SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210
---------------------
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4035997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10889 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
(310) 208-8800
(Registrant's telephone number, including area code)
---------------------
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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 2003
--------------------------------- ----------------------------
Common stock $.20 par value 382,767,268 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
June 30, 2003 and December 31, 2002 2
Consolidated Condensed Statements of Operations--
Three and six months ended June 30, 2003 and 2002 4
Consolidated Condensed Statements of Cash Flows --
Six months ended June 30, 2003 and 2002 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2003 and December 31, 2002
(Amounts in millions)
2003 2002
================================================================================ ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 115 $ 146
Receivables, net 1,016 1,079
Inventories 497 491
Prepaid expenses and other 161 157
---------- ----------
Total current assets 1,789 1,873
LONG-TERM RECEIVABLES, net 253 275
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES 1,084 1,056
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation, depletion and amortization of $6,973 at
June 30, 2003 and $6,395 at December 31, 2002 13,797 13,036
OTHER ASSETS 256 308
---------- ----------
$ 17,179 $ 16,548
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2003 and December 31, 2002
(Amounts in millions)
2003 2002
================================================================================ ========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ 28 $ 206
Accounts payable 784 785
Accrued liabilities 931 1,107
Domestic and foreign income taxes 208 137
---------- ----------
Total current liabilities 1,951 2,235
---------- ----------
LONG-TERM DEBT, net of current maturities and unamortized discount 4,065 3,997
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 996 982
Other 2,333 2,228
---------- ----------
3,329 3,210
---------- ----------
MINORITY INTEREST 326 333
---------- ----------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 454 455
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 77 75
Additional paid-in capital 4,088 3,967
Retained earnings 2,902 2,303
Accumulated other comprehensive income (13) (27)
---------- ----------
7,054 6,318
---------- ----------
$ 17,179 $ 16,548
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
3
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Amounts in millions, except per-share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2003 2002 2003 2002
================================================================= ========== ========== ========== ==========
REVENUES
Net sales $ 2,266 $ 1,867 $ 4,637 $ 3,390
Interest, dividends and other income 17 26 51 51
Gains (losses) on disposition of assets, net 22 (1) 22 (1)
---------- ---------- ---------- ----------
2,305 1,892 4,710 3,440
---------- ---------- ---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,264 1,125 2,562 2,112
Selling, general and administrative and other
operating expenses 250 161 437 312
Environmental remediation 13 -- 13 --
Exploration expense 29 59 57 86
Interest and debt expense, net 59 78 190 152
---------- ---------- ---------- ----------
1,615 1,423 3,259 2,662
---------- ---------- ---------- ----------
Income before taxes and other items 690 469 1,451 778
Provision for domestic and foreign income and other taxes 290 221 623 347
Minority interest 19 16 38 41
Loss (income) from equity investments 7 (9) 23 26
---------- ---------- ---------- ----------
Income from continuing operations 374 241 767 364
Discontinued operations, net -- (1) -- (4)
Cumulative effect of changes in accounting principles, net -- -- (68) (95)
---------- ---------- ---------- ----------
NET INCOME AND EARNINGS APPLICABLE TO
COMMON STOCK $ 374 $ 240 $ 699 $ 265
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 0.98 $ 0.64 $ 2.02 $ 0.97
Discontinued operations, net -- -- -- (0.01)
Cumulative effect of changes in accounting principles, net -- -- (0.18) (0.25)
---------- ---------- ---------- ----------
Basic earnings per common share $ 0.98 $ 0.64 $ 1.84 $ 0.71
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 0.97 $ 0.63 $ 1.99 $ 0.96
Discontinued operations, net -- -- -- (0.01)
Cumulative effect of changes in accounting principles, net -- -- (0.18) (0.25)
---------- ---------- ---------- ----------
Diluted earnings per common share $ 0.97 $ 0.63 $ 1.81 $ 0.70
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ 0.26 $ 0.25 $ 0.52 $ 0.50
========== ========== ========== ==========
BASIC SHARES OUTSTANDING 382.6 375.8 380.9 375.1
========== ========== ========== ==========
DILUTED SHARES 386.7 379.1 384.9 378.0
================================================================= ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Amounts in millions)
2003 2002
===================================================================================== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 767 $ 364
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 571 514
Deferred income tax provision 50 114
Other noncash charges to income 112 18
(Gains) losses on disposition of assets, net (22) 1
Loss from equity investments 23 26
Dry hole and impairment expense 30 42
Changes in operating assets and liabilities 36 (78)
Other operating, net (101) (88)
---------- ----------
Operating cash flow from continuing operations 1,466 913
Operating cash flow from discontinued operations -- (3)
---------- ----------
Net cash provided by operating activities 1,466 910
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (791) (557)
Sales of businesses and disposal of property, plant and equipment, net 26 1
Purchase of businesses, net (251) (77)
Equity investments and other investing, net (110) 169
---------- ----------
Investing cash flow from continuing operations (1,126) (464)
Investing cash flow from discontinued operations -- (3)
---------- ----------
Net cash used by investing activities (1,126) (467)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 298 --
Repurchase of trust preferred securities (1) (4)
Purchases for natural gas delivery commitment -- (63)
Payments of long-term debt and capital lease liabilities (587) (3)
Proceeds from issuance of common stock 7 7
Cash dividends paid (193) (187)
Stock options exercised 106 40
Other financing, net (1) (1)
---------- ----------
Net cash used by financing activities (371) (211)
---------- ----------
(Decrease) increase in cash and cash equivalents (31) 232
Cash and cash equivalents--beginning of period 146 198
---------- ----------
Cash and cash equivalents--end of period $ 115 $ 430
===================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
1. General
In these unaudited consolidated condensed financial statements,
"Occidental" means Occidental Petroleum Corporation, entities where it owns
a majority voting interest, its undivided interest in exploration and
production ventures, and variable interest entities where it is the primary
beneficiary. Certain information and disclosures normally included in notes
to consolidated financial statements have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and regulations,
but resultant disclosures are in accordance with accounting principles
generally accepted in the United States of America as they apply to interim
reporting. The consolidated condensed financial statements should be read
in conjunction with the consolidated financial statements and the notes
thereto in Occidental's Annual Report on Form 10-K for the year ended
December 31, 2002 (2002 Form 10-K).
In the opinion of Occidental's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to fairly present Occidental's
consolidated financial position as of June 30, 2003, and the consolidated
statements of operations and cash flows for the three months then ended.
The income and cash flows for the period ended June 30, 2003, are not
necessarily indicative of the income or cash flows to be expected for the
full year.
Certain financial statements and notes for the prior year have been changed
to conform to the 2003 presentation.
Refer to Note 1 to the consolidated financial statements in the 2002 Form
10-K for a summary of significant accounting policies, including critical
accounting policies.
2. Accounting Changes
See Notes 8 and 9 regarding accounting changes related to asset retirement
obligations and variable interest entities, respectively.
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes accounting standards for how a company
classifies and measures financial instruments that have characteristics of
liabilities and equity. Occidental will adopt the provisions of this
statement in the third quarter of 2003. On a preliminary basis, Occidental
believes that, upon adoption, its mandatorily redeemable trust preferred
securities will be considered a liability and the payments to the holders
of the securities, which are currently recorded as minority interest on the
statement of operations, will be recorded to interest expense.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments.
This statement is effective for contracts entered into or modified after
June 30, 2003. Occidental will adopt this statement in the third quarter of
2003. Occidental is currently evaluating the provisions of this statement
but does not expect it to have a material effect on its financial
statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a
company to recognize a liability for the obligations it has undertaken in
issuing a
6
guarantee. This liability would be recorded at the inception of a guarantee
and would be measured at fair value. FIN 45 also requires certain
disclosures related to guarantees, which are included in Note 11.
Occidental adopted the measurement provisions of this statement in the
first quarter of 2003 and it did not have an effect on the financial
statements when adopted.
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 (See Note 13). The provisions of this statement
apply to financial statements for fiscal years ending after December 15,
2002. The statement did not have a material effect on the financial
statements.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with Emerging Issues Task Force (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 both 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 adopted
this accounting change in the first quarter of 2003 and recorded a
cumulative effect of a change in accounting principles charge of
approximately $18 million, after tax.
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 adopted SFAS No. 146 in the first quarter of
2003 and it did not have a material effect on its financial statements.
Occidental has classified all of its mineral drilling rights as tangible
assets in property, plant and equipment. Under a possible interpretation of
SFAS No. 141, "Business Combinations", paragraph A14.d (7), contract-based
mineral rights acquired after June 30, 2001 may have to be classified as
intangible assets. Occidental's understanding is that this issue is being
considered by the FASB and the staff of the Securities and Exchange
Commission. Occidental is in the process of determining the impact of this
potential change on the financial statements; however, we do not expect the
resolution of the issue to materially affect Occidental's results of
operations.
3. Asset Acquisitions and Dispositions and Other Commitments
In 2003, Occidental made several acquisitions in the Permian Basin for
approximately $251 million in cash.
In April 2003, Occidental exercised its purchase option related to the
OxyVinyls, L.P., LaPorte, Texas VCM plant lease for approximately $180
million.
7
4. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
2003 2002 2003 2002
============================================= ========== ========== ========== ==========
Net income $ 374 $ 240 $ 699 $ 265
Other comprehensive income items
Foreign currency translation adjustments 22 (12) 24 (12)
Derivative mark-to-market adjustments 7 (7) (5) (9)
Minimum pension liability adjustments (4) -- (4) --
Unrealized (losses) gains on securities (24) 82 (1) 82
---------- ---------- ---------- ----------
Other comprehensive income, net of tax 1 63 14 61
---------- ---------- ---------- ----------
Comprehensive income $ 375 $ 303 $ 713 $ 326
============================================= ========== ========== ========== ==========
5. Supplemental Cash Flow Information
During the six months ended June 30, 2003 and 2002, net cash payments (net
of refunds) for federal, foreign and state income taxes were approximately
$152 million and $(18) million, respectively. Interest paid (net of
interest capitalized of $3 million for both periods) totaled approximately
$180 million and $120 million for the six months ended June 30, 2003 and
2002, respectively.
6. Inventories
A portion of inventories is valued under the LIFO method. The valuation of
LIFO inventory for interim periods is based on management's estimates of
year-end inventory levels and costs. Inventories consist of the following
(in millions):
Balance at June 30, 2003 December 31, 2002
========================= ==================== ====================
Raw materials $ 56 $ 54
Materials and supplies 142 125
Finished goods 306 319
---------- ----------
504 498
LIFO adjustment (7) (7)
---------- ----------
Total $ 497 $ 491
========================= ========== ==========
7. Derivative Activities
For the three and six months ended June 30, 2003, the results of operations
included a net pre-tax gain of $2 million and $23 million, respectively,
related to derivative mark-to-market adjustments. For the three and six
months ended June 30, 2002, the results of operations included a net
pre-tax (loss) gain of $(5) million and $4 million, respectively, related
to derivative mark-to-market adjustments. The amount of interest expense
recorded in the income statement was lower by approximately $13 million and
$26 million for the three and six months ended June 30, 2003, respectively,
to reflect net pre-tax gains from fair-value hedges. The amount of interest
expense recorded in the income statement was lower by approximately $11
million and $22 million for the three and six months ended June 30, 2002,
respectively, to reflect net pre-tax gains from fair-value hedges.
8
The following table summarizes after-tax derivative activity recorded in
other comprehensive income (OCI) for the six months ended June 30, 2003 and
2002 (in millions):
2003 2002
======================================================= ========== ==========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges (14) (11)
Amount reclassified to income from the expiration of
cash flow hedges 9 3
---------- ----------
Ending Balance $ (31) $ (28)
======================================================= ========== ==========
During the next twelve months, Occidental expects that $6 million of net
derivative after-tax losses included in OCI, based on their valuation at
June 30, 2003, will be reclassified into earnings. Hedge ineffectiveness
did not have a significant impact on earnings for the three and six months
ended June 30, 2003 and 2002.
8. Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies 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 its
useful life. When the liability is initially recorded, the company
capitalizes the cost into property, plant and equipment. Over time, the
liability is accreted and the cost is depreciated, both over the asset's
useful life. Occidental's asset retirement obligations primarily relate to
the cost of plugging and abandoning wells, well-site cleanup, facilities
abandonment and environmental closure and post-closure care.
Occidental adopted SFAS No. 143 in the first quarter of 2003. The initial
adoption resulted in an after-tax charge of $50 million, which was recorded
as a cumulative effect of a change in accounting principles. The adoption
increased net property, plant and equipment by $73 million, increased asset
retirement obligations by $151 million and decreased deferred tax
liabilities by $28 million. The pro-forma asset retirement obligation, if
the adoption of this statement had occurred on January 1, 2002, would have
been $131 million at January 1, 2002 and $151 million at December 31, 2002.
The following table summarizes the activity of the asset retirement
obligations (in millions):
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
======================================================= =============== ===============
Beginning balance $ 151 $ --
Cumulative effect of change in accounting principles 150
Liabilities settled in the period (3) (5)
Accretion expense 2 5
Acquisitions 2 2
Revisions to estimated cash flows 3 3
--------------- ---------------
Ending balance $ 155 $ 155
======================================================= =============== ===============
9. Variable Interest Entities (VIE)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 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
VIE is generally defined as an entity whose equity is unable to finance its
activities or whose owners lack
9
the risk and rewards of ownership. The statement also has disclosure
requirements for all the VIEs of a company, even if the company is not the
primary beneficiary. The provisions of this statement apply at inception
for any entity created after January 31, 2003. Occidental adopted the
provisions of this Interpretation for its existing entities on April 1,
2003 which resulted in the consolidation of its OxyMar VCM joint venture
that was previously accounted for as an equity investment. As a result of
the OxyMar consolidation, assets increased by $166 million and liabilities
increased by $72 million. There was no material effect on net income as a
result of the consolidation.
Occidental has a 50-percent interest in Elk Hills Power LLC (EHP), a
limited liability company that operates a gas-fired, power-generation plant
in California. EHP is a VIE under the provisions of FIN 46. However,
Occidental is not the primary beneficiary of EHP and therefore accounts for
it as an equity investment. In January 2002, EHP entered into a $400
million loan facility, 50 percent of which is guaranteed by Occidental. The
loan facility was increased to $425 million in May 2003.
10. Environmental Expenditures
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are
subject to environmental-protection laws. The laws that require or address
environmental remediation may apply retroactively to past waste disposal
practices and releases. In many cases, the laws apply regardless of fault,
legality of the original activities or current ownership or control of
sites. Occidental Petroleum Corporation (OPC) or certain of its
subsidiaries are currently participating in environmental assessments and
cleanups under these laws at federal Superfund sites and other sites
subject to the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA), comparable state sites and other remediation sites,
including Occidental facilities and previously owned sites.
The following table presents Occidental's environmental remediation
reserves at June 30, 2003, grouped by three categories of environmental
remediation sites ($ amounts in millions):
# of Sites Reserve
============================== =============== ===============
CERCLA & Equivalent Sites 127 $ 254
Active Facilities 14 51
Closed or Sold Facilities 42 56
--------------- ---------------
Total 183 $ 361
============================== =============== ===============
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 $400 million
beyond the amount accrued.
10
Shown below is additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries
were involved at June 30, 2003 ($ amounts in millions):
Description # of Sites Reserve
============================== =============== ===============
Minimal/No Exposure (a) 107 $ 6
Reserves between $1-10 MM 13 53
Reserves over $10 MM 7 195
--------------- ---------------
Total 127 $ 254
============================== =============== ===============
(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, 55 sites where Occidental's
reserves are less than $50,000 each, and 12 sites where reserves are
between $50,000 and $1 million each.
Refer to Note 8 to the consolidated financial statements in the 2002 Form
10-K for additional information regarding Occidental's environmental
expenditures.
11. 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 1997 are closed for U.S.
federal income tax purposes. Taxable years 1997 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.
As mentioned in Note 2, Occidental is required under FIN 45 to disclose
information relating to guarantees issued by Occidental and outstanding at
June 30, 2003. 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.
At June 30, 2003, the notional amount of these guarantees was approximately
$540 million. Of this amount, approximately $430 million relates to
Occidental's guarantee of equity investees' debt and other commitments. The
remaining $110 million relates to various indemnities and guarantees
provided to third parties.
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.
11
12. Income Taxes
The provision for taxes based on income for the 2003 and 2002 interim
periods was computed in accordance with Interpretation No. 18 of APB
Opinion No. 28 on reporting taxes for interim periods and was based on
projections of total year pre-tax income excluding significant unusual
items.
13. Stock-Based Compensation
Occidental accounts for stock options using the intrinsic value method
under Accounting Principles Board Opinion (APB) No. 25 and related
interpretations. Under this accounting method, Occidental did not record
any compensation expense related to its stock option plans. The following
table presents pro-forma information as if Occidental had adopted the
provisions of SFAS No. 123 at January 1, 2002 (in millions, except per
share amounts):
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
2003 2002 2003 2002
============================================= ========== ========== ========== ==========
Net income $ 374 $ 240 $ 699 $ 265
SFAS No. 123 compensation cost, net 5 5 9 10
---------- ---------- ---------- ----------
Pro-forma net income $ 369 $ 235 $ 690 $ 255
========== ========== ========== ==========
Basic earnings per share $ 0.98 $ 0.64 $ 1.84 $ 0.71
SFAS No. 123 compensation cost, net per share 0.01 0.01 0.03 0.03
---------- ---------- ---------- ----------
Pro-forma basic earnings per share $ 0.97 $ 0.63 $ 1.81 $ 0.68
========== ========== ========== ==========
Diluted earnings per share $ 0.97 $ 0.63 $ 1.81 $ 0.70
SFAS No. 123 compensation cost, net per share 0.02 0.01 0.03 0.03
---------- ---------- ---------- ----------
Pro-forma diluted earnings per share $ 0.95 $ 0.62 $ 1.78 $ 0.67
============================================= ========== ========== ========== ==========
14. Investments in Unconsolidated Subsidiaries
The following table presents Occidental's proportionate interest in the
summarized financial information of its equity method investments (in
millions):
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
2003 2002 2003 2002
============================================= ========== ========== ========== ==========
Revenues $ 316 $ 557 $ 743 $ 989
Costs and expenses 323 548 766 1,015
---------- ---------- ---------- ----------
Net income (loss) $ (7) $ 9 $ (23) $ (26)
============================================= ========== ========== ========== ==========
12
15. Industry Segments
The following table presents Occidental's interim industry segment
disclosures (in millions):
Corporate
Oil and Gas Chemical and Other Total
======================================== =============== =============== =============== ===============
Six months ended June 30, 2003
Net sales $ 2,993 $ 1,575 $ 69 (d) $ 4,637
=============== =============== =============== ===============
Pre-tax operating profit (loss) $ 1,637 $ 84 $ (331)(a) $ 1,390
Income taxes (273) (6) (344)(b) (623)
Cumulative effect of changes in
accounting principles, net -- -- (68) (68)
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,364 $ 78 $ (743)(c) $ 699
======================================== =============== =============== =============== ===============
Six months ended June 30, 2002
Net sales $ 2,123 $ 1,267 $ -- $ 3,390
=============== =============== =============== ===============
Pre-tax operating profit (loss) $ 932 $ 9 $ (230)(a) $ 711
Income taxes (205) (6) (136)(b) (347)
Discontinued operations, net -- -- (4) (4)
Cumulative effect of changes in
accounting principles, net -- -- (95) (95)
--------------- --------------- --------------- ---------------
Net income (loss) $ 727 $ 3 $ (465) $ 265
======================================== =============== =============== =============== ===============
(a) Includes unallocated net interest expense, administration expense and
other items.
(b) Includes unallocated income taxes.
(c) Includes a $61 million pre-tax interest charge ($40 million net of
tax) to repay a $450 million 6.4 percent senior note issue that had
ten years of remaining life, but was subject to remarketing on April
1, 2003.
(d) During the first quarter of 2003, the Taft cogeneration facility began
generating revenue, which is included in the corporate net sales
amount.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental (as defined in Note 1 to the consolidated condensed financial
statements) reported net income for the first six months of 2003 of $699
million, on net sales of $4.6 billion, compared with net income of $265 million,
on net sales of $3.4 billion, for the same period of 2002. Basic earnings per
common share were $1.84 for the first six months of 2003, compared with basic
earnings per share of $0.71 for the same period of 2002. Occidental reported net
income for the second quarter of 2003 of $374 million, on net sales of $2.3
billion, compared with net income of $240 million, on net sales of $1.9 billion,
for the same period of 2002. Basic earnings per common share were $0.98 for the
second quarter of 2003, compared with basic earnings per share of $0.64 for the
same period of 2002.
Net income for the first six months and the second quarter of 2003, compared to
the same periods in 2002, reflected higher crude oil and natural gas prices and
higher crude oil sales volumes. Additionally, net income in both periods of
2003, compared to the same periods in 2002, increased due to higher chemical
prices, partially offset by higher energy and raw material costs and lower
chemical sales volumes.
The increase in net sales of $399 million and $1.2 billion for the three and six
months ended June 30, 2003, compared with the same periods in 2002, primarily
reflected higher crude oil, natural gas and chemical prices and higher oil
production partially offset by lower chemical sales volumes. For the three
months ended June 30, 2003, the gains (losses) on disposition of assets, net
account included a pre-tax gain of $22 million on the sale of the remaining
interests in a subsidiary holding assets in the Gulf of Mexico.
The increase in cost of sales of $139 million and $450 million for the three and
six months ended June 30, 2003, respectively, compared with the same periods in
2002, primarily reflected higher energy and raw material costs. The increase of
$89 million and $125 million in selling, general and administrative and other
operating expenses for the three and six months ended June 30, 2003,
respectively, compared with the same periods in 2002, primarily reflected
increases in various oil and gas costs, including higher production taxes.
Additionally, for the three months ended June 30, 2003, selling, general and
administrative and other operating expenses included $16 million of severance
costs for the chemical segment and a $9 million pre-tax write-off for certain
assets at a Niagara Falls plant. The decrease in exploration expense of $30
million and $29 million for the three and six months ended June 30, 2003,
respectively, compared with the same periods in 2002, was primarily due to the
2002 write-off of leases in the San Joaquin Valley. The decrease in interest and
debt expense, net of $19 million for the three months ended June 30, 2003,
compared to the same period in 2002, primarily reflected lower interest rates.
The $38 million increase in interest and debt expense, net for the six months
ended June 30, 2003, compared to the same period in 2002, primarily reflected a
pre-tax debt repayment charge of $61 million, partially offset by lower interest
rates and lower average debt levels.
14
SEGMENT OPERATIONS
The following table sets forth the sales and earnings of each operating segment
and corporate items (in millions):
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
2003 2002 2003 2002
======================================================= ========== ========== ========== ==========
SEGMENT NET SALES
Oil and Gas $ 1,440 $ 1,165 $ 2,993 $ 2,123
Chemical 785 702 1,575 1,267
Other 41 -- 69 --
---------- ---------- ---------- ----------
NET SALES $ 2,266 $ 1,867 $ 4,637 $ 3,390
========== ========== ========== ==========
SEGMENT EARNINGS
Oil and Gas $ 637 $ 421 $ 1,364 $ 727
Chemical 43 34 78 3
---------- ---------- ---------- ----------
680 455 1,442 730
UNALLOCATED CORPORATE ITEMS
Interest expense, net (53) (66) (177) (122)
Income taxes (167) (101) (345) (145)
Trust preferred distributions and other (11) (12) (22) (23)
Other (75) (35) (131) (76)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 374 241 767 364
Discontinued operations, net -- (1) -- (4)
Cumulative effect of changes in accounting
principles, net -- -- (68) (95)
---------- ---------- ---------- ----------
NET INCOME $ 374 $ 240 $ 699 $ 265
======================================================= ========== ========== ========== ==========
15
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 earnings is
not considered to be an alternative to operating income in accordance with
generally accepted accounting principles.
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate for the three months ended
June 30, 2003 and 2002:
Three Months Ended June 30
-------------------------------------------------------
Basic Basic
(in millions, except per share amounts) 2003 EPS 2002 EPS
============================================= ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 374 $ 0.98 $ 240 $ 0.64
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings 637 421
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 637 421
---------- ----------
CHEMICAL
- --------
Segment Earnings 43 34
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 43 34
---------- ----------
CORPORATE
- ---------
Results (306) (215)
Less:
Discontinued operations, net * -- (1)
---------- ----------
TOTAL CORE EARNINGS $ 374 $ 0.98 $ 241 $ 0.64
============================================= ========== ========== ========== ==========
* These amounts are shown after-tax.
16
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate for the six months ended June
30, 2003 and 2002:
Six Months Ended June 30
-------------------------------------------------------
(in millions, except per share amounts) 2003 EPS 2002 EPS
============================================= ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 699 $ 1.84 $ 265 $ 0.71
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings $ 1,364 $ 727
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 1,364 727
---------- ----------
CHEMICAL
- --------
Segment Earnings 78 3
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 78 3
---------- ----------
CORPORATE
- ---------
Results (743) (465)
Less:
Debt repayment charge (61) --
Tax effect of pre-tax adjustments 21 --
Discontinued operations, net * -- (4)
Changes in accounting principles, net * (68) (95)
---------- ----------
TOTAL CORE EARNINGS $ 807 $ 2.12 $ 364 $ 0.97
============================================= ========== ========== ========== ==========
* These amounts are shown after-tax.
17
OIL AND GAS SEGMENT
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
Summary of Operating Statistics 2003 2002 2003 2002
======================================================= ========== ========== ========== ==========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 254 232 246 232
Latin America 54 54 54 52
Middle East and Other Eastern Hemisphere 107 100 108 107
NATURAL GAS (MMCF)
United States 541 565 535 579
Middle East and Other Eastern Hemisphere 77 50 76 50
BARRELS OF OIL EQUIVALENT (MBOE)
Consolidated subsidiaries 518 489 510 496
Other interests 26 23 28 22
---------- ---------- ---------- ----------
Worldwide production 544 512 538 518
======================================================= ========== ========== ========== ==========
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States 26.89 23.88 29.15 21.35
Latin America 25.01 22.78 28.06 20.67
Middle East and Other Eastern Hemisphere 25.22 24.27 27.71 22.15
NATURAL GAS ($/MCF)
United States 5.46 2.92 4.89 2.64
Middle East and Other Eastern Hemisphere 1.91 2.04 1.91 2.28
======================================================= ========== ========== ========== ==========
Oil and gas earnings for the six months ended June 30, 2003 were $1.4 billion,
compared with $727 million for the same period of 2002. Oil and gas earnings for
the three months ended June 30, 2003 were $637 million, compared with $421
million for the same period of 2002. The increase in earnings for the three and
six months ended June 30, 2003 compared with the same periods in 2002, primarily
reflected higher crude oil and natural gas prices, higher crude oil sales
volumes and lower exploration expense.
The increase in net sales of $275 million and $870 million for the three and six
months ended June 30, 2003, compared with the same periods in 2002, primarily
reflected higher crude oil and natural gas prices and higher oil production.
The average West Texas Intermediate price in the second quarter of 2003 was
$28.89 per barrel and the New York Merchantile Exchange (NYMEX) natural gas
price for the second quarter of 2003 was $5.83 per thousand cubic feet. A swing
of 10-cents per million BTU's in NYMEX gas prices impacts quarterly oil and gas
segment earnings by $5 million while a $1.00 per barrel change in oil prices has
a quarterly impact of $30 million.
For the first six months of 2003, production volumes increased to 538,000
barrels of oil equivalent (BOE) per day compared with 518,000 BOE per day for
the same period in 2002. For the second quarter of 2003, production volumes
increased to 544,000 BOE per day compared with 512,000 BOE per day for the same
period in 2002. Occidental expects third quarter 2003 oil and gas production to
remain at approximately the same level as the second quarter of 2003.
The Core Venture Two consortium, in which Occidental had a 20-percent interest,
will not be continuing its development efforts in Saudi Arabia. However,
Occidental continues to evaluate exploration and production in the Kingdom and
hopes to be selected to participate in future opportunities as they arise.
18
CHEMICAL SEGMENT
Periods Ended June 30
-------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
Summary of Operating Statistics 2003 2002 2003 2002
======================================================= ========== ========== ========== ==========
MAJOR PRODUCT VOLUMES
Chlorine (M Tons) 664 735 1,350 1,436
Caustic (M Tons) 719 743 1,356 1,317
Ethylene Dichloride (M Tons) 108 140 239 292
PVC Resins (MM Lbs.) 872 1,151 1,935 2,193
MAJOR PRODUCT PRICE INDEX (BASE 1987-1990 = 1.0)
Chlorine 1.81 0.77 1.72 0.64
Caustic 0.87 0.66 0.84 0.79
Ethylene Dichloride 1.17 1.29 1.21 0.94
PVC Resins 0.97 0.70 0.92 0.62
======================================================= ========== ========== ========== ==========
Chemical earnings for the six months ended June 30, 2003 were $78 million,
compared with $3 million for the same period of 2002. Chemical earnings for the
three months ended June 30, 2003 were $43 million, compared with $34 million for
the same period of 2002. The increase in earnings for the three and six months
ended June 30, 2003, compared to the same periods in 2002, primarily reflected
higher sales prices, mainly for chlorine and polyvinyl chloride resins (PVC),
partially offset by higher energy and raw material costs, lower sales volumes
and severance charges. Additionally, the 2002 results reflected losses from the
Equistar equity investment of $4 million and $40 million for the three and six
months ended June 30, 2002, respectively. The Equistar equity investment was
sold in August 2002.
The increase in net sales of $83 million and $308 million for the three and six
months ended June 30, 2003, respectively, compared with the same periods in
2002, primarily reflected higher sales prices, mainly for chlorine and PVC,
partially offset by lower sales volumes.
Occidental expects third quarter 2003 chemical segment earnings to be between
$30 million and $45 million since no upturn in chemical markets is expected.
CORPORATE AND OTHER
The three and six months ended June 30, 2003 other net sales amount includes
revenues from certain co-generation facilities. The three and six months ended
June 30, 2003 unallocated corporate items - other amount includes the results
from the Lyondell equity investment. Unallocated corporate items - income taxes
exclude U.S. federal income tax charges and credits allocated to the segments
and foreign taxes. For the first six months of 2003, segment earnings include
charges of $7 million (all for oil and gas). For the first six months of 2002,
segment earnings benefited by $9 million from credits allocated: $1 million to
oil and gas and $8 million to chemical.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities was approximately $1.5
billion for the first six months of 2003, compared with net cash provided of
$910 million for the same period of 2002. The increase of approximately $556
million in the 2003 amount is primarily attributable to higher income from
continuing operations in 2003 compared with the same period in 2002.
Additionally, changes in operating assets and liabilities reflected
significantly increased income tax expense payable in future quarters.
Occidental's net cash used by investing activities was $1.1 billion for the
first six months of 2003, compared with net cash used of $467 million for the
same period of 2002. The 2003 amount includes several acquisitions in the
Permian Basin totaling $251 million. The 2003 amount also includes advances and
capital contributions to equity investees, purchases of equity investee debt and
an additional purchase
19
of stock of a cost-method investee. The 2002 amount includes the receipt of
partial repayments of amounts that were advanced to equity affiliates in prior
years. Capital expenditures for the first six months of 2003 were $791 million,
including $508 million for oil and gas and $273 million for chemical. The
chemical amount includes $180 million for the purchase of a leased facility in
La Porte, Texas and $44 million related to the exercise of purchase options for
certain leased assets. Capital expenditures for the first six months of 2002
were $557 million, including $497 million for oil and gas.
Financing activities used net cash of $371 million in the first six months of
2003, compared with cash used of $211 million for the same period of 2002. The
2003 amount includes net debt payments of approximately $289 million.
Available but unused lines of committed bank credit totaled approximately $1.8
billion at June 30, 2003. In addition, OxyMar has a $220 million committed bank
revolver which was unused at June 30, 2003. Occidental currently expects to
spend approximately $1.4 billion (excluding the lease buyouts mentioned above)
on its 2003 capital spending program with about 90 percent in the oil and gas
segment. Occidental expects to have sufficient cash in 2003 from operations to
fund its operating needs, capital expenditure requirements, dividend payments
and mandatory debt repayments. If needed, Occidental could access existing
credit facilities.
ASSET ACQUISITIONS AND DISPOSITIONS AND OTHER COMMITMENTS
In 2003, Occidental made several acquisitions in the Permian Basin for
approximately $251 million in cash.
In April 2003, Occidental exercised its purchase option related to the
OxyVinyls, L.P., LaPorte, Texas VCM plant lease for approximately $180 million.
DERIVATIVE ACTIVITIES
For the three and six months ended June 30, 2003, the results of operations
included a net pre-tax gain of $2 million and $23 million, respectively, related
to derivative mark-to-market adjustments. For the three and six months ended
June 30, 2002, the results of operations included a net pre-tax (loss) gain of
$(5) million and $4 million, respectively, related to derivative mark-to-market
adjustments. The amount of interest expense recorded in the income statement was
lower by approximately $13 million and $26 million for the three and six months
ended June 30, 2003, respectively, to reflect net pre-tax gains from fair-value
hedges. The amount of interest expense recorded in the income statement was
lower by approximately $11 million and $22 million for the three and six months
ended June 30, 2002, respectively, to reflect net pre-tax gains from fair-value
hedges.
The following table summarizes after-tax derivative activity recorded in other
comprehensive income (OCI) for the six months ended June 30, 2003 and 2002 (in
millions):
2003 2002
======================================================= ========== ==========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges (14) (11)
Amount reclassified to income from the expiration of
cash flow hedges 9 3
---------- ----------
Ending Balance $ (31) $ (28)
======================================================= ========== ==========
During the next twelve months, Occidental expects that $6 million of net
derivative after-tax losses included in OCI, based on their valuation at June
30, 2003, will be reclassified into earnings. Hedge ineffectiveness did not have
a significant impact on earnings for the three and six months ended June 30,
2003 and 2002.
20
ACCOUNTING CHANGES
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes accounting standards for how a company classifies and measures
financial instruments that have characteristics of liabilities and equity.
Occidental will adopt the provisions of this statement in the third quarter of
2003. On a preliminary basis, Occidental believes that, upon adoption, its
mandatorily redeemable trust preferred securities will be considered a liability
and the payments to the holders of the securities, which are currently recorded
as minority interest on the statement of operations, will be recorded to
interest expense.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 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 VIE is generally defined as an entity whose equity is unable
to finance its activities or whose owners lack the risk and rewards of
ownership. The statement also has disclosure requirements for all the VIEs of a
company, even if the company is not the primary beneficiary. The provisions of
this statement apply at inception for any entity created after January 31, 2003.
Occidental adopted the provisions of this Interpretation for its existing
entities on April 1, 2003 which resulted in the consolidation of its OxyMar VCM
plant that was previously accounted for as an equity investment. As a result of
the OxyMar consolidation, assets increased by $166 million and liabilities
increased by $72 million. There was no material effect on net income as a result
of the consolidation.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires companies 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 its useful life. When the
liability is initially recorded, the company capitalizes the cost into property,
plant and equipment. Over time, the liability is accreted and the cost is
depreciated, both over the asset's useful life. Occidental's asset retirement
obligations primarily relate to the cost of plugging and abandoning wells,
well-site cleanup, facilities abandonment and environmental closure and
post-closure care. Occidental adopted SFAS No. 143 in the first quarter of 2003.
The initial adoption resulted in an after-tax charge of $50 million, which was
recorded as a cumulative effect of a change in accounting principles. The
adoption increased net property, plant and equipment by $73 million, increased
asset retirement obligations by $151 million and decreased deferred tax
liabilities by $28 million. The pro-forma asset retirement obligation, if the
adoption of this statement had occurred on January 1, 2002, would have been $131
million at January 1, 2002 and $151 million at December 31, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. Occidental will adopt this statement in the third quarter of 2003.
Occidental is currently evaluating the provisions of this statement but does not
expect it to have a material effect on its financial statements.
In January 2003, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 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. FIN 45 also
requires certain disclosures related to guarantees, which are included in
"Lawsuits, Claims, Commitments, Contingencies and Related Matters" below.
Occidental adopted the measurement provisions of this statement in the first
quarter of 2003 and it did not have an effect on the financial statements when
adopted.
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
21
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 did not have a material effect on
the financial statements.
Since 1999, Occidental has accounted for certain energy-trading contracts in
accordance with Emerging Issues Task Force (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 both 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 adopted this accounting change in the first quarter of 2003 and
recorded a cumulative effect of a change in accounting principles charge of
approximately $18 million, after tax.
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
adopted SFAS No. 146 in the first quarter of 2003 and it did not have a material
effect on its financial statements.
Occidental has classified all of its mineral drilling rights as tangible assets
in property, plant and equipment. Under a possible interpretation of SFAS No.
141, "Business Combinations", paragraph A14.d (7), contract-based mineral rights
acquired after June 30, 2001 may have to be classified as intangible assets.
Occidental's understanding is that this issue is being considered by the FASB
and the staff of the Securities and Exchange Commission. Occidental is in the
process of determining the impact of this potential change on the financial
statements; however, we do not expect the resolution of the issue to materially
affect Occidental's results of operations.
ENVIRONMENTAL MATTERS
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. The laws that 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 and other sites subject to the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), comparable
state sites and other remediation sites, including Occidental facilities and
previously owned sites.
The following table presents Occidental's environmental remediation reserves at
June 30, 2003, grouped by three categories of environmental remediation sites ($
amounts in millions):
# of Sites Reserve
============================== =============== ===============
CERCLA & Equivalent Sites 127 $ 254
Active Facilities 14 51
Closed or Sold Facilities 42 56
--------------- ---------------
Total 183 $ 361
============================== =============== ===============
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
22
reasonably possible loss for existing environmental remediation matters could be
up to $400 million beyond the amount accrued.
Shown below is additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries were
involved at June 30, 2003 ($ amounts in millions):
Description # of Sites Reserve
============================== =============== ===============
Minimal/No Exposure (a) 107 $ 6
Reserves between $1-10 MM 13 53
Reserves over $10 MM 7 195
--------------- ---------------
Total 127 $ 254
============================== =============== ===============
(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, 55 sites where Occidental's
reserves are less than $50,000 each, and 12 sites where reserves are
between $50,000 and $1 million each.
Refer to the "Environmental Expenditures" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the 2002 Form 10-K
for additional information regarding Occidental's environmental expenditures.
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 1997 are closed for U.S. federal income
tax purposes. Taxable years 1997 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.
As mentioned above, Occidental is required under FIN 45 to disclose information
relating to guarantees issued by Occidental and outstanding at June 30, 2003.
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. At June 30, 2003, the notional
amount of these guarantees was approximately $540 million. Of this amount,
approximately $430 million relates to Occidental's guarantee of equity
investees' debt and other commitments. The remaining $110 million relates to
various indemnities and guarantees provided to third parties.
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.
23
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND FORWARD-LOOKING INFORMATION
Portions of this report 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended June 30, 2003, there were no material changes in the
information required to be provided under Item 305 of Regulation S-X included
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations (Incorporating Item 7A) - Derivative Activities" in
Occidental's 2002 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Occidental's Chief Executive Officer and Chief Financial Officer supervised and
participated in Occidental's evaluation of its disclosure controls and
procedures as of the end of the period covered by this report. 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, as amended, 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.
There has been no change in Occidental's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, Occidental's internal control over
financial reporting.
24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
There is incorporated by reference herein the information regarding legal
proceedings in Note 11 to the consolidated condensed financial statements in
Part I hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.(I) Restated Certificate of Incorporation of Occidental,
dated November 12, 1999 (incorporated by reference to
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
(incorporated by reference to 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 (incorporated by reference to Exhibit 3.1(II) to
the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 2002, File 1-9210)
10.1 Employment Agreement, dated May 19, 2003, between
Occidental and Donald P. de Brier
10.2 Consulting Agreement, dated as of July 1, 2003, between
Occidental and J. Roger Hirl
10.3 Occidental Petroleum Corporation 2001 Incentive
Compensation Plan Incentive Stock Option Terms and
Conditions
10.4 Occidental Petroleum Corporation 2001 Incentive
Compensation Plan Nonqualified Stock Option Terms and
Conditions
10.5 Occidental Petroleum Corporation 2001 Incentive
Compensation Plan Restricted Share Unit Award Terms and
Conditions (mandatory deferred issuance of shares)
11 Statement regarding the computation of earnings per
share for the three and six months ended June 30, 2003
and 2002
12 Statement regarding the computation of total enterprise
ratios of earnings to fixed charges for the six months
ended June 30, 2003 and 2002 and the five years ended
December 31, 2002
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certifications of CEO and CFO Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
25
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated April 22, 2003 (date of
earliest event reported), filed on April 22, 2003, for the
purpose of reporting, under Items 9 and 12, Occidental's
results of operations for the first quarter ended March 31,
2003, and speeches and supplemental investor information
relating to Occidental's first quarter 2003 earnings
announcement.
2. Current Report on Form 8-K dated April 25, 2003 (date of
earliest event reported), filed on April 25, 2003, for the
purpose of reporting, under Item 9, a speech made by Dr. Ray
R. Irani, Chief Executive Officer, at Occidental's 2003
Annual Meeting of Stockholders.
From June 30, 2003 to the date hereof, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated July 22, 2003 (date of
earliest event reported), filed on July 22, 2003, for the
purpose of reporting, under Items 9 and 12, Occidental's
results of operations for the second quarter ended June 30,
2003, and speeches and supplemental investor information
relating to Occidental's second quarter 2003 earnings
announcement.
26
SIGNATURES
Pursuant to the requirements 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
DATE: August 5, 2003 /s/ S. P. Dominick, Jr.
--------------------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
27
EXHIBIT INDEX
EXHIBITS
- --------
10.1 Employment Agreement, dated May 19, 2003, between Occidental and
Donald P. de Brier
10.2 Consulting Agreement, dated as of July 1, 2003, between
Occidental and J. Roger Hirl
10.3 Occidental Petroleum Corporation 2001 Incentive Compensation Plan
Incentive Stock Option Terms and Conditions
10.4 Occidental Petroleum Corporation 2001 Incentive Compensation Plan
Nonqualified Stock Option Terms and Conditions
10.5 Occidental Petroleum Corporation 2001 Incentive Compensation Plan
Restricted Share Unit Award Terms and Conditions (mandatory
deferred issuance of shares)
11 Statement regarding the computation of earnings per share for the
three and six months ended June 30, 2003 and 2002
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the six months ended June 30, 2003
and 2002 and the five years ended December 31, 2002
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certifications of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002