2001.
Occidental has implemented the provisions of SFAS No. 141, which had no impact
on the financial statements.
SFAS NO. 133
On January 1, 2001, Occidental adopted SFAS No. 133, as amended. These
statements established accounting and reporting standards for derivative
instruments and hedging activities and required an entity to recognize all
derivatives in the statement of financial position and measure those instruments
at fair value. Changes in the derivative instrument's fair value must be
recognized in earnings unless specific hedge accounting criteria are met.
Adoption of these new accounting standards resulted in cumulative after-tax
reductions in net income of approximately $24 million and OCI of approximately
$27 million in the first quarter of 2001. The adoption also increased total
assets by $588 million and total liabilities by $639 million as of January 1,
2001.
EITF ISSUE NO. 00-10
In the fourth quarter of 2000, Occidental adopted the provisions of EITF
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs", which
establishes accounting and reporting standards for the treatment of shipping and
handling costs. Among its provisions, EITF Issue No. 00-10 requires that
transportation costs that had been accounted for as deductions from revenues
should now be recorded as an expense. The implementation of EITF Issue No. 00-10
had no effect on net income. All prior-year balances have been adjusted to
reflect this accounting change. The transportation costs that have been removed
as deductions from revenues and included in cost of sales on Occidental's
Statements of Operations totaled $245 million in 2000.
50
SFAS NO. 140
In the fourth quarter of 2000, Occidental adopted the disclosure provisions
of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB Statement No. 125", which
revises disclosure standards for asset securitizations and other financial asset
transfers. SFAS No. 140 also contains provisions which revise certain criteria
for accounting for securitizations, financial-asset transfers and collateral.
These accounting provisions were adopted by Occidental on April 1, 2001. The
implementation of the provisions of SFAS No. 140 did not have an impact on
Occidental's consolidated financial position or results of operations.
NOTE 5 INVENTORIES
- --------------------------------------------------------------------------------
Inventories of approximately $190 million and $214 million were valued
under the LIFO method at December 31, 2002 and 2001, respectively. Inventories
consisted of the following (in millions):
Balance at December 31, 2002 2001
============================================= ========== ==========
Raw materials $ 54 $ 53
Materials and supplies 125 119
Work in process -- --
Finished goods 319 252
---------- ----------
498 424
LIFO reserve (7) (10)
---------- ----------
TOTAL $ 491 $ 414
============================================= ========== ==========
NOTE 6 LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following (in millions):
Balance at December 31, 2002 2001
===================================================================================== ========== ==========
OCCIDENTAL PETROLEUM CORPORATION
6.75% senior notes due 2012 $ 500 $ 500
7.65% senior notes due 2006 (a) 485 457
6.4% senior notes due 2013, subject to remarketing April 1, 2003 450 450
7.375% senior notes due 2008 (a) 436 394
8.45% senior notes due 2029 350 350
5.875% senior notes due 2007 (a) 323 297
9.25% senior debentures due 2019, putable August 1, 2004 at par 300 300
10.125% senior debentures due 2009 276 276
7.2% senior debentures due 2028 200 200
4% medium-term notes due 2007 175 --
6.75% senior notes due 2002 -- 163
6.5% senior notes due 2005 (a) 164 155
8.75% medium-term notes due 2023 100 100
Medium-term notes due 2003 through 2008 (7.45% to 8.25% at December 31, 2002) 85 120
4.101% medium-term notes due 2007 75 --
11.125% senior notes due 2010 12 12
---------- ----------
3,931 3,774
---------- ----------
SUBSIDIARY DEBT
4.8% unsecured notes due 2006 20 20
7.2% unsecured notes due 2020 7 7
1.05% to 7% unsecured notes due 2003 through 2030 253 273
---------- ----------
4,211 4,074
Less:
Unamortized discount, net (8) (9)
Current maturities (206) --
---------- ----------
TOTAL LONG-TERM DEBT $ 3,997 $ 4,065
===================================================================================== ========== ==========
(a) Amounts include mark-to-market adjustments due to fair-value hedges.
51
Occidental intends to repurchase rather than remarket its 6.4 percent
senior notes due 2013. At December 31, 2002, the balance of the notes was $450
million and $300 million was classified as non-current since Occidental intends
to refinance this portion on a long-term basis initially using available lines
of bank credit with maturities extending to 2006. At January 2, 2003, Occidental
had available lines of committed bank credit of approximately $1.8 billion. Bank
fees on these committed lines of credit ranged from 0.125 percent to 0.225
percent.
At December 31, 2002, minimum principal payments on long-term debt
subsequent to December 31, 2003 aggregated $3,899 million, of which $323 million
is due in 2004, $157 million in 2005, $796 million in 2006, $550 million in
2007, $405 million in 2008 and $1,668 million thereafter. These amounts do not
include the mark-to-market adjustments, which netted to $106 million, related to
fair-value hedges on debt of $1.3 billion. Unamortized discount is generally
being amortized to interest expense on the effective interest method over the
lives of the related issuances.
At December 31, 2002, under the most restrictive covenants of certain
financing agreements, the capacity for the payment of cash dividends and other
distributions on, and for acquisitions of, Occidental's capital stock was
approximately $4.1 billion, assuming that such dividends, distributions and
acquisitions were made without incurring additional borrowings.
Occidental estimates the fair value of its long-term debt based on the
quoted market prices for the same or similar issues or on the yields offered to
Occidental for debt of similar rating and similar remaining maturities. The
estimated fair value of Occidental's total debt, including Trust Preferred
Securities, at December 31, 2002 and 2001 was approximately $5.2 billion and
$4.8 billion, respectively, compared with a carrying value of approximately $4.7
billion, and approximately $4.5 billion, respectively.
NOTE 7 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The present value of net minimum capital lease payments, net of the current
portion, totaled $26 million at both December 31, 2002 and 2001. These amounts
are included in other liabilities.
Operating and capital lease agreements, which include leases for
manufacturing facilities, office space, railcars and tanks, frequently include
renewal and/or purchase options and require Occidental to pay for utilities,
taxes, insurance and maintenance expense.
At December 31, 2002, future net minimum lease payments for capital and
operating leases (excluding oil and gas and other mineral leases) were the
following (in millions):
Capital Operating
================================================================================ ========= =========
2003 $ 1 $ 88
2004 1 87
2005 1 80
2006 1 72
2007 1 62
Thereafter 28 958
--------- ---------
TOTAL MINIMUM LEASE PAYMENTS 33 $ 1,347
=========
Less:
Imputed interest (7)
Current portion --
---------
PRESENT VALUE OF MINIMUM CAPITAL LEASE PAYMENTS, NET OF CURRENT PORTION $ 26
================================================================================ =========
Rental expense for operating leases, net of sublease rental income, was $81
million in 2002, $84 million in 2001 and $98 million in 2000. Rental expense was
net of sublease income of $7 million in 2002 and $8 million in 2001 and 2000. At
December 31, 2002, sublease rental amounts included in the future operating
lease payments totaled $95 million, as follows (in millions): 2003--$8,
2004--$8, 2005--$9, 2006--$9, 2007--$8 and 2008 and thereafter--$53.
Occidental has guaranteed the residual value of certain leased assets of
approximately $190 million, including the LaPorte, Texas VCM plant. If the
assets are not purchased at the end of the lease-term, Occidental would be
obligated to pay any deficiency between the fair value of the assets and the
guaranteed residual; however, Occidental does not expect to make payments under
this provision.
Included in the 2002 and 2001 property, plant and equipment accounts were
$10 million and $11 million, respectively, of property leased under capital
leases and $7 million and $8 million, respectively, of related accumulated
amortization.
Occidental is leasing a cogeneration facility which was completed in 2002.
This facility supplies all the steam and electric power requirements for
Occidental's Taft chlor-alkali plant at a lower cost than if the plant were to
generate its own steam and purchase electricity from a public utility. An owner
trust with investors as participating beneficiaries owns the project. The equity
participants in the owner trust funded the owner trust with equity during
construction in the amount of three percent of the cumulative project costs
throughout the period and in an amount in excess of 14 percent of the final
project costs upon the commencement of the lease term. In connection with the
completion of construction and satisfaction of certain other conditions, the
26-year term of the operating lease commenced in December 2002. At December 31,
2002, Occidental estimates the present value of the remaining lease payments to
be $455 million.
52
Occidental has entered into various operating lease agreements, mainly for
railcars, power plants, manufacturing facilities and office space. The leased
assets are used in Occidental's operations where leasing offers advantages of
greater operating flexibility and generally costs less than alternative methods
of funding that were available at the time financing decisions were made. Lease
payments are charged to Occidental's operations, mainly as cost of sales.
The accounting treatment for the leases described above, including the Taft
lease, is dictated by SFAS 13 and other related pronouncements. These leases
have been classified as operating leases in accordance with the operating lease
criteria.
As discussed in Note 4, FIN No. 46 is expected to result in the
consolidation of certain variable interest entities that are owners of plant and
equipment Occidental leases from them. The probable consolidation will affect
the LaPorte, Texas VCM plant lease. If consolidation were to take place, there
would be no significant effect on Occidental's financial condition, however,
consolidation would result in an increase in assets of approximately $132
million and liabilities of $154 million, with an after-tax charge of
approximately $22 million in the third quarter of 2003. Occidental expects to
record this charge as a cumulative effect of a change in accounting principles.
Annual expense for depreciation will increase by approximately $12 million
pre-tax. If Occidental chose to terminate the leases prior to adoption, there
would be no cumulative effect of a change in accounting principles.
NOTE 8 ENVIRONMENTAL EXPENDITURES
- --------------------------------------------------------------------------------
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are subject
to environmental-protection laws. Costs associated with environmental compliance
have increased over time and are generally expected to rise in the future.
Environmental expenditures related to current operations are factored into the
overall business planning process. These expenditures are mainly considered an
integral part of production in manufacturing quality products responsive to
market demand.
The laws which require or address environmental remediation may apply
retroactively to past waste disposal practices and releases. In many cases, the
laws apply regardless of fault, legality of the original activities or current
ownership or control of sites. Occidental Petroleum Corporation (OPC) or certain
of its subsidiaries are currently participating in environmental assessments and
cleanups under these laws at federal Superfund sites, comparable state sites and
other remediation sites, including Occidental facilities and previously owned
sites. Also, OPC and certain of its subsidiaries have been involved in a
substantial number of governmental and private proceedings involving historical
practices at various sites including, in some instances, having been named in
proceedings under CERCLA and similar federal, state and local environmental
laws. These proceedings seek funding or performance of remediation and, in some
cases, compensation for alleged property damage, punitive damages and civil
penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc. (GSH), which reports its results
directly to Occidental's corporate management. The following table presents
Occidental's environmental remediation reserves at December 31, 2002, 2001 and
2000 grouped by three categories of environmental remediation sites:
($ amounts in millions) 2002 2001 2000
============================== ========================= ========================= =========================
NUMBER OF SITES RESERVE Number of Sites Reserve Number of Sites Reserve
--------------- ------- --------------- ------- --------------- -------
CERCLA & Equivalent Sites 124 $ 284 126 $ 320 127 $ 263
Active Facilities 14 46 14 59 14 66
Closed or Sold Facilities 44 63 47 75 49 73
--------------- ------- --------------- ------- --------------- -------
TOTAL 182 $ 393 187 $ 454 190 $ 402
============================== =============== ======= =============== ======= =============== =======
In determining the environmental remediation reserves, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. Occidental expects that it will continue to incur additional
liabilities beyond those recorded for environmental remediation at these and
other sites. The range of reasonably possible loss for existing environmental
remediation matters could be up to $400 million beyond the amount accrued. Many
factors could result in changes to Occidental's environmental reserves and
reasonably possible range of loss. The most significant are:
>> The original cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
53
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Remediation technology might improve to decrease the cost of remediation.
In particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bio-remediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
For Management's opinion, refer to Note 9.
At December 31, 2002, OPC or certain of its subsidiaries have been named in
124 CERCLA or state equivalent proceedings, as shown below.
Description ($ amounts in millions) Number of Sites Reserve Balance
============================================================ =============== ===============
Minimal/No Exposure (a) 102 $ 7
Reserves between $1-10 MM 14 54
Reserves over $10 MM 8 223
--------------- ---------------
TOTAL 124 $ 284
============================================================ =============== ===============
(a) Includes 33 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has denied
liability without challenge, 48 sites where Occidental's reserves are less
than $50,000 each, and 14 sites where reserves are between $50,000 and $1
million each.
The eight sites with individual reserves over $10 million in 2002 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three former chemical
plants (Western New York, Montague, Michigan and Tacoma, Washington),
replacement of a municipal drinking water treatment plant in Western New York,
and various sediment clean-up actions in Washington.
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 14 active facilities. Three facilities - certain oil and
gas properties in the southwestern United States, a chemical plant in Louisiana,
and a phosphorous recovery operation in Tennessee -- account for 62 percent of
the reserves associated with these facilities.
There are 44 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements. Three sites
account for 66 percent of the reserves associated with this group. The three
sites are: an active refinery in Louisiana where Occidental indemnifies the
current owner and operator for certain remedial actions, a water treatment
facility at a former coal mine in Pennsylvania, and a former chemical plant in
West Virginia.
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations are shown below for each
segment:
In millions 2002 2001 2000
============================================= ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 32 $ 22 $ 17
Chemical 46 47 51
-------- -------- --------
$ 78 $ 69 $ 68
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 70 $ 60 $ 27
Chemical 16 19 20
-------- -------- --------
$ 86 $ 79 $ 47
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 23 $ 109 $ --
======== ======== ========
ENVIRONMENTAL RESERVES
Corporate $ 393 $ 454 $ 402
============================================= ======== ======== ========
54
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
Eight counties in the Houston-Galveston area are subject to a federal EPA
mandate to adopt a plan for implementing certain requirements of the federal
Clean Air Act, known as a State Implementation Plan. In October 2001, the EPA
approved a State Implementation Plan for the Houston Galveston area (the Plan).
In December 2002, the Texas Commission on Environmental Quality revised the
regulations associated with the Plan. The revised Plan contains provisions
requiring the reduction of 80 percent of current nitrogen oxide (NOx) emissions
and 60 percent of the volatile organic compound (VOC) emissions in the
Houston-Galveston area by November 2007. Occidental operates six facilities that
will be subject to the Plan's NOx and VOC-reduction requirements. Occidental
estimates that over the next several years its capital expenditures will
increase by a total of $70 - $120 million for environmental control and
monitoring equipment necessary to comply with the Plan, depending on the amount
of emissions reduction that is ultimately required. Occidental began expending
the capital necessary to comply with the Plan in 2001 and expects expenditures
to end in 2007, although the timing of the expenditures will vary by facility.
Occidental presently estimates that capital expenditures for environmental
compliance (including the Plan discussed above) will be approximately $72
million for 2003 and $95 million for 2004.
NOTE 9 LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
- --------------------------------------------------------------------------------
OPC and certain of its subsidiaries have been named in a substantial number
of lawsuits, claims and other legal proceedings. These actions seek, among other
things, compensation for alleged personal injury, breach of contract, property
damage, punitive damages, civil penalties or other losses; or injunctive or
declaratory relief. OPC and certain of its subsidiaries also have been named in
proceedings under CERCLA and similar federal, state and local environmental
laws. These environmental proceedings seek funding or performance of remediation
and, in some cases, compensation for alleged property damage, punitive damages
and civil penalties; however, Occidental is usually one of many companies in
these proceedings and has to date been successful in sharing response costs with
other financially-sound companies. With respect to all such lawsuits, claims and
proceedings, including environmental proceedings, Occidental accrues reserves
when it is probable a liability has been incurred and the amount of loss can be
reasonably estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1996 are closed for U.S. federal income
tax purposes. Taxable years 1996 through 2000 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law.
At December 31, 2002, commitments for major capital expenditures during
2003 and thereafter were approximately $158 million.
Occidental has entered into agreements providing for future payments to
secure terminal and pipeline capacity, drilling services, electrical power,
steam and certain chemical raw materials. At December 31, 2002, the net present
value of the fixed and determinable portion of the obligations under these
agreements, which were used to collateralize financings of the respective
suppliers, aggregated $94 million, which was payable as follows (in millions):
2003--$21, 2004--$19, 2005--$16, 2006--$14, 2007--$11 and 2008 through
2019--$13. Fixed payments under these agreements were $27 million in 2002, $20
million in 2001 and $42 million in 2000.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.3 billion capital expenditures estimated for 2003.
As discussed in Note 4, FIN No. 45 requires the disclosure in Occidental's
financial statements of information relating to guarantees issued by Occidental
and outstanding at December 31, 2002.
These guarantees encompass performance bonds, letters of credit,
indemnities, commitments and other forms of guarantees provided by Occidental to
third parties, mainly to provide assurance that Occidental and/or its
subsidiaries and affiliates will meet their various obligations ("guarantees").
At December 31, 2002, the notional amount of the guarantees was
approximately $1 billion. Of this amount, approximately $700 million relates to
Occidental's guarantee of equity investees' debt and other commitments. An
additional $200 million relates to the LaPorte, Texas VCM plant operating lease
and other equipment leases. The foregoing items have also been discussed in Note
7 and in Note 14, specifically, the debt guarantees relating to OxyMar and Elk
Hills Power, the guarantees on debt and other commitments relating to the
Ecuador pipeline and the residual value guarantee of the LaPorte, Texas VCM
plant operating lease. The remaining $100 million relates to various indemnities
and guarantees provided to third parties.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2002, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently
55
anticipated, it is possible that such outcome could have a material adverse
effect upon Occidental's consolidated financial position or results of
operations. However, after taking into account reserves, management does not
expect the ultimate resolution of any of these matters to have a material
adverse effect upon Occidental's consolidated financial position or results of
operations.
NOTE 10 DOMESTIC AND FOREIGN INCOME AND OTHER TAXES
- --------------------------------------------------------------------------------
The domestic and foreign components of income(loss) from continuing
operations before domestic and foreign income and other taxes were as follows
(in millions):
For the years ended December 31, Domestic Foreign Total
================================================== ========== ========== ==========
2002 $ 438 $ 1,147 $ 1,585
========== ========== ==========
2001 $ 272 $ 1,463 $ 1,735
========== ========== ==========
2000 $ 1,511 $ 1,480 $ 2,991
================================================== ========== ========== ==========
The provisions(credits) for domestic and foreign income and other taxes
consisted of the following (in millions):
U.S. State
For the years ended December 31, Federal and Local Foreign Total
======================================================= ========== ========== ========== ==========
2002
Current $ 79 $ 9 $ 475 $ 563
Deferred (112) (26) (3) (141)
---------- ---------- ---------- ----------
$ (33) $ (17) $ 472 $ 422
======================================================= ========== ========== ========== ==========
2001
Current $ 326 $ 17 $ 396 $ 739
Deferred (40) (141) (2) (183)
---------- ---------- ---------- ----------
$ 286 $ (124) $ 394 $ 556
======================================================= ========== ========== ========== ==========
2000
Current $ 425 $ 18 $ 578 $ 1,021
Deferred 403 9 1 413
---------- ---------- ---------- ----------
$ 828 $ 27 $ 579 $ 1,434
======================================================= ========== ========== ========== ==========
The credit for deferred federal and state and local income taxes in 2002
results primarily from the sale of the investment in Equistar.
The credit for deferred state and local income taxes in 2001 reflects a
benefit of $70 million related to the settlement of a state tax issue, deferred
tax reversing due to the sale of the entity owning pipelines in Texas that are
leased to a former subsidiary and an adjustment to reflect lower effective state
tax rates.
The following is a reconciliation, stated as a percentage of pre-tax
income, of the U.S. statutory federal income tax rate to Occidental's effective
tax rate on income from continuing operations:
For the years ended December 31, 2002 2001 2000
============================================================ ========== ========== ==========
U.S. federal statutory tax rate 35 % 35 % 35 %
Operations outside the United States (a) 12 2 11
Benefit from sale of subsidiary stock (21) -- --
State taxes, net of federal benefit -- (5) 1
Other 1 -- 1
---------- ---------- ----------
Tax rate provided by Occidental 27 % 32 % 48 %
============================================================ ========== ========== ==========
(a) Included in these figures is the impact of not providing U.S. taxes on the
unremitted earnings of certain foreign subsidiaries. The effect of this is
to reduce the U.S. federal tax rate by approximately 7 percent in 2002. The
effect on 2001 and 2000 was insignificant due to distributions from these
subsidiaries.
56
The tax effects of temporary differences resulting in deferred income taxes
at December 31, 2002 and 2001 were as follows (in millions):
2002 2001
-------------------------- --------------------------
DEFERRED DEFERRED Deferred Deferred
TAX TAX Tax Tax
Items resulting in temporary differences ASSETS LIABILITIES Assets Liabilities
============================================================= =========== =========== =========== ===========
Property, plant and equipment differences $ 87 $ 1,166 $ 100 $ 967
Equity investments including partnerships -- 375 -- 694
Environmental reserves 155 -- 178 --
Postretirement benefit accruals 129 -- 130 --
Deferred compensation and fringe benefits 135 -- 117 --
State income taxes 41 -- 54 --
All other 186 60 197 96
----------- ----------- ----------- -----------
Subtotal 733 1,601 776 1,757
Valuation allowance -- -- (8) --
----------- ----------- ----------- -----------
Total deferred taxes $ 733 $ 1,601 $ 768 $ 1,757
============================================================= =========== =========== =========== ===========
Included in total deferred tax assets was a current portion aggregating
$114 million as of both December 31, 2002 and 2001 that was reported in prepaid
expenses and other.
A deferred tax liability of approximately $165 million at December 31, 2002
has not been recognized for temporary differences related to Occidental's
investment in certain foreign subsidiaries primarily as a result of unremitted
earnings of consolidated subsidiaries, as it is Occidental's intention,
generally, to reinvest such earnings permanently.
The discontinued operations include an income tax benefit of $18 million in
2002, income tax expense of $3 million in 2001 and income tax expense of $9
million in 2000.
The cumulative effect of changes in accounting principles was reduced by an
income tax benefit of $6 million in 2002 and $13 million in 2001.
Additional paid-in capital was credited $7 million in 2002 and 2001 for a
tax benefit resulting from the exercise of certain stock options.
Items included in OCI are net of a tax charge of $27 million in 2002,
benefit of $14 million in 2001 and charge of $6 million in 2000.
NOTE 11 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The following is an analysis of common stock (shares in thousands):
Common Stock
============================================================= ================
BALANCE, DECEMBER 31, 1999 367,916
Issued 2,244
Options exercised and other, net (176)
- ------------------------------------------------------------- ----------------
BALANCE, DECEMBER 31, 2000 369,984
Issued 1,064
Options exercised and other, net 3,078
- ------------------------------------------------------------- ----------------
BALANCE, DECEMBER 31, 2001 374,126
Issued 1,027
Options exercised and other, net 2,707
- ------------------------------------------------------------- ----------------
BALANCE, DECEMBER 31, 2002 377,860
============================================================= ================
NONREDEEMABLE PREFERRED STOCK
Occidental has authorized 50,000,000 shares of preferred stock with a par
value of $1.00 per share. At December 31, 2002, 2001 and 2000, Occidental had no
outstanding shares of preferred stock.
57
STOCK INCENTIVE PLANS
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The 1987 Stock Plan, as amended, provided for the grant of incentive stock
options (ISOs), nonqualified stock options (NQSOs) and stock appreciation rights
(SARs) to the executive officers and other key employees of Occidental and its
subsidiaries. An aggregate of 9,000,000 shares of common stock was reserved for
issuance upon exercise of ISOs, NQSOs or SARs granted. Options granted under the
plan were granted at an exercise price not less than the fair market value on
the date of grant and the price may not be changed except to reflect a change in
capitalization. The 1987 Plan provides that outstanding options and SARs will be
accelerated if Occidental enters into one or more agreements to dispose of
substantially all the assets or 50 percent, or more of the capital stock, of
Occidental by sale, merger, reorganization or liquidation in one transaction or
a related series of transactions. In an acceleration event, optionees subject to
Section 16 of the Securities Exchange Act of 1934 (Exchange Act) will receive a
cash payment equal to the difference between the fair market value of the shares
subject to the option and the exercise price. The 1987 Plan was terminated for
the purposes of further grants upon the effective date of the 1995 Incentive
Stock Plan.
The 1995 Incentive Stock Plan, as amended, provided for the grant of awards
in the form of options, SARs, performance stock or restricted stock to salaried
employees of Occidental or persons who have agreed to become salaried employees.
An aggregate of 25,000,000 shares of common stock were reserved for issuance in
connection with awards under the 1995 Plan. Adjustments to the number of shares
covered by an award or the option or base price of an option or SAR may be made
by the Committee in order to prevent the dilution or expansion in participants'
rights due to a change in capitalization, merger, consolidation, reorganization
or similar corporate transaction. Stockholder approval is required to extend the
maximum period for exercising stock options or SARs (10 years from the date of
grant), to reduce the option price or base price of any outstanding options or
SARs, or for any material amendment of the 1995 Plan as defined in Rule 16b-3 of
the Exchange Act. The 1995 Incentive Stock Plan was terminated for the purposes
of further grants upon the effective date of the 2001 Incentive Stock Plan.
The 2001 Incentive Compensation Plan, as amended, provides for the grant of
awards in the form of common stock, options, SARs, restricted stock, stock units
or similar rights to purchase shares. Any of the awards may be granted as
performance-based awards. An aggregate of 17,000,000 shares were initially
reserved for issuance under the 2001 Plan. The plan administrator will
proportionately adjust outstanding awards in the event of an extraordinary
dividend or distribution or any reclassification, recapitalization,
reorganization, merger or other extraordinary corporate transaction, or a sale
of substantially all of the assets of Occidental as a whole. In such events, an
adjustment may be made to the number and type of shares subject to an award, the
grant, purchase or exercise price of outstanding awards; the securities, cash or
property deliverable upon exercise of an outstanding award or the performance
goals or objectives applicable to an outstanding award. Upon the occurrence of a
change of control event (the dissolution or liquidation of Occidental,
consummation of a business combination, any person acquiring more than 20
percent of the voting power of Occidental or a significant change in
Occidental's Board of Directors composition) and unless the administrator
determines to the contrary, options and SARs become immediately exercisable,
restricted stock immediately vests, performance-based awards become immediately
payable and any rights of a participant under any other award are accelerated to
give the participant the benefit of the award. Stockholder approval is required
for any reduction in the exercise price of any option or SAR below the fair
market value on the date of grant and for any amendment to the plan that would
materially increase the benefits to participants under the 2001 Plan or the
number of securities that may be issued or would materially modify the
requirements for eligibility. No awards may be made under the 2001 Plan after
April 20, 2011. At December 31, 2002, 4,049,638 shares were available under this
plan for future awards, which may include stock options, SARs, restricted stock,
performance stock and dividend equivalents.
Options to purchase common stock of Occidental have been granted to
officers and employees under stock option plans adopted in 1987, 1995 and 2001,
as discussed above. During 2002, options for 4,289,285 shares became
exercisable, and options for 16,185,809 shares were exercisable at December 31,
2002 at a weighted-average exercise price of $23.33. Generally, these options
vest over three years with a maximum term of ten years and one month. At
December 31, 2002, no SARs were outstanding.
The following is a summary of stock option transactions during 2002, 2001
and 2000 (shares in thousands):
2002 2001 2000
-------------------------- -------------------------- --------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
=================================== ======== ============== ======== ============== ======== ==============
BEGINNING BALANCE 25,390 $ 23.396 18,217 $ 21.532 13,033 $ 23.249
Granted or issued 4,904 $ 26.430 11,039 $ 26.171 5,577 $ 20.144
Exercised (3,097) $ 21.115 (3,395) $ 22.398 (93) $ 19.968
Canceled or expired (225) $ 22.518 (471) $ 23.495 (300) $ 25.018
-------- -------- --------
ENDING BALANCE 26,972 $ 24.219 25,390 $ 23.396 18,217 $ 21.532
OPTIONS EXERCISABLE AT YEAR END 16,186 15,023 8,374
=================================== ======== ======== ========
58
The following is a summary of stock options outstanding at December 31,
2002 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
=================== ============= ================== ================== ============= =============
$14.88 to $22.00 7,732 6.85 Years $ 19.67 6,013 $ 19.54
$23.12 to $26.00 8,091 4.55 Years $ 25.26 8,091 $ 25.26
$26.43 to $29.44 11,149 8.97 Years $ 26.62 2,082 $ 26.78
- ------------------- ------------- ------------------ ------------------ ------------- -------------
MANDATORY DEFERRED RESTRICTED STOCK AWARDS
Pursuant to the 2001 Incentive Compensation Plan, employees have been
awarded mandatory deferred Occidental restricted common stock, with the right to
receive shares vesting between 3 and 5 years, or earlier under certain
conditions. The mandatory deferred restricted shares are not issued until the
end of the deferral period, but employees receive dividend equivalents on the
deferred shares. The related expense is amortized over the vesting period.
Vested shares are included in both basic and diluted shares outstanding, while
unvested shares are only included in diluted shares outstanding. In 2002, rights
to receive 923,224 shares were awarded at a weighted-average grant-date value of
$26.73.
RESTRICTED STOCK AWARDS
Pursuant to the 2001 Incentive Compensation Plan and the 1995 Incentive
Stock Plan, certain executives have been awarded Occidental restricted common
stock at the par value of $.20 per share, with such shares vesting after three
or four years, respectively, or earlier under certain conditions. The related
expense is amortized over the vesting period. Restricted shares are issued when
granted, but are subject to recall if certain conditions are not satisfied.
Unvested shares are included in diluted shares outstanding. In 2002, 3,784
shares were awarded at a weighted-average grant date value of $25.99; in 2001,
275,384 shares were awarded at a weighted-average grant-date value of $24.59; in
2000, 40,000 shares were awarded at a weighted-average grant-date value of
$21.875 per share. Shares granted prior to 2000 totaled 652,226 with a
weighted-average grant-date price of $22.41.
PERFORMANCE STOCK AWARDS
Performance stock awards have been made to various employees pursuant to
the 2001 Incentive Compensation Plan and the 1995 Incentive Stock Plan. The
number of shares of common stock to be received under these awards by such
officers at the end of the performance period will depend on the attainment of
performance objectives based either on a peer company comparison of total
stockholder return for such period, or in the case of segment employees, a
combination of total stockholder return and return on assets of the segment. The
expected cost of these shares is reflected in income over the performance
period. The grantees will receive shares of common stock in an amount ranging
from zero to 200 percent of the Target Share Award (as such amount is defined in
the grant). Since performance-based unvested stock is contingent upon satisfying
conditions, those unvested shares are considered to be contingently issuable
shares and are not included in the computation of diluted earnings per share
until all conditions for issuance are met. Performance stock awards are included
in basic shares outstanding when issued. In 2002, awards for 310,913 target
shares were granted at a weighted-average grant-date value of $26.53; in 2001,
awards for 336,642 target shares were granted at a weighted-average grant-date
value of $24.27; in 2000, awards for 375,654 target shares were granted at a
weighted-average grant-date value of $21.625 per share. Target shares granted
prior to 2000 are 836,698 with a weighted-average grant-date value of $20.18 per
share. In 2002, 2001 and 2000, 187,780, 47,782 and 101,630 shares, respectively,
were issued for the target shares granted in prior years.
PRO-FORMA DISCLOSURE
Occidental accounts for these plans under Accounting Principles Board
Opinion No. 25. Had the compensation expense for these plans been determined in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation",
Occidental's pro-forma net income would have been $1.0 billion in 2002, $1.1
billion in 2001 and $1.6 billion in 2000. Basic and diluted earnings per share
would have been $2.58 for 2002, $3.05 for 2001 and $4.22 for 2000. The method of
accounting under SFAS No. 123 has not been applied to options granted prior to
January 1, 1995; therefore, the resulting pro-forma compensation expense may not
be representative of that to be expected in future years. The fair value of each
option grant, for pro-forma calculation purposes, is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield
of 3.93, 3.74 and 4.97 percent; expected volatility of 31.70, 29.33 and 28.37
percent; risk-free rate of return of 3.89, 4.84 and 6.27 percent; and expected
lives of 3.5, 5 and 5 years.
These grants have limitations on transferability. In the case of executive
management, such options may not be exercised for approximately two months of
each calendar quarter. The use of short-term volatility measures as a proxy for
long-term volatility provides significant uncertainty as to the value of the
options. These factors could result in the market value of the options being
less than the Black-Scholes values.
59
1996 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Under the 1996 Restricted Stock Plan for Non-Employee Directors, each
non-employee Director of the Company will receive awards of restricted common
stock each year as additional compensation for their services as a member of the
Board of Directors. A maximum of 150,000 shares of common stock may be awarded
under the Directors Plan and 23,500, 21,000 and 21,000 shares of common stock
were awarded during 2002, 2001 and 2000, respectively. At December 31, 2002,
59,165 shares of common stock were available for the granting of future awards.
EARNINGS PER SHARE AND ANTI-DILUTIVE COMPUTATIONS
Basic earnings per share was computed by dividing net income plus the effect
of repurchase of Trust Preferred Securities by the weighted average number of
common shares outstanding during each year. The computation of diluted earnings
per share further assumes the dilutive effect of stock options.
The following are the share amounts used to compute the basic and diluted
earnings per share for the years ended December 31 (in millions):
2002 2001 2000
================================================================= ========== ========== ==========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 376.1 372.4 369.0
Issued, unvested restricted stock (.2) (.4) (.2)
Deferred shares .3 .1 --
---------- ---------- ----------
Basic Shares Outstanding 376.2 372.1 368.8
========== ========== ==========
DILUTED EARNINGS PER SHARE
Basic shares outstanding 376.2 372.1 368.8
Dilutive effect of exercise of options outstanding 2.7 1.8 .2
Issued, unvested restricted stock .2 .4 .2
Dilutive effect of deferred, restricted shares .4 -- --
---------- ---------- ----------
Dilutive Shares 379.5 374.3 369.2
========== ========== ==========
The following items were not included in the computation of diluted
earnings per share because their effect was anti-dilutive for the years ended
December 31:
2002 2001 2000
======================================== ================= ================= ==================
STOCK OPTIONS
Number of shares (in millions) 0.02 0.02 5.64
Price range $29.063 - $29.438 $29.063 - $29.438 $21.250 - $29.438
Expiration range 12/1/07 - 4/29/08 12/1/07 - 4/29/08 4/28/03 - 11/10/09
- ---------------------------------------- ----------------- ----------------- ------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
AOCI consisted of the following (in millions):
Balance at December 31, 2002 2001
======================================================= ========== ==========
Foreign currency translation adjustments $ (56) $ (61)
Derivative mark-to-market adjustments (26) (20)
Minimum pension liability adjustments (10) (5)
Unrealized gains on securities 65 --
---------- ----------
TOTAL $ (27) $ (86)
======================================================= ========== ==========
60
NOTE 12 TRUST PREFERRED SECURITIES
- --------------------------------------------------------------------------------
In January 1999, Oxy Capital Trust I, a wholly-owned subsidiary of
Occidental, issued 21,000,000 shares of 8.16 percent Trust Originated Preferred
Securities (Trust Preferred Securities) to the public and 649,485 shares of
Trust Originated Common Securities (Common Securities) to Occidental. The
proceeds of such issuances were invested by Oxy Capital Trust I in $541.2
million aggregate principal amount of Occidental's 8.16 percent Subordinated
Deferrable Interest Notes due 2039 (Trust Subordinated Notes). The Trust
Subordinated Notes represent the sole assets of Oxy Capital Trust I. The Trust
Subordinated Notes mature on January 20, 2039, bear interest at the rate of 8.16
percent payable quarterly and are redeemable in whole, or in part, by Occidental
beginning on January 20, 2004 at 100 percent of the principal amount thereof,
plus any accrued and unpaid interest to the redemption date. The Trust
Subordinated Notes are unsecured obligations of Occidental and are junior in
right of payment to all present and future senior indebtedness of Occidental and
are also effectively subordinate to certain indebtedness of Occidental's
consolidated subsidiaries. Occidental may defer interest payments on the Trust
Subordinated Notes from time to time for a period not exceeding twenty
consecutive quarters. However, any unpaid quarterly interest payments on the
Trust Subordinated Notes will continue to accrue interest at 8.16 percent per
annum.
Holders of the Trust Preferred Securities and Common Securities are
entitled to cumulative cash distributions at an annual rate of 8.16 percent of
the liquidation amount of $25 per security. The Trust Preferred Securities and
Common Securities will be redeemed upon repayment of the Trust Subordinated
Notes. If Occidental defers interest payments on the Trust Subordinated Notes,
Oxy Capital Trust I will defer distributions on the Trust Preferred Securities
and Common Securities during any deferral period. However, any unpaid quarterly
distributions on the Trust Preferred Securities and Common Securities will
continue to accrue with interest at 8.16 percent per annum.
Occidental has guaranteed, on a subordinated basis, distributions and other
payments due on the Trust Preferred Securities (the Guarantee). The Guarantee,
when taken together with Occidental's obligations under the Trust Subordinated
Notes and the indenture pursuant to which the Trust Subordinated Notes were
issued and Occidental's obligations under the Amended and Restated Declaration
of Trust governing Oxy Capital Trust I, provides a full and unconditional
guarantee of amounts due on the Trust Preferred Securities.
The Trust Subordinated Notes and the related Oxy Capital Trust I investment
in the Trust Subordinated Notes have been eliminated in consolidation and the
Trust Preferred Securities are reported as Occidental Obligated Mandatorily
Redeemable Trust Preferred Securities of a Subsidiary Trust Holding Solely
Subordinated Notes of Occidental in the accompanying consolidated financial
statements. Distributions on the Trust Preferred Securities are reported under
the caption minority interest in the statement of operations. Total net proceeds
to Occidental were $508 million. The balance reflected in the accompanying
consolidated financial statements at December 31, 2002 and 2001 is net of
unamortized issue costs and also reflects the repurchase in 2002 and 2001 of
353,150 and 437,100 shares with a liquidation value of $8.8 million and $10.9
million, respectively. At December 31, 2002, 18,716,554 Trust Preferred
Securities and 649,485 Common Securities were outstanding.
61
NOTE 13 RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
Occidental has various defined benefit and defined contribution retirement
plans for its salaried, domestic union and nonunion hourly, and certain foreign
national employees. Participation in the defined benefit plans is limited and
approximately 1,400 domestic and 500 foreign national employees, mainly union
and non-union hourly employees, are currently accruing benefits under these
plans.
All domestic employees and certain foreign national employees are eligible
to participate in one or more of the defined contribution retirement or savings
plans that provide for periodic contributions by Occidental based on
plan-specific criteria, such as base pay, age level, and/or employee
contributions. Certain salaried employees participate in a supplemental
retirement plan that provides restoration of benefits lost due to governmental
limitations on qualified retirement benefits. The accrued liabilities for the
supplemental retirement plan were $49 million, $42 million, and $38 million as
of December 31, 2002, 2001 and 2000. Occidental expensed $57 million in 2002,
$57 million in 2001, and $55 million in 2000 under the provisions of these
defined contribution and supplemental retirement plans.
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. The benefits generally are funded by Occidental as the benefits are
paid during the year. The cost of providing these benefits is based on claims
filed and insurance premiums paid for the period. The total benefit costs
including the postretirement costs were approximately $91 million in 2002, $82
million in 2001, and $69 million in 2000.
Pension costs for Occidental's defined benefit pension plans, determined by
independent actuarial valuations, are generally funded by payments to trust
funds, which are administered by independent trustees.
The following table sets forth the components of the net periodic benefit
costs for Occidental's defined benefit pension and postretirement benefit plans
for 2002, 2001, and 2000 (in millions):
Pension Benefits Postretirement Benefits
-------------------------------- --------------------------------
For the years ended December 31, 2002 2001 2000 2002 2001 2000
==================================================== ======== ======== ======== ======== ======== ========
NET PERIODIC BENEFIT COSTS:
Service cost--benefits earned during the period $ 10 $ 9 $ 9 $ 6 $ 5 $ 4
Interest cost on benefit obligation 26 25 23 34 31 29
Expected return on plan assets (20) (24) (23) -- -- --
Amortization of net transition obligation -- -- -- -- -- --
Amortization of prior service cost 1 1 1 -- -- 1
Recognized actuarial loss 1 4 (1) 6 -- (1)
Curtailments and settlements 1 -- -- -- -- (8)
Currency adjustments (8) (1) (5) -- -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 11 $ 14 $ 4 $ 46 $ 36 $ 25
==================================================== ======== ======== ======== ======== ======== ========
Occidental recorded a charge to accumulated other comprehensive income of
$5 million in 2002, a credit of $6 million in 2001, and a charge of $2 million
in 2000, to reflect the net-of-tax difference between the additional liability
required under pension accounting provisions and the corresponding intangible
asset. The decrease in accumulated other comprehensive income in 2002 was
attributable to an actual return on plan assets that was less than the expected
return on plan assets and a decrease in the discount rate. The increase was
mitigated by an additional pension contribution of $10 million in 2002.
Occidental's defined benefit pension and postretirement defined benefit
plans are accrued based on various assumptions and discount rates, as described
below. Occidental uses the fair value of assets rather than a smoothed value of
assets to determine pension expense. Occidental funds and expenses negotiated
pension increases for domestic union employees over the term of the collective
bargaining agreement.
The actuarial assumptions used could change in the near term as a result of
changes in expected future trends and other factors which, depending on the
nature of the changes, could cause increases or decreases in the plan
liabilities accrued.
62
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation for Occidental's defined benefit
pension and postretirement benefit plans (in millions):
Pension Benefits Postretirement Benefits
------------------------- -------------------------
2002 2001 2002 2001
============================================================ ========== ========== ========== ==========
CHANGES IN BENEFIT OBLIGATION:
Benefit obligation -- beginning of year $ 337 $ 295 $ 465 $ 383
Service cost--benefits earned during the period 10 9 6 5
Interest cost on projected benefit obligation 26 25 34 31
Actuarial (gain)loss 10 28 61 95
Foreign currency exchange rate changes (11) (3) -- --
Benefits paid (21) (20) (51) (49)
Plan amendments 2 3 -- --
Cost recovery percentage 6 -- -- --
Divestitures (3) -- -- --
Special termination benefits 1 -- -- --
---------- ---------- ---------- ----------
Benefit obligation -- end of year $ 357 $ 337 $ 515 $ 465
============================================================ ========== ========== ========== ==========
The following table sets forth the reconciliation of the beginning and
ending balances of the fair value of plan assets for Occidental's defined
benefit pension plans (in millions):
Pension Benefits
------------------------
2002 2001
============================================================ ========== ==========
CHANGES IN PLAN ASSETS:
Fair value of plan assets -- beginning of year $ 255 $ 254
Actual return on plan assets (1) 14
Foreign currency exchange rate changes (3) (1)
Employer contribution 23 8
Benefits paid (21) (20)
Divestitures (2) --
---------- ----------
Fair value of plan assets -- end of year $ 251 $ 255
============================================================ ========== ==========
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligation in excess of plan assets were $231 million, $211 million, and $124
million respectively, as of December 31, 2002 and $212 million, $193 million and
$123 million, respectively, as of December 31, 2001.
For domestic pension plans, the weighted average discount rate used in
determining the benefit obligation was 6.65 percent and 7 percent, respectively
as of December 31, 2002 and 2001. Occidental bases the discount rate on the
average yield provided by the Moody's Aa Corporate Bond Index. The weighted
average rate of increase in future compensation levels used in determining the
benefit obligations was approximately 4.0 percent in 2002, and 4.5 percent in
2001. These compensation increase assumptions are consistent with Occidental's
past and anticipated future compensation increases for employees participating
in retirement plans that determine benefits using compensation. The expected
long-term rate of return on assets was 8.0 percent in 2002 and 9.0 percent in
2001. This assumption is based on Occidental's expected return on plan assets
with a targeted mix of approximately 60 percent in equities and 40 percent in
fixed income securities.
For pension plans outside of the United States, the assumptions used in
determining the benefit obligation vary by country. The discount rates used in
determining the benefit obligation range from a low of 4 percent to a high of 13
percent as of December 31, 2002 and a low of 4 percent to a high of 25 percent
as of December 31, 2001. Occidental bases its discount rate for foreign pension
plans on rates indicative of government and or investment grade corporate debt
in the applicable country. The average rate of increase in future compensation
levels ranged from a low of 3 percent to a high of 9 percent in 2002 and from a
low of 3 percent to a high of 19 percent in 2001 dependent on local economic
conditions and salary budgets. The expected long-term rates of return on plan
assets were 5.5 percent in excess of local inflation in both 2002 and 2001.
The postretirement benefit obligation was determined by application of the
terms of medical and dental benefits and life insurance coverage, including the
effect of established maximums on covered costs, together with relevant
actuarial assumptions and health care cost trend rates projected at a Consumer
Price Index (CPI) increase of 3.0 percent as of December 31, 2002 and 2001,
(beginning in 1993, participants other than certain union employees pay for all
medical cost increases in excess of increases in the CPI). For certain union
employees, the health care cost trend rates were projected at annual rates
ranging ratably from 11 percent in 2002 to 6.0 percent through the year 2007 and
level thereafter. A 1-percent increase or a 1-percent decrease in these assumed
health care cost trend rates would result in an increase of $16 million or a
reduction of $15 million, respectively, in the postretirement benefit obligation
as of December 31, 2002, and an increase or reduction of $1 million, in interest
cost in 2002. The annual service costs would not be materially affected by these
changes.
63
The following table sets forth the funded status and amounts recognized in
Occidental's consolidated balance sheets for the defined benefit pension and
postretirement benefit plans at December 31, 2002 and 2001 (in millions):
Pension Benefits Postretirement Benefits
------------------------- -------------------------
Balance at December 31, 2002 2001 2002 2001
======================================================= ========== ========== ========== ==========
Unfunded obligation $ (106) $ (83) $ (515) $ (465)
Unrecognized net transition obligation -- 2 -- --
Unrecognized prior service cost 6 5 9 9
Unrecognized net (gain)loss 76 41 130 75
---------- ---------- ---------- ----------
Net amount recognized $ (24) $ (35) $ (376) $ (381)
========== ========== ========== ==========
Prepaid benefit cost $ 49 $ 38 $ -- $ --
Accrued benefit liability (96) (83) (376) (381)
Intangible assets 1 1 -- --
Accumulated other comprehensive income 22 9 -- --
---------- ---------- ---------- ----------
Net amount recognized $ (24) $ (35) $ (376) $ (381)
======================================================= ========== ========== ========== ==========
NOTE 14 INVESTMENTS AND TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Investments in entities, other than oil and gas exploration and production
companies, in which Occidental has a voting stock interest of at least 20
percent, but not more than 50 percent, and certain partnerships are accounted
for on the equity method. At December 31, 2002, Occidental's equity investments
consisted of a 21-percent interest in Lyondell acquired in August 2002, a
24.5-percent interest in the entity that will own the pipeline being constructed
by DEL, the operator of the Dolphin Project, and other various partnerships and
joint ventures, discussed below. Equity investments paid dividends of $22
million, $27 million and $99 million to Occidental in 2002, 2001 and 2000,
respectively. Cumulative undistributed earnings since acquisition, in the amount
of $58 million, of 50-percent-or-less-owned companies have been accounted for by
Occidental under the equity method. At December 31, 2002, Occidental's
investments in unconsolidated subsidiaries exceeded the underlying equity in net
assets by $471 million.
Investments also include certain cost method investments, in which
Occidental owns less than 20 percent of the voting stock. Occidental's most
significant cost method investment is in Premcor, Inc, which became a
publicly-traded company in April 2002. In accordance with the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
this investment is being accounted for as an available-for-sale security and was
adjusted to fair value. As of December 31, 2002, an unrealized gain of $65
million, net of tax, is reflected in OCI.
Occidental's purchases from certain chemical partnerships at market-related
prices, in which it has investments, were $604 million, $656 million and $755
million in 2002, 2001 and 2000, respectively. Occidental's sales to certain
chemical partnerships at market-related prices, in which it has investments,
were $105 million, $68 million and $217 million, in 2002, 2001 and 2000,
respectively.
The following table presents Occidental's proportional interest in the
summarized financial information of its equity method investments (in millions):
For the years ended December 31, 2002 2001 2000
================================================== ========== ========== ==========
Revenues $ 1,782 $ 2,223 $ 2,735
Costs and expenses 2,043 2,315 2,668
---------- ---------- ----------
Net (loss)income $ (261) $ (92) $ 67
================================================== ========== ========== ==========
Balance at December 31, 2002 2001
================================================== ========== ==========
Current assets $ 421 $ 429
Noncurrent assets $ 1,946 $ 1,951
Current liabilities $ 225 $ 298
Long-term debt $ 1,458 $ 960
Other non-current liabilities $ 404 $ 172
Stockholders' equity $ 280 $ 950
- -------------------------------------------------- ---------- ----------
64
Occidental has a 78.6-percent ownership interest (before minority interest)
in OxyMar. Occidental owns 28.6 percent of OxyMar directly and the OxyVinyls
partnership, which is 76-percent owned by Occidental, owns 50 percent.
Therefore, after minority interest, Occidental's effective ownership interest is
67 percent. Marubeni Corporation (Marubeni) owns the remaining 21.4 percent of
OxyMar, but has a 50-percent voting interest. The OxyMar VCM plant is a modern,
efficient manufacturing facility. Occidental's chlorovinyls business derives
significant economic benefit from OxyMar's operations as the supplier of certain
products to OxyMar. OxyMar, in turn, supplies VCM required by Occidental to
manufacture PVC. This investment in OxyMar is recorded as an equity investment
on the consolidated balance sheet. Occidental guarantees 50 percent of OxyMar's
$165 million private placement bonds due 2016 and 100 percent of a $220 million
revolving line of credit which matures in 2005, under which $105 million was
outstanding at December 31, 2002. These amounts are reflected as debt on
OxyMar's balance sheet. Marubeni has a right to put its interest in OxyMar to
Occidental in 2004 by paying approximately $25 million to Occidental and, in
connection with this transfer, require Occidental to assume Marubeni's guarantee
of OxyMar's debt. Occidental determined that Marubeni's strike price was equal
to fair value as of the issue date and assigned a fair value of zero to the
option. Therefore, Occidental did not record an asset or liability associated
with this put option in the consolidated financial statements. Since the put
price was negotiated on arms'-length terms and has no predetermined conditions
that would require exercise of the option, Occidental cannot determine whether
Marubeni will exercise its option. Occidental does not expect to record a loss
if the option is exercised. If OxyMar were to be consolidated at December 31,
2002, assets would increase by $172 million and liabilities would increase by
$163 million on Occidental's consolidated balance sheets. As of December 31,
2002, Occidental had advanced $95 million to OxyMar and had a net equity
investment of $30 million. As discussed in Note 4, FIN No. 46 is expected to
result in the consolidation of OxyMar in the third quarter of 2003. This
consolidation is not expected to have a significant effect on Occidental's
financial condition and will not change Occidental's results of operations.
Occidental and ConocoPhillips (Conoco) each has a 50-percent interest in
Ingleside Cogeneration Limited Partnership, a limited partnership (Ingleside
LP), which operates a cogeneration plant in Texas. The cogeneration facility
supplies all of the steam and electric power requirements to Occidental's
Ingleside chlor-alkali plant and OxyMar's VCM plant at less cost than if these
facilities were to produce their own steam and purchase electric power from a
public utility. At December 31, 2002, Ingleside LP had approximately $171
million in debt, which is secured by its assets. Occidental has not guaranteed
this debt; however, Occidental and Conoco currently each guarantee half of a
debt service reserve amount of approximately $8 million. Occidental accounts for
this investment using the equity method.
In Ecuador, Occidental has a 12-percent interest in a company currently
constructing an oil export pipeline, which is expected to be completed in 2003.
Construction of the pipeline has made it feasible for Occidental to develop the
Eden Yuturi field it discovered several years ago in the southeastern corner of
Block 15. The development of Eden Yuturi, together with ongoing work in the
western portion of the block that is currently in production, is expected to add
net incremental production of 30,000 barrels per day in 2004, all of which is
expected to be transported through the new pipeline. Occidental has committed to
make capital contributions up to its share (currently estimated to be
approximately $64 million) of the estimated total project capital requirements.
As of December 31, 2002, Occidental has contributed $9 million to the project.
Occidental reports this investment in its consolidated statements using the
equity method of accounting.
This project is being funded in part by senior project debt. The senior
project debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including construction risk,
operating risk and force-majeure risk. Occidental would be required to make an
advance tariff payment in the event of termination of the agreement authorizing
the pipeline company to build the pipeline, prolonged delay in project
completion, prolonged force majeure, upstream expropriation events, bankruptcy
of the pipeline company or its parent company, abandonment of the project,
termination of an investment guarantee agreement with Ecuador, or certain
defaults by Occidental. This advance tariff would be used by the pipeline
company to service or prepay project debt. Occidental's obligation relating to
the pipeline company's senior project debt totaled $101 million, and the
completion bonds and other bonds totaled $17 million at December 31, 2002. As
Occidental ships product using the pipeline, its overall obligations will
decrease with the reduction of the pipeline company's senior project debt.
Occidental and Sempra Energy (Sempra) each has a 50-percent interest in Elk
Hills Power LLC, a limited liability company that is currently constructing a
gas-fired, power-generation plant in California. Occidental accounts for this
investment using the equity method. In January 2002, Elk Hills Power LLC entered
into a $400 million construction loan facility. Occidental guarantees $200
million (50 percent) of the loan facility. At December 31, 2002, approximately
$162 million of debt guaranteed by Occidental was outstanding.
65
NOTE 15 INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
In compliance with the provisions of SFAS No. 131--"Disclosures about
Segments of an Enterprise and Related Information," Occidental has identified
two reportable segments through which it conducts its continuing operations: oil
and gas and chemical. The factors for determining the reportable segments were
based on the distinct nature of their operations. They are managed as separate
business units because each requires and is responsible for executing a unique
business strategy. The oil and gas segment explores for, develops, produces and
markets crude oil and natural gas domestically and internationally. The chemical
segment manufactures and markets, domestically and internationally, basic
chemicals, vinyls and performance chemicals.
Earnings of industry segments and geographic areas exclude interest income,
interest expense, environmental remediation expenses, unallocated corporate
expenses, discontinued operations and cumulative effect of changes in accounting
principles, but include income from equity investments and gains and losses from
dispositions of segment and geographic area assets.
Foreign income and other taxes and certain state taxes are included in
segment earnings on the basis of operating results. U.S. federal income taxes
are not allocated to segments except for amounts in lieu thereof that represent
the tax effect of operating charges resulting from purchase accounting
adjustments, which arose from the implementation in 1992 of SFAS No. 109 -
"Accounting for Income Taxes," and the tax effects resulting from major,
infrequently occurring transactions such as asset sales and legal settlements
that relate to segment results.
Identifiable assets are those assets used in the operations of the
segments. Corporate assets consist of cash, short-term investments, certain
corporate receivables, an investment in Lyondell, an intrastate pipeline (sold
in the third quarter of 2001) and other assets.
66
INDUSTRY SEGMENTS
In millions
Oil and Gas Chemical Corporate Total
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2002
Net sales $ 4,634 (a) $ 2,704 (b) $ -- $ 7,338
=========== =========== =========== ===========
Pretax operating profit(loss) (c) $ 2,181 $ (128) $ (468)(e) $ 1,585
Income taxes (474) 403 (351)(f) (422)
Discontinued operations, net -- -- (79) (79)
Cumulative effect of changes in accounting principles, net -- -- (95) (95)
----------- ----------- ----------- -----------
Net income(loss) (d) $ 1,707 (g) $ 275 (h) $ (993)(i) $ 989
=========== =========== =========== ===========
Unconsolidated equity investments $ 475 $ (11) $ 592 $ 1,056
=========== =========== =========== ===========
Property, plant and equipment additions, net (k) $ 1,038 $ 109 $ 89 $ 1,236
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 819 $ 183 $ 10 $ 1,012
=========== =========== =========== ===========
Total assets $ 12,483 $ 3,069 $ 996 $ 16,548
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2001
Net sales $ 5,134 (a) $ 2,968 (b) $ -- $ 8,102
=========== =========== =========== ===========
Pretax operating profit(loss) (c) $ 3,292 $ (442) $ (1,115)(e) $ 1,735
Income taxes (447) 43 (152)(f) (556)
Discontinued operations, net -- -- (1) (1)
Cumulative effect of changes in accounting principles, net -- -- (24) (24)
----------- ----------- ----------- -----------
Net income(loss) (d) $ 2,845 (g) $ (399)(h) $ (1,292)(i) $ 1,154
=========== =========== =========== ===========
Unconsolidated equity investments $ 75 $ 663 $ 255 $ 993
=========== =========== =========== ===========
Property, plant and equipment additions, net (k) $ 1,138 $ 112 $ 58 $ 1,308
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 750 $ 184 $ 31 $ 965
=========== =========== =========== ===========
Total assets $ 13,316 $ 3,943 $ 591 $ 17,850
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2000
Net sales $ 4,875 (a) $ 3,629 (b) $ -- $ 8,504
=========== =========== =========== ===========
Pretax operating profit(loss) (c) $ 3,012 $ 148 $ (169)(e) $ 2,991
Income taxes (595) (7) (832)(f) (1,434)
Discontinued operations, net -- -- 13 13
----------- ----------- ----------- -----------
Net income(loss) (d) $ 2,417 (g) $ 141 (h) $ (988)(i) $ 1,570
=========== =========== =========== ===========
Unconsolidated equity investments $ 67 $ 1,203 $ 57 $ 1,327
=========== =========== =========== ===========
Property, plant and equipment additions, net (k) $ 738 $ 148 $ 6 $ 892
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 670 $ 183 $ 41 $ 894
=========== =========== =========== ===========
Total assets $ 13,384 $ 4,701 $ 1,329 (j) $ 19,414
============================================================= =========== =========== =========== ===========
Footnotes:
- ----------
(a) Oil sales represented approximately 77 percent, 60 percent and 75 percent
of net sales for the periods ended December 31, 2002, 2001 and 2000,
respectively.
(b) Total product sales for the chemical segment were as follows:
Basic Chemicals Commodity Vinyl Resins Performance Chemicals
====================== ====================== ======================
YEAR ENDED DECEMBER 31, 2002 32% 50% 18%
Year ended December 31, 2001 38% 48% 14%
Year ended December 31, 2000 33% 49% 18%
(c) Research and development costs were $7 million in 2002, $8 million in 2001
and $16 million in 2000.
67
Footnotes continued:
- --------------------
(d) Segment earnings include charges and credits in lieu of U.S. federal income
taxes. In 2002, the amounts allocated to the segments were charges of $1
million and a credit of $403 million in oil and gas and chemical,
respectively. In 2001, the amounts allocated to the segments were charges
of $56 million and a credit of $42 million in oil and gas and chemical,
respectively. In 2000, the amounts allocated to the segments were charges
of $32 million and a credit of $7 million in oil and gas and chemical,
respectively. 2002, 2001 and 2000 reflect allocation of taxes to segments
for major, infrequently occurring transactions.
(e) Includes unallocated net interest expense, administration expense,
environmental remediation and other items. 2000 and 2001 also include
pipeline lease income and pipeline depreciation expense. 2002 includes the
equity results from the Lyondell investment from the date of the
acquisition.
(f) Includes unallocated income taxes.
(g) Includes the following significant items affecting earnings for the years
ended December 31:
Benefit (Charge) In millions 2002 2001 2000
============================================================================ ======== ======== ========
OIL AND GAS
Gain on sale of interest in the Indonesian Tangguh LNG project, net of tax $ -- $ 399 $ --
---------------------------------------------------------------------------- -------- -------- --------
(h) Includes the following significant items affecting earnings for the years
ended December 31:
Benefit (Charge) In millions 2002 2001 2000
=================================================================== ======== ======== ========
CHEMICAL
Gain on sale of Equistar investment, net of tax $ 164 $ -- $ --
Write-down of Equistar investment -- (412) --
Write-down of chemical intermediate businesses and various assets -- -- (140)
------------------------------------------------------------------- -------- -------- --------
(i) Includes the following significant items affecting earnings for the years
ended December 31:
Benefit (Charge) In millions 2002 2001 2000
================================================== ======== ======== ========
CORPORATE
Gain on sale of CanadianOxy investment $ -- $ -- $ 493
Loss on sale of pipeline-owning entity (a) -- (272) --
Discontinued operations, net (a) (79) (1) 13
Settlement of state tax issue -- 70 --
Tax effect of pre-tax items -- 148 (145)
Changes in accounting principles, net (a) (95) (24) --
-------------------------------------------------- -------- -------- --------
(a) Amounts shown after-tax.
(j) 2000 includes the net assets of an intrastate pipeline system, which was
sold in 2001.
(k) Excludes acquisitions of other businesses and formation of OxyVinyls.
Amounts exclude $3.8 billion in oil and gas in 2000, but include
capitalized interest of $12 million in 2002, $5 million in 2001 and $3
million in 2000.
GEOGRAPHIC AREAS
In millions
Net sales (a) Property, plant and equipment, net
-------------------------------------- --------------------------------------
For the years ended December 31, 2002 2001 2000 2002 2001 2000
================================== ========== ========== ========== ========== ========== ==========
United States $ 5,198 $ 6,288 $ 6,084 $ 10,996 $ 11,170 $ 11,845
Qatar 566 539 747 955 859 825
Yemen 422 377 435 316 273 229
Colombia 381 179 392 98 81 104
Oman 158 151 116 155 122 99
Pakistan 151 113 102 189 49 44
Canada 150 136 189 33 31 29
Russia 144 157 180 -- 64 66
Ecuador 98 82 148 176 109 85
United Arab Emirates -- -- -- 93 1 --
Other Foreign 70 80 111 25 32 75
---------- ---------- ---------- ---------- ---------- ----------
Total $ 7,338 $ 8,102 $ 8,504 $ 13,036 $ 12,791 $ 13,401
================================== ========== ========== ========== ========== ========== ==========
(a) Sales are shown by individual country based on the location of the entity
making the sale.
68
NOTE 16 COSTS AND RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
- --------------------------------------------------------------------------------
Capitalized costs relating to oil and gas producing activities and related
accumulated depreciation, depletion and amortization, were as follows (in
millions):
Consolidated Subsidiaries
-----------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests(c) Worldwide
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2002
Proved properties $ 9,736 $ 883 $ 2,965 $ 13,584 $ 35 $ 13,619
Unproved properties (b) 1,205 2 102 1,309 -- 1,309
----------- ----------- ----------- ----------- ----------- -----------
TOTAL PROPERTY COSTS 10,941 885 3,067 14,893 35 14,928
Support facilities 332 50 109 491 -- 491
----------- ----------- ----------- ----------- ----------- -----------
TOTAL CAPITALIZED COSTS (a) 11,273 935 3,176 15,384 35 15,419
Accumulated depreciation, depletion
and amortization (2,560) (661) (1,469) (4,690) 9 (4,681)
----------- ----------- ----------- ----------- ----------- -----------
NET CAPITALIZED COSTS $ 8,713 $ 274 $ 1,707 $ 10,694 $ 44 $ 10,738
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2001
Proved properties $ 9,027 $ 789 $ 2,514 $ 12,330 $ (2) $ 12,328
Unproved properties (b) 1,606 2 13 1,621 -- 1,621
----------- ----------- ----------- ----------- ----------- -----------
TOTAL PROPERTY COSTS 10,633 791 2,527 13,951 (2) 13,949
Support facilities 290 43 57 390 19 409
----------- ----------- ----------- ----------- ----------- -----------
TOTAL CAPITALIZED COSTS (a) 10,923 834 2,584 14,341 17 14,358
Accumulated depreciation, depletion
and amortization (2,210) (622) (1,276) (4,108) 27 (4,081)
----------- ----------- ----------- ----------- ----------- -----------
NET CAPITALIZED COSTS $ 8,713 $ 212 $ 1,308 $ 10,233 $ 44 $ 10,277
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2000
Proved properties $ 8,616 $ 750 $ 2,254 $ 11,620 $ (17) $ 11,603
Unproved properties (b) 1,970 19 77 2,066 -- 2,066
----------- ----------- ----------- ----------- ----------- -----------
TOTAL PROPERTY COSTS 10,586 769 2,331 13,686 (17) 13,669
Support facilities 244 46 53 343 17 360
----------- ----------- ----------- ----------- ----------- -----------
TOTAL CAPITALIZED COSTS (a) 10,830 815 2,384 14,029 -- 14,029
Accumulated depreciation, depletion
and amortization (2,299) (596) (1,141) (4,036) 40 (3,996)
----------- ----------- ----------- ----------- ----------- -----------
NET CAPITALIZED COSTS $ 8,531 $ 219 $ 1,243 $ 9,993 $ 40 $ 10,033
========================================== =========== =========== =========== =========== =========== ===========
(a) Includes costs related to leases, exploration costs, lease and well
equipment, pipelines and terminals, gas plants and other equipment.
(b) Primarily consists of California properties.
(c) Includes capitalized costs for equity investees in Russia and Yemen,
partially offset by minority interest for a Colombian affiliate.
69
Costs incurred relating to oil and gas producing activities, whether
capitalized or expensed, were as follows (in millions):
Consolidated Subsidiaries
---------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests(c) Worldwide
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2002
Acquisition of properties
Proved $ 72 $ -- $ 91 $ 163 $ -- $ 163
Unproved -- -- 29 29 -- 29
Exploration costs 54 30 50 134 -- 134
Development costs 457 (b) 97 336 890 7 897
----------- ----------- ----------- ----------- ----------- -----------
$ 583 $ 127 $ 506 $ 1,216 $ 7 $ 1,223
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2001
Acquisition of properties
Proved $ 10 $ -- $ 19 $ 29 $ -- $ 29
Unproved 43 -- 10 53 -- 53
Exploration costs 57 65 54 176 (5) 171
Development costs 602 (b) 58 247 907 11 918
----------- ----------- ----------- ----------- ----------- -----------
$ 712 $ 123 $ 330 $ 1,165 $ 6 $ 1,171
========================================== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 2000
Acquisition of properties
Proved $ 3,690 $ 42 $ 21 $ 3,753 $ -- $ 3,753
Unproved 7 -- 1 8 -- 8
Exploration costs 56 62 20 138 (4) 134
Development costs 339 (a,b) 34 200 573 6 579
----------- ----------- ----------- ----------- ----------- -----------
$ 4,092 $ 138 $ 242 $ 4,472 $ 2 $ 4,474
========================================== =========== =========== =========== =========== =========== ===========
(a) Excludes costs related to the acquisition of CO2 properties.
(b) Excludes capitalized CO2 of $42 million in 2002, $48 million in 2001 and
$44 million in 2000.
(c) Includes equity investees' costs in Russia and Yemen, partially offset by
minority interest for a Colombian affiliate.
70
The results of operations of Occidental's oil and gas producing activities,
which exclude oil and gas trading activities and items such as asset
dispositions, corporate overhead and interest, were as follows (in millions):
Consolidated Subsidiaries
-------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests(c) Worldwide
=========================================== =========== =========== =========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenues $ 2,622 $ 453 $ 1,279 (a) $ 4,354 $ 107 $ 4,461
Production costs 753 92 158 1,003 61 1,064
Exploration expenses 105 27 43 175 1 176
Other operating expenses 152 (7) 67 212 10 222
Depreciation, depletion and amortization 570 41 195 806 13 819
----------- ----------- ----------- ----------- ----------- -----------
PRETAX INCOME 1,042 300 816 2,158 22 2,180
Income tax expense(b) 210 113 385 (a) 708 10 718
----------- ----------- ----------- ----------- ----------- -----------
RESULTS OF OPERATIONS $ 832 $ 187 $ 431 $ 1,450 $ 12 $ 1,462
=========================================== =========== =========== =========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues $ 3,471 $ 245 $ 1,166 (a) $ 4,882 $ 137 $ 5,019
Production costs 773 68 123 964 67 1,031
Exploration expenses 42 91 61 194 (10) 184
Other operating expenses 141 5 65 211 4 215
Depreciation, depletion and amortization 535 27 171 733 14 747
----------- ----------- ----------- ----------- ----------- -----------
PRETAX INCOME 1,980 54 746 2,780 62 2,842
Income tax expense(b) 530 20 430 (a) 980 26 1,006
----------- ----------- ----------- ----------- ----------- -----------
RESULTS OF OPERATIONS $ 1,450 $ 34 $ 316 $ 1,800 $ 36 $ 1,836
=========================================== =========== =========== =========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues $ 2,762 $ 506 $ 1,387 (a) $ 4,655 $ 135 $ 4,790
Production costs 540 71 110 721 64 785
Exploration expenses 50 31 13 94 -- 94
Other operating expenses 141 27 38 206 9 215
Depreciation, depletion and amortization 444 40 167 651 10 661
----------- ----------- ----------- ----------- ----------- -----------
PRETAX INCOME 1,587 337 1,059 2,983 52 3,035
Income tax expense(b) 366 162 505 (a) 1,033 18 1,051
----------- ----------- ----------- ----------- ----------- -----------
RESULTS OF OPERATIONS $ 1,221 $ 175 $ 554 $ 1,950 $ 34 $ 1,984
=========================================== =========== =========== =========== =========== =========== ===========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) U.S. federal income taxes reflect expenses allocated for U.S. income tax
purposes only related to oil and gas activities, including allocated
interest and corporate overhead. Foreign income taxes were included in
geographic areas on the basis of operating results.
(c) Includes results of operations for equity investees in Russia and Yemen,
partially offset by minority interest for a Colombian affiliate.
71
RESULTS PER UNIT OF PRODUCTION (Unaudited)
Consolidated Subsidiaries
-------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests(d) Worldwide(e)
=========================================== =========== =========== =========== =========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenues from net production
Oil ($/bbl.) $ 23.47 $ 23.26 $ 33.05 (a) $ 26.20 $ 14.98 $ 25.37 (a)
=========== =========== =========== =========== =========== ==========
Natural gas ($/Mcf) $ 2.89 $ -- $ 2.08 $ 2.81 $ -- $ 2.81
=========== =========== =========== =========== =========== ==========
Barrel of oil equivalent ($/bbl.)(b,c) $ 21.30 $ 23.26 $ 31.14 (a) $ 23.71 $ 14.98 $ 23.24 (a)
Production costs 6.12 4.72 3.85 5.46 6.75 5.54
Exploration expenses 0.85 1.39 1.05 0.95 0.10 0.92
Other operating expenses 1.23 (0.36) 1.63 1.15 0.78 1.16
Depreciation, depletion and amortization 4.63 2.11 4.75 4.39 1.76 4.27
----------- ----------- ----------- ----------- ----------- ----------
PRETAX INCOME 8.47 15.40 19.86 11.76 5.59 11.35
Income tax expense 1.71 5.80 9.37 (a) 3.86 2.35 3.74 (a)
----------- ----------- ----------- ----------- ----------- ----------
RESULTS OF OPERATIONS $ 6.76 $ 9.60 $ 10.49 $ 7.90 $ 3.24 $ 7.61
=========================================== =========== =========== =========== =========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues from net production
Oil ($/bbl.) $ 22.82 $ 19.87 $ 32.68 (a) $ 25.41 $ 15.70 $ 24.65 (a)
=========== =========== =========== =========== =========== ==========
Natural gas ($/Mcf) $ 6.40 $ -- $ 2.29 $ 6.11 $ -- $ 6.11
=========== =========== =========== =========== =========== ==========
Barrel of oil equivalent ($/bbl.)(b,c) $ 28.34 $ 19.87 $ 31.18 (a) $ 28.35 $ 15.70 $ 27.69 (a)
Production costs 6.31 5.51 3.29 5.60 7.20 5.70
Exploration expenses 0.34 7.38 1.63 1.13 -- 1.02
Other operating expenses 1.15 0.41 1.74 1.23 0.50 1.19
Depreciation, depletion and amortization 4.37 2.19 4.57 4.26 1.70 4.12
----------- ----------- ----------- ----------- ----------- ----------
PRETAX INCOME 16.17 4.38 19.95 16.13 6.30 15.66
Income tax expense 4.33 1.62 11.50 (a) 5.69 2.80 5.55 (a)
----------- ----------- ----------- ----------- ----------- ----------
RESULTS OF OPERATIONS $ 11.84 $ 2.76 $ 8.45 $ 10.44 $ 3.50 $ 10.11
=========================================== =========== =========== =========== =========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues from net production
Oil ($/bbl.) $ 26.66 $ 25.92 $ 38.29 (a) $ 30.19 $ 18.62 $ 29.31 (a)
=========== =========== =========== =========== =========== ==========
Natural gas ($/Mcf) $ 3.65 $ -- $ 1.99 $ 3.53 $ -- $ 3.53
=========== =========== =========== =========== =========== ==========
Barrel of oil equivalent ($/bbl.)(b,c) $ 25.42 $ 25.92 $ 36.23 (a) $ 27.96 $ 18.62 $ 27.46 (a)
Production costs 4.97 3.64 2.87 4.33 7.14 4.50
Exploration expenses 0.46 1.59 0.34 0.56 -- 0.54
Other operating expenses 1.30 1.38 0.99 1.24 0.93 1.23
Depreciation, depletion and amortization 4.09 2.05 4.36 3.91 1.55 3.79
----------- ----------- ----------- ----------- ----------- ----------
PRETAX INCOME 14.60 17.26 27.67 17.92 9.00 17.40
Income tax expense 3.37 8.30 13.19 (a) 6.21 3.41 6.02 (a)
----------- ----------- ----------- ----------- ----------- ----------
RESULTS OF OPERATIONS $ 11.23 $ 8.96 $ 14.48 $ 11.71 $ 5.59 $ 11.38
=========================================== =========== =========== =========== =========== =========== ==========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Revenues from net production exclude royalty payments and other
adjustments.
(d) Includes results of operations for equity investees in Russia and Yemen.
(e) The computation of results per unit of production included in the
denominator 4.2 mmboe, 7.8 mmboe and 5.7 mmboe produced by Occidental that
were subject to volumetric production payments for the years 2002, 2001 and
2000, respectively.
72
2002 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
============================================================= ============ ============ ============ ============
Segment net sales
Oil and gas $ 958 $ 1,165 $ 1,224 $ 1,287
Chemical 565 702 739 698
------------ ------------ ------------ ------------
Net sales $ 1,523 $ 1,867 $ 1,963 $ 1,985
============ ============ ============ ============
Gross profit $ 536 $ 742 $ 838 $ 856
============ ============ ============ ============
Segment earnings(loss)
Oil and gas $ 306 $ 421 $ 490 $ 490
Chemical (31) 34 214 58
------------ ------------ ------------ ------------
275 455 704 548
Unallocated corporate items
Interest expense, net (56) (66) (73) (58)
Income taxes (44) (101) (105) (114)
Trust preferred distributions and other (11) (12) (12) (12)
Other (41) (35) (38) (41)
------------ ------------ ------------ ------------
Income from continuing operations 123 241 476 323
Discontinued operations, net (3) (1) (74) (1)
Cumulative effect of changes in accounting principles, net (95) -- -- --
------------ ------------ ------------ ------------
Net income $ 25 $ 240 $ 402 (a) $ 322
============ ============ ============ =============
Basic earnings per common share
Income from continuing operations $ .33 $ .64 $ 1.26 $ .85
Discontinued operations, net (.01) -- (.19) --
Cumulative effect of changes in accounting principles, net (.25) -- -- --
------------ ------------ ------------ ------------
Basic earnings per common share $ .07 $ .64 $ 1.07 $ .85
============ ============ ============ ============
Diluted earnings per common share
Income from continuing operations $ .33 $ .63 $ 1.25 $ .84
Discontinued operations, net (.01) -- (.19) --
Cumulative effect of changes in accounting principles, net (.25) -- -- --
------------ ------------ ------------ ------------
Diluted earnings per common share $ .07 $ .63 $ 1.06 $ .84
============ ============ ============ ============
Dividends per common share $ .25 $ .25 $ .25 $ .25
============ ============ ============ ============
Market price per common share
High $ 29.19 $ 30.75 $ 30.08 $ 30.74
Low $ 24.29 $ 28.05 $ 22.98 $ 26.47
============================================================= ============ ============ ============ ============
(a) Includes $164 million net of tax gain related to the sale of the investment
in Equistar.
73
2001 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
============================================================= ========== ========= ============ ===========
Segment net sales
Oil and gas $ 1,620 $ 1,439 $ 1,251 $ 824
Chemical 831 845 732 560
---------- --------- ------------ -----------
Net sales $ 2,451 $ 2,284 $ 1,983 $ 1,384
========== ========= ============ ===========
Gross profit $ 1,183 $ 1,087 $ 864 $ 413
========== ========= ============ ===========
Segment earnings(loss)
Oil and gas $ 946 $ 806 $ 927 $ 166
Chemical (79) 54 38 (412)
---------- --------- ------------ -----------
867 860 965 (246)
Unallocated corporate items
Interest expense, net (79) (71) (60) (62)
Income taxes (174) (247) (128) 190
Trust preferred distributions and other (16) (14) (13) (13)
Other (89) (57) (321) (113)
---------- --------- ------------ -----------
Income from continuing operations 509 471 443 (244)
Discontinued operations, net (1) 2 1 (3)
Cumulative effect of changes in accounting principles, net (24) -- -- --
---------- --------- ------------ -----------
Net income $ 484 (a) $ 473 $ 444 (b) $ (247) (c)
========== ========= ============ ===========
Basic earnings per common share
Income from continuing operations $ 1.37 $ 1.27 $ 1.19 $ (.65)
Discontinued operations, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net (.06) -- -- --
---------- --------- ------------ -----------
Basic earnings per common share $ 1.31 $ 1.27 $ 1.19 $ (.66)
========== ========= ============ ===========
Diluted earnings per common share
Income from continuing operations $ 1.36 $ 1.26 $ 1.18 $ (.65)
Discontinued operations, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net (.06) -- -- --
---------- --------- ------------ -----------
Diluted earnings per common share $ 1.30 $ 1.26 $ 1.18 $ (.66)
========== ========= ============ ===========
Dividends per common share $ .25 $ .25 $ .25 $ .25
========== ========= ============ ===========
Market price per common share
High $ 26.39 $ 31.08 $ 28.55 $ 26.93
Low $ 22.10 $ 24.39 $ 21.90 $ 23.56
============================================================= ========== ========= ============ ===========
(a) Includes a $70 million pre-tax gain on the settlement of a state-tax issue.
(b) Includes a $399 million after-tax gain from the sale of interest in the
Tangguh LNG project and an after-tax loss of $272 million from the sale of
a pipeline-owning entity.
(c) Includes a $412 million pre-tax writedown of the Equistar investment.
74
SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
The following tables set forth Occidental's net interests in quantities of
proved developed and undeveloped reserves of crude oil, condensate and natural
gas and changes in such quantities. Crude oil reserves (in millions of barrels)
include condensate. The reserves are stated after applicable royalties.
Estimates of reserves have been made by Occidental engineers. These estimates
include reserves in which Occidental holds an economic interest under
production-sharing contracts and other economic arrangements.
OIL RESERVES
In millions of barrels
Consolidated Subsidiaries
--------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests(a) Worldwide
========================================= =========== =========== =========== =========== =========== ===========
PROVED DEVELOPED AND UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 1999 464 247 273 984 53 1,037
Revisions of previous estimates 29 12 21 62 1 63
Improved recovery 41 -- 1 42 -- 42
Extensions and discoveries 24 6 7 37 (1) 36
Purchases of proved reserves 881 19 -- 900 -- 900
Sales of proved reserves (30) (120) -- (150) -- (150)
Production (c) (63) (20) (34) (117) (8) (125)
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 (B) 1,346 144 268 1,758 45 1,803
Revisions of previous estimates (14) 10 25 21 8 29
Improved recovery 92 -- 47 139 -- 139
Extensions and discoveries 22 10 24 56 -- 56
Purchases of proved reserves 3 -- -- 3 -- 3
Sales of proved reserves -- -- -- -- -- --
Production (c) (78) (12) (34) (124) (9) (133)
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 (B) 1,371 152 330 1,853 44 1,897
Revisions of previous estimates 28 13 (28) 13 (1) 12
Improved recovery 69 1 42 112 5 117
Extensions and discoveries 22 11 7 40 -- 40
Purchases of proved reserves 51 -- 5 56 2 58
Sales of proved reserves (4) -- -- (4) -- (4)
Production (85) (19) (38) (142) (8) (150)
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 (B) 1,452 158 318 1,928 42 1,970
========================================= =========== =========== =========== =========== =========== ===========
PROVED DEVELOPED RESERVES
December 31, 1999 339 162 195 696 41 737
=========== =========== =========== =========== =========== ===========
December 31, 2000 1,079 90 205 1,374 36 1,410
=========== =========== =========== =========== =========== ===========
December 31, 2001 1,106 91 240 1,437 35 1,472
=========== =========== =========== =========== =========== ===========
DECEMBER 31, 2002 1,183 85 240 1,508 34 1,542
========================================= =========== =========== =========== =========== =========== ===========
(a) Includes reserves applicable to equity investees in Russia and Yemen,
partially offset by minority interests for a Colombian affiliate.
(b) Includes proved reserves from production-sharing contracts in the Middle
East and Other Eastern Hemisphere and from other economic arrangements in
the United States, in million barrels of oil as follows:
2002 2001 2000
================================================== ========== ========== ==========
United States 94 99 87
Middle East and Other Eastern Hemisphere 304 321 258
Other Interests 2 -- --
-------------------------------------------------- ---------- ---------- ----------
(c) Production excludes 3.1 million barrels for 2001 and 3.2 million barrels
for 2000, which were subject to volumetric production payments.
75
GAS RESERVES
In billions of cubic feet
Consolidated Subsidiaries
---------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere(c) Total Interests(b) Worldwide
========================================= ============ ============ ============ ============ ============ ============
PROVED DEVELOPED AND UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 1999 1,806 -- 86 1,892 -- 1,892
Revisions of previous estimates 179 -- 44 223 -- 223
Improved recovery 25 -- -- 25 -- 25
Extensions and discoveries 108 -- 4 112 -- 112
Purchases of proved reserves 417 -- -- 417 -- 417
Sales of proved reserves (200) -- -- (200) -- (200)
Production (a) (241) -- (18) (259) -- (259)
- ----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 2,094 -- 116 2,210 -- 2,210
Revisions of previous estimates (53) -- 4 (49) -- (49)
Improved recovery 23 -- -- 23 -- 23
Extensions and discoveries 118 -- 4 122 -- 122
Purchases of proved reserves 4 -- -- 4 -- 4
Sales of proved reserves (1) -- -- (1) -- (1)
Production (a) (223) -- (18) (241) -- (241)
- ----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 1,962 -- 106 2,068 -- 2,068
Revisions of previous estimates (39) -- (15) (54) -- (54)
Improved recovery 39 -- 112 151 -- 151
Extensions and discoveries 57 -- 3 60 -- 60
Purchases of proved reserves 14 -- 45 59 -- 59
Sales of proved reserves (6) -- -- (6) -- (6)
Production (a) (206) -- (23) (229) -- (229)
- ----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2002 1,821 -- 228 2,049 -- 2,049
========================================= ============ ============ ============ ============ ============ ============
PROVED DEVELOPED RESERVES
December 31, 1999 1,670 -- 61 1,731 -- 1,731
============ ============ ============ ============ ============ ============
December 31, 2000 1,814 -- 84 1,898 -- 1,898
============ ============ ============ ============ ============ ============
December 31, 2001 1,718 -- 89 1,807 -- 1,807
============ ============ ============ ============ ============ ============
DECEMBER 31, 2002 1,630 -- 110 1,740 -- 1,740
========================================= ============ ============ ============ ============ ============ ============
(a) Production excludes 25.3 bcf, 28.0 bcf and 15.0 bcf subject to volumetric
production payments for the years 2002, 2001 and 2000, respectively.
(b) There were no gas reserves associated with equity investees in Russia or
Yemen.
(c) Includes proved reserves from production-sharing contracts in the Middle
East and Other Eastern Hemisphere of 106 bcf in 2002.
76
STANDARDIZED MEASURE, INCLUDING YEAR-TO-YEAR CHANGES THEREIN, OF DISCOUNTED
FUTURE NET CASH FLOWS
For purposes of the following disclosures, estimates were made of
quantities of proved reserves and the periods during which they are expected to
be produced. Future cash flows were computed by applying year-end prices to
Occidental's share of estimated annual future production from proved oil and gas
reserves, net of royalties. Future development and production costs were
computed by applying year-end costs to be incurred in producing and further
developing the proved reserves. Future income tax expenses were computed by
applying, generally, year-end statutory tax rates (adjusted for permanent
differences, tax credits, allowances and foreign income repatriation
considerations) to the estimated net future pre-tax cash flows. The discount was
computed by application of a 10 percent discount factor. The calculations
assumed the continuation of existing economic, operating and contractual
conditions at each of December 31, 2002, 2001 and 2000. However, such arbitrary
assumptions have not necessarily proven to be the case in the past. Other
assumptions of equal validity would give rise to substantially different
results.
The year-end prices used to calculate future cash flows vary by producing
area and market conditions. For the 2002, 2001 and 2000 disclosures, the West
Texas Intermediate oil prices used were $31.17/bbl, $19.84/bbl and $26.80/bbl,
respectively. The NYMEX gas prices used for the 2002, 2001 and 2000 disclosures
were $4.75/MMBtu, $2.57/MMBtu and $9.78/MMBtu, respectively.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
In millions
Consolidated Subsidiaries
------------------------------------------------------------
Middle East
and Other
United Latin Eastern Other
States America Hemisphere Total Interests(a)
=================================================== ============ ============ ============ ============ ============
AT DECEMBER 31, 2002
Future cash flows $ 46,806 $ 3,407 $ 9,183 $ 59,396 $ 429
Future costs
Production costs and other operating expenses (18,288) (907) (2,329) (21,524) (286)
Development costs (b) (1,997) (165) (997) (3,159) (40)
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 26,521 2,335 5,857 34,713 103
Future income tax expense (7,929) (906) (523) (9,358) --
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS 18,592 1,429 5,334 25,355 103
Ten percent discount factor (10,342) (440) (2,144) (12,926) (22)
------------ ------------ ------------ ------------ ------------
STANDARDIZED MEASURE $ 8,250 $ 989 $ 3,190 $ 12,429 $ 81
=================================================== ============ ============ ============ ============ ============
AT DECEMBER 31, 2001
Future cash flows $ 28,146 $ 2,259 $ 6,010 $ 36,415 $ 469
Future costs
Production costs and other operating expenses (14,404) (868) (1,882) (17,154) (321)
Development costs (b) (2,282) (204) (575) (3,061) (32)
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 11,460 1,187 3,553 16,200 116
Future income tax expense (2,224) (483) (396) (3,103) (26)
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS 9,236 704 3,157 13,097 90
Ten percent discount factor (5,088) (199) (1,276) (6,563) (22)
------------ ------------ ------------ ------------ ------------
STANDARDIZED MEASURE $ 4,148 $ 505 $ 1,881 $ 6,534 $ 68
=================================================== ============ ============ ============ ============ ============
AT DECEMBER 31, 2000
Future cash flows $ 53,195 $ 2,923 $ 6,207 $ 62,325 $ 482
Future costs
Production costs and other operating expenses (13,236) (823) (1,599) (15,658) (130)
Development costs (b) (1,962) (51) (490) (2,503) (45)
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 37,997 2,049 4,118 44,164 307
Future income tax expense (11,023) (969) (468) (12,460) (82)
------------ ------------ ------------ ------------ ------------
FUTURE NET CASH FLOWS 26,974 1,080 3,650 31,704 225
Ten percent discount factor (14,608) (408) (1,508) (16,524) (61)
------------ ------------ ------------ ------------ ------------
STANDARDIZED MEASURE $ 12,366 $ 672 $ 2,142 $ 15,180 $ 164
=================================================== ============ ============ ============ ============ ============
(a) Includes future net cash flows applicable to equity investees in Russia and
Yemen, partially offset by minority interests for a Colombian affiliate.
(b) Includes dismantlement and abandonment costs.
77
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
In millions
For the years ended December 31, 2002 2001 2000
=================================================================================================== ======= ======= =======
BEGINNING OF YEAR $ 6,534 $15,180 $ 7,249
------- ------- -------
Sales and transfers of oil and gas produced, net of production costs and other operating expenses (2,910) (3,383) (3,455)
Net change in prices received per barrel, net of production costs and other operating expenses 9,731 (12,737) 6,196
Extensions, discoveries and improved recovery, net of future production and development costs 1,496 1,238 1,222
Change in estimated future development costs (538) (931) (78)
Revisions of quantity estimates (87) 58 1,315
Development costs incurred during the period 954 902 569
Accretion of discount 757 1,895 768
Net change in income taxes (2,820) 4,138 (3,993)
Purchases and sales of reserves in place, net 522 19 5,928
Changes in production rates and other (1,210) 155 (541)
------- ------- -------
NET CHANGE 5,895 (8,646) 7,931
------- ------- -------
END OF YEAR $12,429 $ 6,534 $15,180
=================================================================================================== ======= ======= =======
AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS OF OIL AND GAS
The following table sets forth, for each of the three years in the period
ended December 31, 2002, Occidental's approximate average sales prices and
average production costs of oil and gas. Production costs are the costs incurred
in lifting the oil and gas to the surface and include gathering, treating,
primary processing, field storage, property taxes and insurance on proved
properties, but do not include depreciation, depletion and amortization,
royalties, income taxes, interest, general and administrative and other
expenses.
Consolidated Subsidiaries
---------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America (a) Hemisphere (a,b) Total Interests (c) Worldwide
================================================= ====== =========== ================ ======= ============= =========
2002
Oil -- Average sales price ($/bbl.) $23.47 $ 23.14 $ 24.01 (d) $ 23.56 $ 14.80 $ 22.91
Gas -- Average sales price ($/Mcf) $ 2.89 $ -- $ 2.08 $ 2.81 $ -- $ 2.81
Average oil and gas production cost ($/bbl.)(b) $ 6.12 $ 4.72 $ 3.85 $ 5.46 $ 7.30 $ 5.54
- ------------------------------------------------- ------ ----------- ---------------- ------- ------------- ---------
2001
Oil -- Average sales price ($/bbl.) $21.74 $ 20.10 $ 22.97 (d) $ 21.91 $ 15.57 $ 21.41
Gas -- Average sales price ($/Mcf) $ 6.40 $ -- $ 2.29 $ 6.09 $ -- $ 6.09
Average oil and gas production cost ($/bbl.)(b) $ 6.31 $ 5.51 $ 3.29 $ 5.60 $ 7.39 $ 5.70
- ------------------------------------------------- ------ ----------- ---------------- ------- ------------- ---------
2000
Oil -- Average sales price ($/bbl.) $26.66 $ 26.07 $ 26.92 (d) $ 26.62 $ 18.60 $ 25.99
Gas -- Average sales price ($/Mcf) $ 3.66 $ -- $ 1.99 $ 3.53 $ -- $ 3.53
Average oil and gas production cost ($/bbl.)(b) $ 4.97 $ 3.64 $ 2.87 $ 4.33 $ 8.01 $ 4.50
- ------------------------------------------------- ------ ----------- ---------------- ------- ------------- ---------
(a) Sales prices include royalties with respect to certain of Occidental's
interests.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Includes prices and costs applicable to equity investees in Russia and
Yemen.
(d) Excludes implied taxes.
78
NET PRODUCTIVE AND DRY -- EXPLORATORY AND DEVELOPMENT WELLS COMPLETED
The following table sets forth, for each of the three years in the period
ended December 31, 2002, Occidental's net productive and dry-exploratory and
development wells completed.
Consolidated Subsidiaries
-----------------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
States America Hemisphere Total Interests (a) Worldwide
======================== ============== ============== ============== ============== ============== ==============
2002
Oil -- Exploratory 2.9 1.2 3.8 7.9 -- 7.9
Development 258.5 16.8 60.8 336.1 8.6 344.7
Gas -- Exploratory -- -- 0.5 0.5 -- 0.5
Development 17.9 -- 0.6 18.5 -- 18.5
Dry -- Exploratory 5.1 1.2 2.1 8.4 -- 8.4
Development 20.8 1.1 0.8 22.7 (0.1) 22.6
- ------------------------ -------------- -------------- -------------- -------------- -------------- --------------
2001
Oil -- Exploratory 3.0 -- 3.1 6.1 -- 6.1
Development 432.1 15.1 47.9 495.1 11.4 506.5
Gas -- Exploratory 7.8 -- -- 7.8 -- 7.8
Development 38.1 -- .5 38.6 -- 38.6
Dry -- Exploratory 10.1 1.2 1.8 13.1 (0.3) 12.8
Development 34.7 -- .3 35.0 -- 35.0
- ------------------------ -------------- -------------- -------------- -------------- -------------- --------------
2000
Oil -- Exploratory 1.6 1.5 -- 3.1 (0.2) 2.9
Development 273.9 9.1 115.5 398.5 2.5 401.0
Gas -- Exploratory 3.4 -- 0.6 4.0 -- 4.0
Development 32.9 -- 4.3 37.2 -- 37.2
Dry -- Exploratory 1.2 2.7 1.0 4.9 -- 4.9
Development 25.3 -- 0.7 26.0 0.5 26.5
- ------------------------ -------------- -------------- -------------- -------------- -------------- --------------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth, as of December 31, 2002, Occidental's
productive oil and gas wells (both producing wells and wells capable of
production). The numbers in parentheses indicate the number of wells with
multiple completions.
Consolidated Subsidiaries
-----------------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
Wells at December 31, 2002 States America Hemisphere Total Interests (c) Worldwide
========================== ============== ============== ============== ============== ============== ==============
Oil -- Gross (a) 16,586 (393) 272 (--) 696 (21) 17,554 (414) 421 (49) 17,975 (463)
Net (b) 10,723 (287) 142 (--) 374 (21) 11,239 (308) 199 (25) 11,438 (333)
Gas -- Gross (a) 2,399 (50) -- (--) 41 (1) 2,440 (51) 2 (--) 2,442 (51)
Net (b) 2,014 (33) -- (--) 13 (1) 2,027 (34) 1 (--) 2,028 (34)
- -------------------------- -------------- -------------- -------------- -------------- -------------- --------------
(a) The total number of wells in which interests are owned.
(b) The sum of fractional interests.
(c) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
79
PARTICIPATION IN EXPLORATORY AND DEVELOPMENT WELLS BEING DRILLED
The following table sets forth, as of December 31, 2002, Occidental's
participation in exploratory and development wells being drilled.
Consolidated Subsidiaries
---------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
Wells at December 31, 2002 States America Hemisphere Total Interests(a) Worldwide
========================================== ============ ============ ============ ============ ============ ============
Exploratory and development wells -- Gross 31 4 10 45 -- 45
Net 20 2 5 27 -- 27
- ------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
At December 31, 2002, Occidental was participating in 95 pressure
maintenance projects in the United States, 5 in Latin America and 20 in the
Eastern Hemisphere.
OIL AND GAS ACREAGE
The following table sets forth, as of December 31, 2002, Occidental's
holdings of developed and undeveloped oil and gas acreage.
Consolidated Subsidiaries
---------------------------------------------------------
Middle East
and Other
United Latin Eastern Other Total
Thousands of acres at December 31, 2002 States America Hemisphere Total Interests(e) Worldwide
======================================= ============ ============ ============ ============ ============ ============
Developed (a) -- Gross (b) 3,836 20 1,676 5,532 15 5,547
Net (c) 2,782 11 501 3,294 8 3,302
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Undeveloped (d) -- Gross (b) 1,463 7,882 21,831 31,176 6 31,182
Net (c) 1,092 6,509 9,661 17,262 (717) 16,545
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(a) Acres spaced or assigned to productive wells.
(b) Total acres in which interests are held.
(c) Sum of the fractional interests owned based on working interests, or
interests under production-sharing contracts and other economic
arrangements.
(d) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether the acreage contains proved reserves.
(e) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
80
OIL AND NATURAL GAS PRODUCTION PER DAY
The following table sets forth, for each of the three years in the period
ended December 31, 2002, Occidental's oil, NGL and natural gas production per
day.
2002 2001 2000
======================================================= ========== ========== ==========
United States
Crude oil and liquids (MBL)
California 86 76 70
Permian 142 137 101
U.S. Other 4 -- 1
---------- ---------- ----------
TOTAL 232 213 172
Natural Gas (MMCF)
California 286 303 306
Hugoton 148 159 168
Permian 130 148 119
Other -- -- 66
---------- ---------- ----------
TOTAL 564 610 659
Latin America
Crude oil (MBL)
Colombia 40 21 37
Ecuador 13 13 17
---------- ---------- ----------
TOTAL 53 34 54
Middle East and Other Eastern Hemisphere
Crude oil (MBL)
Oman 13 12 9
Pakistan 10 7 6
Qatar 42 43 49
Yemen 37 33 32
---------- ---------- ----------
TOTAL 102 95 96
Natural Gas (MMCF)
Pakistan 63 50 49
Barrels of Oil Equivalent (MBOE)
- --------------------------------
Consolidated subsidiaries 492 452 440
Colombia - minority interest (5) (3) (5)
Russia - Occidental net interest 27 27 26
Yemen - Occidental net interest 1 -- --
---------- ---------- ----------
Other interests 23 24 21
---------- ---------- ----------
Total worldwide production 515 476 461
======================================================= ========== ========== ==========
81
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Occidental Petroleum Corporation
In millions and Subsidiaries
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
========================================================= ========== ========== ========== ========== ==========
2002
Allowance for doubtful accounts $ 35 $ -- $ -- $ (7) $ 28
========== ========== ========== ========== ==========
Environmental $ 454 $ 25 $ -- $ (86)(a) $ 393
Foreign and other taxes, litigation and other reserves 930 8 193 (27) 1,104
---------- ---------- ---------- ---------- ----------
$ 1,384 $ 33 $ 193 $ (113) $ 1,497 (b)
========================================================= ========== ========== ========== ========== ==========
2001
Allowance for doubtful accounts $ 25 $ 12 $ -- $ (2) $ 35
========== ========== ========== ========== ==========
Environmental $ 402 $ 111 $ 16 $ (75)(a) $ 454
Foreign and other taxes, litigation and other reserves 1,001 10 27 (108)(c) 930
---------- ---------- ---------- ---------- ----------
$ 1,403 $ 121 $ 43 $ (183) $ 1,384 (b)
========================================================= ========== ========== ========== ========== ==========
2000
Allowance for doubtful accounts $ 24 $ 2 $ -- $ (1) $ 25
========== ========== ========== ========== ==========
Environmental $ 454 $ 2 $ 31 $ (85)(a) $ 402
Foreign and other taxes, litigation and other reserves 857 42 231 (129)(d) 1,001
---------- ---------- ---------- ---------- ----------
$ 1,311 $ 44 $ 262 $ (214) $ 1,403 (b)
========================================================= ========== ========== ========== ========== ==========
(a) Primarily represents payments.
(b) Of these amounts, $160 million, $165 million and $143 million in 2002, 2001
and 2000, respectively, is classified as current.
(c) Included a reclassification of $46 million to the "Deferred and other
domestic and foreign income taxes" account.
(d) Included a $52 million credit to the consolidated income statement, which
reflects a reduction in abandonment liabilities, mainly from the GOM
transactions discussed in Note 3.
82
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information regarding
Occidental's directors appearing under the caption "Election of Directors" in
Occidental's definitive proxy statement filed in connection with its April 25,
2003, Annual Meeting of Stockholders (the "2003 Proxy Statement"). See also the
list of Occidental's executive officers and related information under "Executive
Officers of the Registrant" in Part I hereof.
ITEM 11 EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing under
the captions "Executive Compensation" (excluding, however, the information
appearing under the subcaptions "Report of the Compensation Committee" and
"Performance Graph") and "Election of Directors -- Information Regarding the
Board of Directors and Its Committees" in the 2003 Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information with respect to
security ownership appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2003 Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14 CONTROLS AND PROCEDURES
Within 90 days before filing this Annual Report, Occidental's Chief
Executive Officer and Chief Financial Officer supervised and participated in
Occidental's evaluation of its disclosure controls and procedures. Disclosure
controls and procedures are controls and procedures designed to ensure that
information required to be disclosed in Occidental's periodic reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Based upon that evaluation, Occidental's
Chief Executive Officer and Chief Financial Officer concluded that Occidental's
disclosure controls and procedures are effective. (See Signatures and
Certifications following Exhibits).
There have been no significant changes in Occidental's internal controls or
in other factors that could significantly affect internal controls after the
date Occidental carried out its evaluation.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the Index to Financial Statements and Related Information
under Item 8 in Part II hereof, where these documents are listed.
(a) (3). EXHIBITS
3.(I)* Restated Certificate of Incorporation of Occidental, dated
November 12, 1999 (filed as Exhibit 3.(i) to the Annual Report on
Form 10-K of Occidental for the fiscal year ended December 31,
1999, File No. 1-9210).
3.(I)(A)* Certificate of Change of Location of Registered Office and of
Registered Agent, dated July 6, 2001. (filed as Exhibit 3.1(i) to
the Registration Statement on Form S-3 of Occidental, File No.
333-82246).
3.(II) Bylaws of Occidental, as amended through February 13, 2003.
4.1* Occidental Petroleum Corporation Five-Year Credit Agreement,
dated as of January 4, 2001 among Occidental, Chase Securities
Inc. and Banc of America Securities, LLC, as Co-Lead Arrangers,
The Chase Manhattan Bank, as Syndication Agent, Bank of America,
N.A. and ABN Amro Bank N.V., as Co-Documentation Agents, and The
Bank of Nova Scotia, as Administrative Agent (filed as Exhibit
4.1 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 2000, File No. 1-9210).
4.2* Indenture (Senior Debt Securities), dated as of April 1, 1998,
between Occidental and The Bank of New York, as Trustee (filed as
Exhibit 4 to the Registration Statement on Form S-3 of
Occidental, File No. 333-52053).
- ----------------------------------
*Incorporated herein by reference.
83
4.3* Specimen certificate for shares of Common Stock (filed as Exhibit
4.9 to the Registration Statement on Form S-3 of Occidental, File
No. 333-82246).
4.4 Instruments defining the rights of holders of other long-term
debt of Occidental and its subsidiaries are not being filed since
the total amount of securities authorized under each of such
instruments does not exceed 10 percent of the total assets of
Occidental and its subsidiaries on a consolidated basis.
Occidental agrees to furnish a copy of any such instrument to the
Commission upon request.
All of the Exhibits numbered 10.1 to 10.49 are management contracts and
compensatory plans required to be identified specifically as responsive to Item
601(b)(10)(iii)(A) of Regulation S-K pursuant to Item 15(c) of Form 10-K.
10.1* Employment Agreement, dated as of December 13, 2001, between
Occidental and J. Roger Hirl (filed as Exhibit 10.1 to the Annual
Report on Form 10-K of Occidental for the fiscal year ended
December 31, 2001, File No, 1-9210).
10.2* Employment Agreement, dated as of November 17, 2000, between
Occidental and Dr. Ray R. Irani (filed as Exhibit 10.2 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.3* Employment Agreement, dated as of November 17, 2000, between
Occidental and Dr. Dale R. Laurance (filed as Exhibit 10.3 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.4* Employment Agreement, dated as of November 17, 2000, between
Occidental and Stephen I. Chazen (filed as Exhibit 10.4 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.5* Employment Agreement, dated April 3, 1998, between Occidental and
Donald P. de Brier (filed as Exhibit 10.7 to the Annual Report on
Form 10-K of Occidental for the fiscal year ended December 31,
1999, File No. 1-9210).
10.6* Amendment, dated November 17, 2000, to Employment Agreement,
dated April 3, 1998, between Occidental and Donald P. de Brier
(filed as Exhibit 10.6 to the Annual Report on Form 10-K of
Occidental for the fiscal year ended December 31, 2000, File No.
1-9210).
10.7* Form of Indemnification Agreement between Occidental and each of
its directors and certain executive officers (filed as Exhibit B
to the Proxy Statement of Occidental for its May 21, 1987, Annual
Meeting of Stockholders, File No. 1-9210).
10.8* Occidental Petroleum Corporation Split Dollar Life Insurance
Program and Related Documents (filed as Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 1994, File No. 1-9210).
10.9* Split Dollar Life Insurance Agreement, dated January 24, 2002, by
and between Occidental and Donald P. de Brier (filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2002, File No. 1-9210).
10.10* Occidental Petroleum Insured Medical Plan, as amended and
restated effective April 29, 1994, amending and restating the
Occidental Petroleum Corporation Executive Medical Plan (as
amended and restated effective April 1, 1993) (filed as Exhibit
10 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ending March 31, 1994, File No. 1-9210).
10.11* Occidental Petroleum Corporation 1987 Stock Option Plan, as
amended through September 12, 2002 (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.12* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.2 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
10.13* Form of Nonqualified Stock Option Agreement, with Stock
Appreciation Right, under Occidental Petroleum Corporation 1987
Stock Option Plan (filed as Exhibit 10.3 to the Quarterly Report
on Form 10-Q of Occidental for the quarterly period ended March
31, 1992, File No. 1-9210).
10.14* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.4 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
- ----------------------------------
*Incorporated herein by reference.
84
10.15* Form of Incentive Stock Option Agreement, with Stock Appreciation
Right, under Occidental Petroleum Corporation 1987 Stock Option
Plan (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 1992, File
No. 1-9210).
10.16 Occidental Petroleum Corporation Deferred Compensation Plan,
Amended and Restated Effective as of January 1, 2003.
10.17* Occidental Petroleum Corporation Senior Executive Deferred
Compensation Plan (effective as of January 1, 1986, as amended
and restated effective as of January 1, 1996) (filed as Exhibit
10.24 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 1995, File No. 1-9210).
10.18* Occidental Petroleum Corporation Senior Executive Supplemental
Life Insurance Plan (effective as of January 1, 1986, as amended
and restated effective as of January 1, 1996) (filed as Exhibit
10.25 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 1995, File No. 1-9210).
10.19* Occidental Petroleum Corporation Senior Executive Supplemental
Retirement Plan (effective as of January 1, 1986, as amended and
restated effective as of January 1, 1996) (filed as Exhibit 10.26
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1995, File No. 1-9210).
10.20* Amendment to Occidental Petroleum Corporation Senior Executive
Supplemental Retirement Plan (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended June 30, 1998, File No. 1-9210).
10.21* Occidental Petroleum Corporation Senior Executive Survivor
Benefit Plan (effective as of January 1, 1986, as amended and
restated effective as of January 1, 1996) (filed as Exhibit 10.27
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1995, File No. 1-9210).
10.22* Amendment No. 1 to Occidental Petroleum Corporation Senior
Executive Survivor Benefit Plan, dated February 28, 2002 (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2002, File
No. 1-9210).
10.23* Occidental Petroleum Corporation 1995 Incentive Stock Plan, as
amended (filed as Exhibit 10.28 to the Annual Report on Form 10-K
of Occidental for the fiscal year ended December 31, 1999, File
No. 1-9210).
10.24* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.25* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.3 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.26* Form of Stock Appreciation Rights Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.4 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.27* Form of Restricted Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.5 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
10.28* Form of Performance Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.6 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
10.29* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.2 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.1 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.39
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.30* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.3 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.40
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.31* Form of Incentive Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
- ----------------------------------
*Incorporated herein by reference.
85
10.32* Form of Nonqualified Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
10.33* Form of 1997 Performance Stock Option Agreement under the 1995
Incentive Stock Plan of Occidental Petroleum Corporation (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended June 30, 1997, File No.
1-9210).
10.34* Form of Amendment to 1997 Performance Stock Option Agreement
under the 1995 Incentive Stock Plan of Occidental Petroleum
Corporation (filed as Exhibit 10.43 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 1999,
File No. 1-9210).
10.35* Occidental Petroleum Corporation 1996 Restricted Stock Plan for
Non-Employee Directors (as amended April 28, 2000) (filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended March 31, 2000, File No. 1-9210).
10.36* Form of Restricted Stock Option Assignment under Occidental
Petroleum Corporation 1996 Restricted Stock Plan for Non-Employee
Directors (filed as Exhibit 99.2 to the Registration Statement on
Form S-8 of Occidental, File No. 333-02901).
10.37* Occidental Petroleum Corporation 1988 Deferred Compensation Plan
(as amended and restated effective as of January 1, 1996) (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the fiscal quarter ended September 30, 1996, File
No. 1-9210).
10.38* Occidental Petroleum Corporation Supplemental Retirement Plan,
Amended and Restated Effective as of January 1, 1999, reflecting
amendments effective through March 1, 2001 (filed as Exhibit 10.3
to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2001, File No. 1-9210).
10.39* Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(as amended through September 12, 2002) (filed as Exhibit 10.2 to
the Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.40* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.41* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.42* Form of Restricted Common Share Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.40 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
10.43* Form of Performance Based Stock Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.41 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
10.44* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.4 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.45* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.5 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.46* Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (filed as Exhibit
10.6 to the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.47 Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2002
version).
10.48* Occidental Petroleum Corporation Deferred Stock Program (filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2002, File No.
1-9210).
10.49* Occidental Petroleum Corporation Executive Incentive Compensation
Plan (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 2001, File
No. 1-9210)
- ----------------------------------
*Incorporated herein by reference.
86
10.50* Purchase and Sale Agreement dated March 7, 2000, by and among
Amoco D. T. Company, Amoco X. T. Company, Amoco Y. T. Company,
SWEPI LP, Shell Land & Energy Company, Shell Onshore Ventures
Inc., Shell K2 Inc., and Shell Everest, Inc., as Sellers, and
Occidental Petroleum Corporation, as Buyer (filed as Exhibit 10.1
to the Current Report on Form 8-K of Occidental dated March 7,
2000 (date of earliest event reported), filed March 15, 2000,
File No. 1-9210).
10.51* Securities Purchase Agreement, dated as of July 8, 2002, by and
between Lyondell Chemical Company and Occidental Chemical Holding
Corporation (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.52* Stockholders Agreement, dated as of August 22, 2002, by and among
Lyondell Chemical Company and the Stockholders as defined therein
(incorporated by reference to Exhibit 10.2 to the Current Report
on Form 8-K of Occidental dated August 22, 2002 (date of earliest
event reported), filed September 6, 2002, File No. 1-9210).
10.53* Warrant for the Purchase of Shares of Common Stock, issued August
22, 2002 (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.54* Registration Rights Agreement, dated as of August 22, 2002, by
and between Occidental Chemical Holding Corporation and Lyondell
Chemical Company (incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K of Occidental dated August 22,
2002 (date of earliest event reported), filed September 6, 2002,
File No. 1-9210).
10.55* Occidental Partner Sub Purchase Agreement, dated July 8, 2002, by
and among Lyondell Chemical Company, Occidental Chemical Holding
Corporation, Oxy CH Corporation and Occidental Chemical
Corporation (incorporated by reference to Exhibit 10.5 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
12 Statement regarding computation of total enterprise ratios of
earnings to fixed charges for the five years ended December 31,
2002.
16 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated March 22, 2002 (incorporated by reference to
Exhibit 16.1 to the Current Report on Form 8-K of Occidental
dated March 22, 2002 (date of earliest event reported), filed
March 22, 2002, File No. 1-9210).
21 List of subsidiaries of Occidental at December 31, 2002.
23 Independent Auditors' Consent.
(b) REPORTS ON FORM 8-K
During the fourth quarter of 2002, Occidental filed the following Current
Reports on Form 8-K:
1. Current Report on Form 8-K dated October 21, 2002 (date of earliest
event reported), filed on October 21, 2002, for the purpose of reporting, under
Item 5, Occidental's results of operations for the third quarter ended September
30, 2002, and under Item 9, speeches and supplemental investor information
relating to Occidental's third quarter 2002 earnings announcement (which
information under Item 9 shall not be deemed to be filed).
2. Current Report on Form 8-K dated November 26, 2002 (date of earliest
event reported), filed on November 27, 2002, for the purpose of reporting, under
Item 5, Occidental's Dolphin project acquisition and the Rule 10b5-1 plan of Dr.
Irani.
During the first quarter of 2003, Occidental filed the following Current Reports
on Form 8-K:
1. Current Report on Form 8-K dated January 29, 2003 (date of earliest
event reported), filed on January 29, 2003, for the purpose of reporting, under
Item 5, Occidental's results of operations for the fourth quarter and fiscal
year ended December 31, 2002, and under Item 9, speeches and supplemental
investor information relating to Occidental's fourth quarter 2002 earnings
announcement (which information under Item 9 shall not be deemed to be filed).
- ----------------------------------
*Incorporated herein by reference.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
March 4, 2003 By: /s/ RAY R. IRANI
--------------------------------------
Ray R. Irani
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAY R. IRANI Chairman of the Board of March 4, 2003
- ------------------------------- Directors and Chief
Ray R. Irani Executive Officer
/s/ STEPHEN I. CHAZEN Executive Vice President - March 4, 2003
- ------------------------------- Corporate Development
Stephen I. Chazen and Chief Financial Officer
/s/ SAMUEL P. DOMINICK, JR. Vice President and March 4, 2003
- ------------------------------- Controller (Chief
Samuel P. Dominick, Jr. Accounting Officer)
/s/ RONALD W. BURKLE Director March 4, 2003
- -------------------------------
Ronald W. Burkle
/s/ JOHN S. CHALSTY Director March 4, 2003
- -------------------------------
John S. Chalsty
/s/ EDWARD P. DJEREJIAN Director March 4, 2003
- -------------------------------
Edward P. Djerejian
/s/ R. CHAD DREIER Director March 4, 2003
- -------------------------------
R. Chad Dreier
/s/ JOHN E. FEICK Director March 4, 2003
- -------------------------------
John E. Feick
/s/ DALE R. LAURANCE Director March 4, 2003
- -------------------------------
Dale R. Laurance
88
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IRVIN W. MALONEY Director March 4, 2003
- -------------------------------
Irvin W. Maloney
/s/ RODOLFO SEGOVIA Director March 4, 2003
- -------------------------------
Rodolfo Segovia
/s/ AZIZ D. SYRIANI Director March 4, 2003
- -------------------------------
Aziz D. Syriani
/s/ ROSEMARY TOMICH Director March 4, 2003
- -------------------------------
Rosemary Tomich
/s/ WALTER L. WEISMAN Director March 4, 2003
- -------------------------------
Walter L. Weisman
89
CERTIFICATIONS
I, Ray R. Irani, certify that:
1. I have reviewed this annual report on Form 10-K of Occidental Petroleum
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 4, 2003
/s/ RAY R. IRANI
--------------------------------------------
Ray R. Irani
Chief Executive Officer
90
I, Stephen I. Chazen, certify that:
1. I have reviewed this annual report on Form 10-K of Occidental Petroleum
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 4, 2003
/s/ STEPHEN I. CHAZEN
--------------------------------------------
Stephen I. Chazen
Chief Financial Officer
91