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 September 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
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Commission file number 1-9210
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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 September 30, 2003
- ------------------------------------- ---------------------------------
Common stock $.20 par value 385,125,026 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
Part I Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
September 30, 2003 and December 31, 2002 2
Consolidated Condensed Statements of Operations --
Three and nine months ended September 30, 2003 and 2002 4
Consolidated Condensed Statements of Cash Flows --
Nine months ended September 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 25
Item 4. Controls and Procedures 25
Part II Other Information
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Amounts in millions)
2003 2002
================================================================================ ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 529 $ 146
Receivables, net 1,053 1,079
Inventories 530 491
Prepaid expenses and other 161 157
---------- ----------
Total current assets 2,273 1,873
LONG-TERM RECEIVABLES, net 262 275
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,106 1,056
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation, depletion and amortization of $7,187 at
September 30, 2003 and $6,395 at December 31, 2002 13,815 13,036
OTHER ASSETS 250 308
---------- ----------
$ 17,706 $ 16,548
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 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 884 785
Accrued liabilities 887 1,107
Domestic and foreign income taxes 162 137
---------- ----------
Total current liabilities 1,961 2,235
---------- ----------
LONG-TERM DEBT, net of current maturities and unamortized discount 4,051 3,997
---------- ----------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 454 455
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,071 982
Other 2,351 2,228
---------- ----------
3,422 3,210
---------- ----------
MINORITY INTEREST 323 333
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 77 75
Additional paid-in capital 4,160 3,967
Retained earnings 3,248 2,303
Accumulated other comprehensive income 10 (27)
---------- ----------
7,495 6,318
---------- ----------
$ 17,706 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Amounts in millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2003 2002 2003 2002
================================================================= ========== ========== ========== ==========
REVENUES
Net sales $ 2,319 $ 1,963 $ 6,956 $ 5,353
Interest, dividends and other income 21 21 72 72
Gains on disposition of assets, net 9 11 31 10
---------- ---------- ---------- ----------
2,349 1,995 7,059 5,435
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,282 1,125 3,844 3,237
Selling, general and administrative and other
operating expenses 216 207 653 519
Environmental remediation -- 8 13 8
Exploration expense 37 29 94 115
Interest and debt expense, net 72 79 262 231
---------- ---------- ---------- ----------
1,607 1,448 4,866 4,110
---------- ---------- ---------- ----------
Income before taxes and other items 742 547 2,193 1,325
Provision (benefit) for domestic and foreign income and
other taxes 300 (168) 923 179
Minority interest 11 22 49 63
(Income) loss from equity investments (15) 217 8 243
---------- ---------- ---------- ----------
Income from continuing operations 446 476 1,213 840
Discontinued operations, net -- (74) -- (78)
Cumulative effect of changes in accounting principles, net -- -- (68) (95)
---------- ---------- ---------- ----------
NET INCOME AND EARNINGS APPLICABLE TO
COMMON STOCK $ 446 $ 402 $ 1,145 $ 667
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.16 $ 1.26 $ 3.17 $ 2.23
Discontinued operations, net -- (.19) -- (.21)
Cumulative effect of changes in accounting principles, net -- -- (.18) (.25)
---------- ---------- ---------- ----------
Basic earnings per common share $ 1.16 $ 1.07 $ 2.99 $ 1.77
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.14 $ 1.25 $ 3.14 $ 2.22
Discontinued operations, net -- (.19) -- (.21)
Cumulative effect of changes in accounting principles, net -- -- (.18) (.25)
---------- ---------- ---------- ----------
Diluted earnings per common share $ 1.14 $ 1.06 $ 2.96 $ 1.76
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .26 $ .25 $ .78 $ .75
========== ========== ========== ==========
BASIC SHARES OUTSTANDING 385.5 376.8 382.6 375.7
========== ========== ========== ==========
DILUTED SHARES 391.1 380.4 387.0 378.8
================================================================= ========== ========== ========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Amounts in millions)
2003 2002
===================================================================================== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,213 $ 840
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation, depletion and amortization of assets 866 759
Deferred income tax provision (benefit) 112 (265)
Other noncash charges to income 186 86
Gains on disposition of assets, net (31) (10)
Loss from equity investments 8 243
Dry hole and impairment expense 50 50
Changes in operating assets and liabilities (13) (26)
Other operating, net (129) (141)
---------- ----------
Operating cash flow from continuing operations 2,262 1,536
Operating cash flow from discontinued operations -- (6)
---------- ----------
Net cash provided by operating activities 2,262 1,530
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,151) (840)
Sale of businesses and disposal of property, plant and equipment, net 67 12
Purchases of businesses, net (262) (98)
Equity investments and other, net (108) 32
---------- ----------
Investing cash flow from continuing operations (1,454) (894)
Investing cash flow from discontinued operations -- (4)
---------- ----------
Net cash used by investing activities (1,454) (898)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 298 --
Repurchase of trust preferred securities (1) (7)
Purchases for natural gas delivery commitment -- (95)
Buyout of natural gas delivery commitment, net -- (179)
Payments of long-term debt and capital lease liabilities (596) (29)
Proceeds from issuance of common stock 8 14
Cash dividends paid (292) (281)
Stock options exercised 159 47
Other financing, net (1) (2)
---------- ----------
Net cash used by financing activities (425) (532)
---------- ----------
Increase in cash and cash equivalents 383 100
Cash and cash equivalents--beginning of period 146 198
---------- ----------
Cash and cash equivalents--end of period $ 529 $ 298
===================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 to
those financial statements 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 September 30, 2003, the consolidated
statements of operations for the three and nine months then ended and the
consolidated cash flows for the nine months then ended. The income and cash
flows for the period ended September 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.
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 adopted the provisions of this statement
on July 1, 2003. As a result of the adoption, Occidental's mandatorily
redeemable trust preferred securities are now classified as a liability and
the payments to the holders of the securities, which were previously
recorded as minority interest on the statement of operations, are recorded
as 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 adopted this statement in the third quarter of
2003 and it did not 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 when adopted.
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 charge
for the cumulative effect of a change in accounting principles 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. The FASB and the staff of the
Securities and Exchange Commission are considering a possible
interpretation of SFAS No. 141, "Business Combinations", paragraph A14.d.
(7), under which contract-based mineral rights acquired after June 30, 2001
may have to be classified as intangible assets. Occidental is in the
process of determining the effect of this potential change on the financial
statements; however, it does not expect the resolution of the issue to
materially affect its results of operations.
3. Asset Acquisitions and Dispositions and Other Commitments
In 2003, Occidental made several oil and gas acquisitions in the Permian
Basin for approximately $251 million in cash and sold approximately $34
million of these assets shortly thereafter.
In April 2003, Occidental exercised its purchase option related to the
OxyVinyls, L.P., LaPorte, Texas VCM plant lease for approximately $180
million. In the first quarter of 2003, Occidental exercised purchase
options on railcar leases for a total of $44 million.
7
4. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2003 2002 2003 2002
================================================== ========== ========== ========== ==========
Net income $ 446 $ 402 $ 1,145 $ 667
Other comprehensive income items
Foreign currency translation adjustments 3 12 27 --
Derivative activity 11 (9) 6 (18)
Unrealized gains (losses) on securities 9 (50) 8 32
Minimum pension liability adjustment -- -- (4) --
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax 23 (47) 37 14
---------- ---------- ---------- ----------
Comprehensive income $ 469 $ 355 $ 1,182 $ 681
========== ========== ========== ==========
5. Supplemental Cash Flow Information
During the nine months ended September 30, 2003 and 2002, net cash payments
(net of refunds) for federal, foreign and state income taxes totaled
approximately $323 million and $(3) million, respectively. Interest paid
(net of interest capitalized) totaled approximately $276 million and $212
million for the nine months ended September 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 September 30, December 31,
2003 2002
========================= ==================== ====================
Raw materials $ 59 $ 54
Materials and supplies 145 125
Finished goods 333 319
---------- ----------
537 498
LIFO adjustment (7) (7)
---------- ----------
Total $ 530 $ 491
========== ==========
7. Derivative Activities
For the three and nine months ended September 30, 2003, the results of
operations included a net pre-tax gain of $15 million and $38 million,
respectively, related to derivative mark-to-market adjustments. For the
three and nine months ended September 30, 2002, the results of operations
included a net pre-tax loss of $4 million and $0.2 million, respectively,
related to derivative mark-to-market adjustments. The amount of interest
expense recorded in the income statement was lower by approximately $15
million and $41 million for the three and nine months ended September 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 $32 million for the three and nine months
ended September 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 nine months ended September 30,
2003 and 2002 (in millions):
2003 2002
======================================================= ========== ==========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges -- (26)
Amount reclassified to income from the expiration of
cash flow hedges 6 8
---------- ----------
Ending Balance $ (20) $ (38)
======================================================= ========== ==========
During the next twelve months, Occidental expects that $3 million of net
derivative after-tax gains included in OCI, based on their valuation at
September 30, 2003, will be reclassified into earnings. Hedge
ineffectiveness did not have a significant impact on earnings for the three
and nine months ended September 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 Nine Months
Ended Ended
September 30, September 30,
2003 2003
============================================================ ==================== ====================
Beginning balance $ 155 $ --
Cumulative effect of change in accounting principles -- 150
Liabilities settled in the period (2) (7)
Accretion expense 3 8
Acquisitions and other 1 3
Revisions to estimated cash flows (1) 2
-------------------- --------------------
Ending balance $ 156 $ 156
============================================================ ==================== ====================
9
9. Variable Interest Entities (VIEs)
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 the risks 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 $178 million. There was no
material effect on net income as a result of the consolidation. In
September 2003, Marubeni indicated it would exercise its option to put its
interest in OxyMar to Occidental by paying approximately $25 million to
Occidental. In connection with the transfer, which is expected to be
complete in April 2004, Occidental will assume Marubeni's guarantee of
OxyMar's debt. As all the OxyMar debt is already consolidated in
Occidental's financial statements with the adoption of FIN 46, the exercise
of the put will not have a material effect on Occidental's financial
condition or results of operations.
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 $425 million in May 2003.
10. Environmental Expenditures
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are
subject to environmental-protection laws. The laws that require or address
environmental remediation may apply retroactively to past waste disposal
practices and releases. In many cases, the laws apply regardless of fault,
legality of the original activities or current ownership or control of
sites. Occidental Petroleum Corporation (OPC) or certain of its
subsidiaries are currently participating in environmental assessments and
remediation activities under these laws at federal Superfund sites and
other sites subject to the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), comparable state sites and other
remediation sites, including Occidental facilities and previously owned
sites.
The following table presents Occidental's environmental remediation
reserves at September 30, 2003, grouped by three categories of
environmental remediation sites ($ amounts in millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 129 $ 241
Active Facilities 14 46
Closed or Sold Facilities 41 56
--------------- ---------------
Total 184 $ 343
=================================== =============== ===============
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.
10
The range of reasonably possible loss for existing environmental
remediation matters could be up to $400 million beyond the amount accrued.
Shown below is additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries
were involved at September 30, 2003 ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure (a) 109 $ 5
Reserves between $1-10 MM 13 52
Reserves over $10 MM 7 184
--------------- ---------------
Total 129 $ 241
=================================== =============== ===============
(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 14 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
September 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 September 30, 2003, the notional amount of these guarantees was
approximately $510 million. Of this amount, approximately $422 million
relates to Occidental's guarantee of equity investees' debt and other
commitments. The remaining $88 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
11
ultimate resolution of any of these matters to have a material adverse
effect upon Occidental's consolidated financial position or results of
operations.
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 Accounting
Principles Board 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 September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2003 2002 2003 2002
================================================== ========== ========== ========== ==========
Net income $ 446 $ 402 $ 1,145 $ 667
SFAS No. 123 compensation cost, net 5 4 14 14
---------- ---------- ---------- ----------
Pro-forma net income $ 441 $ 398 $ 1,131 $ 653
========== ========== ========== ==========
Basic earnings per share $ 1.16 $ 1.07 $ 2.99 $ 1.77
SFAS No. 123 compensation cost, net per share 0.01 0.01 0.03 0.03
---------- ---------- ---------- ----------
Pro-forma basic earnings per share $ 1.15 $ 1.06 $ 2.96 $ 1.74
========== ========== ========== ==========
Diluted earnings per share $ 1.14 $ 1.06 $ 2.96 $ 1.76
SFAS No. 123 compensation cost, net per share 0.01 0.01 0.04 0.04
---------- ---------- ---------- ----------
Pro-forma diluted earnings per share $ 1.13 $ 1.05 $ 2.92 $ 1.72
================================================== ========== ========== ========== ==========
14. Investments in Unconsolidated Entities
The following table presents Occidental's proportionate interest in the
summarized financial information of its equity method investments (in
millions):
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2003 2002 2003 2002
================================================== ========== ========== ========== ==========
Revenues $ 370 $ 501 $ 1,113 $ 1,490
Costs and expenses (355) (476) (1,121) (1,491)
Loss on sale of Equistar -- (242) -- (242)
---------- ---------- ---------- ----------
Net income (loss) $ 15 $ (217) $ (8) $ (243)
================================================== ========== ========== ========== ==========
In October 2003, Occidental purchased an additional 2.7 million shares of
Lyondell common stock for $12.40 a share totaling approximately $33
million. Occidental now owns approximately 39 million
12
shares of Lyondell common stock, which still represents approximately 22
percent of Lyondell's outstanding common stock.
15. Industry Segments
The following table presents Occidental's interim industry segment
disclosures (in millions):
Oil and Gas Chemical Corporate Total
======================================== ============= ============= ============= =============
Nine months ended
September 30, 2003
Net sales $ 4,473 $ 2,368 $ 115 (c) $ 6,956
============= ============= ============= =============
Pretax operating profit (loss) $ 2,436 $ 147 $ (447)(a) $ 2,136
Income taxes (412) (8) (503)(b) (923)
Cumulative effect of changes in
accounting principles, net -- -- (68) (68)
------------- ------------- ------------- -------------
Net income (loss) $ 2,024 $ 139 $ (1,018)(d) $ 1,145
======================================== ============= ============= ============= =============
Nine months ended
September 30, 2002
Net sales $ 3,347 $ 2,006 $ -- $ 5,353
============= ============= ============= =============
Pretax operating profit (loss) $ 1,556 $ (180) $ (357)(a) $ 1,019
Income taxes (339) 397 (237)(b) (179)
Discontinued operations, net -- -- (78) (78)
Cumulative effect of changes in
accounting principles, net -- -- (95) (95)
------------- ------------- ------------- -------------
Net income (loss) $ 1,217 $ 217 (e) $ (767) $ 667
======================================== ============= ============= ============= =============
(a) Includes unallocated net interest expense, administration expense and
other items.
(b) Includes unallocated income taxes.
(c) During the first quarter of 2003, the Taft cogeneration facility began
generating revenue, which is included in the corporate net sales
amount.
(d) 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.
(e) Includes an after-tax gain of $164 million related to the sale of the
Equistar equity investment.
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 nine months of 2003 of $1.1
billion, on net sales of $7.0 billion, compared with net income of $667 million,
on net sales of $5.4 billion, for the same period of 2002. Basic earnings per
common share were $2.99 for the first nine months of 2003, compared with basic
earnings per common share of $1.77 for the same period of 2002. Occidental's net
income for the third quarter of 2003 was $446 million, on net sales of $2.3
billion, compared with net income of $402 million, on net sales of $2.0 billion
for the same period of 2002. Basic earnings per common share were $1.16 for the
third quarter of 2003, compared with $1.07 for the same period of 2002.
Net income for the three and nine months ended September 30, 2003, compared with
the same periods in 2002, reflected higher worldwide crude oil and natural gas
prices and higher crude oil volumes partially offset by lower natural gas
volumes and higher operating costs. 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 raw material and feedstock costs.
The increase in net sales of $356 million and $1.6 billion for the three and
nine months ended September 30, 2003, compared with the same periods in 2002,
primarily reflected higher crude oil, natural gas and chemical prices and higher
crude oil production partially offset by lower natural gas volumes. For the nine
months ended September 30, 2003, the gains 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 $157 million and $607 million for the three and
nine months ended September 30, 2003, compared with the same periods in 2002,
primarily reflected higher energy and raw material costs and higher DD&A
expense. The increase of $134 million in selling, general, administrative and
other operating expenses for the nine months ended September 30, 2003, compared
to the same period in 2002, primarily reflected increases in various oil and gas
costs, including higher production taxes, higher general and administrative
costs and higher other operating costs. The decrease in exploration expense for
the nine months ended September 30, 2003, compared with the same period in 2002,
was primarily due to lower seismic costs and geological and geophysical costs in
2003. The $31 million increase in interest and debt expense, net for the nine
months ended September 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. Loss (income) from equity
investments for the three months and nine months ended September 30, 2002
included the pre-tax loss on the sale of the Equistar equity investment. The
provision for income taxes for the three and nine months ended September 30,
2002 reflected the tax benefit resulting from the sale of the Equistar equity
investment.
14
SEGMENT OPERATIONS
The following table sets forth the sales and earnings of each operating segment
and corporate items (in millions):
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2003 2002 2003 2002
======================================================= ========== ========== ========== ==========
SEGMENT NET SALES
Oil and Gas $ 1,480 $ 1,224 $ 4,473 $ 3,347
Chemical 793 739 2,368 2,006
Other 46 -- 115 --
---------- ---------- ---------- ----------
NET SALES $ 2,319 $ 1,963 $ 6,956 $ 5,353
========== ========== ========== ==========
SEGMENT EARNINGS
Oil and Gas $ 660 $ 490 $ 2,024 $ 1,217
Chemical 61 214 139 217
---------- ---------- ---------- ----------
721 704 2,163 1,434
UNALLOCATED CORPORATE ITEMS
Interest expense, net
Debt, net (59) (73) (236) (195)
Trust preferred distributions & other (12) (12) (34) (35)
Income taxes (160) (105) (505) (250)
Other (44) (38) (175) (114)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 446 476 1,213 840
Discontinued operations, net -- (74) -- (78)
Cumulative effect of changes in accounting
principles, net -- -- (68) (95)
---------- ---------- ---------- ----------
NET INCOME $ 446 $ 402 $ 1,145 $ 667
======================================================= ========== ========== ========== ==========
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
September 30, 2003 and 2002:
Three Months Ended September 30
------------------------------------------------------
Basic Basic
(in millions, except per share amounts) 2003 EPS 2002 EPS
================================================== ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 446 $ 1.16 $ 402 $ 1.07
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings $ 660 $ 490
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 660 490
---------- ----------
CHEMICAL
- --------
Segment Earnings 61 214
Less: Gain on sale of Equistar investment * -- 164
---------- ----------
Segment Core Earnings 61 50
---------- ----------
CORPORATE
- ---------
Results (275) (302)
Less: Discontinued operations, net * -- (74)
---------- ----------
TOTAL CORE EARNINGS $ 446 $ 1.16 $ 312 $ 0.83
================================================== ========== ========== ========== ==========
*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 nine months ended
September 30, 2003 and 2002:
Nine Months Ended September 30
------------------------------------------------------
Basic Basic
(in millions, except per share amounts) 2003 EPS 2002 EPS
================================================== ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 1,145 $ 2.99 $ 667 $ 1.77
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings $ 2,024 $ 1,217
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 2,024 1,217
---------- ----------
CHEMICAL
- --------
Segment Earnings 139 217
Less: Gain on sale of Equistar investment * -- 164
---------- ----------
Segment Core Earnings 139 53
---------- ----------
CORPORATE
- ---------
Results (1,018) (767)
Less: Debt repayment charge (61) --
Tax effect of pre-tax adjustments 21 --
Discontinued operations, net * -- (78)
Changes in accounting principles, net * (68) (95)
---------- ----------
TOTAL CORE EARNINGS $ 1,253 $ 3.27 $ 676 $ 1.80
================================================== ========== ========== ========== ==========
*These amounts are shown after tax.
17
OIL AND GAS SEGMENT
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
Summary of Operating Statistics 2003 2002 2003 2002
============================================================ ========== ========== ========== ==========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 259 230 252 231
Latin America 58 51 55 52
Middle East and Other Eastern Hemisphere 101 94 105 103
NATURAL GAS (MMCF)
United States 534 564 535 574
Middle East and Other Eastern Hemisphere 71 74 74 58
BARRELS OF OIL EQUIVALENT (MBOE)
Consolidated subsidiaries 519 481 514 491
Other interests 27 21 27 22
---------- ---------- ---------- ----------
Worldwide production 546 502 541 513
- ------------------------------------------------------------ ---------- ---------- ---------- ----------
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States $ 28.24 $ 25.75 $ 28.83 $ 22.81
Latin America $ 25.84 $ 25.36 $ 27.29 $ 22.23
Middle East and Other Eastern Hemisphere $ 26.98 $ 26.36 $ 27.47 $ 23.45
NATURAL GAS ($/MCF)
United States $ 5.00 $ 2.94 $ 4.93 $ 2.74
Middle East and Other Eastern Hemisphere $ 2.13 $ 1.95 $ 1.98 $ 2.14
============================================================ ========== ========== ========== ==========
Oil and gas segment and core earnings for the three months ended September 30,
2003, were $660 million, compared with $490 million for the same period of 2002.
Oil and gas segment and core earnings for the nine months ended September 30,
2003, were $2.0 billion, compared with $1.2 billion for the same period of 2002.
The increase in earnings for the three and nine months ended September 30, 2003,
compared with the same periods in 2002, primarily reflected higher worldwide
crude oil and natural gas prices and higher crude oil volumes partially offset
by lower natural gas volumes and higher operating costs.
The increase in net sales of $256 million and $1.1 billion for the three and
nine months ended September 30, 2003, compared with the same periods in 2002,
primarily reflected higher crude oil and natural gas prices and higher crude oil
production partially offset by lower natural gas volumes.
The average West Texas Intermediate price in the third quarter of 2003 was
$30.20 per barrel and the New York Mercantile Exchange (NYMEX) natural gas price
for the third quarter of 2003 was $5.59 per thousand cubic feet. A change of
10-cents per million BTUs in NYMEX gas prices impacts quarterly oil and gas
segment earnings by $5 million and a $1.00 per barrel change in oil prices has a
quarterly impact of $30 million pre-US tax.
Occidental expects fourth quarter 2003 oil and gas production to increase
modestly due primarily to increased production from the Eden-Yuturi field and
other recent discoveries, which will be shipped through the new Ecuador
pipeline. The pipeline began operations in September 2003.
18
CHEMICAL SEGMENT
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
Summary of Operating Statistics 2003 2002 2003 2002
============================================================ ========== ========== ========== ==========
MAJOR PRODUCT VOLUMES
Chlorine (M Tons) 681 685 2,031 2,121
Caustic Soda (M Tons) 697 716 2,053 2,033
Ethylene Dichloride (M Tons) 135 94 374 386
PVC Resins (MM Lbs.) 1,009 1,022 2,944 3,215
MAJOR PRODUCT PRICE INDEX (BASE: 1987-1990 AVG PRICE = 1.0)
Chlorine 1.76 1.37 1.73 0.83
Caustic 0.85 0.61 0.85 0.72
Ethylene Dichloride 1.13 1.30 1.18 1.02
PVC Resins 0.88 0.88 0.91 0.70
============================================================ ========== ========== ========== ==========
Chemical core earnings were $61 million and $139 million, respectively, for the
three and nine months ended September 30, 2003, compared with $50 million and
$53 million for the same periods of 2002. The increase in core earnings for the
three and nine months ended September 30, 2003, compared with the same periods
in 2002, is primarily due to higher prices for chlorine, caustic soda and
polyvinyl chloride resins (PVC), partially offset by higher raw material and
feedstock costs. The net result was higher overall margins. Additionally, for
the nine months ended September 30, 2003, the margin improvement was reduced by
lower chemical sales volumes. Also, the 2002 chemical earnings reflected the
results of the Equistar equity investment which were a gain of $7 million and a
loss of $33 million for the three and nine months ended September 30, 2002,
respectively. The Equistar equity investment was sold in August 2002.
The increase in net sales of $54 million and $362 million for the three and nine
months ended September 30, 2003, compared with the same periods in 2002,
primarily reflected higher prices for chlorine, caustic soda and PVC.
Occidental expects fourth quarter 2003 chemical segment earnings to be between
$45 million and $55 million since the first and fourth quarter are typically the
weakest quarters for the chemical business due to seasonal factors.
CORPORATE AND OTHER
The three and nine months ended September 30, 2003 other net sales amounts
includes revenues from certain co-generation facilities. The three and nine
months ended September 30, 2003 unallocated corporate items - other amounts
include the results from the Lyondell equity investment. Unallocated corporate
items - income taxes excludes U.S. federal income tax charges and credits
allocated to the segments and foreign taxes. For the first nine months of 2003,
segment earnings include charges of $(6) million (all for oil and gas). For the
first nine months of 2002, segment earnings benefited by $401 million from
credits allocated: $(2) million of charges to oil and gas and $403 million of
credits to chemical.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities was approximately $2.3
billion and $1.5 billion for the first nine months of 2003 and 2002,
respectively. The increase of $732 million in the 2003 amount is primarily
attributable to higher core earnings with higher non-cash charges to income
accounting for approximately $100 million of the increase.
19
Occidental's net cash used by investing activities was $1.5 billion and $898
million for the first nine months of 2003 and 2002, respectively. 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 of stock
of a cost-method investee, partially offset by equity investment dividends,
totaling approximately $108 million, net. 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 nine months of 2003 were $1.15
billion, including $836 million for oil and gas and $300 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 nine months of
2002 were $840 million, including $742 million for oil and gas.
Occidental's financing activities used net cash of $425 million and $532 million
in the first nine months of 2003 and 2002, respectively. The 2003 amount
includes net debt repayments of approximately $298 million. The 2002 amount
includes $179 million for the net buyout of the natural gas delivery commitment.
Available but unused lines of committed bank credit totaled approximately $1.8
billion at September 30, 2003. In addition, Occidental has $529 million of cash
and cash equivalents on the September 30, 2003 balance sheet and its OxyMar
subsidiary has a $220 million committed bank revolver which was unused at
September 30, 2003. Excluding the purchases of leased assets mentioned above,
Occidental currently expects to spend approximately $1.4 billion on its 2003
capital spending program with about 90 percent in the oil and gas segment. In
December 2003, Occidental expects to give notice to redeem $454 million in trust
preferred securities in January 2004. 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 lines.
ASSET ACQUISITIONS AND DISPOSITIONS AND OTHER COMMITMENTS
In 2003, Occidental made several oil and gas acquisitions in the Permian Basin
for approximately $251 million in cash and sold approximately $34 million of
these assets shortly thereafter.
In April 2003, Occidental exercised its purchase option related to the
OxyVinyls, L.P., LaPorte, Texas VCM plant lease for approximately $180 million.
In the first quarter of 2003, Occidental exercised purchase options on railcar
leases for a total of $44 million.
DERIVATIVE ACTIVITIES
For the three and nine months ended September 30, 2003, the results of
operations included a net pre-tax gain of $15 million and $38 million,
respectively, related to derivative mark-to-market adjustments. For the three
and nine months ended September 30, 2002, the results of operations included a
net pre-tax loss of $4 million and $0.2 million, respectively, related to
derivative mark-to-market adjustments. The amount of interest expense recorded
in the income statement was lower by approximately $15 million and $41 million
for the three and nine months ended September 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 $32
million for the three and nine months ended September 30, 2002, respectively, to
reflect net pre-tax gains from fair-value hedges.
20
The following table summarizes after-tax derivative activity recorded in other
comprehensive income (OCI) for the nine months ended September 30, 2003 and 2002
(in millions):
2003 2002
======================================================= ========== ==========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges -- (26)
Amount reclassified to income from the expiration
of cash flow hedges 6 8
---------- ----------
Ending Balance $ (20) $ (38)
======================================================= ========== ==========
During the next twelve months, Occidental expects that $3 million of net
derivative after-tax gains included in OCI, based on their valuation at
September 30, 2003, will be reclassified into earnings. Hedge ineffectiveness
did not have a significant impact on earnings for the three and nine months
ended September 30, 2003 and 2002.
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 adopted the provisions of this statement on July 1, 2003. As a result
of the adoption, Occidental's mandatorily redeemable trust preferred securities
are now classified as a liability and the payments to the holders of the
securities, which were previously recorded as minority interest on the statement
of operations, are recorded as interest expense.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a company to consolidate a variable interest entity
(VIE) 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 risks 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 $178 million. There was
no material effect on net income as a result of the consolidation. In September
2003, Marubeni indicated it would exercise its option to put its interest in
OxyMar to Occidental by paying approximately $25 million to Occidental. In
connection with the transfer, which is expected to be complete in April 2004,
Occidental will assume Marubeni's guarantee of OxyMar's debt. As all the OxyMar
debt is already consolidated in Occidental's financial statements with the
adoption of FIN 46, the exercise of the put will not have a material effect on
Occidental's financial condition or results of operations.
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,
21
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 adopted this statement in the third quarter of 2003 and it did
not 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 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 when adopted.
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 charge for the cumulative effect of a change in accounting principles
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. The FASB and the staff of the Securities and
Exchange Commission are considering a possible interpretation of SFAS No. 141,
"Business Combinations", paragraph A14.d. (7), under which contract-based
mineral rights acquired after June 30, 2001 may have to be classified as
intangible assets. Occidental is in the process of determining the effect of
this potential change on the financial statements; however, it does not expect
the resolution of the issue to materially affect its 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
22
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 remediation activities 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
September 30, 2003, grouped by three categories of environmental remediation
sites ($ amounts in millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 129 $ 241
Active Facilities 14 46
Closed or Sold Facilities 41 56
--------------- ---------------
Total 184 $ 343
=================================== =============== ===============
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 $400 million beyond the amount accrued.
Shown below is additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries were
involved at September 30, 2003 ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure (a) 109 $ 5
Reserves between $1-10 MM 13 52
Reserves over $10 MM 7 184
--------------- ---------------
Total 129 $ 241
=================================== =============== ===============
(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 14 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.
23
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 September 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 September
30, 2003, the notional amount of these guarantees was approximately $510
million. Of this amount, approximately $422 million relates to Occidental's
guarantee of equity investees' debt and other commitments. The remaining $88
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.
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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 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.
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
This item incorporates by reference the information regarding lawsuits, claims,
commitments, contingencies and related matters in Note 11 to the consolidated
condensed financial statements in Part I of this Form 10-Q.
ENVIRONMENTAL PROCEEDINGS
On October 1, 2003, the Environmental Protection Agency (EPA) served one of
Occidental's subsidiaries with an administrative compliance order and an
administrative complaint alleging certain violations of environmental laws at
the subsidiary's Pottstown, PA facility. The order and complaint do not propose
any amount of penalties. However, the EPA implied in public statements that it
may seek penalties exceeding $100,000. Occidental's subsidiary disputes many of
the EPA's allegations. Occidental does not expect the resolution of this matter
to have a material effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement regarding the computation of earnings per share for the
three and nine months ended September 30, 2003 and 2002.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the nine months ended September 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
26
(b) Reports on Form 8-K
During the quarter ended September 30, 2003, 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.
From September 30, 2003 to the date hereof, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 21, 2003 (date of
earliest event reported), filed on October 21, 2003, for the
purpose of reporting, under Items 9 and 12, Occidental's results
of operations for the third quarter ended September 30, 2003, and
speeches and supplemental investor information relating to
Occidental's third quarter 2003 earnings announcement.
27
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: November 3, 2003 S. P. Dominick, Jr.
--------------------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
28
EXHIBIT INDEX
EXHIBITS
- --------
11 Statement regarding the computation of earnings per share for the
three and nine months ended September 30, 2003 and 2002.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the nine months ended September 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